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 March 7, 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 March 7, 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 73,003,783 shares of common stock, $.01 par value per share,
outstanding on April 3, 1998.
<PAGE>
INTERSTATE BAKERIES CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 7, 1998
CONTENTS
- --------
Description Page
----------- ----
PART I - FINANCIAL INFORMATION (UNAUDITED)
- ------------------------------------------
Management's Discussion and Analysis of Financial
Condition and Results of Operations 1-2
Consolidated Balance Sheet 3
Consolidated Statement of Income 4
Consolidated Statement of Cash Flows 5
Notes to Consolidated Financial Statements 6-7
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 8
Signatures 9
<PAGE>
INTERSTATE BAKERIES CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net sales for the third quarter of fiscal 1998, the sixteen weeks ended March
7, 1998, were $964,778,000, up $19,520,000 and 2.1% from net sales of
$945,258,000 in the prior year. Excluding the impact of acquired and disposed
operations, net sales for the quarter were down .8%. Year-to-date net sales
for the first forty weeks of fiscal 1998 were $2,482,664,000, an increase of
$25,403,000 over net sales of $2,457,261,000 in fiscal 1997. Selling prices
remained steady for the quarter, while non-branded bread and cake unit volume
was down due to mix changes to higher-margin, branded products. Unit volume
for branded bread and cake showed slight improvements for both the quarter and
year-to-date.
Gross profit was 52.6% of net sales for the third quarter of 1998, up from
50.7% of net sales in the prior year. Year-to-date gross profit increased to
52.8% of net sales from the prior year's 50.9%. These improvements resulted
from lower ingredient costs, primarily flour, partially offset by higher labor
and labor-related costs.
Selling, delivery and administrative expenses represented 43.5% of net sales
for the quarter, up from 42.7% in the prior year. Year-to-date selling,
delivery and administrative expenses were 42.7% of net sales compared to the
prior year's 42.2%. The year-to-year dollar increases in selling, delivery
and administrative expenses were 4.2% and 2.2% for the quarter and year-to-
date, respectively, primarily reflecting inflationary increases in labor and
labor-related costs as well as acquisitions.
Based upon these factors, operating income for the third quarter of fiscal
1998 was $55,894,000, up $9,626,000 or 20.8% from the prior year's
$46,268,000. Year-to-date operating income was up $36,766,000, or 27.0%, to
$172,895,000 from $136,129,000 in fiscal 1997.
Interest expense declines of $852,000 and $3,138,000 for the third quarter and
year-to-date, respectively, reflect lower average borrowing levels, as well as
slightly lower interest rates during these periods.
The effective tax rates for fiscal 1998 and 1997 were 40.7% and 43.1%,
respectively. Non-deductible intangible asset amortization was responsible
for the higher effective tax rate in fiscal 1997.
Reflecting these overall improvements, net income for the third quarter of
fiscal 1998 was $29,871,000, or $.40 per share (diluted basis), compared to
$22,629,000, or $.30 per share, the prior year. Year-to-date net income
improved to $93,998,000, or $1.25 per share (diluted basis), from $67,538,000,
or $.89 per share, last year. These earnings per share amounts, which have
been adjusted for a two-for-one stock split effected in the form of a stock
-1-
<PAGE>
dividend paid November 3, 1997, represent improvements of 33.3% and 40.4% for
the quarter and year-to-date, respectively.
Adoption of New Accounting Standard
- -----------------------------------
During the third quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 replaces 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 the new standard.
Changes in Financial Condition
- ------------------------------
Cash generated by operating activities for the forty weeks ended March 7, 1998
was $157,337,000 compared to $144,327,000 a year ago. This increase of
$13,010,000 reflects improved operations, offset by an increase in working
capital. Cash generated by operations during fiscal 1998, along with
additional borrowings of $23,000,000 and stock issuance proceeds of
$5,194,000, was used to repurchase common stock of $65,333,000, fund net
capital expenditures of $60,927,000, acquire a business for $43,671,000 and
pay common stock dividends of $15,336,000.
On January 4, 1998, the Company acquired the assets of the John J. Nissen
Baking companies ("Nissen"), a major baker and distributor of fresh bread to
the New England region. Sales of Nissen-branded products exceed $115 million
annually. In conjunction with the Nissen acquisition, the Company will be
spending approximately $42 million to complete the $60 million Biddeford,
Maine bakery under construction at the acquisition date.
As noted in the Company's Annual Report on Form 10-K for the year ended May
31, 1997, cash flows from operations and borrowing capacity under the bank
credit facility should be sufficient to meet the ongoing cash requirements in
the current year, including the Nissen acquisition and Biddeford construction.
-2-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(000's)
March 7, May 31,
1998 1997
------------ -----------
Assets
Current assets:
Accounts receivable, less allowance
for doubtful accounts of $5,012,000
($4,577,000 at May 31) $ 191,927 $ 190,747
Inventories 64,475 63,962
Other current assets 76,906 70,453
---------- ----------
Total current assets 333,308 325,162
---------- ----------
Property and equipment:
Land and buildings 334,194 291,526
Machinery and equipment 822,937 784,910
---------- ----------
1,157,131 1,076,436
Less accumulated depreciation (323,595) (269,153)
---------- ----------
Net property and equipment 833,536 807,283
---------- ----------
Intangibles 372,095 360,642
---------- ----------
$1,538,939 $1,493,087
========== ==========
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt payable within one year $ 25,000 $ -
Accounts payable 143,889 146,638
Accrued expenses 203,050 201,878
---------- ----------
Total current liabilities 371,939 348,516
---------- ----------
Long-term debt 249,000 251,000
Other liabilities 236,873 230,967
Deferred income taxes 123,882 123,882
---------- ----------
Total long-term liabilities 609,755 605,849
---------- ----------
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 -
79,009,000 shares (78,530,000 at May 31) 790 393
Additional paid-in capital 534,318 529,127
Retained earnings 121,496 43,228
Treasury stock, at cost - 5,571,000 shares
(3,416,000 at May 31) (99,359) (34,026)
---------- ----------
Total stockholders' equity 557,245 538,722
---------- ----------
$1,538,939 $1,493,087
========== ==========
See accompanying notes.
-3-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended
-------------------------- ----------------------------
March 7, March 8, March 7, March 8,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $964,778 $945,258 $2,482,664 $2,457,261
-------- -------- ---------- ----------
Cost of products sold 457,054 465,891 1,171,339 1,205,895
Selling, delivery and administrative
expenses 419,984 403,174 1,059,527 1,036,296
Depreciation and amortization 31,846 29,925 78,903 78,941
-------- -------- ---------- ----------
908,884 898,990 2,309,769 2,321,132
-------- -------- ---------- ----------
Operating income 55,894 46,268 172,895 136,129
-------- -------- ---------- ----------
Other income (291) (166) (469) (556)
Interest expense 5,812 6,664 14,851 17,989
-------- -------- ---------- ----------
5,521 6,498 14,382 17,433
-------- -------- ---------- ----------
Income before income taxes 50,373 39,770 158,513 118,696
Provision for income taxes 20,502 17,141 64,515 51,158
-------- -------- ---------- ----------
Net income $ 29,871 $ 22,629 $ 93,998 $ 67,538
======== ======== ========== ==========
Earnings per share:
Basic $ .41 $ .30 $ 1.28 $ .90
======== ======== ========== ==========
Diluted $ .40 $ .30 $ 1.25 $ .89
======== ======== ========== ==========
</TABLE>
See accompanying notes.
-4-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000's)
Forty Weeks Ended
--------------------------
March 7, March 8,
1998 1997
------------ ------------
Cash flows from operating activities:
Net income $ 93,998 $ 67,538
Depreciation and amortization 78,903 78,941
Other (6,880) (10,502)
Change in operating assets and liabilities:
Accounts receivable 7,503 3,144
Inventories 1,038 5,684
Other current assets (6,398) 6,869
Accounts payable and accrued expenses (10,827) (7,347)
-------- --------
Cash from operating activities 157,337 144,327
-------- --------
Cash flows from investing activities:
Acquisition of a business (43,671) -
Additions to property and equipment (64,092) (54,203)
Sale of assets 3,165 13,842
Other (264) 6,736
-------- --------
Cash from investing activities (104,862) (33,625)
-------- --------
Cash flows from financing activities:
Reduction of long-term debt - (126,205)
Addition to long-term debt 23,000 40,000
Common stock dividends paid (15,336) (14,789)
Issuance of common stock 5,194 5,053
Acquisition of treasury stock (65,333) (4,022)
-------- --------
Cash from financing activities (52,475) (99,963)
-------- --------
Change in cash and cash equivalents - 10,739
Cash and cash equivalents:
Beginning of period - -
-------- --------
End of period $ - $ 10,739
======== ========
Supplemental disclosures:
Interest paid $ 16,520 $ 20,754
Income taxes paid 71,812 52,563
See accompanying notes.
-5-
<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)
-------------------------
March 7, May 31,
1998 1997
------------ ----------
Ingredients and packaging $43,634 $43,195
Finished goods 14,590 14,420
Other 6,251 6,347
------- -------
$64,475 $63,962
======= =======
3. Income Taxes
------------
The reconciliation of the provision for income taxes to the statutory federal
rate is as follows:
Forty Weeks Ended
----------------------------
March 7, March 8,
1998 1997
------------ ------------
Statutory federal tax 35.0% 35.0%
State income tax 4.8 4.6
Intangibles amortization 1.4 2.8
Other (.5) .7
------ ------
40.7% 43.1%
====== ======
The provision for income taxes for the current quarter of both fiscal years
includes any adjustments for revisions in the projected annual effective tax
rate.
-6-
<PAGE>
4. Stock Split
-----------
On September 23, 1997, the shareholders of the Company approved an increase in
the number of authorized common shares to 120,000,000. The same day the
Company's Board of Directors declared a two-for-one stock split effected in the
form of a stock dividend payable November 3, 1997 to stockholders of record on
October 15, 1997. All share and per share amounts have been adjusted to reflect
this stock split.
5. Acquisition
-----------
On January 4, 1998, the Company acquired the assets of the John J. Nissen Baking
companies, a major baker and distributor of fresh bread to the New England
region. Sales of Nissen-branded products exceed $115 million annually. The
transaction has been accounted for as a purchase.
6. Adoption of New Accounting Standard
-----------------------------------
During the third quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 replaces 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 the new standard. Following is a
reconciliation between basic and diluted weighted average shares outstanding
used in the Company's earnings per share computations (000's):
Sixteen Weeks Ended Forty Weeks Ended
--------------------- ---------------------
March 7, March 8, March 7, March 8,
1998 1997 1998 1997
-------- -------- -------- --------
Basic weighted average
common shares outstanding 73,349 75,058 73,665 74,882
Effect of dilutive stock
compensation 1,418 1,528 1,389 1,208
-------- -------- -------- --------
Dilutive weighted average
common shares outstanding 74,767 76,586 75,054 76,090
======== ======== ======== ========
-7-
<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
-8-
<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: April 3, 1998 /s/ Charles A. Sullivan
-------------------------------
Charles A. Sullivan, Chairman
and Chief Executive Officer
DATE: April 3, 1998 /s/ John F. McKenny
-------------------------------
John F. McKenny, Vice President/
Corporate Controller and
Principal Accounting Officer
-9-
EXHIBIT 11
INTERSTATE BAKERIES CORPORATION
SCHEDULE REGARDING COMPUTATION OF PER SHARE EARNINGS
(000's EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended
--------------------- ---------------------
March 7, March 8, March 7, March 8,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 29,871 $ 22,629 $ 93,998 $ 67,538
======== ======== ======== ========
Basic weighted average common shares
outstanding 73,349 75,058 73,665 74,882
Effect of dilutive stock compensation 1,418 1,528 1,389 1,208
-------- -------- -------- --------
Diluted weighted average common
shares outstanding 74,767 76,586 75,054 76,090
======== ======== ======== ========
Earnings per share:
Basic $ .41 $ .30 $ 1.28 $ .90
======== ======== ======== ========
Diluted $ .40 $ .30 $ 1.25 $ .89
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 7, 1998 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE FORTY WEEKS ENDED MARCH 7, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-30-1998
<PERIOD-END> MAR-07-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 196,939
<ALLOWANCES> 5,012
<INVENTORY> 64,475
<CURRENT-ASSETS> 333,308
<PP&E> 1,157,131
<DEPRECIATION> 323,595
<TOTAL-ASSETS> 1,538,939
<CURRENT-LIABILITIES> 371,939
<BONDS> 249,000
0
0
<COMMON> 790
<OTHER-SE> 556,455
<TOTAL-LIABILITY-AND-EQUITY> 1,538,939
<SALES> 2,482,664
<TOTAL-REVENUES> 2,482,664
<CGS> 1,171,339
<TOTAL-COSTS> 1,171,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,851
<INCOME-PRETAX> 158,513
<INCOME-TAX> 64,515
<INCOME-CONTINUING> 93,998
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 93,998
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.25
</TABLE>
