INGLES MARKETS INC 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Ingles, a leading supermarket chain in the Southeast, operates 198 supermarkets in North Carolina (75), Georgia (65), South Carolina (35), Tennessee (21), Virginia (1) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and rural communities. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products. Non-food products include fuel centers, pharmacies, health/beauty/cosmetic products and general merchandise, as well as quality private label items. In addition, the Company focuses on selling high-growth, high-margin products to its customers through the development of certified organic products, bakery departments and prepared foods including delicatessen sections. As of March 26, 2022, the Company operated 111 in-store pharmacies and 107 fuel centers. 14 Coronavirus (COVID-19) Pandemic Impact The COVID-19 pandemic which began in March 2020 and has continued through the six months ended March 26, 2022, has impacted supermarket operations, as the Company implemented several enhanced cleaning and social distancing protocols designed to keep our customers and our associates safe. Since March 2020, the Company’s stores have experienced increased customer traffic and have experienced occasional product shortages due to supply chain issues. Recently, an extremely tight labor market has impacted the Company’s ability to attract and retain qualified store personnel, but these impacts have not materially affected our operations. Finally, as the economy has been recovering from the effects of the pandemic, inflation has reached levels not seen in decades. Inflation impacts product costs, labor costs and the cost of other goods used by the Company, which could negatively impact our results of operation. At the present time, we do not know how long and to what extent the pandemic could impact our sales and financial performance. Critical Accounting Policies and Estimates Critical accounting policies and estimates are those accounting policies and estimates that management believes are important to the presentation of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. Estimates are based on historical experience and other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management estimates, by their nature, involve judgments regarding future uncertainties, and actual results may therefore differ materially from these estimates. Self-Insurance The Company is self-insured for workers’ compensation and group medical and dental benefits. Risks and uncertainties are associated with self-insurance; however, the Company has limited its exposure by maintaining excess liability coverage of $1.0 million per occurrence for workers’ compensation and for general liability, and $450,000 per covered person for medical care benefits for a policy year. Self-insurance liabilities are established based on claims filed and estimates of claims incurred but not reported. The estimates are based on data provided by the respective claims administrators. These estimates can fluctuate if historical trends are not predictive of the future. The majority of the Company’s properties are self-insured for casualty losses and business interruption; however, liability coverage is maintained. At March 26, 2022 the Company’s self-insurance reserves totaled $32.3 million. This amount is inclusive of $4.2 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable. Asset Impairments The Company accounts for the impairment of long-lived assets in accordance with FASB ASC Topic 360. For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal associates. Estimates of future cash flows and expected sales prices are judgments based upon the Company’s experience and knowledge of local operations and cash flows that are projected for several years into the future. These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital spending decisions and inflation. The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether any indicators of impairment have occurred. There were no asset impairments during the six-month period ended March 26, 2022. Vendor Allowances The Company receives funds for a variety of merchandising activities from the many vendors whose products the Company buys for resale in its stores. These incentives and allowances are primarily composed of volume or purchase based incentives, advertising allowances, slotting fees, and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs incurred by the Company for stocking, advertising, promoting and selling the applicable vendor’s products. These allowances generally relate to short term arrangements with vendors, often relating to a period of one-month or less, and are negotiated on a purchase-by-purchase or transaction-by-transaction basis. Whenever practicable, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a component of item cost in inventory and recognized in merchandise costs when the item is sold. Due to the use of the retail method of store inventory and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the vendor consideration received is sold. Vendor allowances applied as a reduction of merchandise costs totaled $26.2 million and $28.9 million for the fiscal quarters ended March 26, 2022 and March 27, 2021, respectively. For the six-month periods ended March 26, 2022 and March 27, 2021, vendor allowances applied as a reduction of merchandise costs totaled $58 million and $58.6 million, respectively. Vendor advertising allowances that represent a reimbursement of specifically identifiable incremental 15 costs of advertising the vendor’s specific products are recorded as a reduction to the related expense in the period in which the related expense is incurred. Vendor advertising allowances recorded as a reduction of advertising expense totaled $1.7 million and $2.1 million for the fiscal quarters ended March 26, 2022 and March 27, 2021, respectively. For the six-month periods ended March 26, 2022 and March 27, 2021, vendor advertising allowances recorded as a reduction of advertising expense totaled $3.7 million and $4.0 million, respectively. Overall, v endor allowances have been lower since the COVID-19 pandemic began. If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising, as well as the volume and frequency of the Company’s product advertising, which could increase or decrease the Company’s expenditures. Additionally, the Company is not able to assess the impact of vendor advertising allowances on the creation of additional revenue, as such allowances do not directly generate revenue for the Company’s stores. Results of Operations Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in September. There are 13 and 26 weeks of operations included in the Unaudited Condensed Consolidated Statements of Income for the three- and six-month periods ended March 26, 2022 and March 27, 2021, respectively. Comparable store sales are defined as sales by retail stores in operation for five full fiscal quarters. Sales from replacement stores, major remodels and the addition of fuel stations to existing stores are included in the comparable store sales calculation from the date thereof. A replacement store is a newly-opened store that replaces an existing nearby store that is closed. A major remodel entails substantial remodeling of an existing store and includes additional retail square footage. For the three- and six-month periods ended March 26, 2022, comparable store sales included 196 stores. For the three- and six-month periods ended March 27, 2021, comparable store sales included 197 stores. The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the various segments of the business, see Note I “Segment Information” to the Condensed Consolidated Financial Statements. Three Months Ended Six Months Ended March 26, March 27, March 26, March 27, 2022 2021 2022 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 25.3 % 26.2 % 25.3 % 26.3 % Operating and administrative expenses 18.5 % 20.0 % 18.6 % 20.0 % Gain from sale or disposal of assets — % 0.1 % — % — % Income from operations 6.9 % 6.3 % 6.7 % 6.3 % Other income, net 0.1 % 0.1 % 0.1 % 0.1 % Interest expense 0.4 % 0.5 % 0.4 % 0.5 % Income tax expense 1.6 % 1.4 % 1.5 % 1.4 % Net income 5.0 % 4.5 % 4.9 % 4.5 % Three Months Ended March 26, 2022 Compared to the Three Months Ended March 27, 2021 Net income for the second quarter of fiscal 2022 totaled $68.6 million, compared with net income of $52.2 million for the second quarter of fiscal 2021.While the Company has incurred significant inventory cost increases and volatility, expenses did not increase as much as sales, resulting in higher pre-tax income. Net Sales. Net sales increased by $193.0 million, or 16.3%, to $1.38 billion for the three months ended March 26, 2022 compared with $1.18 billion for the three months ended March 27, 2021. Comparing the second quarter of fiscal 2022 with the second quarter of fiscal 2021, gasoline sales dollars and gallons sold were higher due to increased travel and an increase in market prices for fuel. Excluding gasoline sales, total grocery comparable store sales increased 10.1% over the comparative fiscal quarter. Comparing the second quarters of fiscal years 2022 and 2021 (and excluding gasoline), the number of customer transactions increased 5.3% and the average transaction size increased 5.0%. Ingles operated 198 stores at both March 26, 2022 and March 27, 2021. Retail square feet totaled approximately 11.3 million square feet at both March 26, 2022 and at March 27, 2021. During the twelve months ended March 26, 2022, the Company opened one store and closed one store. 16 Sales by product category (in thousands) were as follows: Three Months Ended March 26, March 27, 2022 2021 Grocery $ 482,179 $ 427,219 Non-foods 289,419 268,799 Perishables 355,651 320,493 Gasoline 200,192 130,679 Total retail grocery $ 1,327,441 $ 1,147,190 The grocery category includes grocery, dairy, and frozen foods. The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products. The perishables category includes meat, produce, deli and bakery. Changes in retail grocery sales for the quarter ended March 26, 2022 are summarized as follows (in thousands): Total retail sales for the three months ended March 27, 2021 $ 1,147,190 Comparable store sales increase (including gasoline) 170,752 Impact of stores opened in fiscal 2021 13,976 Impact of stores closed in fiscal 2021 (2,507) Other (1,970) Total retail sales for the three months ended March 26, 2022 $ 1,327,441 Gross Profit. Gross profit for the three-month period ended March 26, 2022 totaled $348.6 million, an increase of $38.1 million, or 12.3%, compared with gross profit of $310.5 million for the three-month period ended March 27, 2021. Gross profit as a percentage of sales was 25.3% and 26.2% for the three months ended March 26, 2022 and March 27, 2021, respectively. Operating and Administrative Expenses. Operating and administrative expenses increased $17.8 million, or 7.6%, to $254.7 million for the three months ended March 26, 2022, from $236.9 million for the three months ended March 27, 2021. As a percentage of sales, operating and administrative expenses were 18.5% and 20.0% for the March 2022 and March 2021 quarters, respectively. Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 21.5% of sales for the second fiscal quarter of 2022 compared with 22.3% for the second fiscal quarter of 2021. A breakdown of the major changes in operating and administrative expenses is as follows: Increase Increase as a % of in millions sales Salaries and wages $ 10.1 0.73 % Depreciation and amortization $ 1.7 0.13 % Bank charges $ 2.2 0.16 % Professional fees $ 1.4 0.10 % Salaries and wages increased in dollars due to higher sales volume requiring additional hours, as well as increased wages due to labor market competition. Depreciation expense increased due to equipment purchased for store improvements, technology improvements and the distribution network. Bank charges increased as a result of increased sales and higher card usage compared with cash or checks. Professional fees increased in conjunction with improvements to the Company’s information technology platforms. Gain from Sale or Disposal of Assets. Gain from the sale or disposal of assets totaled $1.3 million during the three months ended March 26, 2022, primarily from the sale of rolling stock. During the quarter ended March 27, 2021, the gain from the sale or disposal of assets totaled $0.7 million. Interest Expense. Interest expense totaled $5.4 million for the three-month period ended March 26, 2022 compared with $6.2 million for the three-month period ended March 27, 2021. Total debt at March 2022 was $578.5 million compared with $647.8 million at March 2021. Over the past twelve months, the Company has reduced or refinanced higher rate debt to lower rates. 17 Income Taxes. Income tax expense totaled $22.4 million for the three months ended March 26, 2022, an effective tax rate of 24.6% of pretax income. Income tax expense totaled $16.6 million for the three months ended March 27, 2021, an effective tax rate of 24.1% of pretax income. Net Income. Net income totaled $68.6 million for the three-month period ended March 26, 2022 compared with $52.2 million for the three-month period ended March 27, 2021. Basic and diluted earnings per share for Class A Common Stock were $3.70 and $3.61, respectively, for the March 2022 quarter, compared to $2.65 and $2.58, respectively, for the March 2021 quarter. Basic and diluted earnings per share for Class B Common Stock were each $3.36 for the March 2022 quarter compared with $2.41 for the March 2021 quarter. Six Months Ended March 26, 2022 Compared to the Six Months Ended March 27, 2021 Net income for the first half of fiscal 2022 totaled $134.8 million, compared with net income of $106.0 million earned for the first half of fiscal 2021. Retail grocery sales increased due to continued consumer trends seen since the beginning of the COVID 19 pandemic as well as the effects of inflation. Corresponding operating expenses did not increase as much, resulting in higher pre-tax income. Net Sales. Net sales increased by $393.7 million, or 16.6%, to $2.77 billion for the six months ended March 26, 2022 compared with $2.37 billion for the six months ended March 27, 2021. Comparing the first half of fiscal 2022 with the first half of fiscal 2021, gasoline sales dollars and gallons sold were higher. Excluding gasoline sales, total grocery comparable store sales increased 10.2% over the comparative six-month period. Comparing the first halves of fiscal years 2022 and 2021 (and excluding gasoline), the number of customer transactions increased 6.3% and the average transaction size increased 4.2%. Sales by product category (in thousands) are as follows: Six Months Ended March 26, March 27, 2022 2021 Grocery $ 970,585 $ 869,339 Non-foods 594,091 548,487 Perishables 720,001 641,756 Gasoline 391,025 241,148 Total retail grocery $ 2,675,702 $ 2,300,730 Changes in retail grocery sales for the quarter ended March 26, 2022 are summarized as follows (in thousands): Total retail sales for the six months ended March 27, 2021 $ 2,300,730 Comparable store sales increase (including gasoline) 351,984 Impact of stores opened in fiscal 2021 28,776 Impact of stores closed in fiscal 2021 (5,080) Other (708) Total retail sales for the six months ended March 26, 2022 $ 2,675,702 The grocery category includes grocery, dairy, and frozen foods. The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products. The perishables category includes meat, produce, deli and bakery. Gross Profit. Gross profit for the six-month period ended March 26, 2022 totaled $699.1 million, an increase of $74.4 million, or 11.9%, compared with gross profit of $624.7 million for the six-month period ended March 27, 2021. Gross profit as a percentage of sales was 25.3% and 26.3% for the six months ended March 26, 2022 and March 27, 2021, respectively. Inflation and supply chain pressures have increased the cost of goods sold. Operating and Administrative Expenses. Operating and administrative expenses increased $39.8 million, or 8.4%, to $514.8 million for the six months ended March 26, 2022, from $475.0 million for the six months ended March 27, 2021. As a percentage of sales, operating and administrative expenses were 18.6% and 20.0% for the March 2022 and March 2021 six-month periods, respectively. Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 21.5% of sales for the first six months of 2022 compared with 22.1% for the first six months of 2021. The fiscal 2022 first half expense percentages are lower due to additional pandemic-related sales during the first half of 2022. 18 A breakdown of the major changes in operating and administrative expenses is as follows: Increase Increase as a % of in millions sales Salaries and wages $ 19.6 0.71 % Depreciation and amortization $ 4.3 0.15 % Bank charges $ 3.9 0.14 % Professional fees $ 3.0 0.11 % Salaries and wages increased in dollars due to additional labor hours required for the increased sales volume and continued labor market pressures. Depreciation expense increased due to equipment purchased for store improvements, technology and the distribution network. Bank charges increased as a result of increased sales and higher card usage compared with cash or checks. Professional fees increased in conjunction with improvements to the Company’s information technology platforms. Gain from Sale or Disposal of Assets. Gain from the sale or disposal of assets totaled $1.2 million during the six months ended March 26, 2022. During the six-months ended March 27, 2021, the gain from the sale or disposal of assets totaled $1.1 million. Interest Expense. Interest expense totaled $10.8 million for the six-month period ended March 26, 2022 compared with $12.6 million for the six -month period ended March 27, 2021. Total debt at March 2022 was $578.5 million compared with $647.8 million at March 2021. Over the past twelve months, the Company has reduced or refinanced higher rate debt to lower rates. Income Taxes. Income tax expense totaled $42.8 million for the six months ended March 26, 2022, an effective tax rate of 24.1% of pretax income. Income tax expense totaled $33.5 million for the six months ended March 27, 2021, an effective tax rate of 24.0% of pretax income. Net Income. Net income totaled $134.8 million for the six-month period ended March 26, 2022 compared with $106.0 million for the six-month period ended March 27, 2021. Basic and diluted earnings per share for Class A Common Stock were $7.26 and $7.10, respectively, for the six months ended March 26, 2022, compared to $5.38 and $5.24, respectively, for the six months ended March 27, 2021. Basic and diluted earnings per share for Class B Common Stock were each $6.60 for the six-months ended March 26, 2022 compared with $4.89 for the six months ended March 27, 2021. Liquidity and Capital Resources Capital Expenditures The Company believes that a key to its ability to continue to develop a loyal customer base is providing conveniently located, clean and modern stores which provide customers with good service and an increasingly diverse selection of competitively priced products. Therefore, the Company has invested and plans to continue to invest significant amounts of capital toward the modernization of its store base. The Company’s modernization program includes the opening of new stores, the completion of major remodels and expansion of selected existing stores, the relocation of selected existing stores to larger, more convenient locations and the completion of minor remodeling of its remaining existing stores. Capital expenditures totaled $34.1 million for the six-month period ended March 26, 2022. These capital expenditures focused on construction on stores opened or scheduled to open in fiscal 2022, site acquisition, and smaller-scale remodeling projects in a number of the Company’s stores. Capital expenditures also included the costs of upgrading and replacing store equipment, technology investments, rolling stock, and capital expenditures related to the Company’s milk processing plant. Capital expenditures were lower this quarter as compared to the same quarter in 2021 due to both increased costs and reduced availability of labor and materials. The Company expects to increase capital expenditures when labor and material costs normalize. Ingles’ capital expenditure plans for fiscal 2022 currently include investments of approximately $100 to $120 million. The Company currently plans to dedicate the majority of its fiscal 2022 capital expenditures to continued improvement of its store base and also include investments in stores expected to open in fiscal 2022, as well as technology improvements, upgrading and replacing existing store equipment and warehouse and transportation equipment and improvements to the Company’s milk processing plant. The Company currently expects that its annual capital expenditures will be in the range of approximately $100 to $160 million going forward in order to maintain a modern store base. Among other things, planned expenditures for any given future fiscal year will be affected by the availability of financing, which can affect both the number of projects pursued at any given time and the cost of those projects. The number of projects may also fluctuate due to the varying costs of the types of projects pursued including new stores and 19 major remodel/expansions. The Company makes decisions on the allocation of capital expenditure dollars based on many factors including the competitive environment, other Company capital initiatives and its financial condition. The Company does not generally enter into commitments for capital expenditures other than on a store-by-store basis at the time it begins construction on a new store or begins a major or minor remodeling project. Outstanding construction commitments totaled $15.6 million at March 26, 2022. Liquidity The Company generated $155.5 million net cash from operations in the March 2022 six-month period compared with $114.7 million during the March 2021 six-month period. Cash from operations increased by $40.1 million due to higher net income and less working capital needs during the March 2022 six-month period compared with the March 2021 six-month period. Cash used by investing activities for the six-month periods ended March 26, 2022 and March 27, 2021 totaled $142.6 million and $68.1 million, respectively, consisting primarily of capital expenditures offset by proceeds from property and equipment sales. Lower current year capital expenditures and increased purchases of short term investments as compared to the prior year period account for the difference in investing activities between the two six-month periods. Cash used by financing activities totaled $17.6 million for the six-month period ended March 26, 2022, compared with $44.6 million for the six-month period ended March 27, 2021. The decrease is primarily related to the repurchase of common stock during the prior fiscal year, part of which was funded with borrowings under the Line. In June 2021, the Company issued $350.0 million aggregate principal amount of senior notes due 2031 (the “Notes”). The Notes bear an interest rate of 4.00% per annum and were issued at par. Upon issuance of the Notes, the Company issued an irrevocable notice to redeem the remaining $295.0 million aggregate principle amount of the Company’s 5.75% senior notes due 2023, which the Company redeemed at par value on July 16, 2021. The Company has a $150.0 million line of credit (the “Line”) that matures in June 2026. The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or LIBOR. The Line allows the Company to issue up to $10.0 million in letters of credit, of which no letters of credit were issued at March 26, 2022. The Company is not required to maintain compensating balances in connection with the Line. At March 26, 2022, the Company had no borrowings outstanding under the Line. In December 2010, the Company completed the funding of $99.7 million of Bonds (the “Bonds”) for the construction of new warehouse and distribution space adjacent to its existing space in Buncombe County, North Carolina (the “Project”). The final maturity date of the Bonds is January 1, 2036. Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between certain financial institutions and the Company, the financial institutions would hold the Bonds until December 17, 2029, subject to certain events. Mandatory redemption of the Bonds by the Company in the annual amount of $4.5 million began on January 1, 2014. The outstanding balance of the Bonds is $59.0 million as of March 26, 2022. The Company may redeem the Bonds without penalty or premium at any time prior to December 17, 2029. The Covenant Agreement was amended during the three months ended December 25, 2021, to extend the holding period and reduce the interest rate on the Bonds. In September 2017, the Company refinanced approximately $60 million secured borrowing obligations with a LIBOR-based amortizing floating rate loan secured by real estate maturing in October 2027. The Company has an interest rate swap agreement for a current notional amount of $33.5 million at a fixed rate of 3.92%. Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027. In December 2019, the Company closed a $155 million LIBOR-based amortizing floating rate loan secured by real estate maturing in January 2030. The Company has an interest rate swap agreement for a current notional amount of $136.3 million at a fixed rate of 2.95%. Under this agreement, the Company pays monthly the fixed rate of 2.95% and receives the one-month LIBOR plus 1.50%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.65 million and mature in fiscal year 2030. The fair market value of the interest rate swaps are measured quarterly with adjustments recorded in other comprehensive income. The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under the Company’s Line, Bonds and Notes indenture in the event of default under any one instrument. 20 The Company’s long-term debt agreements generally contain provisions that under certain circumstances would permit lending institutions to terminate or withdraw their respective extensions of credit to the Company. Included among the triggering factors permitting the termination or withdrawal of the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents. As of March 26, 2022, the Company was in compliance with these covenants. Under the most restrictive of these covenants, the Company would be able to incur approximately $2.3 billion of additional borrowings (including borrowings under the Line) as of March 26, 2022. The Company’s principal sources of liquidity are expected to be cash flow from operations, borrowings under the Line and long-term debt financing. The Company believes, based on its current results of operations and financial condition, that its financial resources, including the Line, short- and long-term financing expected to be available to it and internally generated funds, will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future, including any debt service requirements of additional borrowings. However, there is no assurance that any such sources of financing will be available to the Company when needed on acceptable terms, or at all. It is possible that, in the future, the Company’s results of operations and financial condition will be different from that described in this report based on a number of factors. These factors may include, among others, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery, changing demographics, and the impact of the COVID-19 pandemic, as well as the additional factors discussed below under “Forward Looking Statements.” It is also possible, for such reasons, that the results of operations from the new, expanded, remodeled and/or replacement stores will not meet or exceed the results of operations from existing stores that are described in this report. Quarterly Cash Dividends Since December 27, 1993, the Company has paid regular quarterly cash dividends of $0.165 (sixteen and one-half cents) per share on its Class A Common Stock and $0.15 (fifteen cents) per share on its Class B Common Stock for an annual rate of $0.66 and $0.60 per share, respectively. The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors periodically reconsiders the declaration of dividends. The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant. In addition, the Notes, the Bonds, the Line, and other debt agreements contain provisions that, based on certain financial parameters, restrict the ability of the Company to pay additional cash dividends in excess of current quarterly per share amounts. Further, the Company is prevented from declaring dividends at any time that it is in default under the indenture governing the Notes. Seasonality Grocery sales are subject to a slight seasonal variance due to holiday related sales and due to sales in areas where seasonal homes are located. Sales are traditionally higher in the Company’s first fiscal quarter due to the inclusion of sales related to Thanksgiving and Christmas. The Company’s second fiscal quarter traditionally has the lowest sales of the year, unless Easter falls in that quarter. In the third and fourth quarter, sales are affected by the return of customers to seasonal homes in our market area. The Company’s fluid dairy operations have slight seasonal variation to the extent of its sales into the grocery industry. The Company’s real estate activities are not subject to seasonal variations. Impact of Inflation As the economy recovers from the initial impact of the COVID-19 pandemic, inflation has reached levels not experienced in decades. Food and energy costs have increased, reflecting a tight labor market and supply chain and transportation disruptions. The following table from the United States Bureau of Labor Statistics lists annualized changes in the Consumer Price Index that could have an effect on the Company’s operations. One of the Company’s significant costs is labor, which increases with general increases in inflation. Inflation or deflation in energy costs affects the Company’s gasoline sales, distribution expenses and plastic supply costs. Twelve Months Ended March 2022 All items 8.5 % Food at home 10.0 % Energy 32.0 % ‎ 21 Forward Looking Statements This Quarterly Report contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect”, “anticipate”, “intend”, “plan”, “likely”, “goal”, “believe”, “seek”, “will”, “may”, “would”, “should” and similar expressions are intended to identify forward-looking statements. While these forward-looking statements and the related assumptions are made in good faith and reflect the Company’s current judgment regarding the direction of the Company’s business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested or described by such forward-looking statements. Such statements are based upon a number of assumptions and estimates which are inherently subject to significant risks and uncertainties many of which are beyond the Company’s control. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect the Company’s results. Some important factors (but not necessarily all factors) that affect the Company’s revenues, financial position, growth strategies, profitability and operating results, or that otherwise could cause actual results to differ materially from those expressed in or implied by any forward-looking statement, include the potential continued impact of the COVID-19 pandemic on our business and economic conditions generally in the Company’s operating area; the Company’s ability to successfully implement its expansion and operating strategies and to manage rapid expansion; pricing pressures and other competitive factors; reduction in per gallon retail gasoline prices; the maturation of new and expanded stores; the Company’s ability to reduce costs and achieve improvements in operating results; the availability and terms of financing; increases in labor and utility costs; success or failure in the ownership and development of real estate; changes in the laws and government regulations applicable to the Company; disruptions in the efficient distribution of food products; changes in accounting policies, standards, guidelines or principles as may be adopted by regulatory agencies as well as the Financial Accounting Standards Board; and those factors contained under the heading “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K. Consequently, actual events affecting the Company and the impact of such events on the Company’s operations may vary significantly from those described in this report or contemplated or implied by statements in this report. The Company does not undertake and specifically denies any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments, except to the extent required by applicable law.