Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-Q, Received: 11/07/2011 17:08:41)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarter ended October 1, 2011

Commission File Number 0-398

LOGO

 

 

SNYDER’S-LANCE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

North Carolina   56-0292920

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

704-554-1421

(Registrant’s telephone number, including area code)

 

 

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 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.

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes     ¨   No     þ

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 October 28, 2011, was 67,788,182 shares.

 

 

 


Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES

INDEX

 

     Page  

CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

     3   

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Statements of Income (Unaudited) – Quarters and Nine Months Ended October 1, 2011 and September 25, 2010

     4   

Condensed Consolidated Balance Sheets – As of October 1, 2011 (Unaudited) and January 1, 2011

     5   

Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended October 1, 2011 and September 25, 2010

     6   

Notes to the Condensed Consolidated Financial Statements (Unaudited)

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     21   

Item 4. Controls and Procedures

     21   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     22   

Item 1A. Risk Factors

     22   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     22   

Item 3. Defaults Upon Senior Securities

     22   

Item 4. [Removed and Reserved]

     22   

Item 5. Other Information

     22   

Item 6. Exhibits

     23   

SIGNATURE

     24   

 

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES

CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

This report 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 risks and uncertainties set forth in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended January 1, 2011, and those described from time to time in our other reports filed with the Securities and Exchange Commission.

Caution should be taken not to place undue reliance on our forward-looking statements, which reflect our management’s expectations 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.

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

SNYDER’S-LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

For the Quarters and Nine Months Ended October 1, 2011 and September 25, 2010

(in thousands, except per share data)

 

     Quarter Ended      Nine Months Ended  
     October 1,
2011
    September 25,
2010*
     October 1,
2011
    September 25,
2010*
 

Net revenue

   $ 421,897      $ 237,683       $ 1,222,909      $ 694,717   

Cost of sales

     280,892        143,062         797,095        418,786   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross margin

     141,005        94,621         425,814        275,931   
  

 

 

   

 

 

    

 

 

   

 

 

 

Selling, general and administrative

     126,816        78,416         384,856        236,517   

Other (income)/expense, net

     (4,241     221         5,942        4,006   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before interest and income taxes

     18,430        15,984         35,016        35,408   

Interest expense, net

     3,037        841         8,064        2,563   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     15,393        15,143         26,952        32,845   

Income tax expense

     6,608        4,958         10,830        10,940   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

     8,785        10,185         16,122        21,905   

Net loss/(income) attributable to noncontrolling interests

     45        —           (291     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to Snyder’s-Lance, Inc.

   $ 8,830      $ 10,185       $ 15,831      $ 21,905   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per share

   $ 0.13      $ 0.32       $ 0.24      $ 0.69   

Weighted average shares outstanding – basic

     67,706        32,140         67,268        31,962   

Diluted earnings per share

   $ 0.13      $ 0.31       $ 0.23      $ 0.67   

Weighted average shares outstanding – diluted

     68,787        32,672         68,324        32,462   

Cash dividends declared per share

   $ 0.16      $ 0.16       $ 0.48      $ 0.48   

 

* Quarter and Nine Months Ended September 25, 2010 amounts have been revised to reflect the change in accounting for inventory. See Note 3 for more information.

See Notes to the Condensed Consolidated Financial Statements (Unaudited).

 

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

As of October 1, 2011 (Unaudited) and January 1, 2011

(in thousands, except share data)

 

     October 1,
2011
     January 1,
2011
 
ASSETS      

Current assets:

     

Cash and cash equivalents

   $ 15,056       $ 27,877   

Accounts receivable, net of allowances of $2,358 and $2,899, respectively

     161,275         128,556   

Inventories

     116,103         96,936   

Income tax receivable

     24,012         29,304   

Deferred income taxes

     15,151         14,346   

Assets held for sale

     32,187         385   

Prepaid expenses and other current assets

     18,684         26,363   
  

 

 

    

 

 

 

Total current assets

     382,468         323,767   

Noncurrent assets:

     

Fixed assets, net of accumulated depreciation of $325,049 and $299,877, respectively

     326,053         336,673   

Goodwill, net

     378,300         376,281   

Other intangible assets, net

     393,554         407,579   

Other noncurrent assets

     19,749         18,056   
  

 

 

    

 

 

 

Total assets

   $ 1,500,124       $ 1,462,356   
  

 

 

    

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY      

Current liabilities:

     

Accounts payable

   $ 64,927       $ 39,938   

Accrued compensation

     39,457         31,564   

Other payables and accrued liabilities

     71,080         64,000   

Current portion of long-term debt

     58,847         57,767   
  

 

 

    

 

 

 

Total current liabilities

     234,311         193,269   

Noncurrent liabilities:

     

Long-term debt

     224,012         227,462   

Deferred income taxes

     194,844         180,812   

Other noncurrent liabilities

     23,196         24,198   
  

 

 

    

 

 

 

Total liabilities

     676,363         625,741   

Commitments and contingencies

     —           —     

Stockholders’ equity:

     

Common stock, 67,777,625 and 66,336,807 shares outstanding, respectively

     56,479         55,278   

Preferred stock, no shares outstanding

     —           —     

Additional paid-in capital

     729,658         722,007   

Retained earnings

     23,958         40,199   

Accumulated other comprehensive income

     11,378         15,104   
  

 

 

    

 

 

 

Total Snyder’s-Lance, Inc. stockholders’ equity

     821,473         832,588   

Noncontrolling interests

     2,288         4,027   
  

 

 

    

 

 

 

Total stockholders’ equity

     823,761         836,615   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 1,500,124       $ 1,462,356   
  

 

 

    

 

 

 

See Notes to the Condensed Consolidated Financial Statements (Unaudited).

 

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended October 1, 2011 and September 25, 2010

(in thousands)

 

September 25, September 25,
     Nine Months Ended  
     October 1,
2011
    September 25,
2010*
 

Operating activities

    

Net income

   $ 16,122      $ 21,905   

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation and amortization

     41,965        28,629   

Stock-based compensation expense

     1,761        5,635   

(Gain)/Loss on sale of fixed and intangible assets

     (3,856     214   

Impairment of fixed assets

     10,119        584   

Changes in operating assets and liabilities, excluding business acquisitions

     6,679        (4,977
  

 

 

   

 

 

 

Net cash provided by operating activities

     72,790        51,990   
  

 

 

   

 

 

 

Investing activities

    

Purchases of fixed assets

     (43,359     (21,163

Purchases of route businesses

     (19,689     —     

Proceeds from sale of fixed and intangible assets

     2,701        2,232   

Proceeds from sale of route businesses

     19,595        —     

Proceeds from sale of investments

     960        —     

Business acquisitions, net of cash acquired

     (15,394     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (55,186     (18,931
  

 

 

   

 

 

 

Financing activities

    

Dividends paid to stockholders

     (32,071     (15,510

Dividends paid to noncontrolling interests

     (281     —     

Acquisition of additional interest in Melisi Snacks, Inc.

     (3,500     —     

Issuances of common stock

     8,248        2,551   

Repurchases of common stock

     —          (4,668

Net repayments of existing credit facilities

     (2,547     (7,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (30,151     (24,627
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (274     190   
  

 

 

   

 

 

 

(Decrease)/Increase in cash and cash equivalents

     (12,821     8,622   

Cash and cash equivalents at beginning of period

     27,877        5,418   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 15,056      $ 14,040   
  

 

 

   

 

 

 

Supplemental information:

    

Cash (received)/paid for income taxes, net of refunds of $7,251 and $23, respectively

   $ (5,699   $ 7,042   

Cash paid for interest

   $ 7,191      $ 2,552   

 

* Nine Months Ended September 25, 2010 amounts have been revised to reflect the change in accounting for inventory. See Note 3 for more information.

See Notes to the Condensed Consolidated Financial Statements (Unaudited).

 

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

1. BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements of Snyder’s-Lance, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These condensed financial statements should be read in conjunction with the audited financial statements and notes included in our Form 10-K for the year ended January 1, 2011, filed with the Securities and Exchange Commission (the “SEC”) on March 2, 2011. In our opinion, these Condensed Consolidated Financial Statements reflect all adjustments, consisting of only normal, recurring accruals, necessary to present fairly our Condensed Consolidated Financial Statements for the interim periods presented herein. The consolidated results of operations for the quarter and nine months ended October 1, 2011, are not necessarily indicative of the results to be expected for the full year.

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 and postemployment benefits including severance, intangible asset valuations and impairments, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates.

On December 6, 2010, Lance, Inc. (“Lance”) and Snyder’s of Hanover, Inc. (“Snyder’s”) completed a merger (“Merger”) to create Snyder’s-Lance, Inc. The third quarter and first nine months of 2011 reflect the results of operations of the combined company, while the respective periods for 2010 only reflect the results of operations for Lance.

Effective December 6, 2010, we 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 was applied by retrospectively adjusting the prior years’ financial statements, is described further in Note 3.

Prior year amounts shown in the accompanying Condensed Consolidated Financial Statements have been reclassified for consistent presentation.

 

2. NEW ACCOUNTING STANDARDS

In June 2011, the FASB issued an Accounting Standards Update (“ASU”) regarding the presentation of comprehensive income. The new standard requires comprehensive income to be reported either as a single statement or in two consecutive statements reporting net income and other comprehensive income. In addition, the standard eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. The ASU requires retrospective application and will become effective for us in the first quarter of 2012.

In September 2011, the FASB issued an ASU regarding testing goodwill for impairment. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. We plan to adopt the revised standard for the goodwill impairment test performed for 2011.

 

3. 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.

The effect of the change on the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Cash Flows for the quarter and nine months ended September 25, 2010, was not significant.

 

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

4. MERGER AND INTEGRATION ACTIVITIES

During the quarter ended July 2, 2011, we adjusted our initial purchase price allocation related to the Merger for changes in the valuation of certain assets and liabilities. The adjustment resulted in a $0.6 million reduction in inventory, a $2.3 million reduction in property, plant, and equipment, a $0.3 million decrease in other current liabilities, a $0.2 million decrease in other noncurrent liabilities, a $0.7 million decrease in the deferred income tax liability, a $0.6 million increase in noncontrolling interests, and a $2.3 million increase in goodwill. The impact of these adjustments on previously presented balance sheets and income statements was not significant for retrospective adjustment. During the quarter ended October 1, 2011, there were no additional adjustments to our initial purchase price allocation in the valuation of certain assets and liabilities. Our valuations remain subject to adjustment as additional information is obtained, but any such adjustments are not expected to be significant.

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 2010. 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. 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)

   Quarter
Ended
September  25,
2010
     Nine Months
Ended
September 25,
2010
 

Net revenue

   $ 403,112       $ 1,177,524   

Income before interest and income taxes

   $ 24,774       $ 68,121   

Net income attributable to Snyder’s-Lance, Inc.

   $ 13,949       $ 38,397   

Weighted average diluted shares

     66,636         66,418   

Diluted earnings per share

   $ 0.21       $ 0.58   

In February 2011, we announced a plan to convert approximately 1,300 company-owned routes to an independent business operator structure. The conversion is currently in process and is expected to be complete by the middle of 2012.

During the quarter ended October 1, 2011, we incurred $3.4 million in severance costs and professional fees related to Merger and integration activities, which are included in selling, general, and administrative expenses on the Condensed Consolidated Statements of Income. In addition, for the quarter ended October 1, 2011, we recorded $3.2 million in net gain on the sale of route businesses associated with the conversion to an independent business operator structure. This gain is included in other income/expense, net on the Condensed Consolidated Statements of Income.

During the nine months ended October 1, 2011, costs incurred as a result of the Merger and integration activities include $15.8 million in severance costs and $2.4 million in professional fees, which are included in selling, general, and administrative expenses on the Condensed Consolidated Statements of Income. In addition, we recorded $3.2 million in net gain on the sale of route businesses and $10.1 million in asset impairment charges, both of which were associated with the conversion to an independent business operator structure and recorded in other income/expense, net on the Condensed Consolidated Statements of Income. The asset impairment was recorded due to the decision to sell the route trucks prior to the end of their useful lives. In order to determine an appropriate fair value for the route trucks, we reviewed market pricing for similar assets from multiple sources, including trucks sold at auction.

During the third quarter and nine months ended September 25, 2010, we incurred $2.9 million and $3.2 million, respectively, in professional fees associated with the Merger.

 

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

5. BUSINESS ACQUISITIONS

On August 9, 2011, we acquired all of the issued and outstanding shares of George Greer Company, Inc. (“Greer”), a snack food distributor, for $15.0 million in cash. Goodwill recorded as part of the purchase price allocation was $9.8 million, and identifiable intangible assets acquired as part of the acquisition were $8.5 million. In addition, we acquired cash and other tangible assets, which were more than offset by assumed liabilities. Although accretive since the acquisition date, the assets, liabilities and results of operations of this acquisition were not material to our consolidated financial position or results of operations. We continue to evaluate the purchase price allocation, primarily the value of certain intangible assets, and may revise the purchase price allocation in future periods as these estimates are finalized.

 

6. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income attributable to Snyder’s-Lance, Inc. by the weighted average number of shares outstanding during each period. Diluted earnings per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. In the calculation of diluted earnings per share, the denominator includes the number of additional common shares that would have been outstanding if our outstanding dilutive stock options had been exercised, as determined pursuant to the treasury stock method.

For the quarter and nine months ended October 1, 2011, approximately 20,000 and 25,000 shares, respectively, were excluded from the calculation of diluted earnings per share because their effects were antidilutive. Approximately 776,000 and 716,000 shares were excluded from the calculations of diluted earnings per share for the quarter and nine months ended September 25, 2010, respectively, because their effects were antidilutive.

 

7. INVENTORIES

 

(in thousands)

   October 1,
2011
     January 1,
2011
 

Finished goods

   $ 68,052       $ 55,658   

Raw materials

     21,611         17,015   

Maintenance parts and supplies

     26,440         24,263   
  

 

 

    

 

 

 

Total inventories

   $ 116,103       $ 96,936   
  

 

 

    

 

 

 

 

8. 2010 WORKFORCE REDUCTION

On June 4, 2010, we announced a reduction in our workforce, which resulted in $3.0 million of pre-tax charges being recognized in the second quarter of 2010. This included severance expense of approximately $2.8 million (net of a reduction in accrued vacation of $0.4 million), and job placement and medical coverage expenses of approximately $0.2 million. We recorded $1.1 million in cost of sales and $1.9 million in selling, general and administrative on the Condensed Consolidated Statements of Income.

 

9. INVESTMENTS

We own a non-controlling equity interest in Late July Snacks LLC (“Late July”), an organic snack food company. Equity earnings, which are not material, are included in other income/expense, net. We also manufacture products for Late July. Contract manufacturing revenue from Late July was approximately $1.2 million and $1.0 million during the third quarters of 2011 and 2010, respectively. Contract manufacturing revenue was approximately $3.4 million and $2.8 million during the first nine months of 2011 and 2010, respectively. As of October 1, 2011, and January 1, 2011, accounts receivable due from Late July totaled $0.5 million and $0.4 million, respectively.

As of October 1, 2011, and January 1, 2011, we had $7.4 million and $8.9 million, respectively, in long-term investments consisting of limited partnerships and real estate investment trusts. During the first quarter of 2011, one of these investments was sold for approximately $1.0 million resulting in an immaterial loss. Since our ownership interests are less than 5%, these investments are recorded at cost and adjusted for impairments considered other than temporary. Distributions received are recorded as either a return of capital or as investment income if in the form of a dividend.

 

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

10. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the nine months ended October 1, 2011, are as follows:

 

(in thousands)

   Carrying
Amount
 

Balance as of January 1, 2011

   $ 376,281   

Purchase price adjustments (see Note 4)

     2,267   

Business acquisitions (see Note 5)

     9,764   

Goodwill acquired in the purchase of route businesses

     3,426   

Goodwill attributable to the sale of route businesses

     (4,640

Goodwill allocated to assets held for sale

     (6,715

Change in foreign currency exchange rate

     (2,083
  

 

 

 

Balance as of October 1, 2011

   $ 378,300   
  

 

 

 

As of October 1, 2011 and January 1, 2011, acquired intangible assets consisted of the following:

 

(in thousands)

   Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Carrying
Amount
 

As of October 1, 2011:

       

Customer relationships – amortized

   $ 64,168       $ (4,002   $ 60,166   

Non-compete agreement – amortized

     500         (500     —     

Greer intangible assets – amortized

     8,500         (248     8,252   

Routes – unamortized

     30,875         —          30,875   

Trademarks – unamortized

     294,787         (526     294,261   
  

 

 

    

 

 

   

 

 

 

Balance as of October 1, 2011

   $ 398,830       $ (5,276   $ 393,554   
  

 

 

    

 

 

   

 

 

 

As of January 1, 2011:

       

Customer relationships – amortized

   $ 64,168       $ (1,384   $ 62,784   

Non-compete agreement – amortized

     500         (451     49   

Routes – unamortized

     50,485         —          50,485   

Trademarks – unamortized

     294,787         (526     294,261   
  

 

 

    

 

 

   

 

 

 

Balance as of January 1, 2011

   $ 409,940       $ (2,361   $ 407,579   
  

 

 

    

 

 

   

 

 

 

The intangible assets related to customer relationships are amortized over a weighted average useful life of 18.5 years and will be amortized through November 2029. Amortization expense related to intangibles was $2.9 million and $0.5 million for the nine months ended October 1, 2011, and September 25, 2010, respectively. We estimate that annual amortization expense for these intangible assets will be approximately $5.1 million per year for 2012, 2013 and 2014, $4.2 million for 2015, and $4.0 million for 2016.

Routes and trademarks are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely. Although not amortized, they are reviewed for impairment as conditions change or at least on an annual basis.

 

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

For the nine months ended October 1, 2011, changes in the carrying value of routes are as follows:

 

(in thousands)

   Routes  

Balance of routes as of January 1, 2011

   $ 50,485   

Purchases of routes, exclusive of goodwill acquired

     16,643   

Sales of routes

     (11,165

Routes allocated to assets held for sale

     (25,088
  

 

 

 

Balance of routes as of October 1, 2011

   $ 30,875   
  

 

 

 

Routes and associated goodwill allocated to assets held for sale represent assets available for sale in their present condition and for which actions to complete a sale have been initiated.

 

11. INCOME TAXES

We have recorded gross unrecognized tax benefits as of October 1, 2011 totaling $4.6 million and related interest and penalties of $2.1 million in other noncurrent liabilities on the Condensed Consolidated Balance Sheets. Of this amount, $5.6 million would affect the effective tax rate if subsequently recognized. As of January 1, 2011, we recorded gross unrecognized tax benefits totaling $3.8 million and related interest and penalties of $1.5 million in other long-term liabilities on the Condensed Consolidated Balance Sheets. The increase is primarily related to an increase in the liability for business acquisitions. We expect that statutes of limitation will likely expire in the next twelve months and may result in a potential $0.4 million decrease in the unrecognized tax benefit amount. We classify interest and penalties associated with income tax positions within income tax expense.

We have open years for income tax audit purposes in our major taxing jurisdictions according to statutes as follows:

 

Jurisdiction

   Open Years  

U.S. federal

     2008 and forward   

Canada federal

     2007 and forward   

Ontario provincial

     2005 and forward   

Massachusetts

     2007 and forward   

North Carolina

     2006 and forward   

Iowa

     2007 and forward   

Missouri

     2007 and forward   

New York

     2007 and forward   

California

     2006 and forward   

Pennsylvania

     2007 and forward   

Michigan

     2006 and forward   

 

12. FAIR VALUE MEASUREMENTS

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 the first nine months of 2011.

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 variable-rate debt approximates fair value since its variable interest rate is based on current market rates and interest payments are made monthly. The carrying amount of fixed-rate debt approximates fair value since it was recently recorded at fair value upon the Merger.

 

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

13. DERIVATIVE INSTRUMENTS

We are exposed to certain risks relating to our ongoing business operations. We use derivative instruments to manage interest rate and foreign exchange rate risks.

The fair value of the derivative instrument asset/(liability) in the Condensed Consolidated Balance Sheets using Level 2 inputs is as follows:

 

     Fair Value of Asset/(Liability) at  

(in thousands)

   October 1,
2011
    January 1,
2011
 

Derivatives designated as hedging instruments:

    

Interest rate swaps (included in Other noncurrent liabilities)

   $ (1,515   $ (2,630

Interest rate swaps (included in Other payables and accrued liabilities)

     (111     —     

Foreign currency forwards (included in Other payables and accrued liabilities/Prepaid expenses and other current assets)

     (567     256   
  

 

 

   

 

 

 

Total derivatives designated as hedging instruments

   $ (2,193   $ (2,374
  

 

 

   

 

 

 

Interest Rate Swaps

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. The notional amount of the interest rate swaps designated as hedging instruments as of October 1, 2011 and January 1, 2011 was $59.9 million and $62.1 million, respectively.

Foreign Currency Forwards

We have exposure to foreign exchange rate fluctuations through the operations of our Canadian subsidiary. A majority of the revenue of our Canadian operations is denominated in U.S. dollars and a substantial portion of its costs, such as raw materials and direct labor, are denominated in Canadian dollars. We have entered into a series of derivative forward contracts to mitigate a portion of this foreign exchange rate exposure. These contracts have maturities through December 2012. The notional amount for foreign currency forwards increased to $23.1 million at October 1, 2011, from $4.4 million at January 1, 2011, due to additional contracts entered into in August and September 2011.

The pre-tax income/(expense) effect of derivative instruments on the Condensed Consolidated Statements of Income is as follows:

 

September 25, September 25, September 25, September 25,
     Quarter Ended     Nine Months Ended  

(in thousands)

   October 1,
2011
    September 25,
2010
    October 1,
2011
    September 25,
2010
 

Interest rate swaps (included in Interest expense, net)

   $ (654   $ (600   $ (1,985   $ (1,818

Foreign currency forwards (included in Net revenue)

     (39     88        309        1,191   

Foreign currency forwards (included in Other income/expense, net)

     (33     (8     (47     (110
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net pre-tax expense from derivative instruments

   $ (726   $ (520   $ (1,723   $ (737
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

The change in unrealized pre-tax gains/(losses) included in other comprehensive income due to fluctuations in interest rates and foreign exchange rates were as follows:

 

     Quarter Ended      Nine Months Ended  

(in thousands)

        October 1,     
2011
    September 25,
2010
          October 1,     
2011
    September 25,
2010
 

Interest rate swaps

   $ (196   $ 330       $ 803      $ 926   

Foreign currency forwards

     (590     79         (823     (638
  

 

 

   

 

 

    

 

 

   

 

 

 

Total change in unrealized pre-tax gains/(losses) from derivative instruments (effective portion)

   $ (786   $ 409       $ (20   $ 288   
  

 

 

   

 

 

    

 

 

   

 

 

 

We have no counterparty credit risk associated with our derivative instruments, as all are currently in a liability position.

 

14. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

In order to mitigate the risks of volatility in commodity markets to which we are exposed, we have entered into forward purchase agreements with certain suppliers based on market prices, forward price projections, and expected usage levels. Purchase commitments for inventory increased from $169.6 million as of January 1, 2011, to $204.2 million as of October 1, 2011, due to the increased volume of purchase agreements compared to the end of 2010. We currently contract from approximately three to eighteen months in advance for all major ingredients and packaging.

Customer Concentration

For the quarter and nine months ended October 1, 2011, sales to our largest customer, Wal-Mart Stores, Inc., represented approximately 19% and 18% of total revenues, respectively. Sales to Wal-Mart Stores, Inc. were approximately 25% and 24% of total revenues for the quarter and nine months ended September 25, 2010, respectively. The decrease in the percentage of total revenue attributable to Wal-Mart Stores, Inc. relative to last year was driven by the Merger. In addition, third-party distributors, which account for approximately 12% of total revenues, purchase and resell our products to customers including Wal-Mart Stores, Inc., thereby increasing our total revenue attributable to Wal-Mart Stores, Inc. by an amount we are unable to reasonably estimate. Accounts receivable from Wal-Mart Stores, Inc. at October 1, 2011 and January 1, 2011 were $35.8 million and $22.9 million, respectively.

Guarantees

We currently guarantee loans made to independent business operators by a third party financial institution for the purchase of distribution routes and trucks. The outstanding aggregate balance on these loans was approximately $29.8 million as of October 1, 2011. The annual maximum amount of future payments we could be required to make under the guarantee equates to 25% of the outstanding aggregate loan balance on the first day of each calendar year plus 25% of the amount of any new loans issued during such calendar year.

Loan Service Arrangements

We have entered into loan service arrangements with certain related parties that allow us to repurchase certain distribution assets in the event an independent business operator defaults on a loan with the related party. We have the right to repurchase the assets 30 days after default at the fair market value as defined in the loan service agreement. As of October 1, 2011, there were outstanding loans made to independent business operators by the related parties for the purchase of distribution routes and trucks with an outstanding aggregate principal balance of approximately $35.8 million.

Legal Matters

We are currently subject to various lawsuits and environmental matters arising in the normal course of business. In our opinion, such matters should not have a material effect upon our Condensed Consolidated Financial Statements taken as a whole.

 

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

15. RELATED PARTY TRANSACTIONS

We own 51% of Patriot Snacks Real Estate, LLC (“Patriot”) and consolidate its balance sheet and operating results into our Condensed Consolidated Financial Statements. The remaining 49% is owned by an employee.

We own 80% of Michaud Distributors, Inc., which distributes our products in the northeastern United States. As of October 1, 2011, we have notes receivable from stockholders and employees of Michaud Distributors, Inc. of $0.3 million. The notes are unsecured, due upon demand, and bear interest at the best rate available to Michaud Distributors, Inc. by its primary commercial lenders.

ARWCO Corporation, MAW Associates, LP and Warehime Enterprises, Inc. are significantly owned or controlled by the Chairman of the Board of Snyder’s-Lance, Inc. or direct family members. Among other unrelated business activities, these entities provide financing to independent business operators for the purchase of trucks and routes. Our Chairman of the Board also serves as an officer and/or director of these entities. Transactions with these related parties are primarily related to the collection and remittance of loan payments on notes receivable held by the affiliates. We are reimbursed for certain overhead and administrative services associated with the services provided to these related parties. The receivables from, payables to, and administrative fees from these entities are not significant.

One of our directors, C. Peter Carlucci, Jr., is a member of Eckert Seamans Cherin & Mellott, LLC (“Eckert”), which serves as one of our outside legal firms. There were $0.3 million in payments made to Eckert during the first nine months of 2011.

 

16. COMPREHENSIVE INCOME AND NONCONTROLLING INTERESTS

Comprehensive income consisted of the following:

 

     Quarter Ended      Nine Months Ended  

(in thousands)

        October 1,     
2011
    September 25,
2010*
          October 1,     
2011
    September 25,
2010*
 

Net income

   $ 8,785      $ 10,185       $ 16,122      $ 21,905   

Foreign currency translation adjustment

     (6,416     790         (3,651     1,691   

Net unrealized (loss)/gain on derivatives, net of tax

     (530     257         (75     130   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

     1,839        11,232         12,396        23,726   

Comprehensive loss/(income) attributable to noncontrolling interests

     45        —           (291     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Snyder’s-Lance, Inc.

   $ 1,884      $ 11,232       $ 12,105      $ 23,726   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

* Quarter and Nine Months Ended September 25, 2010 amounts have been revised to reflect the change in accounting for inventory. See Note 3 for more information.

Noncontrolling interests are associated with our 51% ownership of Patriot and 80% ownership of Michaud Distributors, Inc. During the second quarter of 2011, we acquired an additional 10% ownership interest in Melisi Snacks, Inc. for $1.5 million. During the third quarter of 2011, we acquired the remaining ownership interest in Melisi Snacks, Inc. (10%) for $2.0 million, increasing our total ownership to 100%.

 

17. SUBSEQUENT EVENT

On October 20, 2011, we repaid the $50.0 million U.S. term loan which is listed in the current portion of long-term debt on the Condensed Consolidated Balance Sheets. The repayment was funded with borrowings from the existing revolving credit facility.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 II, “Item 1A. Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended January 1, 2011, and those described from time to time in our other reports filed with the Securities and Exchange Commission.

Management’s discussion and analysis of our financial condition and results of operations are based on the Condensed 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. The consolidated results of operations for the quarter and nine months ended October 1, 2011, are not necessarily indicative of the results to be expected for the full year. 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 and postemployment benefits including severance, intangible asset valuations and impairments, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates.

Overview

On December 6, 2010, Lance, Inc. (“Lance”) and Snyder’s of Hanover, Inc. (“Snyder’s”) completed a merger (“Merger”) to create Snyder’s-Lance, Inc. The third quarter and first nine months of 2011 reflect the results of operations of the combined company, while the respective periods for 2010 only reflect the results of operations for Lance.

As a result of the Merger, we are integrating our business and business processes to eliminate duplication of costs, and as a result, have recorded severance charges, asset impairments and increased professional fees, which we expect will continue throughout 2011.

In February 2011, we announced a plan to convert approximately 1,300 company-owned employee-based direct-store-delivery (“DSD”) routes to an independent business operator structure to better position our distribution network to serve customers. The conversion is expected to be complete by the middle of 2012 and is expected to materially impact our financial results in several areas, as follows:

 

   

Revenue – Although total revenue will increase as a result of the Merger, we expect to have lower revenue per unit sold as we shift from a company-owned to an independent business operator DSD network.

 

   

Gross margin – Lower revenue per unit sold will also drive lower gross margin as a percentage of net revenue.

 

   

Selling, general, and administrative expenses – As we shift to an independent business operator DSD network, we believe our distribution-related expenses will decline more than the decline in gross margin dollars.

 

   

Severance – We recorded an estimate of the severance charges related to converting our company-owned routes to an independent business operator structure.

 

   

Impairment of fixed assets – During the second quarter, we recorded an impairment of route trucks reflecting a fair value estimate that is significantly lower than the current book value of these assets. We may have additional impairments of distribution equipment as we evaluate the impacts of the conversion.

 

   

Gains on the sale of route businesses – We expect to record net gains on the sale of route businesses to independent business operators that will mitigate a portion of the integration-related expenses and provide significant cash inflows. The basis of the route businesses will include an allocation of goodwill, which will reduce the overall gain recorded in the Condensed Consolidated Statements of Income. As of October 1, 2011, we had sold approximately 200 routes associated with the DSD independent business operator conversion.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Our branded products are sold under our recognized company-owned brands. Non-branded products consist of:

 

  1.

Private brand products , which are sold to retailers and distributors using store brands or our own control brands, such as Brent & Sam’s ® , Vista ® and Delicious ® ;

 

  2. Partner brands , which consists of other third-party brands that we sell through our DSD network; and

 

  3. Contract manufacturing , which represents our contracts with other branded food manufacturers to produce their products.

Revenue increased significantly in the third quarter of 2011 compared to the third quarter of 2010 primarily as a result of the Merger. Including only the historical Lance branded and non-branded products, revenue increased approximately 7% due to selling price increases, increased distribution, and new product introductions.

The third quarter of 2011 continued to be negatively affected by higher commodity costs compared to the third quarter of 2010. These higher costs were most impactful to our private brand product margins, where gross margin percentages are generally lower than branded products and planned selling price increases were not fully realized until the latter part of the third quarter. We expect that fourth quarter commodity costs will be higher than prior year fourth quarter commodity costs but will be lower than the third quarter of 2011.

We recognized approximately $3.2 million of gains on the sale of route businesses associated with the DSD independent business operator conversion. We also incurred approximately $3.4 million of severance charges and professional fees related to the Merger and other integration efforts during the third quarter of 2011.

As we move into the fourth quarter of 2011, we expect to see continued growth compared to 2010 as a result of incremental revenue from the Merger, increased product distribution from Merger-related synergies, continued organic volume growth, and selling price increases.

As a result of the Merger, gross margin as a percentage of revenue is expected to decline compared to 2010 due to a greater percentage of sales to independent business operators and a higher concentration of non-branded revenue. However, selling and distribution costs are expected to decline as a result of the conversion to an independent business operator structure.

Quarter Ended October 1, 2011 Compared to Quarter Ended September 25, 2010

 

(in thousands)

   Quarter Ended     Favorable/
(Unfavorable)
Variance
 
   October 1, 2011     September 25, 2010*    

Net revenue

   $ 421,897        100.0   $ 237,683         100.0   $ 184,214        77.5

Cost of sales

     280,892        66.6     143,062         60.2     (137,830     -96.3
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross margin

     141,005        33.4     94,621         39.8     46,384        49.0

Selling, general and administrative

     126,816        30.1     78,416         33.0     (48,400     -61.7

Other (income)/expense, net

     (4,241     -1.0     221         0.1     4,462        nm   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before interest and taxes

     18,430        4.4     15,984         6.7     2,446        15.3

Interest expense, net

     3,037        0.7     841         0.4     (2,196     -261.1

Income tax expense

     6,608        1.6     4,958         2.1     (1,650     -33.3
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 8,785        2.1   $ 10,185         4.3   $ (1,400     -13.7
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

* Quarter Ended September 25, 2010 amounts have been revised to reflect the change in accounting for inventory.

 

nm = not meaningful.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Revenue

Net revenue increased $184.2 million compared to the third quarter of 2010 primarily as a result of the incremental branded and non-branded revenue from the Merger. The comparability of our results is significantly impacted by the Merger. Compared to the third quarter of 2010 and including only the historical Lance branded and non-branded products:

 

   

We had approximately 5% revenue growth in our branded products primarily from increased distribution and new product innovation.

 

   

We experienced approximately 11% revenue growth in our non-branded products primarily due to selling price increases, sales to new customers, and new product offerings.

Revenue by product category was as follows (in millions):

 

     Quarter Ended  
          October 1,     
2011
     September 25,
2010
 

Branded Products

   $ 241.8       $ 138.0   

Non-Branded Products

     180.1         99.7   
  

 

 

    

 

 

 

Total Revenue

   $ 421.9       $ 237.7   
  

 

 

    

 

 

 

Gross Margin

Gross margin increased $46.4 million during the third quarter of 2011 compared to the same quarter last year but declined 6.4% as a percentage of revenue. The overall increase in gross margin was driven by the increase in sales volume primarily as a result of the Merger. Gross margin declined as a percentage of revenue due to the following:

 

   

Higher portion of sales to independent business operators where we realize lower selling prices compared to direct sales to retailers;

 

   

Higher mix of non-branded products that have a lower gross margin;

 

   

Higher commodity costs for our branded and non-branded products; and

 

   

Selling price increases did not fully offset higher commodity costs during the quarter for private brand products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $48.4 million during the third quarter of 2011 compared to the third quarter of 2010 but decreased 2.9% as a percentage of revenue. The dollar increase was primarily driven by incremental expenses assumed as part of the Merger. Additionally, we recognized $3.4 million of severance charges and professional fees associated with the independent business operator conversion and other Merger integration activities. This amount was compared to $2.9 million in expenses recognized in the third quarter of 2010 associated with the Merger. We also introduced several media campaigns during the quarter as an investment in our core brands, which resulted in a $7.9 million increase in advertising costs over the third quarter of 2010 or a 3.2% increase as a percentage of branded revenue. In addition, during the third quarter, we continued to experience duplicate costs as a result of the Merger, which we expect to be addressed as a part of the integration and DSD conversion to independent business operators.

Other Income/Expense, Net

During the third quarter of 2011, we recognized approximately $3.2 million of gains on the sale of route businesses associated with the DSD independent business operator conversion. As we continue to convert the company-owned routes to an independent business operator DSD network, additional gains on the sale of assets are expected. In addition, we experienced foreign currency gains of $1.0 million during the third quarter of 2011. Other income/expense, net was not significant in the third quarter of 2010.

Interest Expense

Interest expense increased $2.2 million during the third quarter of 2011 compared to the third quarter of 2010 as a result of higher debt levels and higher average interest rates due to the Merger.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Income Tax Expense

The effective income tax rate increased from 32.7% for the third quarter of 2010 to 42.9% for the third quarter of 2011. The increase in the effective tax rate was due to higher non-tax deductible expenses, primarily related to the goodwill associated with the sale of route businesses.

Nine Months Ended October 1, 2011 Compared to Nine Months Ended September 25, 2010

 

(in thousands)

   Nine Months Ended     Favorable/
(Unfavorable)
Variance
 
   October 1, 2011     September 25, 2010*    

Net revenue

   $ 1,222,909         100.0   $ 694,717         100.0   $ 528,192        76.0

Cost of sales

     797,095         65.2     418,786         60.3     (378,309     -90.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Gross margin

     425,814         34.8     275,931         39.7     149,883        54.3

Selling, general and administrative

     384,856         31.5     236,517         34.0     (148,339     -62.7

Other expense, net

     5,942         0.5     4,006         0.6     (1,936     -48.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before interest and taxes

     35,016         2.9     35,408         5.1     (392     -1.1

Interest expense, net

     8,064         0.7     2,563         0.4     (5,501     -214.6

Income tax expense

     10,830         0.9     10,940         1.6     110        1.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 16,122         1.3   $ 21,905         3.2   $ (5,783     -26.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

* Nine Months Ended September 25, 2010 amounts have been revised to reflect the change in accounting for inventory.

Revenue

Net revenue increased $528.2 million compared to the first nine months of 2010 primarily as a result of the incremental branded and non-branded revenue for new products offerings as a result of the Merger. In addition, revenue increased due to increased distribution of our branded products, increased revenue through new product innovation for both branded and non-branded products and increased selling prices to offset higher commodity costs.

Revenue by product category was as follows (in millions):

 

September 25, September 25,
     Nine Months Ended  
     October 1,
2011
     September 25,
2010
 

Branded Products

   $ 711.4       $ 404.9   

Non-Branded Products

     511.5         289.8   
  

 

 

    

 

 

 

Total Revenue

   $ 1,222.9       $ 694.7   
  

 

 

    

 

 

 

Gross Margin

Gross margin increased $149.9 million during the first nine months of 2011 compared to the same period last year but declined 4.9% as a percentage of revenue. The overall dollar increase in gross margin was driven by the increase in sales volume primarily as a result of the Merger. The gross margin decline as a percentage of revenue was attributable to the mix of incremental revenue from the Merger, due to the independent business operator DSD network having lower revenue per unit sold, and higher commodity costs, which were not fully offset by selling price increases, primarily in our non-branded products.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $148.3 million during the first nine months of 2011 compared to the first nine months of 2010, but decreased 2.5% as a percentage of revenue. The dollar increase was primarily driven by incremental expenses assumed as part of the Merger. Additionally, in the first nine months of 2011, we recognized $15.8 million of severance expenses and $2.4 million of professional fee expenses associated with the Merger and independent business operator conversion. During the first nine months of 2010, selling and general expenses were unfavorably impacted by $3.2 million of expenses associated with the Merger and $1.9 million of costs incurred in connection with a workforce reduction. In the first nine months of 2011, we increased our investment in advertising for our core brands over the first nine months of 2010 by $13.1 million or a 1.4% increase as a percentage of branded revenue. During 2011, we also experienced duplicate costs as a result of the Merger, which we expect to be addressed as a part of the integration and DSD conversion to independent business operators.

Other Expense, Net

During the second quarter of 2011, we recognized asset impairment charges of $10.1 million on our fleet of route trucks expected to be sold as a result of the independent business operator conversion. During the third quarter of 2011, we recognized approximately $3.2 million of gains on the sale of route businesses associated with the DSD independent business operator conversion. As we continue to convert the company-owned routes to an independent business operator DSD network, additional gains on the sale of assets are expected.

During the first nine months of 2010, we recorded financing commitment fees of $2.7 million associated with an unsuccessful bid for a targeted acquisition and an impairment charge of $0.6 million related to the assets in Little Rock, Arkansas.

Interest Expense

Interest expense increased $5.5 million during the first nine months of 2011 compared to the first nine months of 2010 from higher debt levels and higher average interest rates due to the Merger.

Income Tax Expense

Our effective income tax rate was 40.2% in the first nine months of 2011 compared to 33.3% in the first nine months of 2010. The increase in the effective tax rate was due to higher non-tax deductible expenses, primarily related to the goodwill associated with the sale of route businesses.

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 should not 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 for fixed assets, route businesses, acquisitions, and dividends. We believe we have sufficient liquidity 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, which is effective through March 26, 2012.

Operating Cash Flows

Net cash provided by operating activities was $72.8 million during the first nine months of 2011 and $52.0 million during the first nine months of 2010. Cash provided by changes in operating assets and liabilities was $6.7 million during the first nine months of 2011, an increase from cash used by changes in operating assets and liabilities of $5.0 million in the first nine months of 2010. The increases in accounts receivable and inventory during the first nine months of 2011 were more than offset by increases in accounts payable, accrued compensation and reductions in prepaid expenses and other current assets.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Investing Cash Flows

Net cash used in investing activities was $55.2 million for the first nine months of 2011. Capital expenditures for fixed assets, principally manufacturing equipment, totaled $43.4 million during the first nine months of 2011, partially offset by proceeds from the sale of fixed and intangible assets of $2.7 million. Capital expenditures are expected to continue at a level sufficient to support our strategic and operating needs. Capital expenditures for 2011 are projected to be between $55 million and $60 million and funded by net cash flow from operating activities, proceeds from the sale of route businesses, cash on hand, and our existing credit facilities. Expenditures for the purchase of route businesses were $19.7 million in the first nine months of 2011, offset by proceeds from the sale of route businesses of $19.6 million. The purchases and sales of route businesses are expected to continue increasing over the remainder of the year and into 2012 as we convert to an independent business operator structure. During the third quarter of 2011, we acquired the George Greer Company, Inc. for $15.0 million in addition to another distributor.

Net cash used in investing activities during the first nine months of 2010 represented capital expenditures of $21.2 million, partially offset by proceeds from the sale of fixed and intangible assets of $2.2 million. Capital expenditures for purchases of fixed assets were $33.3 million for the year ended January 1, 2011.

Financing Cash Flows

Net cash used in financing activities was $30.2 million for the first nine months of 2011 compared with $24.6 million in the first nine months of 2010. During both of the first nine months of 2011 and 2010, we paid dividends of $0.48 per common share totaling $32.1 million and $15.5 million, respectively, with the increase due to the change in the number of shares outstanding. We received cash and related tax benefits of $8.2 million and $2.6 million during the first nine months of 2011 and 2010, respectively, as a result of stock option exercises. Repayments on our existing credit facilities totaling $2.5 million and $7.0 million, respectively, for the first nine months of 2011 and 2010, were primarily funded by cash on hand and cash provided by operating activities.

During the first nine months of 2011, we acquired the remaining ownership interest in Melisi Snacks, Inc. for $3.5 million, increasing our total ownership to 100%.

During the first nine months of 2010, we repurchased 56,152 shares of common stock from employees and net-settled 172,650 of the 300,000 restricted stock units that vested in May 2010, to cover $3.8 million of withholding taxes payable by employees upon the vesting of restricted stock and restricted stock units. We also paid $0.9 million of accrued dividends on restricted stock units.

On November 1, 2011, the Board of Directors declared a quarterly cash dividend of $0.16 per share, payable on November 22, 2011, to stockholders of record on November 14, 2011.

Other Cash Flow Considerations

In February 2011, we announced a plan to convert approximately 1,300 company-owned routes to an independent business operator structure to better position our distribution network to serve customers. The conversion is expected to be complete by the middle of 2012. We continue to expect significant cash inflows and outflows from the independent business operator conversion and other integration activities. We expect to generate after-tax proceeds of approximately $40 to $50 million from the sale of route businesses and route trucks by the middle of 2012.

Debt

Additional borrowings available under our existing credit facility totaled $153.0 million as of October 1, 2011. We have complied with all financial covenants contained in the credit agreement. Under a separate existing credit agreement, a $50.0 million loan was due in October 2011. The repayment of this loan was made on October 20, 2011, and was funded with borrowings from the existing revolving credit facility. We also maintain standby letters of credit in connection with our self-insurance reserves for casualty claims. The total amount of these letters of credit was $16.1 million as of October 1, 2011.

Contractual Obligations

In order to mitigate the risks of volatility in commodity markets to which we are exposed, we have entered into forward purchase agreements with certain suppliers based on market prices, forward price projections, and expected usage levels. Purchase commitments for inventory increased from $169.6 million as of January 1, 2011, to $204.2 million as of October 1, 2011, due to the increased volume of purchase agreements compared to the end of 2010. We currently contract from approximately three to eighteen months in advance for all major ingredients and packaging.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

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.

Market Risks

The principal market risks that may adversely impact results of operations and financial position relate to ingredient, packaging and energy costs, interest and foreign exchange rates, and credit risks.

See the “ Contractual Obligations” section above for a discussion of market risks associated with ingredient, packaging and energy costs.

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. While these interest rate swap agreements fixed a portion of the interest rate at a predictable level, pre-tax interest expense would have been $2.0 million lower without these agreements during the first nine months of 2011.

We are exposed to foreign exchange rate fluctuations through the operations of our Canadian subsidiary. 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 derivative forward contracts to mitigate a portion of this foreign exchange rate exposure. These contracts have maturities through December 2012. The effect of foreign exchange rate fluctuations, net of the effect of derivative forward contracts, was unfavorable by $0.4 million for the first nine months of 2011 compared to the first nine months of 2010.

Other than immaterial investments acquired in the Merger, we do not have or use market risk sensitive instruments for trading or speculative purposes. See Note 13 to our Condensed Consolidated Financial Statements for additional information about our derivative instruments.

We are exposed to credit risks related to our accounts receivable. We perform ongoing credit evaluations of our customers to minimize the potential exposure. For the first nine months of 2011 and 2010, net bad debt expense was $0.7 million and $0.9 million, respectively. Allowances for doubtful accounts were $2.4 million at October 1, 2011 and $2.9 million at January 1, 2011.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about these market risks are included under “Market Risks” in Item 2 above, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Item 4. Controls and Procedures

As of the end of the period covered by this report and pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), we conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 1, 2011.

There have been no changes in our internal control over financial reporting during the quarter ended October 1, 2011, that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are currently subject to various lawsuits and environmental matters arising in the normal course of business. In our opinion, such matters should not have a material effect upon our Condensed Consolidated Financial Statements taken as a whole.

 

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 1, 2011, which factors could materially affect our business, financial condition or future results. There have been no material changes to such risk factors.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Our revolving credit agreement restricts our 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. As of October 1, 2011, our consolidated stockholders’ equity was $823.8 million. The private placement agreement for $100 million of senior notes assumed as part of the Merger, as amended in December 2010, has provisions no more restrictive than the revolving credit agreement dated December 2010.

The Board of Directors has authorized the repurchase of shares from employees in order to cover withholding taxes payable by employees upon the vesting of restricted stock. On July 21, 2010, the Board of Directors authorized the repurchase of up to 100,000 shares, or up to $2.4 million, of common stock from employees. There were no share repurchases during the first nine months of 2011. However, share repurchases during the fourth quarter of 2010 reduced the remaining number of shares authorized to be repurchased to 57,380.

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. [Removed and Reserved]

Not applicable.

 

Item 5. Other Information

Not applicable.

 

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Item 6. Exhibits

Exhibit Index

 

No.

  

Description

  3.1    Restated Articles of Incorporation of Snyder’s-Lance, Inc. as amended through April 17, 1998, incorporated herein by reference to Exhibit 3 to the Registrant’s Quarterly Report on Form 10-Q for the twelve weeks ended June 13, 1998 (File No. 0-398).
  3.2    Articles of Amendment to Amended and Restated Articles of Incorporation of Snyder’s-Lance, Inc., incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on December 6, 2010 (File No. 0-398).
  3.3    Bylaws of Snyder’s-Lance, Inc., as amended through December 6, 2010, incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on December 6, 2010 (File No. 0-398).
10.1    Severance, Release and Amendment to Compensation and Benefits Assurance Agreement, dated as of August 19, 2011, between the Registrant and Blake W. Thompson, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 24, 2011 (File No. 0-398).
10.2    Amendment No. 2 to Standstill Agreement, dated as of September 20, 2011, by and among Snyder’s-Lance, Inc., Michael A. Warehime and Patricia A. Warehime, incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 23, 2011 (File No. 0-398).
31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), filed herewith.
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), filed herewith.
32    Certification pursuant to Rule 13a-14(b), as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101    Financial Statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 1, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) the Notes to the Condensed Consolidated Financial Statements.

 

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

SNYDER’S-LANCE, INC.
By:   /s/    Rick D. Puckett        
  Rick D. Puckett
  Executive Vice President, Chief Financial Officer and Treasurer

Dated: November 7, 2011

 

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES

EXHIBIT 31.1

MANAGEMENT CERTIFICATION

I, David V. Singer, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Snyder’s-Lance, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 7, 2011
/s/ David V. Singer
David V. Singer
Chief Executive Officer

SNYDER’S-LANCE, INC. AND SUBSIDIARIES

EXHIBIT 31.2

MANAGEMENT CERTIFICATION

I, Rick D. Puckett, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Snyder’s-Lance, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 7, 2011
/s/ Rick D. Puckett
Rick D. Puckett
Executive Vice President, Chief Financial Officer and Treasurer

SNYDER’S-LANCE, INC. AND SUBSIDIARIES

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Snyder’s-Lance, Inc. (the “Company”) on Form 10-Q for the period ended October 1, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, David V. Singer, Chief Executive Officer of the Company, and Rick D. Puckett, Executive Vice President, Chief Financial Officer, and Treasurer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to Snyder’s-Lance, Inc. and will be retained by Snyder’s-Lance, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

/s/ David V. Singer         /s/ Rick D. Puckett
David V. Singer     Rick D. Puckett
Chief Executive Officer     Executive Vice President, Chief Financial
November 7, 2011     Officer and Treasurer
    November 7, 2011