Interstate Bakeries Corporation ("IBC") said that, as part of its previously announced operational and financial restructuring and subject to bankruptcy court approval, it plans to consolidate operations in its Florida Profit Center (PC) by closing its bakery in Miami and consolidating routes, depots and thrift stores in Florida and Georgia, where it maintains regional facilities. The company said it expects to complete the consolidation of the Florida PC by July 15, 2005. The consolidation is expected to affect approximately 600 workers in the Florida PC. IBC will continue to service the marketplace from its bakeries in Columbus, Ga., and Jacksonville and Orlando, Fla.
These actions are a part of the company's efforts to address continued revenue declines and its high-cost structure. Monthly consolidated operating reports filed with the bankruptcy court show that net sales for the third quarter (16 weeks ended March 5, 2005) were $1.003 billion, representing a 1.7% decline from the comparable period a year ago.
"In light of continuing revenue challenges, we are taking steps to rationalize and refocus our under-performing operations into a sustainable, ongoing business that can operate outside of bankruptcy protection," said Tony Alvarez II, chief executive of IBC and co-founder and co-chief executive of Alvarez & Marsal, the global corporate advisory and turnaround management services firm.
"These actions are intended to improve profitability by rationalizing marginal products," he said. "The company will strengthen its focus on branded sales and deliveries, which we believe are key components in configuring the business for efficiencies in production, distribution, marketing and sales."
Alvarez said that, since filing to restructure under chapter 11, the company has undertaken a comprehensive review of its operations to determine the appropriate actions necessary to return to profitability. As a first step, the company:
* Closed the Florence, S.C., facility;
* implemented a reduction in force;
* reduced corporate costs; and
* reduced or suspended certain employee benefit programs.
As a result of these initial actions, among others, and the impact of the chapter 11 filing, IBC reported a cash balance of $95.4 million as of March 5, 2005, in the latest monthly consolidated operating report it filed with the bankruptcy court.
The company is now into the second stage of its restructuring process, which involves an exhaustive review of each of the company's 10 PCs on an individual basis.
"We regret the difficulties for employees directly impacted by the consolidation in Florida," Alvarez said. "However, we believe it is critical that we eliminate unprofitable products and routes, streamline distribution, rationalize the number of brands and stock-keeping units (SKUs) and eliminate excess capacity, which will result in lower revenues in the Florida PC. In the long run, we are doing what we must to revitalize the company, preserve jobs and maximize the value of the enterprise for all our constituencies."
"We've approached the PC review process in great detail, identifying the critical issues in our most challenging regions first. Much work remains to be done, and the implementation of the PC restructurings present significant challenges and are not without execution risk," Alvarez said. In the next stage of the restructuring process, IBC plans to finalize its go-forward business plan, including the completion of a comprehensive marketing strategy. "Only after that is accomplished," Alvarez said, "will the company begin to develop a plan of reorganization that will permit it to emerge from bankruptcy protection."
The company's preliminary estimate of charges to be incurred in connection with the Florida PC consolidation is approximately $10 million, including approximately $2 million of severance charges, approximately $5 million of asset impairment charges and approximately $2 million in other charges. IBC further estimates that approximately $5 million of such costs will result in future cash expenditures. In addition, the company intends to spend approximately $1 million in capital expenditures and an additional approximately $1 million in other accrued expenses to effect the consolidation.
IBC currently contributes to over 40 multi-employer pension plans as required under various collective bargaining agreements. Many of these plans are underfunded, in that their liabilities exceed their assets. The portion of a plan's underfunding allocable to an employer deemed to be totally or partially withdrawing from the plan as the result of downsizing, job transfers or otherwise is referred to as "withdrawal liability." To give an example of the size of the underfunding in IBC's pension plans, if IBC is deemed to have completely withdrawn from the two multi-employer pension plans with the largest underfunding, Bakery & Confectionary Union & Industry International Pension Fund and Central States, Southeast and Southwest Areas Pension Plan, the total withdrawal liability (which would be an unsecured claim in the bankruptcy case) is alleged by such plans to be approximately $530 million, in the aggregate. IBC does not believe a total withdrawal has occurred and, based on the facts presently known, does not believe that a total withdrawal will occur in the future.
Certain of the plans have filed proofs of claim alleging that partial withdrawals have occurred already. In addition, there is a risk that this announced consolidation could significantly increase the amount of the liability to IBC should a partial withdrawal from the multi-employer pension plans be found to have occurred. However, IBC is conducting the Florida PC consolidation in a manner that it believes will not constitute a total or partial withdrawal from the relevant multi-employer pension plans. Additionally, IBC disputes the withdrawal liability claims filed in the bankruptcy case. Nevertheless, due to the complex nature of such a determination, no assurance can be given that withdrawal claims based upon IBC's prior actions or resulting from this consolidation or future consolidations will not result in significant liabilities for IBC. Should a partial withdrawal be found to have occurred, the amount of any partial withdrawal liability arising from the underfunded multi-employer pension plans to which IBC contributes, while less than the company's share of the total underfunding for these plans, would likely be material and could adversely affect its financial condition and, as a general unsecured claim, any potential recovery to its constituencies.
IBC filed for bankruptcy protection on September 22, 2004, citing liquidity issues resulting from declining sales, a high fixed-cost structure, excess industry capacity, rising employee healthcare and pension costs and higher costs for ingredients and energy. The company continues to operate its business in the ordinary course as a debtor-in-possession.
