Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-K, Received: 03/02/2011 17:27:29)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM 10-K

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2011

[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________

Commission file number 0-398

SNYDER’S-LANCE, INC.
(Exact name of Registrant as specified in its charter)

North Carolina
56-0292920
(State of incorporation)
(I.R.S. Employer Identification Number)

13024 Ballantyne Corporate Place, Suite 900, Charlotte, North Carolina 28277
(Address of principal executive offices) (zip code)

Post Office Box 32395, Charlotte, North Carolina 28232-2395
(Mailing address of principal executive offices) (zip code)

Registrant’s telephone number, including area code:     (704) 554-1421

Securities Registered Pursuant to Section 12(b) of the Act:
 
 
Title of Each Class
Name of Each Exchange on Which Registered
$0.83-1/3 Par Value Common Stock
The NASDAQ Stock Market LLC

Securities Registered Pursuant to Section 12(g) of the Act:   NONE

Indicate by checkmark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by checkmark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ

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 þ     No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes þ     No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨


Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):
     Large accelerated filer þ              Accelerated filer ¨              Non-accelerated filer ¨              Smaller reporting company ¨
                           (do not check if a smaller reporting company)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes ¨ No þ

The aggregate market value of shares of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of voting or nonvoting common equity, held by non-affiliates as of June 25, 2010, the last business day of the Registrant’s most recently completed second fiscal quarter, was $543,949,000.

The number of shares outstanding of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock, as of February 18, 2011, was 66,428,178 shares.

Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 3, 2011 are incorporated by reference into Part III of this Form 10-K.

 
 

 

SNYDER’S-LANCE, INC.

FORM 10-K
TABLE OF CONTENTS

     
Page
 
PART 1
       
         
      1  
    Item 1
    1  
    Item 1A
    3  
    Item 1B
    9  
    Item 2
    9  
    Item 3
    9  
    Item 4
    10  
    Item X
    11  
           
PART II
         
           
    Item 5
    12  
    Item 6
    13  
    Item 7
    14  
    Item 7A
    25  
    Item 8
    26  
      56  
      57  
      60  
    Item 9
    61  
    Item 9A
    61  
    Item 9B
    61  
           
PART III
         
           
    Item 10
    61  
    Item 11
    61  
    Item 12
    61  
    Item 13
    61  
    Item 14
    61  
           
PART IV
         
           
    Item 15
    62  
      67  
           
       
       
       
       
       
       
       
           
Note: Items 10-14 are incorporated by reference to the Proxy Statement and Item X of Part I.
 


PART I


Cautionary Information About Forward-Looking Statements

This document includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include statements about our estimates, expectations, beliefs, intentions or strategies for the future, and the assumptions underlying such statements.  We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements.  Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations.  Factors that could cause these differences include, but are not limited to, the factors set forth under Part I, Item 1A - Risk Factors.

Caution should be taken not to place undue reliance on our forward-looking statements, which reflect the expectations of management only as of the time such statements are made.  Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Item 1.  Business

General

Incorporated as a North Carolina corporation in 1926, Lance, Inc. (“Lance”) manufactures, markets, and distributes snack foods throughout much of the United States and other parts of North America.  Snyder's of Hanover, Inc. (“Snyder’s”) was a privately held company that manufactures, markets, and distributes snack foods throughout North America, the Caribbean, Europe and the Pacific Rim.  On December 6, 2010, a wholly-owned subsidiary of Lance, Inc. merged with and into Snyder’s of Hanover, Inc., with the result that Snyder’s became a wholly-owned subsidiary of Lance, Inc. (the “Merger”).  In connection with the Merger, Lance changed its name to Snyder’s-Lance, Inc. effective December 10, 2010.  References to “Snyder’s-Lance,” the “Company”, “we”, “us” or “our” refer to Snyder’s-Lance, Inc. and its subsidiaries, as the context requires.  References to “Lance” and “Snyder’s” refer to the companies as they existed prior to the Merger.  The Merger created a national snack food company with well-recognized brands, an expanded branded product portfolio, complementary manufacturing capabilities and a nationwide distribution network.  The Company is headquartered in Charlotte, North Carolina.

Products

We manufacture, market and distribute a variety of snack food products.  We manufacture products including pretzels, sandwich crackers, kettle chips, cookies, potato chips, tortilla chips, other salty snacks, sugar wafers, nuts, restaurant style crackers and candy.  In addition, we purchase certain cakes, meat snacks, candy and other partner brand products for resale in order to broaden our product offerings.  Products are packaged in various single-serve, multi-pack and family-size configurations.

We sell and distribute branded, private brand and partner brand products to customers.  We also contract with other branded food manufacturers to produce their products.  Our branded products are principally sold under the Snyder’s of Hanover®, Lance®, Cape Cod®, Krunchers!®, Jays®, Tom’s®, Archway®, Grande®, Stella D’oro®, O-Ke-Doke®, EatSmart® and Padrinos® brands.  Private brand (private label) products are sold to retailers and distributors using store brands or our own control brands, such as Brent & Sam’s®, Vista®, Delicious® and Jodan®. Partner brands consist of other third-party brands that we sell through our distribution network.  During 2010, 2009, and 2008, branded products represented approximately 58%, 58%, and 60% of total revenue, respectively.  Non-branded products represented approximately 42%, 42%, and 40% of total revenue in 2010, 2009, and 2008, respectively.



Intellectual Property
 
Trademarks that are important to our business are protected by registration or other means in the United States and most other markets where the related products are sold.  We own various registered trademarks for use with our branded products including LANCE, SNYDER’S OF HANOVER, CAPE COD POTATO CHIPS, KRUNCHERS!, TOM’S, JAYS, ARCHWAY, STELLA D’ORO, GRANDE, O-KE-DOKE, EATSMART, PADRINOS, TOASTCHEE, TOASTY, NEKOT, NIPCHEE, CHOC-O-LUNCH, VAN-O-LUNCH, GOLD-N-CHEES, CAPTAIN’S WAFERS and a variety of other marks and designs.  We license trademarks, including HERSHEY’S, BUGLES, BASS PRO SHOP and TEXAS PETE, for limited use on certain products that are classified as branded product sales.  We also own registered trademarks including VISTA, BRENT & SAM’S, DELICIOUS, and JODAN that are used in connection with our private brand products.

Distribution

We distribute snack food products throughout the United States using a direct-store-delivery (“DSD”) network of approximately 3,000 distribution routes, some serviced by employees and others by independent operators.  We also ship products directly to customers using third-party carriers or our own transportation fleet throughout North America.  In February 2011, we announced a plan to convert approximately 1,300 company-owned routes to an independent operator structure over the next 12 to 18 months to better position our distribution network to serve customers.

Customers

The customer base for our branded and partner brand products includes grocery/mass merchandisers, distributors, independent operators, convenience stores, club stores, discount stores, food service establishments and various other customers including drug stores, schools, military and government facilities and “up and down the street” outlets such as recreational facilities, offices and other independent retailers.  Private brand customers include grocery/mass merchandisers and discount stores.  We also contract with other branded food manufacturers to manufacture their products.

Substantially all of our revenues are to customers in the United States.  Revenue from our largest customer, Wal-Mart Stores, Inc. and subsidiaries, was approximately 23% of our total revenue in 2010.  The loss of this customer or a substantial portion of business with this customer could have a material adverse effect on our business and results of operations.

Raw Materials

The principal raw materials used to manufacture our products are flour, vegetable oil, sugar, potatoes, peanuts, other nuts, cheese, cocoa and seasonings.  The principal packaging supplies used are flexible film, cartons, trays, boxes and bags.  These raw materials and supplies are normally available in adequate quantities in the open market and may be contracted by us up to a year or more in advance, depending on market conditions.

Competition and Industry
Our products are sold in highly competitive markets.  Generally, we compete with manufacturers, many of whom have greater total revenues and resources than we do.  The principal methods of competition are price, service, product quality, product offerings and distribution.  The methods of competition and our competitive position vary according to the geographic location, the particular products and the activities of our competitors.


 
Environmental Matters

Our operations in the United States and Canada are subject to various federal, state (or provincial) and local laws and regulations with respect to environmental matters.  However, the Company was not a party to any material proceedings arising under these laws or regulations for the periods covered by this Form 10-K.  We believe the Company is in compliance with all material environmental regulations affecting our facilities and operations and that continued compliance will not have a material impact on our capital expenditures, earnings or competitive position.

Employees

At the beginning of February 2011, we had approximately 7,000 active employees in the United States and Canada.  At the beginning of February 2010, we had approximately 4,800 active employees in the United States and Canada.  The increase in the number of employees was due to the Merger.  None of our employees are covered by a collective bargaining agreement.

Other Matters

Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, are available on our website free of charge.  The website address is www.lanceinc.com.  All required reports are made available on the website as soon as reasonably practicable after they are filed with the Securities and Exchange Commission.  Also available is the Joint Proxy Statement, Prospectus included in the Registration Statement on Form S-4 filed with the Securities and Exchange Commission in connection with the approval of the Merger by the stockholders of Lance.

Item 1A.  Risk Factors

In addition to the other information in this Form 10-K, the following risk factors should be considered carefully in evaluating our business.  Our business, financial condition or results of operations may be adversely affected by any of these risks.  Additional risks and uncertainties, including risks that we do not presently know of or currently deem insignificant, may also impair our business, financial condition or results of operations.

Our performance may be impacted by general economic conditions and an economic downturn.
Recessionary pressures from an overall decline in U.S. economic activity could adversely impact our business and results of operations.  Economic uncertainty may reduce consumer spending in our sales channels and create a shift in consumer preference toward private label products.  While our product portfolio contains both branded and private label offerings and mitigates certain exposure, shifts in consumer spending could result in increased pressure from competitors or customers to reduce the prices of some of our products and/or limit our ability to increase or maintain prices, which could lower our overall revenues and profitability.

Instability in the financial markets may impact our ability or increase the cost to enter into new credit agreements in the future.  Additionally, it may weaken the ability of our customers, suppliers, independent operators, distributors, banks, insurance companies and other business partners to perform in the normal course of business, which could expose us to losses or disrupt the supply of inputs we rely upon to conduct our business.  If one or more of our key business partners fail to perform as expected or contracted for any reason, our business could be negatively impacted.

Volatility in the price or availability of the inputs we depend on, including raw materials, packaging, energy and labor, may adversely impact our profitability.
Our profitability could be adversely impacted by changes in the cost or availability of raw materials and packaging.  While we often obtain substantial commitments for future delivery of certain raw materials and may engage in limited hedging to reduce the price risk of these raw materials, continuing long-term increases in the costs of raw materials and packaging, including but not limited to cost increases due to the tightening of supply, could adversely affect our profitability.

 
Our transportation and logistics system is dependent upon gasoline and diesel fuel, and our manufacturing operations depend on natural gas.  While we may enter into forward purchase contracts to reduce the price risk associated with some of these costs, continuing long-term changes in the cost or availability of natural gas and energy could adversely impact our financial performance.
 
Our continued growth requires us to hire, retain and develop a highly skilled workforce and talented management team. Any unplanned turnover or our failure to develop an adequate succession plan for current positions could erode our competitiveness. In addition, our operating results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs.

We operate in a highly competitive food industry.
Price competition and industry consolidation could adversely impact our results of operations and financial condition.  The sales of most of our products are subject to significant competition primarily through discounting and other price cutting techniques by competitors, many of whom are significantly larger and have greater resources than we do.  In addition, there is a continuing consolidation by the major companies in the food industry, which could increase competition.  Significant competition increases the possibility that we could lose one or more major customers, lose existing product offerings at customer locations, lose market share and/or shelf space, increase expenditures or reduce selling prices, which could have an adverse impact on our business or results of operations.

Sales price increases initiated by us may negatively impact total revenue.  Future price increases, such as those to offset increased ingredient costs, may reduce our overall sales volume, which could reduce total revenues and operating profit.  Additionally, if market prices for certain ingredients decline significantly below our contracted prices, customer pressure to reduce prices could lower total revenues and operating profit.

Changes in our top customer relationships could impact our revenues and profitability.
We are exposed to risks resulting from several large customers that account for a significant portion of our revenue.  Our top ten customers accounted for approximately 41% of our revenue during 2010 with our largest customer representing 23% of our 2010 revenue.  The loss of one or more of our large customers could adversely affect our results of operations.  These customers typically make purchase decisions based on a combination of price, product quality, consumer demand and customer service performance and generally do not enter into long-term contracts.  In addition, these significant customers may re-evaluate or refine their business practices related to inventories, product displays, logistics or other aspects of the customer-supplier relationship.  Our results of operations could be adversely affected if revenue from one or more of these customers is significantly reduced or if the cost of complying with customers’ demands is significant.  If receivables from one or more of these customers become uncollectible, our results of operations may be adversely impacted.

We may not fully realize the anticipated synergies and related benefits of the Merger or do so within the anticipated timeframe.
Achieving the anticipated benefits of the Merger of Lance and Snyder’s will depend in large part upon how successfully we are able to integrate the businesses in an efficient and effective manner. The integration may result in additional and unforeseen expenses, and the anticipated benefits of the integration plan may not be realized in whole or in part. We may not be able to accomplish the integration process smoothly, successfully or on a timely basis. We may have to address potential differences in business backgrounds, corporate cultures and management philosophies to accomplish successful integration. Employee uncertainty during the integration process may also disrupt the business.  Any inability of management to successfully and timely integrate the operations could have an adverse effect on the business, results of operations and the price of our common stock.




 
Even if the integration of the business operations is successful, there can be no assurance that the integration will result in the realization of the full benefits of synergies, cost savings, growth and operational efficiencies that may be possible from this integration, or that these benefits will be achieved within a reasonable period of time.
 
The loss of key personnel as a result of the Merger could have a material adverse effect on our financial condition, results of operations and growth prospects.
The success of the Merger will depend in part on our ability to retain key employees and their continued employment.  It is possible that employees may decide to terminate employment as a result of the Merger. If certain key employees terminate their employment, it could negatively impact sales, marketing or development activities.  Further, management’s attention might be diverted from successfully integrating operations to recruiting suitable replacements and our financial condition, results of operations and growth prospects could be adversely affected. In addition, we may not be able to locate suitable replacements for key employees or offer employment to potential replacements on acceptable terms.

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate business and investors’ views of the Company .
Ensuring that there are adequate internal financial and accounting controls and procedures in place to produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Prior to the Merger, Snyder’s was a private company and not subject to Section 404 of the Sarbanes-Oxley Act.  We are in the process of evaluating internal controls as a result of the Merger.  Implementing appropriate changes to internal controls of Snyder’s may take a significant period of time to complete, may distract directors, officers and employees, and may entail substantial costs in order to modify existing accounting systems.  Further, we may encounter difficulties assimilating or integrating the internal controls, disclosure controls and information technology infrastructure.  Efforts to assimilate and integrate the internal controls may not be effective in maintaining the adequacy of internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase operating costs and could materially impair the ability to operate the business.  In addition, investors’ perceptions that internal controls are inadequate or that we may be unable to produce accurate financial statements may adversely affect the price of our common stock.

Efforts to execute and accomplish our strategic initiatives could adversely affect our financial performance.
We utilize several operating strategies to increase revenue and improve operating performance.  If we are unsuccessful due to our execution, unplanned events, change management or unfavorable market conditions, our financial performance could be adversely affected.  If we pursue strategic acquisitions, divestitures, or joint ventures, we may incur significant costs and may not be able to consummate the transactions or obtain financing.  We also may be unsuccessful at integrating acquired businesses.

Future acquisitions also could result in potentially dilutive issuances of equity securities or the incurrence of debt, which could adversely affect results of operations and financial condition.  In the event we enter into strategic transactions or relationships, our financial results may differ from expectations.  We may not be able to achieve expected returns and other benefits as a result of integration or divestiture challenges not adequately considered at the time of the transaction.

Concerns with the safety and quality of certain food products or ingredients could cause consumers to avoid our products.
We could be adversely affected if consumers in our principal markets lose confidence in the safety and quality of certain products or ingredients.  Negative publicity about these concerns, whether or not valid, may discourage consumers from buying our products or cause disruptions in production or distribution of our products.




 
If our products become adulterated, misbranded or mislabeled, we might need to recall those items and may experience product liability claims if consumers are injured or become sick.
Product recalls or safety concerns could adversely impact our results of operations and market share.  We may be required to recall certain of our products should they be mislabeled, contaminated or damaged.  We also may become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products causes injury or illness.  A product recall or an adverse result in any such litigation could have a material adverse effect on our operating and financial results.  We may also lose customer confidence for our entire brand portfolio.  Additionally, impairment of the carrying value of acquired goodwill and other intangible assets could result in significantly lower operating results and net worth.

Disruption of our supply chain or information technology systems could have an adverse impact on our business, results of operations, and financial condition.
Our ability to manufacture, distribute, and sell products is critical to our success.  Damage or disruption to our manufacturing or distribution capabilities or the supply and delivery of key inputs, such as raw materials, packaging, labor, and energy, could impair our ability to conduct our business.  Examples include, but are not limited to, weather, natural disasters, fires, terrorism, pandemics, and strikes. We specifically have DSD routes and manufacturing facilities located in areas prone to tornadoes, hurricanes, and floods.  Any business disruption due to natural disasters or catastrophic events in these areas could adversely impact our financial performance if not adequately mitigated.

Also, we increasingly rely on information technology systems to conduct our business.  These systems may experience damage, failures, interruptions, errors, inefficiencies, attacks, or suffer from fires or natural disasters, any of which could have a material adverse effect on our business if not adequately mitigated by our security measures and disaster recovery plans.

Demand for our products may be adversely affected by changes in consumer preferences and tastes or if we are unable to innovate or market our products effectively.
We are a consumer products company operating in highly competitive markets and rely on continued demand for our products. To generate revenues and profits, we must sell products that appeal to our customers and consumers. Any significant changes in consumer preferences or any inability on our part to anticipate or react to such changes could result in reduced demand for our products and erosion of our competitive and financial position. Our success depends on the ability to respond to consumer trends, including concerns of consumers regarding health and wellness, obesity, product attributes and ingredients. In addition, changes in product category consumption or consumer demographics could result in reduced demand for our products. Consumer preferences may shift due to a variety of factors, including the aging of the general population, changes in social trends, changes in travel, vacation or leisure activity patterns, weather, or negative publicity resulting from regulatory action or litigation against companies in the snack food industry. Any of these changes may reduce consumers’ willingness to purchase our products.

Our continued success also is dependent on product innovation, including maintaining a robust pipeline of new products, and the effectiveness of advertising campaigns, marketing programs and product packaging. Although we devote significant resources to meet this goal, there can be no assurance as to the continued ability to develop and launch successful new products or variants of existing products, or to effectively execute advertising campaigns and marketing programs. In addition, both the launch and ongoing success of new products and advertising campaigns are inherently uncertain, especially as to their appeal to consumers. Further, failure to successfully launch new products could decrease demand for existing products by negatively affecting consumer perception of existing brands, as well as result in inventory write-offs and other costs.




 
Our distribution network relies significantly on independent operators, and such reliance could affect our ability to efficiently and profitably distribute and market products, maintain existing markets and expand business into other geographic markets.
Our DSD network relies on a significant number of independent operators for the sale and distribution of manufactured products and the products of other manufacturers for whom we provide distribution.
 
Independent operators often must make a commitment of capital or obtain financing to purchase their trucks, equipment and routes to conduct their business.  Some financing arrangements made available to independent operators require us to repurchase an independent operator’s truck, equipment and/or route at market value if the operator defaults on its loan.  As a result, any downturn in an independent operator’s business that affects the operator’s ability to pay the lender financing for the operator’s truck or route could harm our financial condition.  The failure of any of our independent operators to make timely payments could require write-offs of accounts receivable or increased provisions made against accounts receivable, either of which could adversely affect our financial condition.

Our ability to maintain a DSD network and attract additional independent operators and distributors depends on a number of factors, many of which are outside of our control.  Some of these factors include: (i) the level of demand for the brands and products, which are available in a particular distribution area; (ii) the ability to price products at levels competitive with those offered by other competing producers; and (iii) the ability to deliver products in the quantity and at the time ordered by independent operators and customers.  There can be no assurance that we will be able to meet all or any of these factors in any of the current or prospective geographic areas of distribution.  To the extent that any of these factors have a material adverse effect on the relationships with independent operators in a particular geographic area and, thus, limit the ability to maintain and expand the sales market, revenues and financial results may be adversely impacted.

Identifying new independent operators or distributors can be time-consuming and any resulting delay may be disruptive and costly to the business. There also is no assurance that we will be able to maintain current distribution relationships or establish and maintain successful relationships with independent operators in new geographic distribution areas. There is the possibility that we will have to incur significant expenses to attract and maintain independent operators in one or more geographic distribution areas in order to profitably expand geographic markets. The occurrence of any of these factors could result in a significant decrease in sales volume of our branded products and the products which we distribute for others and materially harm our financial condition and results of operations.  The nature of the relationships with the independent operators is subject to ongoing litigation.

Continued success depends on the protection of our trademarks and other proprietary intellectual property rights.
We maintain numerous patents, trademarks and other intellectual property rights, which are important to our success and competitive position, and the loss of or our inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademarks and other proprietary intellectual property rights on a worldwide basis.  Efforts to establish and protect trademarks and other proprietary intellectual property rights may not be adequate to prevent imitation of products by others or to prevent others from seeking to block sales of our products. In addition, the laws and enforcement mechanisms of some foreign countries may not allow for the protection of proprietary rights to the same extent as in the United States and other countries.




 
New regulations or legislation could adversely affect our business.
Food production and marketing are highly regulated by a variety of federal, state and other governmental agencies.  New or increased government regulation of the food industry, including but not limited to areas related to food safety, chemical composition, production processes, traceability, product quality, packaging, labeling, promotions, marketing, and advertising (particularly such communications that are directed toward children), product recalls, records, storage and distribution could adversely impact our results of operations by increasing production costs or restricting our methods of operation and distribution.  These regulations may address food industry or society factors, such as obesity, nutritional and environmental concerns and diet trends.

We are exposed to interest and foreign currency exchange rate volatility, which could negatively impact our operating results and financial condition.
We are exposed to interest rate volatility since the interest rate associated with a portion of our debt is variable.  While we mitigate a portion of this volatility by entering into interest rate swap agreements, those agreements could lock our interest rates above the market rates.

We also are exposed to foreign exchange rate volatility primarily through the operations of our Canadian subsidiary.  We mitigate a portion of the volatility impact on our results of operations by entering into foreign currency derivative contracts.  Because our consolidated financial statements are presented in U.S. dollars, we must translate the Canadian subsidiary’s financial statements at the then-applicable exchange rates.  Consequently, changes in the value of the U.S. dollar may impact our consolidated financial statements, even if the value has not changed in the original currency.
 
A significant portion of our outstanding shares of common stock is controlled by a few individuals, and their interests may conflict with those of other stockholders.
As of January 1, 2011, Michael A. Warehime and his wife, Patricia A. Warehime, beneficially owned in the aggregate approximately 19% of the outstanding common stock of the Company.  Mr. and Mrs. Warehime serve as directors of the Company, with Mr. Warehime serving as the Chairman of the Board. As a result, the Warehimes may be able to exercise significant influence over the Company and certain matters requiring approval of its stockholders, including the approval of significant corporate transactions, such as a merger or other sale of the Company or its assets.  This could limit the ability of other stockholders of the Company to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control of the Company.  In addition, the Warehimes may have actual or potential interests that diverge from the interests of the other stockholders of the Company.




 
As a condition to the execution of the merger agreement, the Warehimes entered into a standstill agreement. The standstill agreement generally provides that, until the third anniversary of the Merger, the Warehimes will not (i) acquire any additional shares of the Company’s common stock, except upon the exercise of stock options, directly from a family member or upon dividend reinvestments; (ii) sell or transfer any of their shares of the Company’s stock, except to the same extent and in the same manner as an “affiliate” (as defined in Rule 144 of the Securities Act) of the Company would be permitted to transfer such shares pursuant to Rule 144, or to a family member for estate planning purposes; or (iii) take any action contrary to maintaining certain aspects of the proposed governance structure for the Company through 2012, including plans for the reduction of the total number of directors over time and the re-election of the Lance directors eligible for re-election in 2011 and 2012. The standstill agreement further provides that at no time may the Warehimes’ aggregate beneficial ownership exceed 30% of the issued and outstanding shares of the Company’s common stock.  Upon the expiration of the standstill agreement, all of the Warehimes’ shares will be available for sale in the public market, subject (to the extent the Warehimes remain affiliates of the Company) to volume, manner of sale and other limitations under Rule 144, and there will be no restrictions on the Warehimes’ ability to acquire additional shares of the Company’s stock or influence the governance structure of the Company. As such, upon expiration of the standstill agreement, the Warehimes may have the ability to obtain or exercise increased control of the Company. In addition, sales by the Warehimes of their shares into the public market after the standstill agreement expires, or the perception that such sales could occur, could cause the market price of the our common stock to decline.

Item 1B.  Unresolved Staff Comments

None.

Item 2.  Properties

Our corporate headquarters are located in Charlotte, North Carolina.  We have an additional corporate office in Hanover, Pennsylvania.  Our manufacturing operations are located in Charlotte, North Carolina; Hanover, Pennsylvania; Goodyear, Arizona; Burlington, Iowa; Columbus, Georgia; Jeffersonville, Indiana; Hyannis, Massachusetts; Corsicana, Texas; Perry, Florida; Ashland, Ohio; Cambridge, Ontario; and Guelph, Ontario.

We also own or lease stockrooms, warehouses, sales offices and administrative offices located throughout the United States to support our operations and DSD network.

The facilities and properties that we own and operate are maintained in good condition and are believed to be suitable and adequate for present needs.  We believe that we have sufficient production capacity or the ability to increase capacity to meet anticipated demand in 2011.

Item 3.  Legal Proceedings

Two lawsuits were filed by Lance stockholders challenging the Merger.  On August 5, 2010, Albert A. Ward filed a purported putative class action complaint allegedly on behalf of Lance’s stockholders in the Mecklenburg County, North Carolina Superior Court against Lance, the members of Lance’s board of directors and Snyder’s. The Ward matter was transferred to the North Carolina Business Court on September 1, 2010.  On September 3, 2010, David Shaev filed a purported putative class action complaint allegedly on behalf of Lance’s stockholders in the United States District Court for the Western District of North Carolina, Charlotte Division against Lance, the members of Lance’s board of directors and Snyder’s. On November 8, 2010, Ward filed an amended complaint in the Ward matter, in which he dropped the class action allegations and added Lance’s merger subsidiary as a defendant.




 
On November 12, 2010, an agreement in principle was concluded to settle the Ward matter, pursuant to which Ward executed a Release Agreement (the “Ward Release Agreement”).  On December 7, 2010, Ward filed a Voluntary Dismissal, dismissing with prejudice the Ward matter and any and all claims against the defendants.

Also on November 12, 2010, an agreement in principle was concluded to settle the Shaev matter, pursuant to which Shaev executed a Release Agreement containing terms substantially similar to those of the Ward Release Agreement, and affecting only Shaev’s individual claims asserted in the Shaev matter.  On December 6, 2010, Shaev filed a Voluntary Dismissal, dismissing with prejudice the Shaev matter and any and all claims against the defendants.

As part of the settlements, Lance and the other defendants denied all allegations of wrongdoing and any liability to the plaintiffs.  In connection with the matters, each of the plaintiffs received settlement payments in an immaterial amount.

We are currently subject to various routine legal proceedings and claims incidental to our business.  In our opinion, such routine litigation and claims should not have a material adverse effect upon our consolidated financial statements taken as a whole.

Item 4.  (Removed and Reserved)

Not applicable.




 

Information about each of our “executive officers,” as defined in Rule 3b-7 of the Securities Exchange Act of 1934, is as follows:

Name
Age
Information About Officers
David V. Singer
55
Chief Executive Officer of Snyder’s-Lance, Inc. since December 2010; President and Chief Executive Officer of Lance, Inc. from 2005 to December 2010; Executive Vice President and Chief Financial Officer of Coca-Cola Bottling Co. Consolidated, a beverage manufacturer and distributor, from 2001 to 2005.
 
Carl E. Lee, Jr.
51
President and Chief Operating Officer of Snyder’s-Lance, Inc. since December 2010; President and Chief Executive Officer of Snyder’s of Hanover, Inc. from 2005 to December 2010.  From 2001 to 2005, Mr. Lee worked for FDC as President and Chief Executive Officer of WFMS.  From 1997 to 2001, Mr. Lee worked for Nabisco where he led their South American business and served as President of their Caricam and Southern Cone Regions.  Mr. Lee also led Nabisco’s Global Export business which covered 95 countries.
 
Rick D. Puckett
57
Executive Vice President, Chief Financial Officer and Secretary of Snyder’s-Lance, Inc. since January 2006 and Treasurer of Snyder’s-Lance, Inc. since April 2006; Executive Vice President, Chief Financial Officer and Treasurer of United Natural Foods, Inc., a wholesale distributor of natural and organic products, from 2005 to January 2006; and Senior Vice President, Chief Financial Officer and Treasurer of United Natural Foods, Inc. from 2003 to 2005.
 
Blake W. Thompson
55
Senior Vice President – Supply Chain of Snyder’s-Lance, Inc. since February 2007; Vice President – Supply Chain of Lance, Inc. from 2005 to 2006; Senior Vice President, Supply Chain of Tasty Baking, a snack food manufacturer and distributor, from 2004 to 2005.
 
Kevin A. Henry
43
Senior Vice President and Chief Human Resources Officer of Snyder’s-Lance, Inc. since January 2010; Chief Human Resources Officer of Coca Cola Bottling Co. Consolidated, a beverage manufacturer and distributor, from September 2007 to 2009; and Senior Vice President of Human Resources at Coca Cola Bottling Co. from February 2001 to 2009.
 
Margaret E. Wicklund
50
Vice President, Corporate Controller, Principal Accounting Officer and Assistant Secretary of Snyder’s-Lance, Inc. since 2007; Corporate Controller, Principal Accounting Officer and Assistant Secretary of Lance, Inc. from 1999 to 2006.



PART II

Item 5.  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our $0.83-1/3 par value Common Stock is traded on the NASDAQ Global Select Market under the symbol LNCE.  We had 4,471 stockholders of record as of February 18, 2010.

The following table sets forth the high and low sales prices and dividends paid during the interim periods in fiscal years 2010 and 2009:

 
High
 
Low
 
Dividend
 
2010 Interim Periods  
Price
 
Price
 
Paid
 
First quarter (13 weeks ended March 27, 2010)
$ 27.23   $ 20.90   $ 0.16  
Second quarter (13 weeks ended June 26, 2010)
  24.00     17.22     0.16  
Third quarter (13 weeks ended September 25, 2010)
  23.55     15.91     0.16  
Fourth quarter (14 weeks ended January 1, 2011)*
  24.14     19.75     3.91  
 
 
High
 
Low
 
Dividend
 
2009 Interim Periods  
Price
 
Price
 
Paid
 
First quarter (13 weeks ended March 28, 2009)
$ 24.00   $ 18.36   $ 0.16  
Second quarter (13 weeks ended June 27, 2009)
  24.05     19.66     0.16  
Third quarter (13 weeks ended September 26, 2009)
  27.00     22.53     0.16  
Fourth quarter (13 weeks ended December 26, 2009)
  28.26     22.83     0.16  
 
* Includes a special cash dividend of $3.75 per share paid to the stockholders of Lance immediately prior to the Merger.

On February 8, 2011, the Board of Directors of Snyder’s-Lance, Inc. declared a quarterly cash dividend of $0.16 per share payable on February 25, 2011 to stockholders of record on February 18, 2011.  Our Board of Directors will consider the amount of future cash dividends on a quarterly basis.

Our credit agreement dated December 7, 2010 restricts payment of cash dividends and repurchases of our common stock if, after payment of any such dividends or any such repurchases of our common stock, our consolidated stockholders’ equity would be less than $200 million.  At January 1, 2011, our consolidated stockholders’ equity was $836.6 million.  The private placement agreement for $100 million of senior notes assumed as part of the Merger has provisions no more restrictive than the credit agreement dated December 7, 2010.

In December 2008, the Board of Directors approved the repurchase of up to 100,000 shares of common stock from employees. On July 21, 2010, the Board of Directors approved the repurchase of up to an additional 100,000 shares, or up to $2.4 million, of common stock from employees.  The purpose of the repurchase is to acquire shares of common stock from employees to cover withholding taxes payable by employees upon the vesting of shares of restricted stock.  During the fourth quarter of 2010, we repurchased the following shares of common stock for this purpose:

Fiscal Month Date Range
Total Number
of Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number of Shares
Repurchased as Part of Publically
Announced Plans or Programs
 
Maximum Number of Shares
That May Yet to be Purchased
Under the Plans or Programs
 
September 26, 2010 – October 23, 2010
  -     -     -     -  
October 24, 2010 – November 20, 2010
  -     -     -     -  
November 21, 2010 – January 1, 2011
  79,727   $ 23.23     -     57,380  

 
 
During the first three quarters of 2010, we repurchased 56,152 shares of common stock.  During 2009, we repurchased 6,741 shares of common stock.  We did not repurchase any shares of common stock during 2008.
 
Item 6.  Selected Financial Data

The following table sets forth selected historical financial data for the five-year period ended January 1, 2011.  The selected financial data set forth below should be read in conjunction with “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and the audited financial statements.  The prior year amounts have been reclassified for consistent presentation, including the reclassification of the vending operations to discontinued operations for 2006 and 2007.
 
2010
 
2009
 
2008
 
2007
 
2006
Results of Operations (in thousands):
                 
Net sales and other operating revenue (1) (2) (3)
$ 979,835   $ 918,163   $ 852,468   $ 762,736   $ 730,116
Income from continuing operations
  before income taxes (4) (5) (6) (7)
  8,162     53,331     28,788     37,732     27,104
Net income from continuing operations
  2,512     35,028     18,828     24,735     17,672
Income from discontinued operations
  before income taxes (8)
  -     -     -     44     153
Net income from discontinued operations
  -     -     -     29     100
Net income
$ 2,512   $ 35,028   $ 18,828   $ 24,764   $ 17,772
                             
Average Number of Common Shares Outstanding (in thousands):
 
Basic
  34,128     31,565     31,202     30,961     30,467
Diluted
  34,348     32,384     31,803     31,373     30,844
                             
Per Share of Common Stock:
                           
From continuing operations – basic
$ 0.07   $ 1.11   $ 0.60   $ 0.80   $ 0.58
From discontinued operations – basic
  -     -     -     -     -
From continuing operations – diluted
  0.07     1.08     0.59     0.79     0.57
From discontinued operations – diluted
  -     -     -     -     -
Cash dividends declared (9)
$ 4.39   $ 0.64   $ 0.64   $ 0.64   $ 0.64
                             
Financial Status at Year-end (in thousands):
 
Total assets
$ 1,462,356   $ 540,114   $ 470,735   $ 416,470   $ 387,993
Long-term debt, net of current portion
$ 227,462   $ 113,000   $ 91,000   $ 50,000   $ 50,000
Total debt
$ 285,229   $ 113,000   $ 98,000   $ 50,000   $ 50,000

Footnotes:
(1)  
2010 revenue included approximately $49 million from the result of the Merger with Snyder’s in December 2010 and approximately $18 million from the acquisition of Stella D’oro in October 2009. In addition, 2010 was a 53-week year. There was approximately $11 million of incremental revenue related to the additional week of revenue.

(2)  
2009 revenue included approximately $27 million from both Archway (acquired in December 2008) and Stella D’oro.

(3)  
2008 revenue included approximately $15 million from Brent & Sam’s (acquired in March 2008).  Also, a significant amount of price increases were initiated in response to unprecedented ingredient costs increases, such as flour and vegetable oil.

(4)  
2010 pre-tax income was significantly impacted by change-in-control and other Merger-related expenses incurred in connection with the Merger, totaling approximately $38 million as well as incremental costs of approximately $3 million for an unsuccessful bid for a targeted acquisition, $3 million for severance costs relating to a workforce reduction, $2 million for a claims buy-out agreement with an insurance company, and a pre-tax loss for the additional fifty-third week of approximately $2 million.
 

(5)  
2009, 2008, 2007 and 2006 figures have been revised to reflect change in accounting for inventory.  See Note 2 to the consolidated financial statements in Item 8.

(6)  
2008 pre-tax income was significantly impacted by unprecedented ingredient costs increases, such as flour and vegetable oil, not fully offset by our selling price increases during the year.

(7)  
Pre-tax income in 2006 was impacted by $1.3 million of expenses related to stock options as required by a change in accounting standard.  Incremental severance and integration costs during 2006 related to the Tom’s acquisition were $2.8 million.

(8)  
During 2006, we committed to a plan to discontinue our vending operations.

(9)  
2010 includes a special dividend of $3.75 in connection with the Merger.


The following discussion provides an assessment of our financial condition, results of operations, liquidity and capital resources and should be read in conjunction with the accompanying consolidated financial statements, and notes to the financial statements. This discussion contains forward-looking statements that involve risks and uncertainties.  The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results.  Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under Part I, Item 1A—Risk Factors and other sections in this report.

Management’s discussion and analysis of our financial condition and results of operations are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  Future events and their effects cannot be determined with absolute certainty.  Therefore, management’s determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances.  We routinely evaluate our estimates, including those related to customer returns and promotions, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, postretirement benefits, intangible asset valuations, incentive compensation, income taxes, self-insurance, contingencies and litigation.  Actual results may differ from these estimates under different assumptions or conditions.

Executive Summary

The past year was historically transformative, ending with the consummation of a merger of equals that positions our Company for future growth through expanded product lines, expanded distribution of products and channels, and significant operating efficiency opportunities.

In the first quarter, we incurred $2.9 million in pre-tax expenses related to an unsuccessful bid for a targeted acquisition.  In addition, the impact of the economic environment and increased price and brand competition led to pressures on our operating profit growth.

In order to restore profit margins and align our operating costs with revenue, we announced a workforce reduction during the second quarter with associated pre-tax costs of $3.0 million.




 
During the third quarter, Lance and Snyder’s announced a merger of equals. Incremental costs associated with this Merger were $37.9 million pre-tax for expenses incurred during the third and fourth quarter related to change in control expenses, investment advisory costs, severance charges, legal and professional fees, purchase price adjustments and other costs.

Additionally, we assumed a $2.1 million net liability during the fourth quarter for workers’ compensation claims that had originated prior to 1992 and been insured by a third-party insurance company.  Due to the uncertainty of that insurer’s ability to continue paying claims, we entered into an agreement where we assumed the full liability of approximately $3.6 million of insurance claims under the pre-existing workers’ compensation policies, and received $1.5 million in cash consideration to be placed in an escrow account to pay these specific claims.

We also announced during the fourth quarter that we changed our fiscal year to the last Saturday closest to the end of the fiscal year, which was January 1, 2011.  This change added an additional week of revenue of $11.1 million, but negatively impacted diluted earnings per share (“EPS”) by approximately $0.04 given the low volume of sales for the holiday week and higher fixed costs.

The Merger between Lance and Snyder’s was completed on December 6, 2010.  The addition of Snyder’s results from the merger date through January 1, 2011 increased revenue by $48.8 million.  Reported earnings per share was not impacted by the addition of Snyder’s results for the post-merger period since it was diluted by the additional shares issued to complete the Merger.

In 2010, we realized $0.07 of EPS as compared to $1.08 in 2009.  The most significant items, merger-related costs, reduced EPS by approximately $0.83 for the year.

As we move into 2011, our Company will be significantly changed as a result of the Merger which will impact the following:
1.  
Revenue is expected to increase between $575 million and $625 million as a result of the Merger and integration efforts;
2.  
Gross margin as a percentage of revenue is expected to decline as we shift from a company-owned route DSD network to an independent operator DSD network;
3.  
Overall percentage of branded and non-branded revenue should remain relatively similar.  However, the make-up of our non-branded revenue will include partner brands (other companies’ branded products), which may also impact our gross margin as a percentage of revenues;
4.  
Although we expect to see declines in our gross margins, we expect operating costs will decline due to the changes in our business structure and expected synergies;
5.  
As we integrate our business, there will be potential costs and benefits which will impact our results of operations and financial results.
6.  
Weighted-average diluted shares are expected to be between 68 million and 70 million for 2011.




 
Results of OperationS
2010 Compared to 2009
 
(in millions)
 2010
           2009*
     
  Favorable/
  (Unfavorable)
Revenue
$ 979.8   100.0 %   $ 918.2   100.0 %   $ 61.6     6.7 %
Cost of sales
  601.0   61.3 %     549.1   59.8 %     (51.9 )   -9.5 %
  Gross margin
  378.8   38.7 %     369.1   40.2 %     9.7     2.6 %
Selling, general and administrative
  359.6   36.7 %     310.6   33.8 %     (49.0 )   -15.8 %
Other expense, net
  7.1   0.7 %     1.8   0.2 %     (5.3 )   -294.7 %
  Earnings before interest and taxes
  12.1   1.3 %     56.7   6.2 %     (44.6 )   -78.7 %
Interest expense, net
  3.9   0.4 %     3.4   0.4 %     (0.5 )   -14.7 %
Income tax expense
  5.7   0.6 %     18.3   2.0 %     12.6     68.9 %
  Net income
$ 2.5   0.3 %   $ 35.0   3.8 %   $ (32.5 )   -92.9 %
 
* 2009 results have been revised to reflect the change in accounting for inventory.

Revenue
Revenue for the year ended January 1, 2011 increased $61.6 million compared to the year ended December 26, 2009, which includes $48.8 million in revenue as a result of the Merger and $11.1 million as a result of the additional week in the fiscal year.  Excluding the revenue from the Merger and the additional revenue week, revenue increased $1.7 million on a comparable basis to last year.

Revenue by product category was as follows:
 
   
2010
   
2009
 
Lance’s Branded Revenue
  55 %   58 %
Lance’s Non-Branded Revenue
  40 %   42 %
Snyder’s Post-Merger Revenue
  5 %   n/a  
    Total Revenue
  100 %   100 %

Lance branded revenue increased $6.6 million, which included $5.6 million of revenue as a result of the additional week in 2010, as compared to 2009.  Revenue growth was significantly impacted by economic conditions and increased competition.  In order to contend with these issues, we increased promotional spending by more than 30% compared to the prior year to support our brands and market share.  Sales of Lance’s branded products to distributors, mass merchandisers, and discount stores generated revenue growth compared to 2009 due to the acquisition of Stella D’oro in 2009, new product offerings and growth with new and existing customers.  These increases were significantly offset by declines in the food service and up-and-down the street customers as we shifted a significant portion of this business to distributors where selling prices are lower.  The convenience store channel for the first three quarters of the year experienced a significant revenue decline compared to the prior year due in part to the overall sales decline in this channel, as well as the impact of the implementation of our DSD transformation strategy completed in early 2010 that was aimed at improving route efficiency and profitability by shifting focus to servicing larger, more profitable customers.  As we moved into the fourth quarter, convenience store revenue was up slightly as compared to the prior year.  However, the decline in convenience store revenue on a full year basis negatively impacted revenue. The Merger also appeared to negatively impact revenue in certain channels due to uncertainty about the Merger and changes in sales management which occurred during the fourth quarter.




 
Approximately 65% of Lance’s branded revenue in 2010 and 68% in 2009 was generated through our DSD network.  The remainder consisted of revenue from distributors and direct shipments to customers.  The percentage of branded revenue may decline as we shift sales from a company-owned route DSD network to an independent operator DSD network, but this shift is also expected to result in lower distribution costs.
 
Lance’s non-branded revenue increased $6.2 million, which included $5.5 million of revenue as result of the additional week in 2010, as compared to 2009.  Our private brand revenue increased modestly compared to prior year as we experienced increased competition from national brand competitors, but still benefited from the introduction of new private brand products in 2009.  Contract manufacturing revenue declined as a result of a planned completion of a short-term contract manufacturing customer contract.

Gross Margin
Gross margin increased $9.7 million compared to 2009 but declined 1.5% as a percentage of revenue.  Excluding the gross margin impact of the extra week of $2.5 million and the Merger-related volume of $17.5 million, gross margin would have declined $10.3 million and 1.2% as percentage of revenue. The decline was driven by increased promotional spending and a higher percentage of Lance non-branded revenue and sales to distributors which have lower gross margin percentages, and increased costs as a result of severance and Merger-related costs including inventory adjustments.  These increased costs were partially offset by favorable commodity costs and manufacturing efficiencies. As we move into 2011, gross margin as a percentage of revenue should decline due to a higher concentration of non-branded revenue and a greater percentage of sales to independent operators, but should also result in lower distribution costs from these channels.  Commodity costs also are expected to increase in 2011 as compared to 2010, and we have planned increases in selling prices for certain products to mitigate the impact on gross margin.

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $49.0 million as compared to 2009 and increased 2.9% as a percentage of revenue.  The majority of the increase related to $35.2 million of Merger costs, including change in control expenses, investment advisory costs, severance charges, legal and professional fees, as well as $14.0 million of incremental selling, general and administrative costs of Snyder’s.  In addition, there was approximately $1.9 million in severance costs related to the workforce reduction that occurred during the second quarter, increased fuel costs of $1.8 million, and $1.7 million of additional bad debt expense due predominantly to a customer bankruptcy.  Partially offsetting these increased expenses were lower advertising costs and lower selling expenses as a result of the implementation of Lance’s DSD transformation strategy.  We expect to have incremental integration costs but also operating efficiencies and lower operating costs for our DSD network in the latter part of 2011.   

Other Expense, Net
During 2010, other expense of $7.1 million consisted mostly of financing commitment fees in the first quarter of 2010 of $2.7 million associated with an unsuccessful bid for a targeted acquisition, $2.1 million of insurance settlement charges which occurred during the fourth quarter, foreign currency transaction losses due to the unfavorable impact of exchange rates in 2010, as well as losses on the sale of fixed assets.  During 2009, other expense of $1.8 million consisted primarily of foreign currency transaction losses due to the unfavorable impact of exchange rates in 2009 and losses on the sale of fixed assets.

Interest Expense
Net interest expense increased $0.5 million primarily due to higher average debt in 2010 resulting from acquisitions made late in 2009 and the Merger in 2010, offset slightly by lower weighted average interest rates.  We expect that interest expense in 2011 will be higher than in 2010 due to the debt assumed as a result of the Merger and additional borrowings.




 
Income Tax Expense
Our effective income tax rate was 69.0% in 2010 as compared to 34.3% in 2009.  The increase in the income tax rate was primarily due to Merger related expenses that are not deductible for tax purposes, limitations on the ability to utilize tax credits and deductions as a result of lower taxable income and deduction limitations for certain executive compensation.
 
2009 Compared to 2008
 
(in millions)
 2009*
         2008*
     
  Favorable/
  (Unfavorable)
Revenue
$ 918.2   100.0 %   $ 852.4   100.0 %   $ 65.8     7.7 %
Cost of sales
  549.1   59.8 %     529.8   62.2 %     (19.3 )   -3.6 %
  Gross margin
  369.1   40.2 %     322.6   37.8 %     46.5     14.4 %
Selling, general and administrative
  310.6   33.8 %     291.7   34.2 %     (18.9 )   -6.5 %
Other expense, net
  1.8   0.2 %     (0.9 ) -0.1 %     (2.7 )   nm  
  Earnings before interest and taxes
  56.7   6.2 %     31.8   3.7 %     24.9     78.3 %
Interest expense, net
  3.4   0.4 %     3.0   0.4 %     (0.4 )   -13.3 %
Income tax expense
  18.3   2.0 %     10.0   1.2 %     (8.3 )   -83.0 %
  Net income
$ 35.0   3.8 %   $ 18.8   2.2 %   $ 16.2     86.2 %

*2009 and 2008 results have been revised to reflect the change in accounting for inventory.
nm = not meaningful
Revenue
Revenue for the year ended December 26, 2009 increased $65.8 million or approximately 8% compared to the year ended December 27, 2008.

As a percentage of total revenue, revenue by product category was as follows:

   
2009
   
2008
 
Branded Products
  58 %   60 %
Non-branded Products
  42 %   40 %
    Total Revenue
  100 %   100 %

Branded revenue increased $20.7 million or 4.0% compared to 2008.  Sales of branded products to grocery stores, distributors, discount stores and club stores generated significant growth compared to 2008 due to acquisitions, increased selling prices and new product offerings. Branded revenue from mass merchandisers increased only modestly compared to 2008 due to changes in store formats, which reduced the number of opportunities for promotional displays.  This growth was significantly offset by double-digit declines in up-and-down the street, convenience store and food service revenue as a result of lower consumer spending in these establishments and the implementation of our DSD transformation strategy aimed at improving route efficiency and profitability by shifting focus to servicing larger, more profitable customers.

Our DSD network represented approximately 68% of branded revenue in 2009 and 72% in 2008.  The remainder consisted of branded revenue from distributors and direct shipments to customers. The increase in our distributor revenue was significantly impacted by the addition of the Archway and Stella D’oro product offerings as well as an intended shift of certain revenue from our DSD network to independent distributors as part of our DSD transformation strategy.

Non-branded revenue increased $45.1 million or 13% compared to 2008, primarily related to growth from new products, increased selling prices and a short-term manufacturing contract for a new customer.  Growth in this category was also driven by increased demand from consumers for store brands, which is in part believed to be the result of the economic downturn.



 
Gross Margin
Gross margin increased $46.5 million or 2.4% as a percentage of revenue, compared to 2008.  The increase in gross margin was mostly due to lower ingredient, natural gas and packaging costs, as well as the favorable impact of higher selling prices aimed at offsetting the escalation of ingredient costs that were experienced throughout 2008 and into 2009. The increase in gross margin was somewhat offset by a higher percentage of both private brand revenue, which has a lower gross margin percentage than our branded products, and a higher percentage of distributor branded revenue, which has a lower gross margin than branded products sold through our DSD channel.  In addition, we had incremental start-up costs related to the acquisitions of Archway and Stella D’oro and the relocation of the production of Brent & Sam’s products.

Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $18.9 million as compared to 2008, but decreased 0.4% as a percentage of revenue.  Advertising costs increased $6.6 million, which included a substantial investment in advertising to support our first national television advertising campaign.  We also incurred incremental marketing costs of approximately $1.3 million to reestablish the Archway® brand in the marketplace and mitigate the negative impact of the peanut butter recall.  Compensation-related expenses increased $6.7 million due to acquisitions and additional employees to support Company initiatives.  Information technology expenditures also increased due to our ERP information technology system implementation.  Somewhat offsetting these increased expenses were favorable fuel rates, lower shipping expenses and lower route costs due to the DSD transformation initiatives compared to 2008.
 
Other Expense/(Income), Net
During 2009, other expense of $1.8 million consisted primarily of foreign currency transaction losses due to the unfavorable impact of exchange rates in 2009, as well as losses on sale of fixed assets.  Conversely, other income during 2008 was primarily the result of $0.9 million of foreign currency transaction gains.

Interest Expense
Net interest expense increased $0.4 million primarily due to higher average debt than 2008 resulting from acquisitions made late in 2008 and 2009, offset slightly by lower weighted average interest rates.

Income Tax Expense
Our effective income tax rate was 34.3% in 2009 as compared to 34.6% in 2008.  The decrease in the income tax rate was primarily due to increased utilization of federal and state credits as a result of higher net income.

Liquidity and Capital Resources

Liquidity
Liquidity represents our ability to generate sufficient cash flows from operating activities to meet our obligations as well as our ability to obtain appropriate financing.  Therefore, liquidity cannot be considered separately from capital resources that consist primarily of current and potentially available funds for use in achieving our objectives.  Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures and dividends.  Sufficient liquidity is expected to be available to enable us to meet these demands.

We have a universal shelf registration statement that, subject to our ability to consummate a transaction on acceptable terms, provides the flexibility to sell up to $250 million of debt or equity securities.

Operating Cash Flows
Net cash from operating activities was $44.4 million in 2010, $69.3 million in 2009 and $54.9 million in 2008.  Cash used from net changes in operating assets and liabilities increased from $12.9 million in 2009 to $39.9 million in 2010, mostly due to an income tax receivable in 2010 as well as incentive payments made prior to year-end as part of the change in control related to the Merger.

 
Cash used from net changes in operating assets and liabilities increased from $9.0 million in 2008 to $12.9 million in 2009, primarily due to higher accounts receivable, as a result of increased sales, and higher inventory, as a result of acquisitions and new product introductions, offset somewhat by higher accrued liabilities.

Investing Cash Flows
Cash used in investing activities in 2010 included capital expenditures of $33.3 million which was partially offset by proceeds from the sale of fixed assets of $2.7 million.  Capital expenditures for fixed assets in 2010 included manufacturing equipment, computer hardware and software, building improvements, office furniture and fixtures, vehicles, and permanent sales displays.  During 2011, capital expenditures are expected to be approximately 4% of revenue.

On December 6, 2010, Lance merged with Snyder’s by issuing common stock and options totaling $676.2 million.  Cash acquired in connection with the Merger totaled $96.3 million.

In February 2011, we announced a plan to convert approximately 1,300 company-owned routes to an independent operator structure over the next 12 to 18 months to better position our distribution network to serve customers.  We expect to generate cash inflows of approximately $40 million to $50 million from the sale of routes and route vans over the same period.

Cash used in investing activities in 2009 included capital expenditures of $40.7 million which was partially offset by proceeds from the sale of fixed assets of $0.8 million.  Capital expenditures for fixed assets in 2009 included manufacturing equipment, computer hardware and software, office furniture and fixtures, route truck shelving and permanent sales displays.  On October 13, 2009, we acquired the Stella D’oro® brand as well as certain inventory and equipment from Stella D’oro Biscuit Co., Inc. for $23.9 million, including the cost of equipment installation.
 
Financing Cash Flows
During 2010, 2009 and 2008, we paid dividends of $0.64 per share each year totaling $20.8 million, $20.4 million and $20.1 million, respectively.  Additionally, we paid a special dividend of $3.75 per share totaling $121.7 million during 2010 as part of the Merger.  As a result of the exercise of stock options by employees, we received cash and tax benefits of $13.1 million in 2010, $4.2 million in 2009 and $2.5 million in 2008.  We repurchased stock from employees to cover withholding taxes totaling $6.5 million in 2010 and $0.1 million in 2009.  During 2010, 2009 and 2008, proceeds from debt, net of repayments, were $47.8 million, $15.0 million, and $46.2 million, respectively.  These proceeds from debt were primarily used to pay for Merger-related costs or fund acquisitions.

In December 2008, the Board of Directors approved the repurchase of up to 100,000 shares of common stock from employees. On July 21, 2010, the Board of Directors approved the repurchase of up to an additional 100,000 shares, or up to $2.4 million, of common stock from employees.  The purpose of the repurchase is to acquire shares of common stock from employees to cover withholding taxes payable by employees upon the vesting of shares of restricted stock.  During 2010 and 2009, we repurchased 135,879 and 6,741 shares of common stock, respectively.  We did not repurchase any shares of common stock during 2008.  The maximum number of shares remaining to be purchased at January 1, 2011 was 57,380.

Debt
In December 2010, we amended a portion of our existing credit agreement and entered into a new credit agreement, which allows us to make revolving credit borrowings of up to $265.0 million through December 2015.  As of January 1, 2011 and December 26, 2009, we had $111.0 million and $63.0 million outstanding under the revolving credit agreement, respectively.  Under the existing credit agreement, a $50.0 million term loan is due in October 2011.  As of January 1, 2011 and December 26, 2009, we had $50.0 million outstanding under the term loan.  Total debt increased $172.2 million during 2010, of which $124.5 million was assumed as part of the Merger.  The proceeds from the increase in debt were used primarily to fund Merger-related costs and pay the special dividend associated with the Merger.

 
Unused and available borrowings were $154.0 million under our existing credit facilities at January 1, 2011.  Under certain circumstances and subject to certain conditions, we have the option to increase available credit under the credit agreement by up to $100.0 million during the life of the facility.

The credit agreement requires us to comply with certain defined covenants, such as a maximum debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 3.25, or 3.50 for four consecutive periods following a material acquisition, and a minimum interest coverage ratio of 2.5.  At January 1, 2011, our debt to EBITDA ratio as defined by the credit agreement was 1.96, and our interest coverage ratio was 9.1.  In addition, our revolving credit agreement restricts payment of cash dividends and repurchases of our common stock if, after payment of any such dividends or any such repurchases of our common stock, our consolidated stockholders’ equity would be less than $200.0 million.  At January 1, 2011, our consolidated stockholders’ equity was $836.6 million.  We were in compliance with these covenants at January 1, 2011.  Total interest expense under all credit agreements for 2010, 2009 and 2008 was $3.9 million, $3.4 million and $3.2 million, respectively.  During 2010, we capitalized no interest expense into fixed assets as part of our ERP system implementation, as compared to $0.2 million which we capitalized during 2009.
 
Contractual Obligations
We lease certain facilities and equipment classified as operating leases.  We also have entered into agreements with suppliers for the purchase of certain ingredients, packaging materials and energy used in the production process.  These agreements are entered into in the normal course of business and consist of agreements to purchase a certain quantity over a certain period of time.  These purchase commitments range in length from a few weeks to twelve months.  Additionally, we provide supplemental retirement benefits to certain retired and active officers.

Contractual obligations as of January 1, 2011 were:
        Payments Due by Period
 
(in thousands)
     Total  
< 1 year
   
1-3 years
   
3-5 years
   
Thereafter
 
Purchase commitments
  $ 169,631   $ 169,631   $ -   $ -   $ -
Debt, including interest payable*
    332,510     68,211     22,684     130,608     111,007
Operating lease obligations
    55,422     13,355     19,405     11,187     11,475
Benefit obligations
    1,263     1,205     58     -     -
  Total contractual obligations
  $ 558,826   $ 252,402   $ 42,147   $ 141,795   $ 122,482
 
* Variable interest will be paid in future periods based on the outstanding balance at that time.
 
Because we are uncertain as to if or when settlements may occur, this table does not reflect our liability for gross unrecognized tax benefits of $3.8 million and related interest and penalties of $1.5 million related to uncertain tax positions.  Details regarding this liability are presented in Note 11 to the consolidated financial statements included in Item 8.

Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations or cash flows.




 
Critical Accounting Estimates

Preparing the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses.  We believe the following estimates and assumptions to be critical accounting estimates.  These assumptions and estimates may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and may have a material impact on the financial condition or operating performance.  Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition
Our policy on revenue recognition varies based on the types of products sold and the distribution method.  We recognize operating revenue when title and risk of loss passes to our customers.  Allowances for sales returns, stale products, promotions and discounts are also recorded as reductions of revenue in the consolidated financial statements.

Revenue for products sold to customers through our company-owned DSD network is recognized when the product is delivered to the retailer.  Our sales representatives create an invoice at time of delivery using a handheld device.  These invoices are transmitted electronically each day and sales revenue is recognized.

Revenue for products sold to our independent operators in our DSD network is recognized when the independent operator purchases the inventory from our warehouses.

Revenue for products shipped directly to the customer from our warehouse is recognized based on the shipping terms listed on the shipping documentation.  Products shipped with terms FOB-shipping point are recognized as revenue at the time the shipment leaves our warehouses.  Products shipped with terms FOB-destination are recognized as revenue based on the anticipated receipt date by the customer.

We allow certain customers to return products under agreed upon circumstances.  We record a returns allowance for damaged products and other products not sold by the expiration date on the product label.  This allowance is estimated based on a percentage of sales returns using historical and current market information.

We record certain reductions to revenue for promotional allowances.  There are several different types of promotional allowances such as off-invoice allowances, rebates and shelf space allowances.  An off-invoice allowance is a reduction of the sales price that is directly deducted from the invoice amount.  We record the amount of the deduction as a reduction to revenue when the transaction occurs.  Rebates are offered to customers based on the quantity of product purchased over a period of time.  Based on the nature of these allowances, the exact amount of the rebate is not known at the time the product is sold to the customer.  An estimate of the expected rebate amount is recorded as a reduction to revenue and an accrued liability at the time the sale is recorded.  The accrued liability is monitored throughout the time period covered by the promotion.  The accrued liability is based on historical information and the progress of the customer against the target amount.  Shelf space allowances are capitalized and amortized over the lesser of the life of the agreement or three years and recorded as a reduction to revenue.  Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.

We also record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue.  The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion.

Total allowances for sales returns, rebates, coupons, scan-backs and other promotional activities included in other payables and accrued liabilities on the consolidated balance sheets increased from $9.2 million at the end of 2009 to $15.5 million at the end of 2010 due to the Merger and a more aggressive marketing effort to drive sales growth.


 
Allowance for Doubtful Accounts
The determination of the allowance for doubtful accounts is based on management’s estimate of uncollectible accounts receivable.  We record a general reserve based on analysis of historical data and aging of accounts receivable.  In addition, management records specific reserves for receivable balances that are considered at higher risk due to known facts regarding the customer.  The assumptions for this determination are reviewed quarterly to ensure that business conditions or other circumstances are consistent with the assumptions.  Allowances for doubtful accounts increased from $1.0 million at the end of 2009 to $2.9 million at the end of 2010 due to specific customer bankruptcies.

Self-Insurance Reserves
We maintain reserves for the self-funded portions of employee medical insurance benefits.  The employer’s portion of employee medical claims is limited by stop-loss insurance coverage each year to $0.3 million per person for Lance.  At January 1, 2011 and December 26, 2009, the accruals for our portion of medical insurance benefits were $3.1 million and $2.9 million, respectively.  As part of the Merger, we also assumed additional reserves of $1.9 million.  Snyder’s portion of employee medical claims is limited by stop-loss coverage each year to $0.2­ million per person, and the accrual at January 1, 2011 was $1.9 million.

For certain casualty insurance obligations, we maintain self-insurance reserves for workers’ compensation and auto liability for individual losses up to the $0.3 million insurance deductible, and in some cases, up to a $0.5 million insurance deductible.  In addition, certain general and product liability claims are self-funded for individual losses up to the $0.1 million insurance deductible.  Claims in excess of the deductible are fully insured up to $100 million per individual claim.  We evaluate input from a third-party actuary in the estimation of the casualty insurance obligation on an annual basis.  In determining the ultimate loss and reserve requirements, we use various actuarial assumptions including compensation trends, healthcare cost trends and discount rates.  We also use historical information for claims frequency and severity in order to establish loss development factors.  The estimate of discounted loss reserves ranged from $14.3 million to $19.3 million in 2010.  In 2009, the estimate of discounted loss reserves ranged from $11.6 million to $14.4 million.  This increase was the result of assuming Snyder’s workers’ compensation liabilities and other factors as described below.

During 2010, we determined that no other point within the range of loss reserves was more probable than another.  Accordingly, we selected the midpoint of the range as our estimated liability.  In 2009, we estimated the claims liability to be at the 75 th percentile.  This change decreased the estimated claims liability by approximately $0.5 million.  In addition, we lowered the discount rate from 3.5% in 2009 to 2.5% in 2010 based on projected investment returns over the estimated future payout period, which increased the estimated claims liability by approximately $0.2 million.

In December 2010, we assumed a liability for workers’ compensation relating to claims that had originated prior to 1992 and been insured by a third-party insurance company.  Due to the uncertainty of that insurer’s ability to continue paying claims, we entered into an agreement where we assumed the full liability of approximately $3.6 million of insurance claims under the pre-existing workers’ compensation policies and received $1.5 million in cash consideration to be placed in an escrow account to pay these specific claims.  Therefore, we have recognized the net liability of $2.1 million as of January 1, 2011.

Impairment Analysis of Goodwill and Other Indefinite-Lived Intangible Assets
The annual impairment analysis of goodwill and other indefinite-lived intangible assets requires us to project future financial performance, including revenue and profit growth, fixed asset and working capital investments, income tax rates and cost of capital.  The analysis of goodwill and other indefinite-lived intangible assets as of January 1, 2011 assumes combined average annual revenue growth of approximately 3.4% during the valuation period.  These projections rely upon historical performance, anticipated market conditions and forward-looking business plans.




 
We also use a combination of internal and external data to develop the weighted average cost of capital.  Significant investments in fixed assets and working capital to support this growth are estimated and factored into the analysis.  If the forecasted revenue growth is not achieved, the required investments in fixed assets and working capital could be reduced.  Even with the excess fair value over carrying value, significant changes in assumptions or changes in conditions could result in a goodwill impairment charge in the future.

Depreciation and Impairment of Fixed Assets
Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the assets.  The estimated useful lives used in computing depreciation are based on estimates of the period over which the assets will provide economic benefits.  Estimated lives are based on historical experience, maintenance practices, technological changes and future business plans.  Depreciation expense was $39.1 million, $34.6 million and $32.0 million during 2010, 2009 and 2008, respectively.  Changes in these estimated lives and increases in capital expenditures could significantly affect depreciation expense in the future.

Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Equity-Based Incentive Compensation Expense
Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term, expected stock price volatility, risk-free interest rate and expected dividends.  Judgment is required in estimating the amount of share-based awards that are expected to be forfeited before vesting.  In addition, our long-term equity incentive plans require assumptions and projections of future operating results and financial metrics.  Actual results may differ from these assumptions and projections, which could have a material impact on our financial results.

Provision for Income Taxes
We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage.  Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate.  Significant judgment is required in evaluating tax positions that affect the annual tax rate.  Unrecognized tax benefits for uncertain tax positions are established when, despite the fact that the tax return positions are supportable, we believe these positions may be challenged and the results are uncertain.  We adjust these liabilities in light of changing facts and circumstances, such as the progress of a tax audit.

New Accounting Standards

See Note 1 to the consolidated financial statements included in Item 8 for a summary of new accounting standards.




 
Item 7A.  Quantitative and Qualitative Disclosure About Market Risk

We are exposed to certain commodity, interest rate and foreign currency exchange rate risks as part of our ongoing business operations and may use derivative financial instruments, where appropriate, to manage some of these risks.  We do not use derivatives for trading purposes.  There are no market risk sensitive instruments held for trading purposes.

In order to reduce the price volatility of certain ingredient, packaging and energy costs, we have entered into various forward purchase agreements with certain suppliers based on market prices, forward price projections, and expected usage levels in order to determine appropriate selling prices for our products.  As of January 1, 2011 and December 26, 2009, we had no significant commodity futures contracts or other derivative contracts related to ingredients and energy.

Our variable-rate debt obligations incur interest at floating rates based on changes in the Eurodollar rate and U.S. base rate interest.  To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements to maintain a desirable proportion of fixed to variable rate debt.  See Note 10 to the consolidated financial statements in Item 8 for further information related to our interest rate swap agreements.  While these interest rate swap agreements fixed a portion of the interest rate at a predictable level, pre-tax interest expense would have been $2.5 million lower without these swaps during 2010.  Including the effects of the interest rate swap agreements, the weighted average interest rates for 2010 and 2009 were 4.0% and 3.1%, respectively.  A 10% increase in the variable interest rate would not have significantly impacted interest expense during 2010.

Through the operations of our Canadian subsidiary, there is an exposure to foreign exchange rate fluctuations, primarily between U.S. dollars and Canadian dollars.  A majority of the revenue of our Canadian operations is denominated in U.S. dollars and a substantial portion of the operations’ costs, such as raw materials and direct labor, are denominated in Canadian dollars.  We have entered into a series of forward contracts to mitigate a portion of this foreign exchange rate exposure.  These contracts have maturities through June 2011.  Foreign currency fluctuations unfavorably impacted 2010 pre-tax earnings by $2.8 million compared to 2009.  However, this decrease in pre-tax earnings was offset by the favorable effect of derivative forward contracts of $2.3 million in 2010 compared to 2009, resulting in a net unfavorable impact of $0.5 million in 2010.


Item 8.    Financial Statements and Supplementary Data

Consolidated Statements of Income

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
For the Fiscal Years Ended January 1, 2011, December 26, 2009, and December 27, 2008
(in thousands, except share and per share data)
 
2010
      2009*       2008*  
                       
Net sales and other operating revenue
$ 979,835     $ 918,163     $ 852,468  
Cost of sales
  601,015       549,119       529,813  
Gross margin
  378,820       369,044       322,655  
                       
Selling, general and administrative
  359,629       310,588       291,680  
Other expense/(income), net
  7,108       1,774       (854 )
Income before interest and income taxes
  12,083       56,682       31,829  
                       
Interest expense, net
  3,921       3,351       3,041  
Income before income taxes
  8,162       53,331       28,788  
                       
Income tax expense
  5,631       18,303       9,960  
Net income
  2,531       35,028       18,828  
                       
Less: Net income attributable to non-controlling interests, net of tax of $4
  19       -       -  
Net income attributable to Snyder’s-Lance, Inc.
$ 2,512     $ 35,028     $ 18,828  
                       
Basic earnings per share
$ 0.07     $ 1.11     $ 0.60  
Weighted average shares outstanding – basic
  34,128,000       31,565,000       31,202,000  
                       
Diluted earnings per share
$ 0.07     $ 1.08     $ 0.59  
Weighted average shares outstanding - diluted
  34,348,000       32,384,000       31,803,000  
 
* 2009 and 2008 amounts have been revised to reflect the change in accounting for inventory.  See Note 2 for more information.
 
See Notes to Consolidated Financial Statements
 


Consolidated Balance Sheets

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
January 1, 2011 and December 26, 2009
(in thousands, except share data)
 
2010
    2009*  
Assets
         
Current assets
         
Cash and cash equivalents
$ 27,877   $ 5,418  
Accounts receivable, net of allowances of $2,899 and $972, respectively
  128,556     87,172  
Inventories
  96,936     63,873  
Deferred income taxes
  14,346     7,777  
Income tax receivable
  29,304     238  
Prepaid expenses and other current assets
  26,748     18,227  
        Total current assets
  323,767     182,705  
Fixed assets, net
  336,673     225,981  
Goodwill, net
  376,281     90,909  
Other intangible assets, net
  407,579     35,154  
Other assets
  18,056     5,365  
        Total assets
$ 1,462,356   $ 540,114  
             
Liabilities and Stockholders’ Equity
           
Current liabilities
           
Accounts payable
$ 39,938   $ 29,777  
Accrued compensation
  31,564     26,604  
Accrued profit-sharing retirement plan
  9,884     6,285  
Accrual for casualty insurance claims
  6,477     4,840  
Accrued selling costs
  15,521     9,235  
Other payables and accrued liabilities
  32,118     19,625  
 Current portion of long-term debt
  57,767     -  
        Total current liabilities
  193,269     96,366  
Long-term debt
  227,462     113,000  
Deferred income taxes
  180,812     35,515  
Accrual for casualty insurance claims
  9,195     8,287  
Other long-term liabilities
  15,003     8,436  
        Total liabilities
  625,741     261,604  
Commitments and contingencies
  -     -  
Stockholders’ equity
           
Common stock, $0.83 1/3 par value.  Authorized 75,000,000 shares; 66,336,807 and 32,093,193 shares outstanding, respectively
  55,278     26,743  
Preferred stock, $1.00 par value.  Authorized 5,000,000 shares; no shares outstanding
  -     -  
Additional paid-in capital
  722,007     60,829  
Retained earnings
  40,199     180,145  
Accumulated other comprehensive income
  15,104     10,793  
  Total Snyder’s-Lance, Inc. stockholders’ equity
  832,588     278,510  
  Non-controlling interests
  4,027     -  
    Total stockholders’ equity
  836,615     278,510  
Total liabilities and stockholders’ equity
$ 1,462,356   $ 540,114  

* 2009 amounts have been revised to reflect the change in accounting for inventory.  See Note 2 for more information.

See Notes to Consolidated Financial Statements.


Consolidated Statements of Stockholders' Equity and Comprehensive Income

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
For the Fiscal Years Ended January 1, 2011, December 26, 2009, and December 27, 2008
(in thousands, except share data)
   
 
 
Shares
 
 
Common Stock
 
Additional Paid-in Capital
 
 
Retained Earnings*
 
Accumulated
Other
Comprehensive
Income
 
Non-Controlling Interest
 
 
 
Total*
                             
Balance, December 29, 2007
    31,214,743   $ 26,011   $ 41,430   $ 166,823   $ 16,300   $ -   $ 250,564  
                                             
Comprehensive income:
                                           
  Net income, as adjusted *
                      18,828                 18,828  
   Net unrealized losses   on derivative instruments,  net of $1,923 tax effect
                            (3,593 )         (3,593 )
  Actuarial gains recognized in net income, net of $5 tax effect
                            9           9  
  Foreign currency translation adjustment
                            (13,553 )         (13,553 )
Total comprehensive income
                            -           1,691  
Cash dividends paid to stockholders
                      (20,124 )               (20,124 )
Amortization of nonqualified stock options
    -           1,124           -           1,124  
Equity-based incentive expense previously  recognized under a liability plan
    39,250     33     876           -           909  
Stock options exercised, including $395 tax benefit
    149,825     125     2,414           -           2,539  
Issuance and amortization of  restricted stock, net of cancellations
    119,135     99     3,294           -           3,393  
Balance, December 27, 2008
    31,522,953   $ 26,268   $ 49,138   $ 165,527   $ (837 ) $ -   $ 240,096  
                                             
Comprehensive income:
                                           
Net income, as adjusted *
                      35,028                 35,028  
  Net unrealized gains on derivative instruments,  net of $1,175 tax effect
                            2,569           2,569  
  Actuarial gains recognized in net income, net of  $104 tax effect
                            (180 )         (180 )
  Foreign currency translation adjustment
                            9,241           9,241  
Total comprehensive income
                                        46,658  
Cash dividends paid to stockholders
                      (20,410 )               (20,410 )
Amortization of nonqualified stock options
                1,295                       1,295  
Equity-based incentive expense previously  recognized under a liability plan
    73,356     61     1,531                       1,592  
Stock options exercised, including $624 tax benefit
    240,191     200     4,040                       4,240  
Issuance and amortization of  restricted stock, net of cancellations
    263,434     220     4,946                       5,166  
Repurchases of common stock
    (6,741 )   (6 )   (121 )                     (127 )
Balance, December 26, 2009
    32,093,193   $ 26,743   $ 60,829   $ 180,145   $ 10,793   $ -   $ 278,510  
                                             
Comprehensive income:
                                           
Net income
                      2,512           19     2,531  
  Net unrealized gains on derivative instruments,  net of $505 tax effect
                            700           700  
  Foreign currency translation adjustment
                            3,611           3,611  
Total comprehensive income
                                        6,842  
Stock issued in connection with Merger
    32,652,949     27,209     649,002                       676,211  
Non-controlling interests assumed in Merger
                                  4,008     4,008  
Cash dividends paid to stockholders
                      (142,458 )               (142,458 )
Amortization of nonqualified stock options
                3,665                       3,665  
Equity-based incentive reclassified to a liability plan
                (4,199 )                     (4,199 )
Restricted stock units settled in common stock, net of repurchases
    172,650     144     (3,551 )                     (3,407 )
Stock options exercised, including $3,199 tax benefit
    1,456,615     1,214     11,888                       13,102  
Issuance and amortization of restricted stock, net of  cancellations
    97,279     81     7,372                       7,453  
Repurchases of common stock
    (135,879 )   (113 )   (2,999 )                     (3,112 )
Balance, January 1, 2011
    66,336,807   $ 55,278   $ 722,007   $ 40,199   $ 15,104   $ 4,027   $ 836,615  
 
* Net income and retained earnings for all periods prior to 2010 have been adjusted to reflect the change in accounting for inventory.  See Note 2 for more information.
 
See Notes to Consolidated Financial Statements

 
 
Consolidated Statements of Cash Flows

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
For the Fiscal Years Ended January 1, 2011, December 26, 2009, and December 27, 2008
(in thousands)
 
 
2010
      2009*       2008*  
Operating activities:
                   
Net income
$ 2,531     $ 35,028     $ 18,828  
Adjustments to reconcile net income to cash from operating activities:
                 
  Fixed asset depreciation and intangible amortization
  40,100       35,211       32,217  
  Equity-based incentive compensation expense
  19,524       7,472       5,967  
  Loss/(gain) on sale of fixed assets, net
  682       702       (339 )
  Impairment of long-lived assets
  584       -       -  
  Deferred income taxes
  18,228       2,828       6,478  
  Provision for doubtful accounts
  2,649       936       763  
Changes in assets and liabilities, excluding business acquisitions,  and foreign currency translation adjustments:
                 
      Accounts receivable
  4,376       (13,109 )     (10,635 )
      Inventory
  7,496       (11,460 )     (4,762 )
      Other current assets
  (30,885 )     (3,285 )     (970 )
      Accounts payable
  (6,032 )     3,600       4,724  
      Other accrued liabilities
  (19,562 )     10,410       2,150  
      Other noncurrent assets
  2,519       (415 )     952  
      Other noncurrent liabilities
  2,234       1,359       (463 )
Net cash flow from operating activities
  44,444       69,277       54,910  
                       
Investing activities:
                     
Purchases of fixed assets
  (33,347 )     (40,737 )     (39,064 )
Business acquisitions, net of cash acquired
  96,336       (23,911 )     (54,984 )
Purchase of investment
  -       -       (190 )
Proceeds from sale of fixed assets
  2,731       765       2,958  
Net cash used in investing activities
  65,720       (63,883 )     (91,280 )
                       
Financing activities:
                     
Dividends paid
  (142,458 )     (20,410 )     (20,124 )
Issuances of common stock under employee stock plans
  13,102       4,240       2,539  
Repurchase of common stock under employee stock plans
  (6,519 )     (127 )     -  
Net proceeds from new and existing credit facilities
  47,762       15,000       48,435  
Repayments of long-term debt from business acquisitions
  -       -       (2,239 )
Net cash (used in)/from financing activities
  (88,113 )     (1,297 )     28,611  
Effect of exchange rate changes on cash
  408       514       (81 )
Increase/(decrease) in cash and cash equivalents
  22,459       4,611       (7,840 )
Cash and cash equivalents at beginning of fiscal year
  5,418       807       8,647  
Cash and cash equivalents at end of fiscal year
$ 27,877     $ 5,418     $ 807  
                       
Non-cash investing activities:
                     
Common stock and options issued for business combinations
$ 676,211     $ -     $ -  
Supplemental information:
                     
Cash paid for income taxes, net of refunds of $23, $159, and  $209, respectively
$ 12,208     $ 13,763     $ 2,145  
Cash paid for interest
$ 6,391     $ 3,515     $ 3,231  
 
* 2008 and 2009 amounts have been revised to reflect the change in accounting for inventory.  See Note 2 for more information.

See Notes to Consolidated Financial Statements.


Notes to Consolidated Financial Statements

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
January 1, 2011 and December 26, 2009

NOTE 1.  OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations
We operate in one segment, snack food products.  We manufacture, market and distribute a variety of snack food products.  We manufacture products including pretzels, sandwich crackers, kettle chips, cookies, potato chips, tortilla chips, other salty snacks, sugar wafers, nuts, restaurant style crackers and candy.  In addition, we purchase certain cakes, meat snacks, candy and other partner brand products for resale in order to broaden our product offerings.  Products are packaged in various single-serve, multi-pack and family-size configurations.

We sell and distribute branded, private brand and partner brand products to customers.  We also contract with other branded food manufacturers to produce their products.  Our branded products are principally sold under the Snyder’s of Hanover®, Lance®, Cape Cod®, Krunchers!®, Jays®, Tom’s®, Archway®, Grande®, Stella D’oro®, O-Ke-Doke®, EatSmart® and Padrinos® brands.  Private brand (private label) products are sold to retailers and distributors using store brands or our own control brands. Partner brands consist of other third-party brands that we sell through our distribution network.

We distribute snack food products throughout the United States using a direct-store-delivery (“DSD”) network of distribution routes, some serviced by employees and others by independent operators.  We also ship products directly to distributors and other direct customers using third-party carriers or our own transportation fleet throughout most of the United States and other parts of North America.

The customer base for our branded and partner brand products include grocery/mass merchandisers, distributors, independent operators, convenience stores, club stores, discount stores, food service establishments and various other customers including drug stores, schools, military and government facilities and “up and down the street” outlets such as recreational facilities, offices and other independent retailers.  Private brand customers include grocery/mass merchandisers and discount stores.  We also contract with other branded food manufacturers to manufacture their products.

Our corporate headquarters are located in Charlotte, North Carolina, with additional corporate offices in Hanover, Pennsylvania.  We have manufacturing operations in Charlotte, North Carolina; Hanover, Pennsylvania; Goodyear, Arizona; Burlington, Iowa; Columbus, Georgia; Jeffersonville, Indiana; Hyannis, Massachusetts; Corsicana, Texas; Perry, Florida; Ashland, Ohio; Cambridge, Ontario and Guelph, Ontario.

Principles of Consolidation
On December 6, 2010, Snyder’s of Hanover, Inc. (“Snyder’s”) merged with a wholly-owned subsidiary of Lance, Inc. (“Lance”) with the result that Snyder’s became a wholly-owned subsidiary of Lance (the “Merger”).  In connection with the Merger, Lance changed its name to Snyder’s-Lance, Inc.  The accompanying consolidated financial statements include the accounts of Snyder’s-Lance, Inc. and its subsidiaries (the “Company”).  See Note 3 for further information.  All intercompany transactions and balances have been eliminated.
 
Non-Controlling Interests
We own 80% of Melisi Snacks, Inc. which distributes our products in Connecticut and New York, 51% of Patriot Snacks Real Estate, LLC which owns real estate in Massachusetts, and 80% of Michaud Distributors, Inc. which distributes our products in the northeastern United States.  Non-controlling interests are classified to equity, with the consolidated net income adjusted to include the net income attributed to the non-controlling interest.




 
Reclassifications
Certain prior year amounts shown in the consolidated financial statements have been reclassified for consistent presentation.  These reclassifications had no impact on net income, financial position or cash flows.

We also changed the accounting method for a portion of our inventories from Last-in, First-out (“LIFO”) to First-in, First-out (“FIFO”).  This change, which required retroactive restatement for all periods displayed, is described further in Note 2.

Revenue Recognition
Our policy on revenue recognition varies based on the types of products sold and the distribution method.  We recognize operating revenue when title and risk of loss passes to our customers.  Allowances for sales returns, stale products, promotions and discounts are also recorded as reductions of revenue in the consolidated financial statements.

We allow certain customers to return products under agreed upon circumstances.  We record a returns allowance for damaged products and other products not sold by the expiration date on the product label.  This allowance is estimated based on a percentage of sales returns using historical and current market information.

We record certain reductions to revenue for promotional allowances.  There are several different types of promotional allowances such as off-invoice allowances, rebates and shelf space allowances.  An off-invoice allowance is a reduction of the sales price that is directly deducted from the invoice amount.  We record the amount of the deduction as a reduction to revenue when the transaction occurs.  Rebates are offered to customers based on the quantity of product purchased over a period of time.  Based on the nature of these allowances, the exact amount of the rebate is not known at the time the product is sold to the customer.  An estimate of the expected rebate amount is recorded as a reduction to revenue and an accrued liability at the time the sale is recorded.  The accrued liability is monitored throughout the time period covered by the promotion.  The accrued liability is based on historical information and the progress of the customer against the target amount.  Shelf space allowances are capitalized and amortized over the lesser of the life of the agreement or three years and recorded as a reduction to revenue.  Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.

We also record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue.  The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion.

Fiscal Year
On September 30, 2010, the Board of Directors approved a change in our fiscal year end from the last Saturday of December to the Saturday nearest to December 31.  The results of this change will be reported in our Annual Report on Form 10-K for the fiscal year ended January 1, 2011, which was a 53-week year.

Use of Estimates
Preparing the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses.  Examples include customer returns and promotions, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, postretirement benefits, intangible asset valuations, incentive compensation, income taxes, self-insurance, contingencies and litigation.  Actual results may differ from these estimates under different assumptions or conditions.




 
Allowance for Doubtful Accounts
Amounts for bad debt expense are recorded in selling, general and administrative expenses on the Consolidated Statements of Income.  The determination of the allowance for doubtful accounts is based on management’s estimate of uncollectible accounts receivable.  We record a general reserve based on analysis of historical data and aging of accounts receivable.  In addition, management records specific reserves for receivable balances that are considered at higher risk due to known facts regarding the customer.  The assumptions for this determination are reviewed quarterly to ensure that business conditions or other circumstances are consistent with the assumptions.

Fair Value
 
We have classified assets and liabilities required to be measured at fair value into the fair value hierarchy as set forth below:

Level 1
-   quoted prices in active markets for identical assets and liabilities.
Level 2
-   observable inputs other than quoted prices for identical assets and liabilities
Level 3
-   unobservable inputs in which there is little or no market data available, which requires us to develop our own assumptions.
 
We measure our derivative instruments at fair value using Level 2 inputs.  There were no changes among the levels during 2010.

The carrying amount of cash and cash equivalents, receivables and accounts payable approximates fair value due to their short-term nature.  The carrying amount of debt approximates fair value since its variable interest rate is based on current market rates and interest payments are made monthly.

During 2010, recent market value declines for commercial real estate resulted in an impairment charge of $0.6 million related to assets held for sale in Little Rock, Arkansas.  This property was subsequently sold during 2010.

Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Inventories
The principal raw materials used in the manufacturing of our snack food products are flour, vegetable oil, sugar, potatoes, peanuts, other nuts, cheese, cocoa and seasonings.  The principal supplies used are flexible film, cartons, trays, boxes and bags.  Inventories are valued at the lower of cost or market.  Effective December 6, 2010, we changed our method of accounting for those finished goods, work-in-progress and raw material inventories previously on the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.  See Notes 2 and 4 for further information.

We may enter into various forward purchase agreements and derivative financial instruments to reduce the impact of volatility in raw material ingredient prices.  As of January 1, 2011, and December 26, 2009, we had no significant outstanding commodity futures contracts or other derivative contracts related to raw materials.




 
Fixed Assets
Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of long-term depreciable assets.  Estimated lives are based on historical experience, maintenance practices, technological changes and future business plans.  The following table summarizes the majority of our estimated useful lives of long-term depreciable assets:

 
Useful Life
Buildings and building improvements
10-45 years
Land improvements
10-15 years
Machinery, equipment and computer systems
3-20 years
Furniture and fixtures
3-12 years
Trucks, trailers and automobiles
3-10 years

Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets held for sale are reported at the lower of the carrying amount or fair value less cost to sell.

Goodwill and Other Intangible Assets
We are required to evaluate and determine our reporting units for purposes of performing the annual impairment analysis of goodwill.  The annual impairment analysis of goodwill and other indefinite-lived intangible assets also requires us to project future financial performance, including revenue and profit growth, fixed asset and working capital investments, income tax rates and cost of capital.  These projections rely upon historical performance, anticipated market conditions and forward-looking business plans.

Amortizable intangible assets are amortized using the straight-line method over their useful lives, which is the estimated period over which economic benefits are expected to be provided.

Income Taxes
Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate.  Significant judgment is required in evaluating tax positions that affect the annual tax rate.  Unrecognized tax benefits for uncertain tax positions are established when, despite the fact that the tax return positions are supportable, we believe these positions may be challenged and the results are uncertain.  We adjust these liabilities in light of changing facts and circumstances, such as the progress of a tax audit.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date.  Deferred U.S. income taxes are not provided on undistributed earnings of our foreign subsidiary since we have no plans to repatriate the earnings.  We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage.




 
Employee and Non-Employee Stock-Based Compensation Arrangements
We account for option awards based on the fair value-method using the Black-Scholes model.  The following assumptions were used to determine the weighted average fair value of options granted during the years ended January 1, 2011, December 26, 2009 and December 27, 2008.

 
2010
   
2009
   
2008
 
  Assumptions used in Black-Scholes pricing model:
 
               
Expected dividend yield
  2.91 %     2.91 %     3.79 %
Risk-free interest rate
  2.77 %     2.16 %     2.71 %
Weighted average expected life
6.1 years
   
6.0 years
   
4.8 years
 
Expected volatility
  27.27 %     30.11 %     26.76 %
Weighted average fair value per share of options granted
$ 4.81     $ 5.01     $ 3.00  

The expected dividend yield is based on the projected annual dividend payment per share divided by the stock price at the date of grant.  The risk free interest rate is based on rates of U.S. Treasury issues with a remaining life equal to the expected life of the option.

The expected life of the option is calculated using the simplified method by using the vesting term of the option and the option expiration date.  The expected volatility is based on the historical volatility of our common stock over the expected life.

The assumptions used to value the options awards assumed as part of the Merger are described in Note 3.

Compensation expense is recognized over the vesting period based on the closing stock price on the grant date of the restricted stock and the restricted stock units.  As compensation expense is recognized, additional paid-in capital is increased in stockholders’ equity.  Restricted stock and restricted stock units receive or accrue the same dividend as common shares outstanding.

Self-Insurance Reserves
We maintain reserves for the self-funded portions of employee medical insurance benefits.  The employer’s portion of employee medical claims is limited by stop-loss insurance coverage each year to $0.3 million per person for Lance.  At January 1, 2011 and December 26, 2009, the accruals for our portion of medical insurance benefits were $3.1 million and $2.9 million, respectively.  As part of the Merger, we also assumed additional reserves of $1.9 million.  Snyder’s portion of employee medical claims is limited by stop-loss coverage each year to $0.2­ million per person, and the accrual at January 1, 2011 was $1.9 million.

For certain casualty insurance obligations, we maintain self-insurance reserves for workers’ compensation and auto liability for individual losses up to the $0.3 million insurance deductible, and in some cases, up to a $0.5 million insurance deductible.  In addition, certain general and product liability claims are self-funded for individual losses up to the $0.1 million insurance deductible.  Claims in excess of the deductible are fully insured up to $100 million per individual claim.  We evaluate input from a third-party actuary in the estimation of the casualty insurance obligation on an annual basis.  In determining the ultimate loss and reserve requirements, we use various actuarial assumptions including compensation trends, healthcare cost trends and discount rates.  We also use historical information for claims frequency and severity in order to establish loss development factors.  The estimate of discounted loss reserves ranged from $14.3 million to $19.3 million in 2010.  In 2009, the estimate of discounted loss reserves ranged from $11.6 million to $14.4 million.  This increase was the result of assuming Snyder’s workers’ compensation liabilities and other factors as described below.




 
During 2010, we determined that no other point within the range of loss reserves was more probable than another.  Accordingly, we selected the midpoint of the range as our estimated liability.  In 2009, we estimated the claims liability to be at the 75 th percentile.  This change decreased the estimated claims liability by approximately $0.5 million.  In addition, we lowered the discount rate from 3.5% in 2009 to 2.5% in 2010 based on projected investment returns over the estimated future payout period, which increased the estimated claims liability by approximately $0.2 million.

In December 2010, we assumed a liability for workers’ compensation relating to claims that had originated prior to 1992 and been insured by a third-party insurance company.  Due to the uncertainty of that insurer’s ability to continue paying claims, we entered into an agreement where we assumed the full liability of approximately $3.6 million of insurance claims under the pre-existing workers’ compensation policies and received $1.5 million in cash consideration to be placed in an escrow account to pay these specific claims.  Therefore, we have recognized the net liability of $2.1 million as of January 1, 2011.

Derivative Financial Instruments
We are exposed to certain market, commodity and interest rate risks as part of our ongoing business operations and may use derivative financial instruments, where appropriate, to manage these risks.  We do not use derivatives for trading purposes.

Earnings Per Share
Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period.

Diluted earnings per share are calculated by including all dilutive common shares such as stock options and restricted stock.  Dilutive potential shares were 220,000 in 2010, 819,000 in 2009, and 601,000 in 2008.  Anti-dilutive shares are excluded from the dilutive earnings calculation.  There were no anti-dilutive shares in 2010, 25,000 in 2009, and 233,000 in 2008.  No adjustment to reported net income is required when computing diluted earnings per share.

Advertising Costs
Advertising costs are expensed as incurred.  Advertising costs included in selling, general and administrative expenses on the Consolidated Statements of Income were $5.0 million, $7.5 million and $0.9 million during 2010, 2009 and 2008, respectively.

Shipping and Handling Costs
We do not bill customers separately for shipping and handling of product.  These costs are included as part of selling, general and administrative expenses on the Consolidated Statements of Income.  For the years ended January 1, 2011, December 26, 2009 and December 27, 2008, shipping and handling costs were $78.8 million, $68.8 million and $67.0 million, respectively.

Foreign Currency Translation
All assets and liabilities of our Canadian subsidiary are translated into U.S. dollars using current exchange rates and income statement items are translated using the average exchange rates during the period.  The translation adjustment is included as a component of stockholders’ equity.  Gains and losses on foreign currency transactions are included in earnings.

Vacation Policy Change
During 2008, we modified our vacation policy to be more competitive and ensure consistency at all facilities.  This policy change generally allows employees to earn more vacation with fewer years of service.  Since our policy allows employees with more than 1 year of service to vest in all of their vacation as of the beginning of 2009, we recorded a pre-tax charge of $1.2 million when this modification was made during the fourth quarter of 2008.




 
New Accounting Standards
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASC) No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends the Accounting Standards Codification (ASC) Topic 820, “Fair Value Measurements and Disclosures.”  ASU No. 2010-06 amends the ASC to require disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and requires more detailed disclosure about the activity within Level 3 fair value measurements.  We adopted the guidance in ASU No. 2010-06 on December 27, 2009, except for the requirements related to Level 3 disclosures, which will be effective for our annual and interim reporting periods beginning after January 2, 2011.  The guidance requires expanded disclosures only, and will not have any impact on our consolidated financial statements.

In June 2009, the FASB issued a new standard that changed the definition of a variable interest entity (“VIE”), contained new criteria for determining the primary beneficiary of a VIE, required enhanced disclosures to provide more information about a company’s involvement in a VIE and increased the frequency of required reassessments to determine whether a company is the primary beneficiary of a VIE. The adoption of this standard at the beginning of the fiscal 2010 had no impact on the Company’s financial position, results of operations or cash flows.

NOTE 2.  CHANGE IN ACCOUNTING METHOD

Prior to December 6, 2010, inventories were valued using both the LIFO and the FIFO methods.  Effective December 6, 2010, we changed our method of accounting for the finished goods, work-in-progress and raw material inventories previously on the LIFO method to the FIFO method.  We believe the change is preferable as the FIFO method better reflects the current value of inventory on the Consolidated Balance Sheets and provides better matching of manufacturing costs and revenues.  The change also conforms all of our raw materials, work-in-process and finished goods to a single costing method (FIFO).

We applied this change in method of inventory costing by retrospectively adjusting the prior years’ financial statements.

The effect of the change on the Consolidated Statements of Income for the years ended December 26, 2009 and December 27, 2008, was as follows:
 
Increase/(Decrease)
 
(in thousands, except share data)
2009
 
2008
 
Cost of sales
$ 1,128   $ (1,715 )
Income before interest and income taxes
  (1,128 )   1,715  
Income tax expense
  (362 )   593  
Net Income
  (766 )   1,122  
Basic earnings per share
  (0.02 )   0.03  
Diluted earnings per share
  (0.02 )   0.03  

The effect on the Consolidated Balance Sheet at December 26, 2009, was as follows:

 
Increase/
 
(in thousands)
(Decrease)
 
Inventories
$ 5,836  
Deferred income tax asset
  (2,013 )
Retained Earnings
  3,823  




 
Had we not changed our policy for accounting for inventory, pre-tax income for both the fourth quarter and the year ended January 1, 2011 would have been $0.2 million lower ($0.1 million reduction after-tax, with no effect on earnings per basic or diluted share).  As a result of the accounting change, retained earnings as of December 29, 2007, increased from $163.4 million using the LIFO method to $166.8 million using the FIFO method.  There was no impact to net cash provided by operating activities as a result of this change in accounting policy.

NOTE 3.  MERGERS & ACQUISITIONS

Merger of Equals
On December 6, 2010 (the “merger date”), a wholly owned subsidiary of Lance was merged with and into Snyder’s, with the result that Snyder’s became a wholly owned subsidiary of Lance.  As part of the Merger, Snyder’s shareholders received 108.25 shares of Lance stock for each share outstanding as of the merger date.  All of the outstanding Snyder’s shares and equity-based awards were exchanged for Lance shares and equity awards as part of the Merger.  Fractional shares generated by the conversion ratio were cash settled for an immaterial amount.  After the exchange was completed, pre-Merger Lance shareholders retained ownership of 49.9% of the Company.  In conjunction with consummating the Merger, the name of the Company was changed to Snyder’s-Lance, Inc.  The results of Snyder’s operations are included in the Company’s consolidated financial statements as of December 6, 2010, which included approximately $48.8 million of net revenue.  The impact to net income was not material during this period.

Snyder’s is a manufacturer and distributor of quality snack foods, including pretzels, potato chips, tortilla chips and other salty snacks.  In addition, Snyder’s purchases and distributes other products for resale.  The Merger creates a national snack food company with well-recognized brands, an expanded branded product portfolio, complementary manufacturing capabilities, and a nationwide distribution network.

Based on the closing price of Lance’s common stock on the merger date, adjusted by the amount of the special dividend received by Lance shareholders, the consideration received by Snyder’s shareholders in the Merger had a value of approximately $676.2 million as detailed below.
 
(in thousands, except share data)
Conversion Calculation
 
Fair Value
Snyder’s common stock outstanding as of the Merger date
  301.6  
 
Multiplied by the exchange ratio of 108.25
  108.25    
Multiplied by Lance’s special dividend-adjusted stock
   price as of the merger date ($23.08-$3.75)
$ 19.33   $ 631,182  
Fair value of vested and unvested stock options
   pertaining to pre-Merger service issued to replace
   existing grants at closing
          45,029  
Cash paid to settle fractional shares
        -  
Total fair value of consideration transferred
      $ 676,211  

As part of the Merger, the Company exchanged the pre-Merger equity awards of Snyder’s for Snyder’s-Lance equity awards.  The fair value of vested options and the earned portion of unvested options are recognized as consideration paid.  The remaining value relating to the unvested and unearned option will be recognized as future equity-based compensation.  The allocation of the pre-Merger equity awards between consideration paid and future equity-based compensation are as follows:

(in thousands)
Number of
Awards
 
Fair Value
Recognized as
Consideration Paid
 
Fair Value to be
Recognized as Future
Compensation Cost
 
Stock options
  3,296   $ 45,029   $ 1,278  



The following assumptions were used for the Black-Scholes valuation of the pre-Merger Snyder’s stock options in the determination of consideration paid:
 
Stock price
$ 19.33  
Weighted-average post-conversion strike price
$ 3.48  
Expected dividend yield
  3.31 %
Weighted-average risk-free interest rate
  1.16 %
Weighted-average expected term
3.9 years
Average expected volatility
  34.33 %
Weighted-average fair value per option
$ 14.05  

The expected dividend yield is based on the projected annual dividend payment per share divided by the stock price.  The risk free interest rate is based on rates of U.S. Treasury issues with a remaining life equal to the expected life of the option.  The expected life of the option is calculated using the simplified method by using the vesting term of the option and the option expiration date.  The expected volatility is based on the historical volatility of our common stock over the expected life.

The transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values as of the merger date.  Since the merger occurred close to our fiscal year-end, the initial recording of the assets and liabilities was based on preliminary valuation assessments and is subject to change.  The following tables summarized the initial estimated fair values of assets acquired and liabilities assumed as part of the Merger:
 
(in thousands)
Purchase Price
Allocation
 
Cash and cash equivalents
$ 96,336  
Accounts receivable, net
  48,192  
Inventories
  40,463  
Other current assets
  15,144  
Fixed assets, net
  117,061  
Goodwill, net
  283,267  
Other intangible assets, net
  373,500  
Other noncurrent assets
  15,471  
     Total assets acquired
  989,434  
       
Accounts payable
  16,100  
Other current liabilities
  34,360  
Current portion of long-term debt
  7,806  
Long-term debt
  116,661  
Deferred income tax liability
  125,616  
Other long-term liabilities
  8,672  
    Total liabilities assumed
  309,215  
       
Less: Non-controlling interests assumed
  4,008  
Net assets acquired
$ 676,211  

Of the $373.5 million of acquired intangible assets, $265.4 million was assigned to the trade name and $50.6 million was assigned to routes, neither of which are subject to amortization.  The remaining acquired intangibles of $57.5 million were allocated to customer related intangibles , which are being amortized over the assets’ determinable useful life of 19 years.  The goodwill from the Merger is not deductible for income tax purposes.



 
We incurred pre-tax Merger-related transaction and other costs in 2010 totaling $37.9 million, of which $2.4 million is included in Cost of sales, $35.2 million in Selling, general and administrative, $0.2 million in Other expense, net and $0.1 million in Interest expense, net.  These costs included incentive payments under the change in control provisions discussed in Note 4.

The following unaudited pro forma consolidated financial information has been prepared as if the Merger between Lance and Snyder’s had taken place at the beginning of each fiscal year presented.  The unaudited pro forma results include estimates and assumptions regarding increased amortization of intangible assets related to the Merger, increased interest expense related to cash paid for Merger-related expenses, and the related tax effects. The unaudited pro forma results for 2010 exclude $37.9 million of Merger-related transaction and other costs described above. However, pro forma results are not necessarily indicative of the results that would have occurred if the Merger had occurred on the date indicated, or that may result in the future.

(in thousands, except per share data)
2010
 
2009
 
Net sales and other operating revenue
$ 1,585,208   $ 1,561,155  
Income before interest and income taxes
  87,574     98,145