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 6, 1999
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 6, 1999 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 70,172,914 shares of common stock, $.01 par value per share,
outstanding on April 8, 1999.
<PAGE>
INTERSTATE BAKERIES CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 6, 1999
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 third quarter of fiscal 1999, the sixteen weeks ended March
6, 1999, were $1,031,342,000, up $66,564,000 and 6.9%, from net sales of
$964,778,000 in the prior year. Year-to-date net sales for fiscal 1999 were
$2,634,351,000, an increase of $151,687,000, or 6.1%, over net sales of
$2,482,664,000 in fiscal 1998. Excluding the impact of acquired and disposed
operations, net sales were up slightly more than 2.0% for the quarter and 1.0%
on a year-to-date basis. These adjusted increases for the quarter and year-to-
date primarily reflect volume gains.
Gross profit was 52.6% of net sales for the third quarter of 1999, identical
to the prior year's gross profit percentage. Year-to-date gross profit
decreased slightly to 52.5% of net sales from 52.8% in fiscal 1998. The
decrease in gross profit on a year-to-date basis reflects higher production-
related costs of recently acquired operations.
Selling, delivery and administrative expense for fiscal 1999 increased 8.2%
for the quarter and 6.7% on a year-to-date basis over fiscal 1998, due to
acquisitions. Selling, delivery and administrative expense as a percentage of
net sales was 44.0% for the third quarter of fiscal 1999 compared to 43.5% the
prior year, while the year-to-date percentage increased to 42.9% from 42.7% in
the prior year. Excluding acquisitions, the quarterly and year-to-date
percentages are consistent with the prior year.
Based upon these factors, operating income for the third quarter of fiscal
1999 was $54,511,000, or 5.3% of net sales, down $1,383,000 from the prior
year's $55,894,000, or 5.8% of net sales. Year-to-date operating income for
fiscal 1999 was $170,367,000, or 6.5% of net sales, compared to $172,895,000,
or 7.0% of net sales, for fiscal 1998, a decrease of $2,528,000.
Interest expense increases of $1,519,000 and $2,018,000 for the third 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.
Net income for the third quarter of fiscal 1999 was $29,583,000, or $.41 per
share (diluted basis), compared to $29,871,000, or $.40 per share, the prior
year. Year-to-date net income improved to $96,181,000, or $1.32 per share,
from $93,998,000, or $1.25 per share, last year.
-1-
<PAGE>
Changes in Financial Condition
- ------------------------------
Cash generated by operating activities for the forty weeks ended March 6, 1999
was $140,586,000 compared to $157,337,000, with the decrease primarily
attributable to higher working capital requirements. Cash generated by
operations during fiscal 1999, along with increased borrowings of $113,000,000
and stock option exercise proceeds of $5,959,000, was used for acquisitions of
$106,566,000, funding net capital expenditures of $77,771,000, repurchasing
common stock of $58,678,000 and paying common stock dividends of $15,150,000.
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)
March 6, May 30,
1999 1998
------------ ------------
Assets
Current assets:
Accounts receivable, less allowance
for doubtful accounts of $4,437,000
($4,106,000 at May 30) $ 212,185 $ 198,644
Inventories 66,904 66,427
Other current assets 63,106 69,387
---------- ----------
Total current assets 342,195 334,458
---------- ----------
Property and equipment:
Land and buildings 378,691 343,339
Machinery and equipment 934,748 849,671
---------- ----------
1,313,439 1,193,010
Less accumulated depreciation (409,992) (344,130)
---------- ----------
Net property and equipment 903,447 848,880
---------- ----------
Intangibles 430,620 366,648
---------- ----------
$1,676,262 $1,549,986
========== ==========
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Long-term debt payable within one year $ 25,000 $ 25,000
Accounts payable 117,726 146,852
Accrued expenses 207,188 193,236
---------- ----------
Total current liabilities 349,914 365,088
---------- ----------
Long-term debt 374,000 261,000
Other liabilities 236,644 236,506
Deferred income taxes 122,237 122,237
---------- ----------
Total long-term liabilities 732,881 619,743
---------- ----------
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 -
79,526,000 shares (79,126,000 at May 30) 795 791
Additional paid-in capital 545,314 539,359
Retained earnings 231,749 150,718
Treasury stock, at cost - 8,595,000 shares
(6,382,000 at May 30) (184,391) (125,713)
---------- ----------
Total stockholders' equity 593,467 565,155
---------- ----------
$1,676,262 $1,549,986
========== ==========
See accompanying notes.
-4-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(000'S EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Sixteen Weeks Ended Forty Weeks Ended
-------------------------- ----------------------------
March 6, March 7, March 6, March 7,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $1,031,342 $964,778 $2,634,351 $2,482,664
---------- -------- ---------- ----------
Cost of products sold 488,976 457,054 1,250,136 1,171,339
Selling, delivery and administrative
expenses 454,295 419,984 1,130,244 1,059,527
Depreciation and amortization 33,560 31,846 83,604 78,903
---------- -------- ---------- ----------
976,831 908,884 2,463,984 2,309,769
---------- -------- ---------- ----------
Operating income 54,511 55,894 170,367 172,895
---------- -------- ---------- ----------
Other income (152) (291) (391) (469)
Interest expense 7,331 5,812 16,869 14,851
---------- -------- ---------- ----------
7,179 5,521 16,478 14,382
---------- -------- ---------- ----------
Income before income taxes 47,332 50,373 153,889 158,513
Provision for income taxes 17,749 20,502 57,708 64,515
---------- -------- ---------- ----------
Net income $ 29,583 $ 29,871 $ 96,181 $ 93,998
========== ======== ========== ==========
Earnings per share:
Basic $ .41 $ .41 $ 1.34 $ 1.28
======== ======== ========== ==========
Diluted $ .41 $ .40 $ 1.32 $ 1.25
======== ======== ========== ==========
</TABLE>
See accompanying notes.
-5-
<PAGE>
INTERSTATE BAKERIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(000's)
Forty Weeks Ended
--------------------------
March 6, March 7,
1999 1998
------------ ------------
Cash flows from operating activities:
Net income $ 96,181 $ 93,998
Depreciation and amortization 83,604 78,903
Other (1,280) (6,880)
Change in operating assets and liabilities:
Accounts receivable (6,013) 7,503
Inventories 1,900 1,038
Other current assets 6,762 (6,398)
Accounts payable and accrued expenses (40,568) (10,827)
-------- --------
Cash from operating activities 140,586 157,337
-------- --------
Cash flows from investing activities:
Acquisitions (106,566) (43,671)
Additions to property and equipment (85,041) (64,092)
Sale of assets 7,270 3,165
Other (521) (264)
-------- --------
Cash from investing activities (184,858) (104,862)
-------- --------
Cash flows from financing activities:
Addition to long-term debt 200,000 23,000
Reduction of long-term debt (87,000) -
Common stock dividends paid (15,150) (15,336)
Stock option exercise proceeds and
related tax benefits 5,959 5,194
Acquisition of treasury stock (58,678) (65,333)
Other (859) -
-------- --------
Cash from financing activities 44,272 (52,475)
-------- --------
Change in cash and cash equivalents - -
Cash and cash equivalents:
Beginning of period - -
-------- --------
End of period $ - $ -
======== ========
Cash payments made:
Interest $ 15,566 $ 16,520
Income taxes 49,974 71,812
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)
-------------------------
March 6, May 30,
1999 1998
------------ ----------
Ingredients and packaging $44,738 $43,534
Finished goods 15,798 16,996
Other 6,368 5,897
------- -------
$66,904 $66,427
======= =======
3. Income Taxes
------------
The reconciliation of the provision for income taxes to the statutory federal
rate is as follows:
Forty Weeks Ended
----------------------------
March 6, March 7,
1999 1998
------------ ------------
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):
Sixteen Weeks Ended Forty Weeks Ended
--------------------- ---------------------
March 6, March 7, March 6, March 7,
1999 1998 1999 1998
-------- -------- -------- --------
Basic weighted average
common shares outstanding 71,468 73,349 72,002 73,665
Effect of dilutive stock
compensation 703 1,418 933 1,389
-------- -------- -------- --------
Dilutive weighted average
common shares outstanding 72,171 74,767 72,935 75,054
======== ======== ======== ========
5. Acquisition
-----------
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 flows 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
-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: April 12, 1999 /s/ Charles A. Sullivan
-------------------------------
Charles A. Sullivan, Chairman
and Chief Executive Officer
DATE: April 12, 1999 /s/ John F. McKenny
-------------------------------
John F. McKenny, Vice President/
Corporate Controller and
Principal Accounting Officer
-10-
<PAGE>
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 6, March 7, March 6, March 7,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 29,583 $ 29,871 $ 96,181 $ 93,998
======== ======== ======== ========
Basic weighted average common shares
outstanding 71,468 73,349 72,002 73,665
Effect of dilutive stock compensation 703 1,418 933 1,389
-------- -------- -------- --------
Diluted weighted average common
shares outstanding 72,171 74,767 72,935 75,054
======== ======== ======== ========
Earnings per share:
Basic $ .41 $ .41 $ 1.34 $ 1.28
======== ======== ======== ========
Diluted $ .41 $ .40 $ 1.32 $ 1.25
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 6, 1999 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE FORTY WEEKS ENDED MARCH 6, 1999 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-29-1999
<PERIOD-END> MAR-06-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 216,622
<ALLOWANCES> 4,437
<INVENTORY> 66,904
<CURRENT-ASSETS> 342,195
<PP&E> 1,313,439
<DEPRECIATION> 409,992
<TOTAL-ASSETS> 1,676,262
<CURRENT-LIABILITIES> 349,914
<BONDS> 374,000
0
0
<COMMON> 795
<OTHER-SE> 592,672
<TOTAL-LIABILITY-AND-EQUITY> 1,676,262
<SALES> 2,634,351
<TOTAL-REVENUES> 2,634,351
<CGS> 1,250,136
<TOTAL-COSTS> 1,250,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,869
<INCOME-PRETAX> 153,889
<INCOME-TAX> 57,708
<INCOME-CONTINUING> 96,181
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,181
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.32
</TABLE>
