Snyder's-Lance, Inc. - Quarterly Report

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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 September 28, 2013

Commission File Number 0-398

SNYDER’S-LANCE, INC.

(Exact name of registrant as specified in its charter)



North Carolina (State or other jurisdiction of incorporation or organization)		56-0292920 (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 ¨	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 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 30, 2013 , wa s 69,874,409 sh ares.

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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 September 28, 2013 and September 29, 2012	4

Condensed Consolidated Statements of Comprehensive Income (Unaudited) – Quarters and Nine Months Ended September 28, 2013 and September 29, 2012	5

Condensed Consolidated Balance Sheets – As of September 28, 2013 (Unaudited) and December 29, 2012	6

Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 28, 2013 and September 29, 2012	7

Notes to the Condensed Consolidated Financial Statements (Unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3. Quantitative and Qualitative Disclosures about Market Risk	24

Item 4. Controls and Procedures	24

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	25

Item 1A. Risk Factors	25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25

Item 3. Defaults Upon Senior Securities	25

Item 4. Mine Safety Disclosures	25

Item 5. Other Information	25

Item 6. Exhibits	26

SIGNATURE	27

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

INDEX

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 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 December 29, 2012 , 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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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 September 28, 2013 and September 29, 2012

(in thousands, except per share data)



	Quarter Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Net revenue	$	453,023		$	406,565		$	1,310,646		$	1,198,808
Cost of sales	295,429			269,626			862,286			802,568
Gross margin	157,594			136,939			448,360			396,240

Selling, general and administrative	122,110			106,512			356,610			324,864
Impairment charges	—			80			1,900			207
Gain on sale of route businesses, net	(465		)	(1,427		)	(2,057		)	(21,596		)
Other (income)/expense, net	(5,099		)	537			(8,603		)	(124		)
Income before interest and income taxes	41,048			31,237			100,510			92,889

Interest expense, net	3,742			1,692			10,702			6,258
Income before income taxes	37,306			29,545			89,808			86,631

Income tax expense	14,194			11,634			33,758			34,930
Net income	23,112			17,911			56,050			51,701
Net income attributable to noncontrolling interests	213			146			329			397
Net income attributable to Snyder’s-Lance, Inc.	$	22,899		$	17,765		$	55,721		$	51,304

Basic earnings per share	$	0.33		$	0.26		$	0.80		$	0.75
Weighted average shares outstanding – basic	69,459			68,598			69,243			68,268

Diluted earnings per share	$	0.33		$	0.26		$	0.80		$	0.74
Weighted average shares outstanding – diluted	70,294			69,526			70,013			69,190

Cash dividends declared per share	$	0.16		$	0.16		$	0.48		$	0.48

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

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Quarters and Nine Months Ended September 28, 2013 and September 29, 2012

(in thousands)



	Quarter Ended						Nine Months Ended
	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Net income	$	23,112		$	17,911		$	56,050		$	51,701

Net unrealized gains/(losses) on derivative instruments, net of income tax	247			5			229			(288		)
Foreign currency translation adjustment	1,432			2,468			(2,473		)	2,794
Total other comprehensive income/(loss)	1,679			2,473			(2,244		)	2,506

Total comprehensive income	24,791			20,384			53,806			54,207
Comprehensive income attributable to noncontrolling interests, net of income tax of $112, $80, $233 and $176, respectively	(213		)	(146		)	(329		)	(397		)
Total comprehensive income attributable to Snyder’s-Lance, Inc.	$	24,578		$	20,238		$	53,477		$	53,810

See Notes to Condensed Consolidated Financial Statements (Unaudited).

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

As of September 28, 2013 (Unaudited) and December 29, 2012

(in thousands, except share data)



	September 28, 2013		December 29, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	16,702	$	9,276
Accounts receivable, net of allowances of $2,300 and $2,159, respectively	152,266		141,862
Inventories	139,764		118,256
Prepaid income taxes	5,272		—
Deferred income taxes	9,361		11,625
Assets held for sale	22,707		11,038
Prepaid expenses and other current assets	26,492		28,676
Total current assets	372,564		320,733

Noncurrent assets:
Fixed assets, net of accumulated depreciation of $351,985 and $331,053, respectively	344,746		331,385
Goodwill	536,655		540,389
Other intangible assets, net	519,517		531,735
Other noncurrent assets	23,139		22,490
Total assets	$	1,796,621	$	1,746,732

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current portion of long-term debt	$	18,389	$	20,462
Accounts payable	59,276		54,791
Accrued compensation	26,780		31,037
Accrued selling and promotional costs	15,097		16,240
Income tax payable	—		1,263
Other payables and accrued liabilities	32,511		30,830
Total current liabilities	152,053		154,623

Noncurrent liabilities:
Long-term debt	526,405		514,587
Deferred income taxes	182,830		176,037
Other noncurrent liabilities	28,607		29,310
Total liabilities	889,895		874,557

Commitments and contingencies

Stockholders’ equity:
Common stock, 69,508,697 and 68,863,974 shares outstanding, respectively	57,922		57,384
Preferred stock, no shares outstanding	—		—
Additional paid-in capital	759,839		746,155
Retained earnings	73,324		50,847
Accumulated other comprehensive income	12,874		15,118
Total Snyder’s-Lance, Inc. stockholders’ equity	903,959		869,504
Noncontrolling interests	2,767		2,671
Total stockholders’ equity	906,726		872,175
Total liabilities and stockholders’ equity	$	1,796,621	$	1,746,732

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 September 28, 2013 and September 29, 2012

(in thousands)



	Nine Months Ended
	September 28, 2013			September 29, 2012
Operating activities:
Net income	$	56,050		$	51,701
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization	44,805			39,255
Stock-based compensation expense	4,397			3,487
(Gain)/loss on sale of fixed assets, net	(1,022		)	87
Gain on sale of route businesses	(2,057		)	(21,596		)
Impairment charges	1,900			207
Deferred income taxes	8,962			(7,419		)
Changes in operating assets and liabilities, excluding business acquisitions	(38,562		)	(5,938		)
Net cash provided by operating activities	74,473			59,784

Investing activities:
Purchases of fixed assets	(55,874		)	(55,962		)
Purchases of route businesses	(26,798		)	(27,747		)
Proceeds from sale of fixed assets	4,552			8,185
Proceeds from sale of route businesses	25,004			88,672
Proceeds from sale of investments	921			—
Business acquisitions, net of cash acquired	(1,513		)	—
Net cash (used in)/provided by investing activities	(53,708		)	13,148

Financing activities:
Dividends paid to stockholders	(33,243		)	(32,790		)
Dividends paid to noncontrolling interests	(232		)	(234		)
Debt issuance costs	—			(567		)
Issuances of common stock	10,514			10,741
Repurchases of common stock	(709		)	(333		)
Repayments of long-term debt	(16,279		)	(1,647		)
Net proceeds/(repayments) from revolving credit facilities	26,805			(59,869		)
Net cash used in financing activities	(13,144		)	(84,699		)

Effect of exchange rate changes on cash	(195		)	(274		)

Increase/(decrease) in cash and cash equivalents	7,426			(12,041		)
Cash and cash equivalents at beginning of period	9,276			20,841
Cash and cash equivalents at end of period	$	16,702		$	8,800

Supplemental information:
Cash paid for income taxes, net of refunds of $36 and $12,361, respectively	$	29,056		$	20,636
Cash paid for interest	$	9,806		$	5,801

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. (the "Company") have been prepared in accordance with generally accepted accounting principles in the United States 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 consolidated financial statements should be read in conjunction with the audited financial statements and notes included in our Form 10-K for the year ended December 29, 2012 , filed with the Securities and Exchange Commission on February 25, 2013. 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 September 28, 2013 , 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 sales and promotional allowances, customer returns, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, goodwill and intangible asset valuations and impairments, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.

Prior year amounts shown in the accompanying condensed consolidated financial statements have been reclassified for consistent presentation.

Our significant accounting policies are summarized in Note 1 to the consolidated financial statements included in our Form 10-K for the year ended December 29, 2012 . An update to these accounting policies is below.

Self-Insurance Reserves

We maintain reserves for the self-funded portions of employee medical insurance benefits. Our portion of employee medical claims is generally limited to $0.3 million per participant annually by stop-loss insurance coverage. Due to the significance of certain historical claims, our 2013 stop-loss insurance coverage limit was increased to $5.0 million in aggregate for a specific portion of our self-funded claims. For the quarter and nine months ended September 28, 2013 , we have recorded $0.4 million and $5.0 million , respectively, in pre-tax expenses associated with these claims.

2. NEW ACCOUNTING STANDARDS

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. Under the standard, an entity is required to disclose items reclassified in their entirety out of accumulated other comprehensive income, the effect of the reclassification on each affected net income line item and for items that are not classified out of accumulated other comprehensive income in their entirety, a cross reference to other required U.S. GAAP disclosures. The requirements were effective and adopted by the Company during the first quarter of 2013.

3. BUSINESS ACQUISITIONS

2013 Acquisition

On July 29, 2013, we acquired substantially all the assets of a snack food distributor in Massachusetts. This acquisition was part of our plans to continue growing and strengthening our independent business owner ("IBO") distribution network.

2012 Acquisition

On October 11, 2012, we completed the acquisition of all of the issued and outstanding shares and membership interests of Snack Factory, LLC and certain affiliates ("Snack Factory") for $343.4 million . Transaction related costs of $0.5 million were recognized in selling, general and administrative expense on the Condensed Consolidated Statements of Income during the quarter ended September 29, 2012 .

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

The following unaudited pro forma results for the quarter and nine months ended September 29, 2012 , include estimates and assumptions regarding increased amortization of intangible assets related to the acquisition, increased interest expense related to debt acquired in order to fund the acquisition and the related tax effects. Pro forma results are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated, or that may result in the future for various reasons including the potential impact of revenue and cost synergies on the business.



	Quarter Ended September 29, 2012		Nine Months Ended September 29, 2012
(in thousands, except per share data)	Quarter Ended September 29, 2012		Nine Months Ended September 29, 2012
Net revenue	$	435,346	$	1,278,264
Income before interest and income taxes	35,401		101,456
Net income attributable to Snyder's-Lance, Inc.	19,302		53,780
Weighted average diluted shares	69,526		69,190
Diluted earnings per share	$	0.28	$	0.78

Merger and Integration Activities

On December 6, 2010, Lance, Inc. and Snyder’s of Hanover, Inc. completed a merger (“Merger”) to create Snyder’s-Lance, Inc. In connection with this Merger, we converted our company owned distribution routes to an IBO distribution network.

During the quarter and nine months ended September 29, 2012 , we incurred $0.2 million and $1.9 million , respectively, in severance costs and professional fees related to the Merger and integration activities, which are included in selling, general and administrative expenses on the Condensed Consolidated Statements of Income. There were no such costs incurred during the quarter and nine months ended September 28, 2013 .

4. 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.

No shares were excluded from the calculation of diluted earnings per share for the quarter or nine months ended September 28, 2013 and September 29, 2012 .

On May 3, 2013, an amendment to the Restated Articles of Incorporation of Snyder's-Lance, Inc. was approved at the annual meeting of stockholders to increase the number of authorized shares of common stock from 75,000,000 to 110,000,000 .

5. STOCK-BASED COMPENSATION

Compensation expense related to equity-based incentive plans of $1.6 million and $1.2 million was recognized for the quarters ended September 28, 2013 , and September 29, 2012 , respectively, and was $4.4 million and $3.5 million , respectively, for the nine months then ended. During the nine months ended September 28, 2013 , we issued 442,493 non-qualified stock options at a weighted-average exercise price of $25.61 per share and 151,737 restricted shares to employees and directors. During the nine months ended September 29, 2012 , we issued 534,994 non-qualified stock options at a weighted-average exercise price of $22.41 per share and 159,867 restricted shares to employees and directors.

During the nine months ended September 28, 2013 , and September 29, 2012 , we repurchased 27,755 and 14,803 shares, respectively, of common stock from employees to cover withholding taxes payable by employees upon the vesting of restricted stock. There were no share repurchases for the quarters ended September 28, 2013 , and September 29, 2012 .

In addition, we recorded $0.8 million and $0.7 million in incentive compensation expense for a performance-based cash incentive plan for the quarters ended September 28, 2013 , and September 29, 2012 , respectively. For the nine months ended September 28, 2013 , and September 29, 2012 , incentive compensation expense for this plan was $1.2 million and $1.5 million , respectively.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

6. INVENTORIES

Inventories as of September 28, 2013 , and December 29, 2012 , consisted of the following:



(in thousands)	September 28, 2013		December 29, 2012
Finished goods	$	92,084	$	74,627
Raw materials	20,029		19,307
Maintenance parts, packaging and supplies	27,651		24,322
Inventories	$	139,764	$	118,256

7. FIXED ASSETS

Fixed assets as of September 28, 2013 , and December 29, 2012 , consisted of the following:



(in thousands)	September 28, 2013			December 29, 2012
Land and land improvements	$	27,983		$	28,501
Buildings and building improvements	142,549			135,491
Machinery, equipment and computer systems	469,216			416,767
Trucks and automobiles	31,244			32,042
Furniture and fixtures	12,164			12,158
Construction in progress	18,461			41,257
	701,617			666,216
Accumulated depreciation	(351,985		)	(331,053		)
	349,632			335,163
Fixed assets held for sale	(4,886		)	(3,778		)
Fixed assets, net	$	344,746		$	331,385

Depreciation expense related to fixed assets was $12.8 million and $12.0 million during the quarters ended September 28, 2013 , and September 29, 2012 , respectively. For the nine months ended September 28, 2013 , and September 29, 2012 , depreciation expense was $37.6 million and $35.6 million , respectively. There were no fixed asset impairment charges during the quarter and nine months ended September 28, 2013 , as compared to $0.1 million and $0.2 million recorded during the quarter and nine months ended September 29, 2012 , respectively.

During the fourth quarter of 2012, we made the decision to close our Cambridge, Ontario manufacturing facility in May 2013 in order to consolidate the operations of our two Canadian manufacturing facilities. In conjunction with this decision, an asset impairment charge of $2.5 million was recorded in the fourth quarter of 2012. Additional expenses of $1.0 million were incurred in the second quarter of 2013 associated with the relocation of assets and start-up costs in order to consolidate the two manufacturing facilities and these costs were included within cost of sales in the Condensed Consolidated Statements of Income for the nine months ended September 28, 2013 . In addition, during the third quarter of 2013 , we recognized $1.1 million in gains on the sale of assets associated with this consolidation of operations.

The closure of the Corsicana, Texas manufacturing facility was completed during the quarter ended March 31, 2012. Upon closure of the facility, many of the assets were relocated to other manufacturing locations. Expenses incurred as part of the relocation process were $2.0 million for the nine months ended September 29, 2012 and were included in cost of sales in the Condensed Consolidated Statements of Income. In addition, during the quarter ended September 29, 2012, we made the decision to close our Greenville, Texas warehouse. Severance, lease termination costs and losses on the disposal of fixed assets totaling $0.8 million were recorded in conjunction with the closing of the warehouse during the quarter ended September 29, 2012 .

The land and buildings in Cambridge, Ontario and Corsicana, Texas comprise the majority of the $4.9 million in fixed assets held for sale in the Condensed Consolidated Balance Sheets as of September 28, 2013 .

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The changes in the carrying amount of goodwill for the nine months ended September 28, 2013 , are as follows:



(in thousands)	Carrying Amount
Balance as of December 29, 2012	$	540,389
Business acquisition	475
Goodwill acquired in the purchase of route businesses	8,617
Goodwill attributable to the sale of route businesses	(7,744		)
Change in goodwill reclassified to assets held for sale	(3,689		)
Change in foreign currency exchange rate	(1,393		)
Balance as of September 28, 2013	$	536,655

As of September 28, 2013 , and December 29, 2012 , other intangible assets consisted of the following:



(in thousands)	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
As of September 28, 2013:
Customer and contractual relationships – amortized	$	148,956	$	(16,857	)	$	132,099
Non-compete agreement – amortized	110		(48		)	62
Reacquired rights – amortized	3,100		(835		)	2,265
Patents – amortized	8,600		(752		)	7,848
Routes businesses – unamortized	17,082		—			17,082
Trademarks – unamortized	360,687		(526		)	360,161
Balance as of September 28, 2013	$	538,535	$	(19,018	)	$	519,517

As of December 29, 2012:
Customer and contractual relationships – amortized	$	148,956	$	(10,524	)	$	138,432
Non-compete agreement – amortized	100		(10		)	90
Reacquired rights – amortized	3,100		(544		)	2,556
Patents – amortized	8,600		(165		)	8,435
Routes businesses – unamortized	20,161		—			20,161
Trademarks – unamortized	362,587		(526		)	362,061
Balance as of December 29, 2012	$	543,504	$	(11,769	)	$	531,735

Amortization expense related to intangibles was $2.4 million and $1.2 million for the quarters ended September 28, 2013 , and September 29, 2012 , respectively, and $7.2 million and $3.6 million , respectively, for the nine months then ended. The increase in amortization expense was attributable to the additional intangible assets acquired related to the Snack Factory acquisition.

Route businesses 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. During the nine months ended September 28, 2013 , we recorded a $1.9 million impairment charge to write off one of our trademarks. The impairment charge was necessary due to the decision to replace future sales of associated products with a more recognizable brand. The majority of our remaining trademarks, predominately those acquired through recent transactions, have a fair value which approximates the book value. Any changes in the use of these trademarks or the sales volumes of the associated products could result in an impairment charge.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

The changes in the carrying amount of route businesses for the nine months ended September 28, 2013 , are as follows:



(in thousands)	Carrying Amount
Balance of route businesses as of December 29, 2012	$	20,161
Business acquisition	813
Purchases of route businesses, exclusive of goodwill acquired	18,181
Sales of route businesses	(15,203		)
Change in route businesses reclassified to assets held for sale	(6,870		)
Balance of route businesses as of September 28, 2013	$	17,082

Route businesses 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. As of September 28, 2013 , $11.8 million of route businesses and $6.0 million of goodwill are included in assets held for sale in the Condensed Consolidated Balance Sheets. As of December 29, 2012 , $4.9 million in route businesses and $2.3 million of goodwill were included in assets held for sale.

9 . LONG-TERM DEBT

Long-term debt outstanding as of September 28, 2013 , and December 29, 2012 , consisted of the following:



(in thousands)	September 28, 2013			December 29, 2012
Revolving credit facilities	$	127,931		$	101,127
Other long-term debt	416,863			433,922
Total debt	544,794			535,049
Less: Current portion of long-term debt	(18,389		)	(20,462		)
Total long-term debt	$	526,405		$	514,587

Our primary credit agreement allows us to make revolving credit borrowings of up to $265 million through December 2015. As of September 28, 2013 , and December 29, 2012 , we had available $138 million and $165 million , respectively, of unused credit on this credit facility. The credit agreement requires us to comply with certain defined covenants, and we are currently in compliance with all such covenants.

The fair value of outstanding debt, including current maturities, was approximately $553 million and $544 million at September 28, 2013 , and December 29, 2012 , respectively. The Level 2 fair value estimate was based on similar debt with comparable maturities, credit ratings and interest rates.

10. INCOME TAXES

We have recorded gross unrecognized tax benefits as of September 28, 2013 , totaling $6.5 million and related interest and penalties of $2.5 million in other noncurrent liabilities on the Condensed Consolidated Balance Sheets. Of this total amount, $7.3 million would reduce the effective tax rate if subsequently recognized. As of December 29, 2012 , we recorded gross unrecognized tax benefits totaling $6.0 million and related interest and penalties of $2.3 million in other noncurrent liabilities on the Condensed Consolidated Balance Sheets. We expect that certain income tax audits will be settled or various tax authorities’ statutes of limitations will expire during the next twelve months resulting in a potential $3.0 million reduction of the unrecognized tax benefit amount. We classify interest and penalties associated with income tax positions within income tax expense.

The effective tax rate decrease d from 39.4% for the third quarter of 2012 to 38.0% for the third quarter of 2013 , and decrease d from 40.3% for the first nine months of 2012 to 37.6% for the first nine months of 2013 . The decrease in the effective income tax rate was due to lower non-tax deductible expenses, primarily related to goodwill associated with the sale of route businesses.

We permanently reinvest earnings from our Canadian subsidiary which cannot be repatriated without unfavorable tax consequences. As of September 28, 2013 , $10.6 million of our cash and cash equivalents balance was held by our Canadian subsidiary compared to $8.2 million as of December 29, 2012.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

11. 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 derivative instruments at fair value using Level 2 inputs. See Note 12 for additional information about our derivative instruments. The fair value of our outstanding debt is measured using Level 2 inputs and is disclosed in Note 9 to the condensed consolidated financial statements. There were no changes among the levels during the first nine months of 2013 .

The carrying amount of cash equivalents, receivables and accounts payable approximates fair value due to their short-term nature.

12 . 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 risks.

The fair value of the derivative instrument liability in the Condensed Consolidated Balance Sheets using Level 2 inputs was as follows:



(in thousands)	Balance Sheet Location	September 28, 2013			December 29, 2012
Interest rate swaps	Other payables and accrued liabilities	$	(1	)	$	(15	)
Interest rate swaps	Other noncurrent liabilities	(993		)	(1,575		)
Foreign currency forwards	Other payables and accrued liabilities	(2		)	—
Total fair value of derivative instruments		$	(996	)	$	(1,590	)

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 fair value of interest rate swaps is determined utilizing a market approach model using the notional amount of the interest rate swaps and the observable inputs of time to maturity and interest rates. The notional amount of the interest rate swaps designated as hedging instruments as of September 28, 2013 and December 29, 2012 , was $50.2 million and $54.3 million , respectively.

Foreign Currency Forwards

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

The changes in unrealized gains/(losses), net of income tax, 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)	September 28, 2013		September 29, 2012			September 28, 2013			September 29, 2012
Interest rate swaps, net of income tax (expense)/benefit of ($0), $62, ($144) and $231, respectively	$	1	$	(101	)	$	231		$	(370	)
Foreign currency forwards, net of income tax (expense)/benefit of ($111), ($48), $1 and ($37), respectively	246		106			(2		)	82
Total change in unrealized gains/(losses) from derivative instruments, net of income tax (effective portion)	$	247	$	5		$	229		$	(288	)

13. 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 certain ingredients, packaging materials and energy decreased from $158.5 million as of December 29, 2012 to $127.8 million as of September 28, 2013 , due primarily to the timing of new purchase agreements. In addition to these commitments, we have contracts for certain ingredients and packaging materials where we have secured a fixed price but do not have a minimum purchase quantity. We currently contract from approximately three to twelve months in advance for certain major ingredients and packaging.

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 $13.9 million as of September 28, 2013 , and $18.9 million as of December 29, 2012 . The reduction was due to the lower collateral requirements of our insurance providers.

Guarantees

We currently provide a partial guarantee for loans made to IBOs by third party financial institutions for the purchase of route businesses and trucks. The outstanding aggregate balance on these loans was approximately $114.8 million as of September 28, 2013 , compared to approximately $109.7 million as of December 29, 2012 . The annual maximum amount of future payments we could be required to make under the guarantee equates to 25% of the outstanding loan balance on the first day of each calendar year plus 25% of the amount of any new loans issued during such calendar year. These loans are collateralized by the route businesses and trucks for which the loans are made. Accordingly, we have the ability to recover substantially all of the outstanding loan value upon default, and our liability associated with this guarantee is not material.

Insurance Settlement

For the quarter and nine months ended September 28, 2013 , other income/expense, net on the Condensed Consolidated Statements of Income included approximately $4.0 million in income from the settlement of a business interruption claim primarily for lost profits incurred earlier in 2013.

Legal Matters

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

14. 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.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

As of September 28, 2013 , we owned 80% of Michaud Distributors (“Michaud”), which distributes our products in the northeastern United States, and consolidated its balance sheet and operating results into our condensed consolidated financial statements. We had notes receivable from stockholders and employees of Michaud of $0.2 million as of September 28, 2013 and December 29, 2012 . The notes were unsecured and due upon demand. We acquired the remaining 20% of Michaud on October 25, 2013, as discussed in Note 17 to the condensed consolidated financial statements.

We own a noncontrolling equity interest in Late July Snacks LLC (“Late July”), an organic snack food company. This investment is reflected in other noncurrent assets on the Condensed Consolidated Balance Sheets. Equity earnings, which are not material, are included in other income/expense, net on the Condensed Consolidated Statements of Income. We also manufacture and distribute products for Late July. Contract manufacturing revenue from Late July was approximately $1.3 million and $0.8 million during the third quarter of 2013 and 2012, respectively, and $3.1 million and $3.3 million , for the first nine month s of 2013 and 2012, respectively. In addition, we purchase products from Late July to sell through our IBO distribution network. Purchases from Late July were $1.5 million and $0.5 million during the third quarter of 2013 and 2012, respectively, and $3.3 million and $1.1 million for the first nine months of 2013 and 2012, respectively. Accounts receivable due from Lat e July totaled $0.6 million and $0.5 million at September 28, 2013 , and December 29, 2012 , respectively.

ARWCO Corporation, MAW Associates, LP and Warehime Enterprises, Inc. are owned or controlled by the Chairman of the Board of Snyder’s-Lance, Inc. or his family members. Among other unrelated business activities, these entities provide financing to IBOs for the purchase of route businesses and trucks. We have entered into loan service agreements with these related parties that allow us to repurchase certain distribution assets in the event an IBO defaults on a loan with the related party. We are required to repurchase the assets 30 days after default at the value as defined in the loan service agreement which approximates fair market value. As of September 28, 2013 , there were outstanding loans made to IBOs by the related parties of approximately $32.0 million compared to $37.0 million in loans outstanding as of December 29, 2012 . 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 related parties. 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 for any period presented.

A Connecticut warehouse used to support our distribution network is leased from a company partially owned by an employee. There were $0.2 million in lease payments made to this company during both the first nine months of 2013 and of 2012 .

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. Expenses incurred for services provided by Eckert were $0.2 million and less than $0.1 million for the third quarter of 2013 and 2012 , respectively, and $0.6 million and $0.2 million for the first nine months of 2013 and 2012 , respectively.

15 . OTHER COMPREHENSIVE INCOME

Total comprehensive income attributable to Snyder's-Lance, Inc., determined as net income adjusted by total other comprehensive income, was $24.6 million and $20.2 million for the quarters ended September 28, 2013 , and September 29, 2012 , respectively, and $53.5 million and $53.8 million , respectively, for the nine months then ended. Total other comprehensive income presently consists of foreign currency translation adjustments and unrealized gains and losses from our derivative financial instruments accounted for as cash flow hedges.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Amounts reclassified out of total other comprehensive income, net of tax, consisted of the following:



		Quarter Ended						Nine Months Ended
(in thousands)	Income Statement Location	September 28, 2013			September 29, 2012			September 28, 2013			September 29, 2012
Gains/(losses) on cash flow hedges reclassified out of total other comprehensive income:
Interest rate swaps, net of tax of $56, $72, $181 and $219, respectively	Interest expense, net	$	(90	)	$	(113	)	$	(290	)	$	(350	)
Foreign currency forwards, net of tax of $34, ($68), $119 and ($139), respectively	Net revenue	(75		)	149			(265		)	308
Foreign currency forwards, net of tax of $9, $6, $19 and $14, respectively	Other income/expense, net	(20		)	(15		)	(42		)	(32		)
Total cash flow hedge reclassifications, net of tax		$	(185	)	$	21		$	(597	)	$	(74	)

During the nine months ended September 28, 2013 , changes to the balance in accumulated other comprehensive income were as follows:



(in thousands)	Gains/(Losses) on Cash Flow Hedges			Foreign Currency Translation Adjustment			Total
Balance as of December 29, 2012	$	(842	)	$	15,960		$	15,118
Other comprehensive income/(loss) before reclassifications	(368		)	(2,473		)	(2,841		)
Losses reclassified from other comprehensive income	597			—			597
Net other comprehensive gain/(loss)	229			(2,473		)	(2,244		)
Balance as of September 28, 2013	$	(613	)	$	13,487		$	12,874

Income taxes on the foreign currency translation adjustment in other comprehensive income are not recognized because these earnings are considered to be permanently reinvested and, accordingly, no provision for U.S. federal and state income taxes is required.

16. SEGMENT REPORTING

We operate in one business segment: the manufacturing, distribution, marketing and sale of snack food products. We define business segments as components of an organization for which discrete financial information is available and operating results are evaluated on a regular basis by the chief operating decision maker (“CODM”) in order to assess performance and allocate resources. Our CODM is the Company's President and Chief Executive Officer. Characteristics of our organization which were relied upon in making this determination include the similar nature of all of the products that we sell, the functional alignment of our organizational structure and the reports that are regularly reviewed by the CODM for the purpose of assessing performance and allocating resources.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Revenue by Product Category

Net revenue by product category was as follows:



	Quarter Ended				Nine Months Ended
(in thousands)	September 28, 2013		September 29, 2012		September 28, 2013		September 29, 2012
Branded	$	273,923	$	238,904	$	801,779	$	703,254
Partner brand	79,949		71,611		227,988		214,440
Private brand	74,342		75,319		211,575		213,579
Other	24,809		20,731		69,304		67,535
Net revenue	$	453,023	$	406,565	$	1,310,646	$	1,198,808

Significant Customers

Sales to our largest retailer, Wal-Mart Stores, Inc., were approximately 16% of net revenue for the quarter and nine months ended September 28, 2013 , and 18% and 17% of net revenue for the quarter and nine months ended September 29, 2012 , respectively. Our sales to Wal-Mart Stores, Inc. do not include sales from third-party distributors outside our IBO distribution network. Sales to these third-party distributors represent approximately 11% of our net revenue and may increase sales to Wal-Mart Stores, Inc. by an amount we are unable to estimate. Accounts receivable at September 28, 2013 , and December 29, 2012 , included receivables from Wal-Mart Stores, Inc. totaling $28.1 million and $25.9 million , respectively.

17 . SUBSEQUENT EVENT

On October 25, 2013, we acquired the remaining 20% equity in Michaud and now own all of the outstanding equity. We exchanged 342,212 newly issued unregistered shares of our common stock for the remaining 20% equity in Michaud.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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, and 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 December 29, 2012 , 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 generally accepted accounting principles 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 September 28, 2013 , 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 sales and promotional allowances, customer returns, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, goodwill and intangible asset valuations and impairments, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.

Overview

We continued to execute our strategic plan during the third quarter of 2013, which provides for growth of our core branded products through expanded distribution, innovation and advertising and improving margins for our allied brands through pricing strategies, enhanced packaging and product configurations. Accordingly, for our core brands:


•	We expanded our distribution network with the acquisition of a regional distributor and continued to optimize and expand our independent business owner ("IBO") distribution network,


•	Introduced new product offerings,


•	Increased advertising and social media marketing efforts, including a movie tie-in promotion, and


•	Continued to experience strong revenue growth and earnings from our Snack Factory ^® Pretzel Crisps ^® pretzel crackers.

For our allied brands:


•	We implemented new pricing or promotional activities for certain products,


•	Updated certain packaging and product configurations, and


•	Introduced Quitos™, a new product line to be distributed primarily through our IBO distribution network.

The third quarter was significantly impacted by pricing pressures from our competitors on our core brands. In response, we increased our promotional activities during the quarter in order to grow our market share for each of our core brands. Despite the increase in promotional spending, we were able to improve our gross margin as a percentage of net revenue due primarily to a higher mix of branded products compared to the third quarter of 2012.

In addition, we settled a business interruption claim for lost profits incurred earlier in 2013 resulting in $4.0 million of additional income which is recorded in other income/expense, net.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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

Quarter Ended September 28, 2013 Compared to Quarter Ended September 29, 2012



											Favorable/ (Unfavorable) Variance
	Quarter Ended
(in thousands)	September 28, 2013					September 29, 2012
Net revenue	$	453,023		100.0	%	$	406,565		100.0	%	$	46,458		11.4	%
Cost of sales	295,429			65.2	%	269,626			66.3	%	(25,803		)	(9.6	)%
Gross margin	157,594			34.8	%	136,939			33.7	%	20,655			15.1	%
Selling, general and administrative	122,110			27.0	%	106,512			26.2	%	(15,598		)	(14.6	)%
Impairment charges	—			—	%	80			—	%	80			nm
Gain on sale of route businesses, net	(465		)	(0.1	)%	(1,427		)	(0.4	)%	(962		)	(67.4	)%
Other (income)/expense, net	(5,099		)	(1.2	)%	537			0.2	%	5,636			nm
Income before interest and income taxes	41,048			9.1	%	31,237			7.7	%	9,811			31.4	%
Interest expense, net	3,742			0.9	%	1,692			0.4	%	(2,050		)	(121.2	)%
Income tax expense	14,194			3.1	%	11,634			2.9	%	(2,560		)	(22.0	)%
Net income	$	23,112		5.1	%	$	17,911		4.4	%	$	5,201		29.0	%

nm - not meaningful

Net Revenue

Net revenue by product category for the quarter ended September 28, 2013 , and September 29, 2012 , was as follows:



									Favorable/ (Unfavorable) Variance
	Quarter Ended
(in thousands)	September 28, 2013				September 29, 2012
Branded	$	273,923	60.5	%	$	238,904	58.8	%	$	35,019		14.7	%
Partner brand	79,949		17.6	%	71,611		17.6	%	8,338			11.6	%
Private brand	74,342		16.4	%	75,319		18.5	%	(977		)	(1.3	)%
Other	24,809		5.5	%	20,731		5.1	%	4,078			19.7	%
Net revenue	$	453,023	100.0	%	$	406,565	100.0	%	$	46,458		11.4	%

Net revenue increase d $46.5 million , or 11.4% , for the quarter ended September 28, 2013 , compared to the quarter ended September 29, 2012 . A significant portion of the increase in net revenue compared to the prior year was driven by the incremental net revenue from Snack Factory, which was acquired in the fourth quarter of 2012.

Compared to the quarter ended September 29, 2012 , net revenue from our branded products increase d $35.0 million , or 14.7% . The majority of this increase was due to incremental net revenue from Snack Factory, which continued to generate strong growth during the third quarter. Combined net revenue from our other core branded products increased approximately 2% compared to the prior year led by growth in Snyder's of Hanover ^® pretzels. However, our net revenue growth was negatively impacted by price competition, which required us to utilize incremental promotional spending in order to grow market share. We also continued to realize improved net revenue from our allied branded products in the third quarter as we realized net revenue growth compared to the prior year, reversing the trend of previous quarters. The revenue growth in allied brands was driven by successful new product and packaging innovation as well as increased distribution of certain brands through the convenience store channel and other retail channels.

Partner brand net revenue increase d $8.3 million , or 11.6% , compared to the third quarter of 2012. The increase in net revenue from partner brands was primarily due to the addition of new products and expanded distribution primarily through acquisitions of regional distributors.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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

Net revenue from private brand products declined $1.0 million , or 1.3% , in the third quarter of 2013 compared to the third quarter of 2012 . During the third quarter of 2013 , net revenue decreased as we continued to experience volume declines from certain large customers due to price competition from branded products, which was substantially offset by volume gains from other existing customers.

Other net revenue increase d $4.1 million , or 19.7% , from the third quarter of 2012 to the third quarter of 2013 primarily due to increased volume from one of our largest contract manufacturing customers and new contract manufacturing business obtained during the quarter.

Gross Margin

Gross margin increase d $20.7 million , or 1.1% as a percentage of net revenue, during the third quarter of 2013 compared to the third quarter of 2012 . We continued to see higher gross margin as a percentage of net revenue when compared to the third quarter of 2012 resulting primarily from a higher mix of branded products, primarily Snack Factory ^® Pretzel Crisps ^® .

Selling, General and Administrative Expenses

Selling, general and administrative expenses increase d $15.6 million in the third quarter of 2013 compared to the third quarter of 2012 , and increase d 0.8% as a percentage of net revenue. The increase in selling, general and administrative expenses was due to the additional expenses for Snack Factory and increased marketing and advertising expenditures to support our core brands.

Gain on the Sale of Route Businesses, Net

During the third quarter of 2013 , we recognized $0.5 million in gains on the sale of route businesses compared with gains of $1.4 million during the third quarter of 2012 . The decrease was due to less route sale activity in 2013 as compared to 2012. Although we continue to routinely purchase and sell route businesses, we do not expect significant net gains from this activity during the remainder of 2013.

Other Income/Expense, Net

Other income increased $5.6 million in the third quarter of 2013 compared to the third quarter of 2012 mainly due to a $4.0 million settlement of a business interruption claim primarily for lost profits incurred earlier in 2013. We also recognized $1.1 million in gains on the sale of fixed assets associated with the consolidation of our Canadian manufacturing facilities. We expect additional gains of approximately $1 million in the fourth quarter from the sale of the remaining land and buildings related to the Canadian plant consolidation.

Interest Expense, Net

Interest expense increase d $2.1 million during the third quarter of 2013 compared to the third quarter of 2012 primarily as a result the additional $325 million of debt incurred in the fourth quarter of 2012 and used to fund the Snack Factory acquisition.

Income Tax Expense

The effective income tax rate decrease d to 38.0% for the third quarter of 2013 from 39.4% for the third quarter of 2012 . The decrease in the effective income tax rate was due to lower non-tax deductible expenses, primarily related to goodwill associated with the sale of route businesses.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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

Nine Months Ended September 28, 2013 Compared to Nine Months Ended September 29, 2012



											Favorable/ (Unfavorable) Variance
	Nine Months Ended
(in thousands)	September 28, 2013					September 29, 2012
Net revenue	$	1,310,646		100.0	%	$	1,198,808		100.0	%	$	111,838		9.3	%
Cost of sales	862,286			65.8	%	802,568			66.9	%	(59,718		)	(7.4	)%
Gross margin	448,360			34.2	%	396,240			33.1	%	52,120			13.2	%
Selling, general and administrative	356,610			27.2	%	324,864			27.1	%	(31,746		)	(9.8	)%
Impairment charges	1,900			0.1	%	207			0.1	%	(1,693		)	nm
Gain on sale of route businesses, net	(2,057		)	(0.2	)%	(21,596		)	(1.8	)%	(19,539		)	(90.5	)%
Other income, net	(8,603		)	(0.6	)%	(124		)	—	%	8,479			nm
Income before interest and income taxes	100,510			7.7	%	92,889			7.7	%	7,621			8.2	%
Interest expense, net	10,702			0.8	%	6,258			0.5	%	(4,444		)	(71.0	)%
Income tax expense	33,758			2.6	%	34,930			2.9	%	1,172			3.4	%
Net income	$	56,050		4.3	%	$	51,701		4.3	%	$	4,349		8.4	%

nm - not meaningful

Net Revenue

Net revenue by product category for the nine months ended September 28, 2013 , and September 29, 2012 , was as follows:



									Favorable/ (Unfavorable) Variance
	Nine Months Ended
(in thousands)	September 28, 2013				September 29, 2012
Branded	$	801,779	61.2	%	$	703,254	58.7	%	$	98,525		14.0	%
Partner brand	227,988		17.4	%	214,440		17.9	%	13,548			6.3	%
Private brand	211,575		16.1	%	213,579		17.8	%	(2,004		)	(0.9	)%
Other	69,304		5.3	%	67,535		5.6	%	1,769			2.6	%
Net revenue	$	1,310,646	100.0	%	$	1,198,808	100.0	%	$	111,838		9.3	%

Net revenue increase d $111.8 million , or 9.3% compared to the first nine months of 2012 . A significant portion of the increase in net revenue compared to the prior year was driven by the incremental net revenue from Snack Factory, which was acquired in the fourth quarter of 2012.

Branded net revenue increase d $98.5 million , or 14.0% , compared to the first nine months of 2012 . The majority of this increase was due to incremental net revenue from Snack Factory. Net revenue from branded products for the first nine months was also positively impacted by combined revenue growth in our core branded products, but this growth was partially offset by volume declines in our allied branded products.

Partner brand net revenue increase d $13.5 million , or 6.3% , for the first nine months of 2013 compared to the first nine months of 2012 . The increase in net revenue from partner brands was primarily due to the addition of new products and expanded distribution primarily through acquisitions of regional distributors.

Private brand net revenue declined $2.0 million , or 0.9% , in the first nine months of 2013 as compared to the same period in 2012 . During the first nine months of 2013, net revenue decreased as we experienced volume declines from certain large customers due to price competition from branded products, which was substantially offset by volume gains from other existing customers.

Other net revenue increase d $1.8 million , or 2.6% , from the first nine months of 2012 to the first nine months of 2013 primarily due to increased volume from one of our largest contract manufacturing customers and new contract manufacturing business obtained during the third quarter of 2013.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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

Gross Margin

Gross margin increase d $52.1 million , or 1.1% as a percentage of net revenue, during the first nine months of 2013 compared to the same period last year. The higher gross margin as a percentage of net revenue was primarily a result a higher mix of branded products, primarily Snack Factory ^® Pretzel Crisps ^® , when compared to the first nine months of 2012.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increase d $31.7 million during the first nine months of 2013 primarily as a result of expenses from the operations of Snack Factory. As a percentage of net revenue, selling, general and administrative expenses remained relatively consistent with the prior year as reduced infrastructure costs and lower compensation and benefit expenses were offset by increased marketing and advertising expenditures, and incremental expenses incurred in 2013 associated with certain self-funded medical claims.

Impairment Charges

We incurred $1.9 million in impairment charges in the first nine months of 2013 compared to only $0.2 million in the first nine months of 2012 . The impairment charge for one of our trademarks was driven by the decision to replace future sales of associated products with a more recognizable brand.

Gain on Sale of Route Businesses, Net

During the first nine months of 2013 , we recognized gains of $2.1 million from the sale of route businesses compared to gains of $21.6 million during the first nine months of 2012 . The conversion to an IBO distribution network was completed during the first six months of 2012 resulting in significantly higher gains on the sale of routes in 2012 compared to 2013.

Other Income, Net

Other income increased $8.5 million in the first nine months of 2013 compared to the first nine months of 2012 mainly due to a $4.0 million settlement of a business interruption claim primarily for lost profits incurred earlier in 2013. We also recognized $1.1 million in gains on the sale of fixed assets associated with the consolidation of our Canadian manufacturing facilities.

Interest Expense

Interest expense increase d $4.4 million during the first nine months of 2013 compared to the first nine months of 2012 primarily as a result of the additional $325 million of debt incurred in the fourth quarter of 2012 and used to fund the Snack Factory acquisition.

Income Tax Expense

The effective income tax rate decrease d from 40.3% for the first nine months of 2012 to 37.6% for the first nine months of 2013 . The decrease in the effective income tax rate was due to lower non-tax deductible expenses, primarily related to 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, purchases of 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 February 27, 2015.

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

Operating Cash Flows

Cash flow provided by operating activities increase d $14.7 million in the first nine months of 2013 compared to the first nine months of 2012 . The increase in cash flow provided by operations was primarily due to higher net income provided by operations in the first nine months of 2013 compared to 2012. This increase was partially offset by increases in working capital in 2013, particularly prepaid income taxes, inventory and accounts receivable.

Investing Cash Flows

Cash used in investing activities in the first nine months of 2013 totaled $53.7 million compared with cash provided by investing activities of $13.1 million in the first nine months of 2012 . The primary cause of the decrease in cash generated from investing activities was the reduction in net proceeds from the sale of route businesses. During 2012, we completed the conversion to our IBO distribution network. As a result, we generated approximately $60.9 million in net proceeds during the first nine months of 2012 from the purchase and sale of our route businesses. Through the first nine months of 2013, we continue to optimize and expand our IBO distribution network as we have purchased $26.8 million and sold $25.0 million in route businesses. Going forward, we expect that route purchases should closely approximate route sales.

Capital expenditures for fixed assets, principally manufacturing equipment, were comparable at $55.9 million and $56.0 million in the first nine months of 2013 and 2012 , respectively. These expenditures were partially offset by proceeds received from the sale of fixed assets of $4.6 million in the first nine months of 2013 , as compared to $8.2 million in the first nine months of 2012 . We currently project capital expenditures of approximately $73 million to $75 million for the full year, which is higher than our historical rate of capital expenditures necessary to maintain equipment and operate the business. The additional capital expenditures are being used to upgrade equipment, enhance capacity and provide capabilities to produce innovative products.

Financing Cash Flows

Net cash used in financing activities was $13.1 million in the first nine months of 2013 compared to $84.7 million in the first nine months of 2012 . The additional cash used in 2012 was primarily due to higher net repayments of debt. Net proceeds from debt were $10.5 million for the first nine months of 2013 compared to net repayments of debt of $61.5 million for the first nine months of 2012, with the repayments in 2012 partially funded by the cash generated by investing activities.

Dividends of $0.48 per common share totaling $33.2 million and $32.8 million were paid in the first nine months of 2013 and 2012, respectively, with the slight increase in 2013 due to the increase in number of shares outstanding.

On November 5, 2013 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on November 29, 2013 to stockholders of record on November 19, 2013 .

Debt

As of September 28, 2013 , additional borrowings available under our primary credit facility were $138 million . We have complied with all financial covenants contained in the credit agreement. 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 $13.9 million as of September 28, 2013 .

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 certain ingredients, packaging materials and energy totaled $127.8 million as of September 28, 2013 compared to $158.5 million as of December 29, 2012 . The decrease in purchase commitments was due primarily to ingredient usage during the nine months and the timing of new purchase agreements. In addition to these commitments, we have contracts for certain ingredients and packaging materials where we have secured a fixed price but do not have a minimum purchase quantity. We currently contract from approximately three to twelve months in advance for certain major ingredients and packaging.

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, liquidity or cash flows.

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

Update to Critical Accounting Estimates

Our critical accounting estimates are summarized in Item 7 of our Form 10-K for the year-ended December 29, 2012 . An update to these critical accounting estimates is included below.

Self-Insurance Reserves

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 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 $0.1 million lower without these swaps during the third quarter of 2013 and $0.5 million lower during the first nine months of 2013 .

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 entered into a series of derivative forward contracts to mitigate a portion of this foreign exchange rate exposure. These contracts have maturities through December 2013. For the third quarter of 2013 and 2012 , foreign currency fluctuations, net of the effect of derivative forward contracts, unfavorably impacted pre-tax income by $0.6 million and $0.4 million, respectively. For the first nine months of 2013 , foreign currency fluctuations, net of the effect of derivative forward contracts, favorably impacted pre-tax income by $0.1 million compared to an unfavorable impact of $0.3 million for the first nine months of 2012 .

We do not have or use market risk sensitive instruments for trading or speculative purposes. See Note 12 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 nine months ended September 28, 2013 , and September 29, 2012 , bad debt expense was $1.8 million and $1.1 million , respectively. Allowances for doubtful accounts were $2.3 million at September 28, 2013 , and $2.2 million at December 29, 2012 .

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures about 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 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 September 28, 2013 .

There have been no changes in our internal control over financial reporting during the quarter ended September 28, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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 December 29, 2012 .

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 September 28, 2013 , our consolidated stockholders’ equity was $906.7 million , and we were in compliance with this covenant. The private placement agreement for $100 million of senior notes assumed as part of the Merger and the new term loan acquired to fund the acquisition of Snack Factory have provisions no more restrictive than the revolving credit agreement.

In November 2011, the Board of Directors authorized the repurchase of up to 200,000 shares of common stock from employees. The purpose of the repurchase program is to permit the Company to acquire shares of common stock from employees to cover withholding taxes payable by employees upon the vesting of shares of restricted stock. As of September 28, 2013, there are 157,379 shares remaining available for repurchase. The repurchase program expires in February 2014.

There were no repurchases of common stock made by the Company or any "affiliated purchaser" of the Company as defined in Rule 10b-18(a)(3) under the Exchange Act during the quarter ended September 28, 2013.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

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 May 3, 2013, incorporated herein by reference to Exhibit 3.5 to the Registrant’s Quarterly Report on Form 8-K filed on August 6, 2013 (File No. 0-398).

	3.2	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	Amendment No. 4 to Standstill Agreement, dated as of August 23, 2013, by and among Snyder’s-Lance, Inc., Michael A. Warehime and Patricia A. Warehime, incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 29, 2013 (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	The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows and (v) 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.


Dated: November 7, 2013	By:	/s/ Rick D. Puckett
		Rick D. Puckett
		Executive Vice President, Chief Financial Officer and Treasurer


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


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.


(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.



/s/ Carl E. Lee, Jr.				/s/ Rick D. Puckett
Carl E. Lee, Jr.				Rick D. Puckett
President and Chief Executive Officer				Executive Vice President, Chief Financial
November 7, 2013				Officer and Treasurer
				November 7, 2013