UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 14, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
_______________
For the Quarter Ended November 14, 1998 Commission File Number 1-11165
INTERSTATE BAKERIES CORPORATION
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1470322
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12 East Armour Boulevard, Kansas City, Missouri 64111
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (816) 502-4000
--------------
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes / X / No / /
There were 71,668,931 shares of common stock, $.01 par value per share,
outstanding on December 17, 1998.
<PAGE>
INTERSTATE BAKERIES CORPORATION
FORM 10-Q
QUARTER ENDED NOVEMBER 14, 1998
CONTENTS
- --------
Description Page
----------- ----
PART I - FINANCIAL INFORMATION (UNAUDITED)
- ------------------------------------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations 1-3
Consolidated Balance Sheet 4
Consolidated Statement of Income 5
Consolidated Statement of Cash Flows 6
Notes to Consolidated Financial Statements 7-8
PART II - OTHER INFORMATION
- ---------------------------
Legal Proceedings Not Applicable
Changes in Securities Not Applicable
Defaults Upon Senior Securities Not Applicable
Submission of Matters to a Vote of Security Holders Not Applicable
Other Information Not Applicable
Exhibits and Reports on Form 8-K 9
Signatures 10
<PAGE>
INTERSTATE BAKERIES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net sales for the second quarter of fiscal 1999, the twelve weeks ended
November 14, 1998, were $814,593,000, up $60,426,000 and 8.0%, from net sales
of $754,167,000, in the prior year. Year-to-date net sales for fiscal 1999
were $1,603,009,000, an increase of $85,123,000, or 5.6%, over net sales of
$1,517,886,000 in fiscal 1998. Excluding the impact of acquired and disposed
operations, net sales for these periods were up less than 1% over the prior
year. These adjusted increases reflect overall unit volume gains over the
prior year of 1.6% for the quarter and 1.1% year-to-date and branded unit
volume gains of 2.4% and 2.0% for the quarter and year-to-date, respectively.
Volume gains for these periods have been partially offset by lower selling
prices in some major markets, resulting from pricing pressures in these areas.
Gross profit was 52.2% of net sales for the second quarter of 1999, down from
53.3% of net sales in the prior year. Year-to-date gross profit decreased to
52.5% of net sales from the prior year's 52.9%. Slightly lower ingredient
costs for the quarter and year-to-date periods were offset by slightly higher
labor and labor-related costs. The decrease in gross profit percentages was
principally due to lower selling prices in some major markets.
Selling, delivery and administrative expense for fiscal 1999 increased 8.4%
for the quarter and 5.7% on a year-to-date basis over fiscal 1998, due to
acquisitions. Selling, delivery and administrative expense as a percentage of
net sales was 42.1% and 42.2% for fiscal 1999's second quarter and
year-to-date, respectively, consistent with fiscal 1998's quarterly 41.9% and
year-to-date 42.1%.
Based upon these factors, operating income for the second quarter of fiscal
1999 was $56,460,000, or 6.9% of net sales, down $5,786,000 from the prior
year's $62,246,000, or 8.3% of net sales. Year-to-date operating income for
fiscal 1999 was $115,856,000, or 7.2% of net sales, compared to $117,001,000,
or 7.7% of net sales for fiscal 1998, a decrease of $1,145,000.
Interest expense increases of $629,000 and $499,000 for the second quarter and
year-to-date, respectively, reflect higher average borrowing levels primarily
due to acquisitions.
The effective tax rates for fiscal 1999 and 1998 were 37.5% and 40.7%,
respectively. The fiscal 1999 effective tax rate approximates the overall
federal and state rates while the fiscal 1998 effective tax rate reflects
higher nondeductible intangibles amortization.
-1-
<PAGE>
Net income for the second quarter of fiscal 1999 was $32,107,000, or $.44 per
share (diluted basis), compared to $34,247,000, or $.46 per share, the prior
year. Year-to-date net income improved to $66,598,000, or $.91 per share,
from $64,127,000, or $.85 per share, last year.
Changes in Financial Condition
- ------------------------------
Cash generated by operating activities for the twenty-four weeks ended
November 14, 1998 was $125,164,000 comparable to $117,975,000 a year ago.
Cash generated by operations during fiscal 1999, along with increased
borrowings of $73,000,000 and stock option exercise proceeds of $4,046,000,
was used for acquisitions of $105,248,000, funding net capital expenditures of
$46,811,000, repurchasing common stock of $38,661,000 and paying common stock
dividends of $10,138,000.
As noted in the Company's Annual Report on Form 10-K for the year ended May
30, 1998, cash flows from operations, along with existing debt and the new
senior debt issuance, are expected to be sufficient to meet the fiscal 1999
cash requirements. On September 10, 1998, the Company entered into a 6.43%
senior note agreement for $200,000,000 with several major insurance companies.
The debt is unsecured and matures September 2005. The proceeds were used to
repay a short-term bank facility and reduce borrowings under the existing
revolving credit facility.
Year 2000 Compliance
- --------------------
The Company has been assessing the impact that the turn of the century will
have on its internal computer systems for several years. The turn of the
century could potentially impact the Company's production systems, route
operations, inventory purchasing and control, receivable collections, cash
management and financial reporting. The Company has developed an overall plan
to evaluate and correct all computer and non-information technology
date-related system issues by mid-summer of 1999. This evaluation and
correction process has already been completed on a number of the Company's
most critical systems with testing of changes already in process. The Company
is also in the process of communicating with significant suppliers and
customers to ascertain the status of their year 2000 compliance programs.
To date, the costs of year 2000 remediation have not been and are not expected
to be material.
Based upon efforts to date and the assumed continued implementation of its
year 2000 compliance plan, the Company does not anticipate that year 2000
issues will significantly impact the business or that the costs associated
with year 2000 compliance will have a material impact on future consolidated
financial position, results of operations or cash flows of the Company.
The Company currently does not have a formal contingency plan in place.
Contingency planning is scheduled to occur during the spring and summer of
1999 as final implementation and testing of the compliance plan takes place.
-2-
<PAGE>
Forward-Looking Statements
- ----------------------------
The Company or its representatives may from time-to-time provide information,
in either written or oral form, which contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. In receiving
and reviewing such information, it should be kept in mind that forward-looking
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those discussed or projected.
Factors which create these risks and uncertainties can be either internal to
the Company or related to general external market conditions.
-3-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(000's)
November 14, May 30,
1998 1998
------------ -----------
Assets
Current assets:
Accounts receivable, less allowance
for doubtful accounts of $4,490,000
($4,106,000 at May 30) $ 212,054 $ 198,644
Inventories 73,759 66,427
Other current assets 58,474 69,387
---------- ----------
Total current assets 344,287 334,458
---------- ----------
Property and equipment:
Land and buildings 364,620 343,339
Machinery and equipment 914,558 849,671
---------- ----------
1,279,178 1,193,010
Less accumulated depreciation (386,013) (344,130)
---------- ----------
Net property and equipment 893,165 848,880
---------- ----------
Intangibles 430,389 366,648
---------- ----------
$1,667,841 $1,549,986
========== ==========
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt payable within one year $ 25,000 $ 25,000
Accounts payable 137,135 146,852
Accrued expenses 222,542 193,236
---------- ----------
Total current liabilities 384,677 365,088
---------- ----------
Long-term debt 334,000 261,000
Other liabilities 239,927 236,506
Deferred income taxes 122,237 122,237
---------- ----------
Total long-term liabilities 696,164 619,743
---------- ----------
Stockholders' equity:
Preferred stock, par value $.01 per share;
authorized - 1,000,000 shares; issued - none - -
Common stock, par value $.01 per share;
authorized - 120,000,000 shares; issued -
79,438,000 shares (79,126,000 at May 30) 794 791
Additional paid-in capital 543,402 539,359
Retained earnings 207,178 150,718
Treasury stock, at cost - 7,782,000 shares
(6,382,000 at May 30) (164,374) (125,713)
---------- ----------
Total stockholders' equity 587,000 565,155
---------- ----------
$1,667,841 $1,549,986
========== ==========
See accompanying notes.
-4-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
-------------------------- ----------------------------
November 14, November 15, November 14, November 15,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $814,593 $754,167 $1,603,009 $1,517,886
-------- -------- ---------- ----------
Cost of products sold 389,354 352,130 761,160 714,285
Selling, delivery and administrative
expenses 342,837 316,217 675,949 639,543
Depreciation and amortization 25,942 23,574 50,044 47,057
-------- -------- ---------- ----------
758,133 691,921 1,487,153 1,400,885
-------- -------- ---------- ----------
Operating income 56,460 62,246 115,856 117,001
-------- -------- ---------- ----------
Other income (114) (79) (239) (178)
Interest expense 5,202 4,573 9,538 9,039
-------- -------- ---------- ----------
5,088 4,494 9,299 8,861
-------- -------- ---------- ----------
Income before income taxes 51,372 57,752 106,557 108,140
Provision for income taxes 19,265 23,505 39,959 44,013
-------- -------- ---------- ----------
Net income $ 32,107 $ 34,247 $ 66,598 $ 64,127
======== ======== ========== ==========
Earnings per share:
Basic $ .45 $ .47 $ .92 $ .87
======== ======== ========== ==========
Diluted $ .44 $ .46 $ .91 $ .85
======== ======== ========== ==========
</TABLE>
See accompanying notes.
-5-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000's)
Twenty-Four Weeks Ended
--------------------------
November 14, November 15,
1998 1997
------------ ------------
Cash flows from operating activities:
Net income $ 66,598 $ 64,127
Depreciation and amortization 50,044 47,057
Other 1,493 (8,802)
Change in operating assets and liabilities:
Accounts receivable (6,140) (8,829)
Inventories (4,955) (1,418)
Other current assets 11,394 (7,396)
Accounts payable and accrued expenses 6,730 33,236
-------- --------
Cash from operating activities 125,164 117,975
-------- --------
Cash flows from investing activities:
Acquisitions (105,248) -
Additions to property and equipment (52,661) (33,726)
Sale of assets 5,850 2,205
Other (521) (252)
-------- --------
Cash from investing activities (152,580) (31,773)
-------- --------
Cash flows from financing activities:
Addition to long-term debt 200,000 -
Reduction of long-term debt (127,000) (17,000)
Common stock dividends paid (10,138) (10,201)
Stock option exercise proceeds and
related tax benefits 4,046 2,213
Acquisition of treasury stock (38,661) (61,214)
Other (831) -
-------- --------
Cash from financing activities 27,416 (86,202)
-------- --------
Change in cash and cash equivalents - -
Cash and cash equivalents:
Beginning of period - -
-------- --------
End of period $ - $ -
======== ========
Cash payments made:
Interest $ 10,990 $ 9,482
Income taxes 10,152 20,517
See accompanying notes.
-6-
<PAGE>
INTERSTATE BAKERIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Accounting Policies and Basis of Presentation
---------------------------------------------
The accompanying unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring accruals, which, in the opinion
of management, are necessary for a fair presentation of financial position,
results of operations and cash flows. Results of operations for interim periods
are not necessarily indicative of results to be expected for a full year.
2. Inventories
-----------
The components of inventories are as follows:
(000's)
-------------------------
November 14, May 30,
1998 1998
------------ ----------
Ingredients and packaging $47,126 $43,534
Finished goods 20,607 16,996
Other 6,026 5,897
------- -------
$73,759 $66,427
======= =======
3. Income Taxes
------------
The reconciliation of the provision for income taxes to the statutory federal
rate is as follows:
Twenty-Four Weeks Ended
----------------------------
November 14, November 15,
1998 1997
------------ ------------
Statutory federal tax 35.0% 35.0%
State income tax 2.7 4.8
Intangibles amortization 1.0 1.4
Other (1.2) (.5)
------ ------
37.5% 40.7%
====== ======
4. Earnings Per Share
------------------
During the third quarter of fiscal 1998, the Company adopted Statement of
-7-
<PAGE>
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 replaced primary earnings per share with a dual presentation of basic and
diluted earnings per share. Earnings per share amounts for prior periods have
been restated in accordance with this standard. Following is a reconciliation
between basic and diluted weighted average shares outstanding used in the
Company's earnings per share computations (000's):
Twelve Weeks Ended Twenty-Four Weeks Ended
-------------------------- --------------------------
November 14, November 15, November 14, November 15,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Basic weighted
average common
shares outstanding 72,053 73,230 72,358 73,876
Effect of dilutive
stock compensation 1,029 1,495 1,082 1,427
------ ------ ------ ------
Dilutive weighted
average common
shares outstanding 73,082 74,725 73,440 75,303
====== ====== ====== ======
5. Acquisitions
------------
On August 16, 1998, the Company acquired the assets of the Drake baking
operation in Wayne, New Jersey (Drake's"). Drake's employs over 800 people,
sells cake product throughout the northeastern United States and has annual
sales of approximately $115 million.
On October 4, 1998, the Company acquired the My Bread Baking Co. ("My Bread")
operation in New Bedford, Massachusetts, in exchange for its Grand Junction,
Colorado bakery and an additional cash payment. My Bread has annual sales of
$37 million and employs over 400 people.
Both transactions have been accounted for as purchases. In addition, the My
Bread exchange included a noncash portion not reflected in investing
activities on the statement of cash flow amounting to $14,700,000.
6. New Debt Agreement
------------------
On September 10, 1998, the Company entered into a 6.43% senior note agreement
for $200,000,000 with several major insurance companies. The debt, which is
unsecured, has a maturity date of September 2005. The note agreement contains
covenants, which a) limit the Company's ability to incur indebtedness, merge,
consolidate and sell assets, and b) require the Company to satisfy certain
ratios related to net worth and interest coverage. These covenants are
comparable to those under the existing revolving credit facility.
The proceeds were used to repay a short-term bank facility and reduce
borrowings under the revolving credit facility.
-8-
<PAGE>
PART II
ITEM 6 - Exhibits and Reports on Form 8-K
a) Exhibits filed with this report
1) 11 - Schedule regarding computation of per share earnings
2) 27 - Financial data schedule
b) Reports on Form 8-K
1) A Report on Form 8-K was filed by the Company on September 23,
1998. The Report set forth information regarding the Company's
6.43% Guaranteed Senior Note Agreement for $200,000,000, dated
September 10, 1998.
-9-
<PAGE>
**************
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Interstate Bakeries Corporation
-------------------------------
(Registrant)
DATE: December 18, 1998 /s/ Charles A. Sullivan
-------------------------------
Charles A. Sullivan, Chairman
and Chief Executive Officer
DATE: December 18, 1998 /s/ John F. McKenny
-------------------------------
John F. McKenny, Vice President/
Corporate Controller and
Principal Accounting Officer
-10-
EXHIBIT 11
INTERSTATE BAKERIES CORPORATION
SCHEDULE REGARDING COMPUTATION OF PER SHARE EARNINGS
(000's EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Twelve Weeks Ended Twenty-Four Weeks Ended
-------------------------- --------------------------
November 14, November 15, November 14, November 15,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 32,107 $ 34,247 $ 66,598 $ 64,127
======== ======== ======== ========
Basic weighted average common shares
outstanding 72,053 73,230 72,358 73,876
Effect of dilutive stock compensation 1,029 1,495 1,082 1,427
-------- -------- -------- --------
Diluted weighted average common
shares outstanding 73,082 74,725 73,440 75,303
======== ======== ======== ========
Earnings per share:
Basic $ .45 $ .47 $ .92 $ .87
======== ======== ======== ========
Diluted $ .44 $ .46 $ .91 $ .85
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF NOVEMBER 14, 1998 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE TWENTY-FOUR WEEKS ENDED NOVEMBER 14, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-29-1999
<PERIOD-END> NOV-14-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 216,544
<ALLOWANCES> 4,490
<INVENTORY> 73,759
<CURRENT-ASSETS> 344,287
<PP&E> 1,279,178
<DEPRECIATION> 386,013
<TOTAL-ASSETS> 1,667,841
<CURRENT-LIABILITIES> 384,677
<BONDS> 334,000
0
0
<COMMON> 794
<OTHER-SE> 586,206
<TOTAL-LIABILITY-AND-EQUITY> 1,667,841
<SALES> 1,603,009
<TOTAL-REVENUES> 1,603,009
<CGS> 761,160
<TOTAL-COSTS> 761,160
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,538
<INCOME-PRETAX> 106,557
<INCOME-TAX> 39,959
<INCOME-CONTINUING> 66,598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 66,598
<EPS-PRIMARY> .92
<EPS-DILUTED> .91
</TABLE>
