INGLES MARKETS INC

On September 29, 2019, the Company adopted Financial Accounting Standards Board Accounting Standards Update ASU 2016-02, “Leases” (ASU 2016-02), which requires the Company as lessee to recognize most leases on the balance sheet thereby resulting in the recognition of right of use assets and lease liabilities for those leases currently classified as operating leases. The accounting for leases where the Company is the lessor remains largely unchanged. As both lessee and lessor, the Company adopted the standard utilizing the transition election to not restate comparative periods for the impact of adopting the standard.  The Company elected the practical expedient related to leases of twelve months or less.  The Company elected the package of transition expedients available for expired or existing contracts, which allowed the carryforward of historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.

The adoption of ASU 2016-02 resulted in the recognition of operating lease assets of $45.0 million and operating lease liabilities of $48.1 million, respectively as of September 29, 2019.  Included in the measurement of the new lease assets is the reclassification of certain balances historically recorded as deferred rent and lease obligations for closed stores.  The adoption of ASU 2016-02 did not materially affect the Company’s consolidated net income or cash flows.

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-month period ended December 28, 2019, the Company recorded  $0.9 million (net of income taxes) of other comprehensive income in its Consolidated Statements of Comprehensive income.  Unrealized gains of $1.2 million are recorded as an asset at fair value in the line “Other Assets” on the Consolidated Balance Sheet as of December 28, 2019.  For the three-month period ended December 29, 2018, the Company recorded $0.3 million (net of income taxes) of other comprehensive income in its Consolidated Statements of Comprehensive income.  Unrealized gains of $0.4 million are recorded as an asset at fair value in the line “Other Assets” on the Consolidated Balance Sheet as of December 29, 2018.

As a result of the adoption of ASU 2016-02 on September 29, 2019 the Company is required to present future minimum operating lease income receipts for operating leases having initial or remaining non-cancelable lease terms in excess of one year.  These future minimum lease payments were previously disclosed in our 2019 Annual Report on Form 10-K and accounted for under previous lease guidance.  Future minimum operating lease receipts as of September 28, 2019 were as follows:

In November 2019, the Company sold two land parcels for $4.3 million to a limited liability corporation having Robert P. Ingle II, the Company’s Chairman of the Board, as one of its principals with a financial interest in the transaction.  In accordance with the Company’s Related Party Transaction policy, independent fair market value appraisals were obtained to determine the selling price, and the Company’s Audit Committee approved the transactions. 

Loss on Early Extinguishment of Debt.  In November 2019, the Company closed a $155 million ten-year amortizing real estate loan (the “Loan”) and issued notice to redeem a like principal amount of the Notes.  The Loan was funded and the Notes redeemed thirty days after the redemption notice in December 2019.  The Notes were redeemed at 101.917% of par value, and the Company recognized debt extinguishment costs of approximately $3.7 million during the quarter ending December 28, 2019.  The debt extinguishment costs were comprised of $3.0 million of redemption premium and a $0.7 million write off of capitalized loan costs related to the redeemed Notes.