INGLES MARKETS INC 10-Q

Item 1. FINANCIAL STATEMENTS INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) March 25, September 24, 2023 2022 ASSETS Current Assets: Cash and cash equivalents $ 250,303,676 $ 267,198,517 Receivables - net 96,844,945 97,157,614 Inventories 474,247,848 457,945,539 Other current assets 32,272,754 15,830,032 Total Current Assets 853,669,223 838,131,702 Property and Equipment - Net 1,403,989,312 1,374,031,169 Operating lease right of use assets 40,144,201 38,594,968 Other Assets 43,262,053 44,752,886 Total Assets $ 2,341,064,789 $ 2,295,510,725 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Current portion of long-term debt $ 17,529,304 $ 17,620,789 Current portion of operating lease liabilities 7,019,650 7,797,975 Accounts payable - trade 192,287,038 213,388,385 Accrued expenses and current portion of other long-term liabilities 75,662,988 94,969,902 Total Current Liabilities 292,498,980 333,777,051 Deferred Income Taxes 69,712,000 73,578,000 Long-Term Debt 539,161,073 554,287,420 Noncurrent operating lease liabilities 35,124,926 32,794,609 Other Long-Term Liabilities 44,361,613 41,479,220 Total Liabilities 980,858,592 1,035,916,300 Stockholders’ Equity Preferred stock, $ 0.05 par value; 10,000,000 shares authorized; no shares issued — — Common stocks: Class A, $ 0.05 par value; 150,000,000 shares authorized; ‎ 14,386,925 shares issued and outstanding March 25, 2023; ‎ 14,377,575 shares issued and outstanding at September 24, 2022 719,346 718,879 Class B, convertible to Class A, $ 0.05 par value; ‎ 100,000,000 shares authorized; ‎ 4,607,451 shares issued and outstanding March 25, 2023; ‎ 4,616,801 shares issued and outstanding at September 24, 2022 230,373 230,840 Paid-in capital in excess of par value — — Accumulated other comprehensive income 9,236,818 12,406,551 Retained earnings 1,350,019,660 1,246,238,155 Total Stockholders’ Equity 1,360,206,197 1,259,594,425 Total Liabilities and Stockholders’ Equity $ 2,341,064,789 $ 2,295,510,725 See notes to unaudited condensed consolidated financial statements. ‎ 3 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended March 25, March 26, 2023 2022 Net sales $ 1,380,604,140 $ 1,377,118,668 Cost of goods sold 1,054,664,179 1,028,556,135 Gross profit 325,939,961 348,562,533 Operating and administrative expenses 268,890,164 254,739,175 Gain from sale or disposal of assets 597,218 1,265,254 Income from operations 57,647,015 95,088,612 Other income, net 1,734,456 1,344,269 Interest expense 5,344,666 5,425,534 Income before income taxes 54,036,805 91,007,347 Income tax expense 13,497,000 22,366,000 Net income $ 40,539,805 $ 68,641,347 Other comprehensive (loss) income: Change in fair value of interest rate swap $ ( 2,671,226 ) $ 9,896,413 Income tax benefit (expense) 652,000 ( 2,418,000 ) Other comprehensive (loss) income, net of tax ( 2,019,226 ) 7,478,413 Comprehensive income $ 38,520,579 $ 76,119,760 Per share amounts: Class A Common Stock Basic earnings per common share $ 2.18 $ 3.70 Diluted earnings per common share $ 2.13 $ 3.61 Class B Common Stock Basic earnings per common share $ 1.98 $ 3.36 Diluted earnings per common share $ 1.98 $ 3.36 Cash dividends per common share Class A Common Stock $ 0.165 $ 0.165 Class B Common Stock $ 0.150 $ 0.150 See notes to unaudited condensed consolidated financial statements. ‎ 4 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) Six Months Ended March 25, March 26, 2023 2022 Net sales $ 2,873,918,247 $ 2,768,648,179 Cost of goods sold 2,176,823,396 2,069,541,379 Gross profit 697,094,851 699,106,800 Operating and administrative expenses 545,069,422 514,824,580 Gain from sale or disposal of assets 1,377,302 1,209,226 Income from operations 153,402,731 185,491,446 Other income, net 3,176,063 2,936,323 Interest expense 10,691,508 10,839,405 Income before income taxes 145,887,286 177,588,364 Income tax expense 35,976,000 42,758,000 Net income $ 109,911,286 $ 134,830,364 Other comprehensive (loss) income: Change in fair value of interest rate swap $ ( 4,193,733 ) $ 11,763,300 Income tax benefit (expense) 1,024,000 ( 2,874,000 ) Other comprehensive (loss) income, net of tax ( 3,169,733 ) 8,889,300 Comprehensive income $ 106,741,553 $ 143,719,664 Per share amounts: Class A Common Stock Basic earnings per common share $ 5.92 $ 7.26 Diluted earnings per common share $ 5.79 $ 7.10 Class B Common Stock Basic earnings per common share $ 5.38 $ 6.60 Diluted earnings per common share $ 5.38 $ 6.60 Cash dividends per common share Class A Common Stock $ 0.33 $ 0.33 Class B Common Stock $ 0.30 $ 0.30 See notes to unaudited condensed consolidated financial statements. ‎ 5 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) THREE AND SIX MONTHS ENDED MARCH 25, 2023 AND MARCH 26, 2022 Paid-in Accumulated Class A Class B Capital in Other Common Stock Common Stock Excess of Comprehensive Retained Shares Amount Shares Amount Par Value Income (Loss) Earnings Total Balance, September 25, 2021 14,271,335 $ 713,567 4,723,041 $ 236,152 $ — $ ( 3,426,140 ) $ 985,734,959 $ 983,258,538 Net income — — — — — — 66,189,018 66,189,018 Other comprehensive income, net of income tax — — — — — 1,410,887 — 1,410,887 Cash dividends — — — — — — ( 3,063,227 ) ( 3,063,227 ) Common stock conversions 33,300 1,665 ( 33,300 ) ( 1,665 ) — — — — Balance, December 25, 2021 14,304,635 $ 715,232 4,689,741 $ 234,487 $ — $ ( 2,015,253 ) $ 1,048,860,750 $ 1,047,795,216 Net income — — — — — — 68,641,347 68,641,347 Other comprehensive income, net of income tax — — — — — 7,478,413 — 7,478,413 Cash dividends — — — — — — ( 3,063,727 ) ( 3,063,727 ) Common stock conversions 20,600 1,030 ( 20,600 ) ( 1,030 ) — — — — Balance, March 26, 2022 14,325,235 $ 716,262 4,669,141 $ 233,457 $ — $ 5,463,160 $ 1,114,438,370 $ 1,120,851,249 Balance, September 24, 2022 14,377,575 $ 718,879 4,616,801 $ 230,840 $ — $ 12,406,551 $ 1,246,238,155 $ 1,259,594,425 Net income — — — — — — 69,371,481 69,371,481 Other comprehensive loss, net of income tax — — — — — ( 1,150,507 ) — ( 1,150,507 ) Cash dividends — — — — — — ( 3,064,821 ) ( 3,064,821 ) Common stock conversions 9,125 456 ( 9,125 ) ( 456 ) — — — — Balance, December 24, 2022 14,386,700 $ 719,335 4,607,676 $ 230,384 $ — $ 11,256,044 $ 1,312,544,815 $ 1,324,750,578 Net income — — — — — — 40,539,805 40,539,805 Other comprehensive loss, net of income tax — — — — — ( 2,019,226 ) — ( 2,019,226 ) Cash dividends — — — — — — ( 3,064,960 ) ( 3,064,960 ) Common stock conversions 225 11 ( 225 ) ( 11 ) — — — — Balance, March 25, 2023 14,386,925 $ 719,346 4,607,451 $ 230,373 $ — $ 9,236,818 $ 1,350,019,660 $ 1,360,206,197 See notes to unaudited condensed consolidated financial statements. ‎ 6 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended March 25, March 26, 2023 2022 Cash Flows from Operating Activities: Net income $ 109,911,286 $ 134,830,364 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 57,969,652 59,264,873 Non cash operating lease cost 3,841,608 3,493,003 Gain from sale or disposal of assets ( 1,377,302 ) ( 1,209,226 ) Receipt of advance payments on purchases contracts 1,582,490 1,147,709 Recognition of advance payments on purchases contracts ( 1,430,226 ) ( 1,494,340 ) Deferred income taxes ( 2,842,000 ) ( 1,678,000 ) Changes in operating assets and liabilities: Receivables 312,669 ( 2,928,641 ) Inventory ( 16,302,309 ) ( 7,937,800 ) Other assets ( 19,145,618 ) ( 8,462,044 ) Operating lease liabilities ( 3,838,850 ) ( 3,682,564 ) Accounts payable and accrued expenses ( 34,267,784 ) ( 15,861,984 ) Net Cash Provided by Operating Activities 94,413,616 155,481,350 Cash Flows from Investing Activities: Purchase of short term investments — ( 110,007,106 ) Proceeds from sales of property and equipment 1,766,849 1,509,285 Capital expenditures ( 91,352,345 ) ( 34,096,602 ) Net Cash Used by Investing Activities ( 89,585,496 ) ( 142,594,423 ) Cash Flows from Financing Activities: Principal payments on long-term borrowings ( 15,593,180 ) ( 11,449,032 ) Dividends paid ( 6,129,781 ) ( 6,126,954 ) Net Cash Used by Financing Activities ( 21,722,961 ) ( 17,575,986 ) Net Decrease in Cash and Cash Equivalents ( 16,894,841 ) ( 4,689,059 ) Cash and cash equivalents at beginning of period 267,198,517 70,313,350 Cash and Cash Equivalents at End of Period $ 250,303,676 $ 65,624,291 See notes to unaudited condensed consolidated financial statements. ‎ 7 INGLES MARKETS, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED UNAUDITED INTERIM FINANCIAL STATEMENTS Three Months and Six Months Ended March 25, 2023 and March 26, 2022 A. BASIS OF PREPARATION In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to present fairly the financial position as of March 25, 2023 and the results of operations and changes in stockholders’ equity for the three-month and six-month periods ended March 25, 2023 and March 26, 2022, and cash flows of Ingles Markets, Incorporated, a North Carolina corporation (“Ingles”, the “Company”, “we”, “us”, or “our”), for the six months ended March 25, 2023 and March 26, 2022. The adjustments made are of a normal recurring nature. Certain information and footnote disclosures included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. It is suggested that these unaudited interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended September 24, 2022, filed by the Company under the Securities Exchange Act of 1934, on November 23, 2022. The results of operations for the three-month and six-month periods ended March 25, 2023 are not necessarily indicative of the results to be expected for the full fiscal year. B. NEW ACCOUNTING PRONOUNCEMENTS In March 2020, the FASB issued ASU 2020-04, “ Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting .” The ASU provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting in response to the risk of cessation of the London Interbank Offered Rate (“LIBOR”). This amendment provides for optional expedients and exceptions for applying generally accepted accounting principles to contracts and hedging relationships that are affected by LIBOR and other reference rates. The ASU generally allows for hedge accounting to continue if the hedge was highly effective or met other standards prior to reference rate reform. Entities are permitted to apply the amendments to all contracts, cash flow and net investment hedge relationships that exist as of March 12, 2020. The relief provided in this ASU has been extended through December 31, 2024. The Company’s debt agreements and interest rate swaps that utilize LIBOR have not yet discontinued the use of LIBOR and, therefore, this ASU is not yet effective for us. To the extent our debt and interest rate swap arrangements change to another accepted rate within the timeline provided by this ASU, we will utilize the relief in this ASU to continue hedge accounting. C. SHORT TERM INVESTMENTS From time to time, the Company purchases financial products that can be readily converted into cash, and the Company accounts for such financial products as short-term investments. The financial products include money market funds, bonds and mutual funds. The carrying values of the Company’s short-term investments approximate fair value because of their liquidity. D. ALLOWANCE FOR DOUBTFUL ACCOUNTS Receivables are presented net of an allowance for doubtful accounts of $ 120,060 at March 25, 2023 and $ 382,657 at September 24, 2022. E. INCOME TAXES The Company’s effective tax rate differs from the federal statutory rate primarily as a result of state income taxes and tax credits. The Company has unrecognized tax benefits and could incur interest and penalties related to uncertain tax positions. These amounts are insignificant and are not expected to significantly increase or decrease within the next twelve months. 8 F. ACCRUED EXPENSES AND CURRENT PORTION OF OTHER LONG-TERM LIABILITIES Accrued expenses and current portion of other long-term liabilities consist of the following: March 25, September 24, 2023 2022 Property, payroll and other taxes payable $ 14,352,644 $ 23,306,546 Salaries, wages and bonuses payable 39,049,851 49,619,593 Self-insurance liabilities 13,028,205 13,120,861 Interest payable 4,647,146 4,590,254 Other 4,585,142 4,332,648 $ 75,662,988 $ 94,969,902 Self-insurance liabilities are established for general liability claims, workers’ compensation and employee group medical and dental benefits based on claims filed and estimates of claims incurred but not reported. The Company is currently insured for covered costs in excess of $ 1.0 million per occurrence for workers’ compensation and for general liability and $ 475,000 per covered person for medical care benefits for a policy year. The Company’s self-insurance reserves totaled $ 31.1 million and $ 31.0 million at March 25, 2023 and September 24, 2022, respectively. Of this amount, $ 13.0 million was accounted for as a current liability and $ 18.1 million as a long-term liability, which is inclusive of $ 4.2 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable at March 25, 2023. At September 24, 2022, the Company’s self-insurance reserves totaled $ 31.0 million of which $ 13.2 million was accounted for as a current liability and $ 17.8 million as a long-term liability, which is inclusive of $ 4.0 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable. Employee insurance expense, including workers’ compensation and medical care benefits, net of employee contributions, totaled $ 8.1 million and $ 7.0 million for the three-month periods ended March 25, 2023 and March 26, 2022, respectively. For the six-month periods ended March 25, 2023 and March 26, 2022, employee insurance expense, net of employee contributions totaled $ 19.0 million and $ 20.3 million, respectively. The Company’s fuel operations use underground tanks for the storage of gasoline and diesel fuel. The Company reviewed FASB Accounting Standards Codification Topic 410 (“FASB ASC 410”) and determined we have a legal obligation to remove tanks at various points in the future and accordingly determined we have met the requirements of an asset retirement obligation. The Company followed the FASB ASC 410 model for determining the asset retirement cost and asset retirement obligation. The amounts recorded were immaterial for each fuel center as well as in the aggregate at March 25, 2023 and September 24, 2022. G. LONG-TERM DEBT In June 2021, the Company issued at par $ 350.0 million aggregate principal amount of 4.00 % senior notes due 2031 (the “Notes”). The Company may redeem all or a portion of the Notes at any time at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning June 15 of the years indicated below: Year 2026 102.000 % 2027 101.333 % 2028 100.667 % 2029 and thereafter 100.000 % 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 none were issued at March 25, 2023. The Company is not required to maintain compensating balances in connection with the Line. At March 25, 2023, 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 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 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 was $ 54.4 million as of March 25, 2023. The Company may redeem the Bonds without penalty or premium at any time prior to December 17, 2029 . Interest earned by bondholders on the Bonds is exempt from Federal and North Carolina income taxation . The interest rate on the Bonds is equal to one-month LIBOR (adjusted monthly) plus a credit spread, adjusted to reflect the income tax exemption . 9 The Company’s obligation to repay the Bonds is collateralized by the Project. The Covenant Agreement incorporates substantially all financial covenants included in the Line. In September 2017, the Company refinanced approximately $ 60 million of secured borrowing obligations with a LIBOR-based amortizing floating rate loan secured by real estate, which matures in October 2027 . The Company has an interest rate swap agreement for a current notional amount of $ 27.5 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, which matures in January 2030. The Company has an interest rate swap agreement for a current notional amount of $ 128.5 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 Company recognizes differences between the variable rate interest payments and the fixed interest rate settlements with the swap counterparties as an adjustment to interest expense each period over the life of the swaps. The Company has designated the swaps as cash flow hedges and records the changes in the estimated fair value of the swaps to other comprehensive income each period. For the three and six months ended March 25, 2023, the Company recorded $ 2.0 million and $ 3.2 million of other comprehensive loss, respectively, net of income taxes, in its Consolidated Statements of Comprehensive Income. Unrealized gains of $ 12.2 million were included as an asset at fair value in the line “Other Assets” on the Consolidated Balance Sheet as of March 25, 2023. For the three- and six-month periods ended March 26, 2022, the Company recorded $ 7.5 million and $ 8.9 million of other comprehensive income, respectively, net of income taxes, in its Consolidated Statements of Comprehensive Income. 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. The Company was in compliance with all financial covenants at March 25, 2023. The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under all long-term debt agreements in the event of default under any one instrument. At March 25, 2023, property and equipment with an undepreciated cost of approximately $ 257.6 million were pledged as collateral for long-term debt. Long-term debt and Line agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios. At March 25, 2023, the Company had excess net worth totaling $ 421.3 million calculated under covenants in the Bonds, various floating rate loans (the “Loans”), and the Line. This amount is available to pay dividends; however, certain loan agreements containing provisions outlining minimum tangible net worth requirements restrict the ability of the Company to pay cash dividends in excess of the current annual per share dividends paid on the Company’s Class A Common Stock and Class B Common Stock. Further, the Company is prevented from paying cash dividends at any time that it is in default under the indenture governing the Notes. In addition, the terms of the indenture may restrict the ability of the Company to pay additional cash dividends based on certain financial parameters. H. DIVIDENDS The Company paid cash dividends of $ 0.165 for each share of Class A Common Stock and $ 0.15 for each share of Class B Common Stock on October 13, 2022 to stockholders of record on October 6, 2022 . The Company paid cash dividends of $ 0.165 for each share of Class A Common Stock and $ 0.15 for each share of Class B Common Stock on January 12, 2023 to stockholders of record on January 6, 2023 . For additional information regarding the dividend rights of the Class A Common Stock and Class B Common Stock, please see Note 8, “Stockholders’ Equity” to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K filed by the Company under the Securities Exchange Act of 1934, on November 23, 2022, as well as Note I, Earnings Per Common Share below. 10 I. EARNINGS PER COMMON SHARE The Company has two classes of common stock: Class A Common Stock, which is publicly traded, and Class B Common Stock, which has no public market. The Class B Common Stock has restrictions on transfer; however, each share is convertible into one share of Class A Common Stock at any time . Each share of Class A Common Stock has one vote per share and each share of Class B Common Stock has ten votes per share . Each share of Class A Common Stock is entitled to receive cash dividends equal to 110 % of any cash dividend paid on Class B Common Stock. The Company calculates earnings per share using the two-class method in accordance with FASB ASC Topic 260. The two-class method of computing basic earnings per share for each period reflects the cash dividends declared per share for each class of stock, plus allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock. Diluted earnings per share is calculated assuming the conversion of all shares of Class B Common Stock to shares of Class A Common Stock on a share-for-share basis. The tables below reconcile the numerators and denominators of basic and diluted earnings per share for current and prior periods. Three Months Ended Six Months Ended March 25, 2023 March 25, 2023 Class A Class B Class A Class B Numerator: Allocated net income Net income allocated, basic $ 31,398,357 $ 9,141,448 $ 85,111,213 $ 24,800,073 Conversion of Class B to Class A shares 9,141,448 — 24,800,073 — Net income allocated, diluted $ 40,539,805 $ 9,141,448 $ 109,911,286 $ 24,800,073 Denominator: Weighted average shares outstanding Weighted average shares outstanding, basic 14,386,862 4,607,514 14,384,087 4,610,289 Conversion of Class B to Class A shares 4,607,514 — 4,610,289 — Weighted average shares outstanding, diluted 18,994,376 4,607,514 18,994,376 4,610,289 Earnings per share Basic $ 2.18 $ 1.98 $ 5.92 $ 5.38 Diluted $ 2.13 $ 1.98 $ 5.79 $ 5.38 Three Months Ended Six Months Ended March 26, 2022 March 26, 2022 Class A Class B Class A Class B Numerator: Allocated net income Net income allocated, basic $ 52,934,311 $ 15,707,036 $ 103,831,190 $ 30,999,174 Conversion of Class B to Class A shares 15,707,036 — 30,999,174 — Net income allocated, diluted $ 68,641,347 $ 15,707,036 $ 134,830,364 $ 30,999,174 Denominator: Weighted average shares outstanding Weighted average shares outstanding, basic 14,320,981 4,673,395 14,299,096 4,695,280 Conversion of Class B to Class A shares 4,673,395 — 4,695,280 — Weighted average shares outstanding, diluted 18,994,376 4,673,395 18,994,376 4,695,280 Earnings per share Basic $ 3.70 $ 3.36 $ 7.26 $ 6.60 Diluted $ 3.61 $ 3.36 $ 7.10 $ 6.60 11 J. LEASES Leases as Lessee The Company conducts part of its retail operations from leased facilities. The initial terms of the leases are generally 20 years. The majority of the leases include one or more renewal options and require that the Company pay property taxes, utilities, repairs and certain other costs incidental to occupation of the premises. Several leases contain clauses that require rental payments based on a percentage of gross sales of the supermarket occupying the leased space. Step rent provisions, escalation clauses and lease incentives are taken into account in computing minimum lease payments. Operating lease cost for all operating leases totaled $ 2.7 million for the three months ended March 25, 2023 and $ 5.3 million for the six months ended March 25, 2023. This amount included short-term (less than one year) leases, common area expenses, and variable lease costs, all of which are insignificant. Cash paid for lease liabilities in operating activities approximates operating lease cost. Maturities of operating lease liabilities as of March 25, 2023 were as follows: Fiscal Year Remainder of 2023 $ 4,369,583 2024 8,030,542 2025 7,229,835 2026 5,947,887 2027 5,097,637 Thereafter 22,704,055 Total lease payments $ 53,379,539 Less amount representing interest 11,234,963 Present value of lease liabilities $ 42,144,576 The weighted average remaining lease term for the Company’s operating leases is 12.7 years. The weighted average discount rate used to determine lease liability balances as of March 25, 2023 was 3.51 %, based on our incremental borrowing rate. Leases as Lessor At March 25, 2023, the Company owned and operated 92 shopping centers in conjunction with its supermarket operations. The Company leases to others a portion of its shopping center properties. The leases are non-cancelable operating lease agreements for terms ranging up to 20 years. Rental income is included in the line item “Net sales” on the Consolidated Statements of Income. Depreciation on owned properties leased to others and other shopping center expenses are included in the line item “Cost of goods sold” on the Consolidated Statements of Income. Three Months Ended Six Months Ended March 25, 2023 March 25, 2023 Rents earned on owned and subleased properties: Base rentals $ 5,825,202 $ 11,942,079 Variable rentals 41,723 83,445 Total 5,866,925 12,025,524 Depreciation on owned properties leased to others ( 1,754,831 ) ( 3,334,553 ) Other shopping center expenses ( 910,994 ) ( 1,537,965 ) Total $ 3,201,100 $ 7,153,006 Future minimum operating lease receipts at March 25, 2023 were as follows: Fiscal Year Remainder of 2023 $ 9,120,094 2024 16,911,437 2025 15,097,395 2026 11,617,994 2027 8,847,337 Thereafter 31,848,431 Total minimum future rental income $ 93,442,688 12 K. SEGMENT INFORMATION The Company operates one primary business segment, retail grocery sales. “Other” includes our remaining operations – fluid dairy and shopping center rentals. Information about the Company’s operations by lines of business (amounts in thousands) is as follows: Three Months Ended Six Months Ended March 25, March 26, March 25, March 26, 2023 2022 2023 2022 Revenues from unaffiliated customers: Grocery $ 492,553 $ 482,179 $ 1,033,411 $ 970,585 Non-foods 308,684 289,419 636,039 594,091 Perishables 348,204 355,651 722,392 720,001 Fuel 175,551 200,192 368,023 391,025 Total Retail $ 1,324,992 $ 1,327,441 $ 2,759,865 $ 2,675,702 Other 55,612 49,678 114,053 92,946 Total revenues from unaffiliated customers $ 1,380,604 $ 1,377,119 $ 2,873,918 $ 2,768,648 Income from operations: Retail $ 50,786 $ 88,663 $ 138,701 $ 174,162 Other 6,861 6,426 14,702 11,329 Total income from operations $ 57,647 $ 95,089 $ 153,403 $ 185,491 March 25, September 24, 2023 2022 Assets: Retail $ 2,075,213 $ 2,042,730 Other 269,038 255,880 Elimination of intercompany receivable ( 3,186 ) ( 3,099 ) Total assets $ 2,341,065 $ 2,295,511 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. The fluid dairy operation sales to the grocery sales segment have been eliminated in consolidation and are excluded from the amounts in the table above. L. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments. The fair value of the Company’s debt and interest rate swaps are estimated using valuation techniques under the accounting guidance related to fair value measurements based on observable and unobservable inputs. Observable inputs reflect readily available data from independent sources, while unobservable inputs reflect the Company’s market assumptions. These inputs are classified into the following hierarchy: Level 1 Inputs – Quoted prices for identical assets or liabilities in active markets. Level 2 Inputs – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 Inputs – Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value require significant management judgment or estimation. 13 The carrying amount and fair value of the Company’s debt, interest rate swaps, and non-qualified retirement plan assets at March 25, 2023 were as follows (in thousands): Carrying Fair Value Amount Fair Value Measurements Senior Notes due 2031 $ 350,000 $ 301,875 Level 2 Facility Bonds due 2036 54,440 54,440 Level 2 Secured notes payable and other 152,250 152,250 Level 2 Interest rate swap derivative contracts asset 12,227 12,227 Level 2 Non-qualified retirement plan assets 18,929 18,929 Level 2 The fair values for Level 2 measurements were determined primarily using market yields and taking into consideration the underlying terms of the instrument. M. COMMITMENTS AND CONTINGENCIES Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims is not expected to materially affect the Company’s financial position, the results of its operations, or its cash flows. N. RELATED PARTY TRANSACTIONS The Company will from time to time make short-term non-interest bearing loans to the Company’s Investment/Profit Sharing Plan to allow the plan to meet distribution obligations during a time when the plan was prohibited from selling shares of the Company’s Class A Common Stock. During the three months ended March 25, 2023, there were no such loans made, repaid or outstanding. During the three months ended December 24, 2022, a limited liability corporation having Robert P. Ingle II, the Company’s Chairman of the Board, as one of its principals, purchased a shopping center from an unrelated party at which the Company has a long-term lease in place. The Company’s lease was in place prior to such purchase, and the terms of the lease have not changed since it was originally negotiated.