Interstate Bakeries Corp., Kansas City, Mo., cleared the first hurdle in its restructuring process by receiving interim court approval for $200 million debtor-in-possession (DIP) financing. This approval gives the company immediate access to $50 million to continue operations, pay employees and purchase goods and services. The final hearing on DIP financing occurs in late October. If approved, IBC will gain access to the remaining cash in the DIP facility. The company also received approval to pay pre-petition and post-petition employee wages and salaries during its restructuring under Chapter 11 bankruptcy.
IBC filed for Chapter 11 bankruptcy protection on September 22, ending months of speculation from the national press and baking industry. The fresh bread and sweet
goods manufacturer cited liquidity issues brought on by declining sales, a high fixed-cost structure, excess industry capacity, rising employee healthcare and pension costs, and higher costs for ingredients and energy as the reason for its filing. According to the company, the bankruptcy filing gives it the necessary time to restructure its operations.
“By filing for protection under chapter 11 and obtaining the DIP (debtor-in-possession) financing, the company should have the liquidity, time and resources necessary to thoroughly identify, assess and address the issues that will enable this company to be successful in the future,” Tony Alvarez, cofounder and chief executive of the turnaround firm Alvarez & Marsal Inc., says. “DIP financing and the protections afforded under the Bankruptcy Code provide the liquidity to ensure payment to vendors for post-petition purchases in the ordinary course.”
Alvarez was put in charge of the company’s restructuring efforts and replaces James Elsesser as chief executive officer of IBC. Alvarez has more than 20 years of experience restructuring companies and managing brands. Most recently, he served as strategic advisor to Levi Strauss & Co. John Suckow, Alvarez & Marsal’s managing director, also was brought on board to serve as IBC’s chief restructuring officer.
Restructuring IBC’s operations and structure will prove difficult for Alvarez and Suckow. Once the model of the baking industry, IBC’s performance throughout the last few years has been undesirable. The company’s stock, which hovered in the $20 to $30 per share range in 2002, has plummeted to about $4 a share.
In its last quarterly reporting period (third quarter ended March 6), the company reported a 2.5% decrease in net sales compared to the prior year. For the same quarter, the company posted a net loss of $6.6 million.
Throughout the last two years IBC has traced its woes to five items:
- Declining sales - In fiscal 2004, both branded bread and sweet goods sales fell 3.7% compared to 2003. The company also stated that low carbohydrate diets negatively impacted sales.
- High fixed-cost structure – The company has an inflexible fixed-cost structure because 81% of its workers are employed under collective bargaining agreements, resulting in increased wages and restricted opportunities to implement productivity improvements.
- Excess industry capacity – The company says that consolidation combined with declining unit sales and its extended shelf life program have resulted in too much capacity.
- Rising employee pension and healthcare costs - IBC’s high percentage of union workers and aging workforce have significantly increased employee-related costs.
- Higher costs for ingredients and energy - Volatile commodity prices and rising raw material, packaging and energy costs impacted the company’s profitability.
Another issue that the company’s new CEO will have to examine is IBC’s extended shelf life (ESL) program. Although the company has firmly stood by this policy in the last three years, many baking industry insiders point to this as a main reason for the company’s recent woes. The Wall Street Journal also lobbed a grenade at IBC’s ESL program in a front-page article that appeared the day after the company filed for bankruptcy protection. In the article, titled At Giant Baker, Freshness Project Takes Sour Turn, the daily newspaper called IBC’s ESL program a “fumbled quest.”
In the short term, the company has defined three objectives: To continue implementing its Project SOAR cost-reduction program, to re-assess and rationalize its operations, and to continue to alter its product mix to conform to consumer preferences. After progress is made on these goals, the company says it will formulate a reorganization plan to exit chapter 11 protection.
