PHILADELPHIA — Certain production difficulties during the optimization of a new Philadelphia bakery prevented Tasty Baking Co. from achieving expected operational cash savings during the fourth quarter ended Dec. 25 and, along with extremely tight liquidity, have the company exploring several strategic actions, including a potential merger or sale of the company, Tasty Baking said Jan. 5.

“As of Nov. 1, 2010, our expectation was that a run rate of $13 million in annualized pre-tax cash savings, net of facility leases but before debt service, would be achieved by the end of the fourth quarter of 2010,” said Charles P. Pizzi, president and chief executive officer of Tasty Baking. “Due to unanticipated operational challenges, the run-rate savings at the end of the fourth quarter of 2010 is now expected to be approximately $10 million.”

Given the operational volatility experienced to date, Tasty Baking said it expects to report only the company’s run-rate savings at the time of each future quarterly earnings release.

Additionally, Tasty Baking said it is experiencing extremely tight liquidity as a result of lower-than-expected cost savings as well as a number of other factors, including the impact of the recent bankruptcy filing by The Great Atlantic & Pacific Tea Company, Inc. (A&P) and the sharp rise in commodity costs.

In response to these circumstances, the company is pursuing two parallel processes. First, Tasty Baking has entered into discussions with its bank group led by Citizens Bank to explore various alternatives to address current liquidity needs, including increasing the amount of funds available under the company’s bank line of credit, as well as addressing the current and future covenant requirements under the company’s credit agreement. While discussions are ongoing, Tasty Baking said the bank group has agreed to defer until Jan. 14, 2011, all principal payments and credit facility reductions, while the lenders for the company’s loans have agreed to defer until Jan. 31, 2011, certain payments due under their loans and leases.

Second, Tasty Baking has retained Janney Montgomery Scott L.L.C. as its financial adviser to assist the company in its evaluation of various possible financial and strategic options, including refinancing the company’s long-term debt due in September 2012, raising additional capital, a potential combination with another company as part of the consolidation occurring in the baked goods industry or a potential sale of the company.

As the company considers possible financial and strategic actions, Mr. Pizzi said Tasty Baking will continue to operate its two modern bakeries and produce, distribute and sell Tastykake products to its customers and consumers.

“While this has been a challenging period for us operationally, we remain focused on growing the business,” he said. “To that end we continue to partner with new grocery and convenience store customers within our core markets, increase penetration with key customers, and launch new products into the marketplace. Finally, despite the challenges we have faced, we have continued to outpace the category and grow our overall market share.”