Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-K, Received: 02/25/2013 17:02:42)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2012
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                         
Commission file number 0-398
SNYDER’S-LANCE, INC.
(Exact name of Registrant as specified in its charter)
North Carolina
 
56-0292920
(State of incorporation)
 
(I.R.S. Employer Identification Number)
13024 Ballantyne Corporate Place, Suite 900, Charlotte, North Carolina 28277
(Address of principal executive offices) (zip code)
Post Office Box 32368, Charlotte, North Carolina 28232-2368
(Mailing address of principal executive offices) (zip code)
Registrant’s telephone number, including area code:     (704) 554-1421
Securities Registered Pursuant to Section 12(b) of the Act: 
Title of Each Class
 
Name of Each Exchange on Which Registered
$0.83-1/3 Par Value Common Stock
 
The NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act:   NONE
Indicate by checkmark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by checkmark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o
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 o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company   o  
 
 
 
 
(do not check if a smaller reporting company)
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of shares of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of voting or nonvoting common equity, held by non-affiliates as of June 30, 2012 , the last business day of the Registrant’s most recently completed second fiscal quarter, was $ 1,299,918,377 .
The number of shares outstanding of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock, as of February 15, 2013 , was 68,947,118 shares.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on May 3, 2013 are incorporated by reference into Part III of this Form 10-K.
 


Table of Contents

SNYDER’S-LANCE, INC.
FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item X
 
 
 
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
 
 
 
Item 9
Item 9A
Item 9B
 
 
 
 
 
Item 10
Directors, Executive Officers and Corporate Governance
 
Item 11
Executive Compensation
 
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13
Certain Relationships and Related Transactions and Director Independence
 
Item 14
Principal Accountant Fees and Services
 
 
 
 
 
 
Item 15
 
 
 
 
Exhibit 12
Ratio of Earnings to Fixed Charges
 
Exhibit 21
Subsidiaries of Snyder’s-Lance, Inc.
 
Exhibit 23
Consent of Independent Registered Public Accounting Firm
 
Exhibit 31.1
Section 302 Certification of the CEO
 
Exhibit 31.2
Section 302 Certification of the CFO
 
Exhibit 32
Section 906 Certification of the CEO and CFO
 
Note: Items 10-14 are incorporated by reference to the Proxy Statement and Item X of Part I.


Table of Contents

PART I
Cautionary Information About Forward-Looking Statements
This document includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, beliefs, intentions or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, the factors set forth under Part I, Item 1A -Risk Factors.
Caution should be taken not to place undue reliance on our forward-looking statements, which reflect the expectations of management only as of the time such statements are made. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.  
Item 1.  Business
General
On December 6, 2010, Lance, Inc. (“Lance”) and Snyder’s of Hanover, Inc. (“Snyder’s”) completed a merger (“Merger”) to form Snyder’s-Lance, Inc., a North Carolina corporation. The Merger created a national snack food company with well-recognized brands, an expanded branded product portfolio, complementary manufacturing capabilities and a nationwide distribution network. Both companies have a successful history which dates back to the early 1900’s. Snyder’s-Lance, Inc. is headquartered in Charlotte, North Carolina. References to “Snyder’s-Lance,” the “Company,” “we,” “us” or “our” refer to Snyder’s-Lance, Inc. and its subsidiaries, as the context requires.
Acquisition of Snack Factory
On October 11, 2012, we completed the acquisition of Snack Factory, LLC and certain affiliates ("Snack Factory") for $343.4 million. Snack Factory develops, markets and distributes snack food products under the Pretzel Crisps ® brand name. The acquisition provides us with a fourth core brand that we believe has strong growth potential. As the world's first pretzel-shaped cracker, Snack Factory's market-leading Pretzel Crisps® branded products are exceptionally thin, flat crackers that are all natural and have multiple uses in snacking. The brand is known for its portfolio of innovative flavor profiles, its commitment to providing the highest-quality, natural ingredients and its broadening base of passionate consumers.
Products
We operate in one business segment: the manufacturing, distribution, marketing and sale of snack food products. These products include pretzels, sandwich crackers, kettle chips, pretzel crackers, cookies, potato chips, tortilla chips, other salty snacks, sugar wafers, nuts and restaurant style crackers. Additionally, we purchase certain cakes, meat snacks and candy sold under our brands and partner brand products for resale in order to broaden our product offerings for our network of independent business owners ("IBO"). Products are packaged in various single-serve, multi-pack and family-size configurations.
We sell and distribute branded products to retailers through our nationwide distribution network using IBOs, company-owned routes, third party distributors and our direct sales organization. Our branded products are principally sold under trade names owned by the Company. Partner brands consist of other third-party brands that we sell through IBOs and company-owned routes in our distribution network. We sell private brand products directly to retailers and distributors using certain store brands or our own control brands. In addition, we contract with other branded food manufacturers to produce their products and periodically sell certain semi-finished goods to other manufacturers.

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For 2012 , branded products represented approximately 59% of net revenue, while partner brand, private brand and other products represented approximately 17% , 18% and 6% of net revenue, respectively. For 2011 , branded products represented approximately 58% of net revenue, while partner brand, private brand and other products represented approximately 17% , 19% and 6% of net revenue, respectively. Branded products represented approximately 58% of net revenue in 2010 , while partner brand, private brand and other products represented approximately 2% , 31% and 9% of net revenue, respectively.
Intellectual Property
Trademarks that are important to our business are protected by registration or other means in the United States and most other markets where the related products are sold. We own various registered trademarks for use with our branded products including our core brands (Snyder’s of Hanover ® , Lance ® , Cape Cod ® , and Pretzel Crisps ® ), our allied brands (Krunchers! ® , Jays ® , Tom’s ® , Archway ® , Grande ® , Stella D’oro ® , O-Ke-Doke ® , EatSmart ® and Padrinos ® ) and a variety of other marks and designs. We license trademarks, including for limited use on certain products that are classified as branded products. We also own registered trademarks including Brent & Sam’s ® , Vista ® and Delicious ® that are used in connection with our private brand products.
Strategic Initiatives
Our strategic initiative is to win as a provider of premium, differentiated snacks, driven by our national distribution network and our direct sales organization. We do this by focusing our efforts on four strategic imperatives:
Lead with Quality. Lead with quality by continuously improving our products and service to our retailers and distributors.
Grow our Core. Grow our core brands which include Snyder’s of Hanover ® , Lance ® , Cape Cod ® and Pretzel Crisps ® by leveraging both our nation-wide distribution network and our direct sales organization and by improving brand awareness.
Reach More Consumers. Reach more consumers by winning new retailers with a significant focus on innovation.
Maximize Shareholder Return. Maximize shareholder return through revenue growth, margin enhancements and optimizing returns on invested capital.
Research and Development
We consider research and development of new products to be a significant part of our overall philosophy and we are committed to developing innovative, high-quality products that exceed consumer expectations. A team of professional product developers, including microbiologists, nutritionists, food scientists, chefs and chemists, work in collaboration with innovation marketing leaders to develop products to meet changing consumer needs. Our research and development staff incorporates product ideas from all areas of our business in order to formulate new products. In addition to developing new products, the research and development staff routinely reformulates and improves existing products based on advances in ingredients and technology, and conducts value engineering to maintain competitive price points. In fiscal 2013, the Company expects to conduct much of its branded portfolio research and development at its new 60,000 square foot Research and Development Center, in Hanover, Pennsylvania.

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Distribution
We distribute snack food products throughout the United States using a direct-store-delivery (“DSD”) network of approximately 3,000 distribution routes, most of which are serviced by IBOs and others that are company-owned. During 2011, we began the process of converting the vast majority of our company-owned routes to an IBO distribution structure in order to better position our distribution network to serve retailers. We completed this project in 2012 and most of our DSD network is now serviced by IBOs. We also ship products directly to distributors who operate in areas where we do not have DSD routes and other direct customers using third-party carriers or our own transportation fleet throughout North America. In 2012 , approximately 66% of net revenue was generated through our DSD network while the other 34% was generated through our direct sales organization. We expect a larger percentage of sales through our direct sales network in 2013 as Pretzel Crisps ® are sold through this channel.
Customers
Through our distribution network, we sell our branded and partner brand products to grocery/mass merchandisers, club stores, discount stores, convenience stores, food service establishments and various other retailers including drug stores, schools, military and government facilities and “up and down the street” outlets such as recreational facilities, offices and other independent retailers. Private brand customers include grocery/mass merchandisers and discount stores. We also contract with other branded food manufacturers to manufacture their products or provide semi-finished goods.
Substantially all of our revenues are from sales to customers in the United States. Revenues from our largest retailer, Wal-Mart Stores, Inc., were approximately 18% of net revenues in both 2012 and 2011 , and 23% of net revenues in 2010 . The decrease in the percentage of revenue attributable to Wal-Mart Stores, Inc. relative to 2010 was driven by the Merger. In addition, third-party distributors, which account for approximately 14% of sales, purchase and resell our products to retailers including Wal-Mart Stores, Inc. thereby increasing our sales attributable to Wal-Mart Stores, Inc. by an amount we are unable to estimate.
Raw Materials
The principal raw materials used to manufacture our products are flour, vegetable oil, sugar, potatoes, peanuts, other nuts, cheese, cocoa and seasonings. The principal packaging supplies used are flexible film, cartons, trays, boxes and bags. These raw materials and supplies are normally available in adequate quantities in the commercial market and are currently contracted from three to twelve months in advance, depending on market conditions.
Competition and Industry
Our products are sold in highly competitive markets. Generally, we compete with manufacturers, some of whom have greater revenues and resources than we do. The principal methods of competition are price, service, product quality, product offerings and distribution. The methods of competition and our competitive position vary according to the geographic location, the particular products and the activities of our competitors.
Environmental Matters
Our operations in the United States and Canada are subject to various federal, state (or provincial) and local laws and regulations with respect to environmental matters. However, the Company was not a party to any material proceedings arising under these laws or regulations for the periods covered by this Form 10-K. We believe the Company is in compliance with all material environmental regulations affecting our facilities and operations and that continued compliance will not have a material impact on our capital expenditures, earnings or competitive position.
Employees
At the beginning of February 2013, we had approximately 5,900 active employees in the United States and Canada. At the beginning of February 2012, we had approximately 6,800 active employees in the United States and Canada. The decrease in the number of employees was primarily due to the completion of the conversion to an IBO distribution structure. None of our employees are covered by a collective bargaining agreement.
Other Matters
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, are available on our website free of charge. The website address is www.snyderslance.com. All required reports are made available on the website as soon as reasonably practicable after they are filed with the Securities and Exchange Commission.

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Item 1A.  Risk Factors
In addition to the other information in this Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition or results of operations may be adversely affected by any of these risks. Additional risks and uncertainties, including risks that we do not presently know of or currently deem insignificant, may also impair our business, financial condition or results of operations.
Our performance may be impacted by general economic conditions and an economic downturn.
Recessionary pressures from an overall decline in U.S. economic activity could adversely impact our business and financial results. Economic uncertainty may reduce consumer spending in our sales channels and create a shift in consumer preference toward private label products. While our product portfolio includes both branded and private label offerings which mitigates certain exposure, shifts in consumer spending could result in increased pressure from competitors or customers to reduce the prices of some of our products and/or limit our ability to increase or maintain prices, which could lower our revenues and profitability.
Instability in the financial markets may impact our ability or increase the cost to enter into new credit agreements in the future. Additionally, it may weaken the ability of our customers, suppliers, IBOs, distributors, banks, insurance companies and other business partners to perform in the normal course of business, which could expose us to losses or disrupt the supply of inputs we rely upon to conduct our business. If one or more of our key business partners fail to perform as expected or contracted for any reason, our business could be negatively impacted.
Volatility in the price or availability of the inputs we depend on, including raw materials, packaging, energy and labor, could adversely impact our financial results.
Our financial results could be adversely impacted by changes in the cost or availability of raw materials and packaging. While we often obtain substantial commitments for future delivery of certain raw materials and may engage in limited hedging to reduce the price risk of these raw materials, continued long-term increases in the costs of raw materials and packaging, including but not limited to cost increases due to the tightening of supply, could adversely affect our financial results.
Our transportation and logistics system is dependent upon gasoline and diesel fuel, and our manufacturing operations depend on natural gas. While we may enter into forward purchase contracts to reduce the price risk associated with some of these costs, continued long-term changes in the cost or availability of these energy sources could adversely impact our financial results.
Our continued growth requires us to hire, retain and develop a highly skilled workforce and talented management team. Any unplanned turnover or our failure to develop an adequate succession plan for current positions could erode our competitiveness. In addition, our financial results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs.
We operate in a highly competitive food industry.
Price competition and industry consolidation could adversely impact our financial results. The sales of most of our products are subject to significant competition primarily through discounting and other price cutting techniques by competitors, some of whom are significantly larger and have greater resources than we do. In addition, there is a continuing consolidation in the snack food industry, which could increase competition. Significant competition increases the possibility that we could lose one or more major customers, lose existing product authorizations at customer locations, lose market share and/or shelf space, increase expenditures or reduce selling prices, which could have an adverse impact on our business or financial results.
Sales price increases initiated by us may negatively impact our financial results. Future price increases, such as those to offset increased ingredient costs, may reduce our overall sales volume, which could reduce revenues and operating profit. Additionally, if market prices for certain ingredients decline significantly below our contracted prices, customer pressure to reduce prices could lower revenues and operating profit.
Changes in our top customer relationships could impact our revenues and profitability.
We are exposed to risks resulting from several large retailers that account for a significant portion of our revenue. Our top ten retailers accounted for approximately 57% of our net revenue during 2012 , with our largest retailer representing approximately 18% of our 2012 net revenue. The loss of one or more of our large retailers could adversely affect our financial results. These customers typically make purchase decisions based on a combination of price, product quality, product offerings, consumer demand, distribution capabilities and customer service and generally do not enter into long-term contracts. In addition, these significant retailers may re-evaluate or refine their business practices related to inventories, product displays, logistics or other aspects of the customer-supplier relationship. Our results of operations could be adversely affected if revenue from one or more of these customers is significantly reduced or if the cost of complying with customers’ demands is significant. If receivables from one or more of these customers become uncollectible, our financial results may be adversely impacted.

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Our failure to successfully integrate acquisitions into our existing operations could adversely affect our financial results.
There are risks associated with our ability to integrate acquired businesses in an efficient and effective manner and on our ability to identify opportunities to meet our strategic objectives. Any inability of management to successfully integrate the operations could have an adverse effect on the business and financial results. Additional potential risks associated with acquisitions include additional debt leverage, the loss of key employees and customers of the acquired business, the assumption of unknown liabilities, failure to achieve expected revenue growth and anticipated synergies which could result in the impairment of goodwill or other acquisition-related intangible assets.
The loss of key personnel could have an adverse effect on our financial results and growth prospects.
There are risks associated with our ability to retain key employees. If certain key employees terminate their employment, it could negatively impact sales, marketing or development activities. Further, management’s attention might be diverted from operations to recruiting suitable replacements and our financial condition, results of operations and growth prospects could be adversely affected. In addition, we may not be able to locate suitable replacements for key employees or offer employment to potential replacements on acceptable terms.
Efforts to execute and accomplish our strategic initiatives could adversely affect our financial results.
We utilize several operating strategies to increase revenue and improve operating performance. If we are unsuccessful due to our execution, unplanned events, ability to manage change or unfavorable market conditions, our financial performance could be adversely affected. If we pursue strategic acquisitions, divestitures, or joint ventures, we may incur significant costs and may not be able to consummate the transactions or obtain financing. Further, the success of our acquisitions will depend on many factors, such as our ability to identify potential acquisition candidates, negotiate satisfactory purchase terms, obtain loans at satisfactory rates to fund acquisitions and successfully integrate and manage the growth from acquisitions. Integrating the operations, financial reporting, disparate technologies and personnel of newly acquired companies involves risks. As a result, we may not be able to realize expected synergies or other anticipated benefits of acquisitions.
Future acquisitions also could result in potentially dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our financial results. In the event we enter into strategic transactions or relationships, our financial results may differ from expectations. We may not be able to achieve expected returns and other benefits as a result of potential acquisitions or divestitures.
Concerns with the safety and quality of certain food products or ingredients could cause consumers to avoid our products.
We could be adversely affected if consumers in our principal markets lose confidence in the safety and quality of certain products or ingredients. Negative publicity about these concerns, whether or not valid, may discourage consumers from buying our products or cause disruptions in production or distribution of our products and negatively impact our business and financial results.
If our products become adulterated, misbranded or mislabeled, we might need to recall those items and we may experience product liability claims if consumers are injured or become sick.
Product recalls or safety concerns could adversely impact our market share and financial results. We may be required to recall certain of our products should they be mislabeled, contaminated or damaged. We also may become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products causes injury or illness. A product recall or an adverse result in any such litigation could have an adverse effect on our operating and financial results. We may also lose customer confidence for our entire brand portfolio.
Disruption of our supply chain or information technology systems could have an adverse impact on our business and financial results.
Our ability to manufacture, distribute and sell products is critical to our success. Damage or disruption to our manufacturing or distribution capabilities or the supply and delivery of key inputs, such as raw materials, finished goods, packaging, labor and energy, could impair our ability to conduct our business. Examples include, but are not limited to, weather, natural disasters, fires, terrorism, pandemics and strikes. Certain warehouses and manufacturing facilities are located in areas prone to tornadoes, hurricanes and floods. Any business disruption due to natural disasters or catastrophic events in these areas could adversely impact our business and financial results if not adequately mitigated. We also rely on a certain supplier for the manufacturing of one of our core branded products. Although we have secured back-up suppliers in the case of emergency, any damage or disruption to this supplier's manufacturing or distribution capabilities could impair our ability to sell this product.
Also, we increasingly rely on information technology systems to conduct our business. These systems can enhance efficiency and business processes but also present risks of unauthorized access to our networks or data centers. If unauthorized parties gain access to our systems, they could obtain and exploit confidential business, customer, or employee information and harm our competitive position. Further, these information systems may experience damage, failures, interruptions, errors, inefficiencies, attacks or suffer from fires or natural disasters, any of which could have an adverse effect on our business and financial results if not adequately mitigated by our security measures and disaster recovery plans.

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Furthermore, given our multiple information technology systems as a result of the Merger, we may encounter difficulties assimilating or integrating data. In addition, we are currently in the process of integrating data which could provide additional security or business disruption risks which could have an adverse impact on our business and financial results.
Improper use or misuse of social media may have an adverse effect on our business and financial results.
Consumers are moving away from traditional means of electronic mail towards new forms of electronic communication, including social media. We support new ways of sharing data and communicating with customers using methods such as social networking. However, misuse of social networking by individuals, customers, competitors, or employees may result in unfavorable media attention which could negatively affect our business. Further, our competitors are increasingly using social media networks to market and advertise products. If we are unable to compete in this environment it could adversely affect our financial results.
Demand for our products may be adversely affected by changes in consumer preferences and tastes or if we are unable to innovate or market our products effectively.
We are a consumer products company operating in highly competitive markets and rely on continued demand for our products. To generate revenues and profits, we must sell products that appeal to our customers and consumers. Any significant changes in consumer preferences or any inability on our part to anticipate or react to such changes could result in reduced demand for our products and erosion of our competitive and financial position. Our success depends on the ability to respond to consumer trends, including concerns of consumers regarding health and wellness, obesity, product attributes and ingredients. In addition, changes in product category consumption or consumer demographics could result in reduced demand for our products. Consumer preferences may shift due to a variety of factors, including the aging of the general population, changes in social trends, changes in travel, vacation or leisure activity patterns, or negative publicity resulting from regulatory action or litigation against companies in the snack food industry. Any of these changes may reduce consumers’ willingness to purchase our products and negatively impact our financial results.
Our continued success also is dependent on product innovation, including maintaining a robust pipeline of new products, and the effectiveness of advertising campaigns, marketing programs and product packaging. Although we devote significant resources to meet this goal, there can be no assurance as to the continued ability to develop and launch successful new products or variants of existing products, or to effectively execute advertising campaigns and marketing programs. In addition, both the launch and ongoing success of new products and advertising campaigns are inherently uncertain, especially as to their appeal to consumers. Further, failure to successfully launch new products could decrease demand for existing products by negatively affecting consumer perception of existing brands, as well as result in inventory write-offs, trademark impairments and other costs, all of which could negatively impact our financial results.
Our distribution network relies on a significant number of IBOs, and such reliance could affect our ability to efficiently and profitably distribute and market products, maintain existing markets and expand business into other geographic markets.
Our DSD network relies on approximately 2,800 IBOs for the sale and distribution of manufactured products and the products of other manufacturers for whom we provide distribution.
IBOs often must make a commitment of capital or obtain financing to purchase their trucks, equipment and routes to conduct their business. Some financing arrangements made available to IBOs require us to repurchase an IBO’s truck, equipment and/or route if the IBO defaults on their loan. As a result, any downturn in an IBO’s business that affects their ability to pay the lender financing for their truck or route could harm our financial condition. The failure of any of our IBOs to make timely payments could require write-offs of accounts receivable or increased provisions made against accounts receivable, either of which could adversely affect our financial results.
Our ability to maintain a network of IBOs and distributors depends on a number of factors, many of which are outside of our control. Some of these factors include: (i) the level of demand for the brands and products which are available in a particular distribution area; (ii) the ability to price products at levels competitive with those offered by other competing producers; and (iii) the ability to deliver products in the quantity and at the time ordered by IBOs and retailers. There can be no assurance that we will be able to mitigate the risks related to all or any of these factors in any of the current or prospective geographic areas of distribution. To the extent that any of these factors have an adverse effect on the relationships with IBOs in a particular geographic area and, thus, limit our ability to maintain and expand the sales market, revenues and financial results may be adversely impacted.
Identifying new IBOs or distributors can be time-consuming and any resulting delay may be disruptive and costly to the business. There also is no assurance that we will be able to maintain current distribution relationships or establish and maintain successful relationships with IBOs in new geographic distribution areas. There is the possibility that we will have to incur significant expenses to attract and maintain IBOs in one or more geographic distribution areas in order to profitably expand geographic markets. The occurrence of any of these factors could result in a significant decrease in sales volume of our branded products and the products which we distribute for others and harm our business and financial results. Our contracts with certain IBOs are the subject of litigation, which could negatively impact our financial results.

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Continued success depends on the protection of our trademarks and other proprietary intellectual property rights.
We maintain numerous trademarks and other intellectual property rights, which are important to our success and competitive position, and the loss of or our inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademarks and other proprietary intellectual property rights on a worldwide basis. Efforts to establish and protect trademarks and other proprietary intellectual property rights may not be adequate to prevent imitation of products by others or to prevent others from seeking to block sales of our products. In addition, the laws and enforcement mechanisms of some foreign countries may not allow for the protection of proprietary rights to the same extent as in the United States and other countries.
Impairment in the carrying value of goodwill or other intangible assets could have an adverse impact on our financial results.
The net carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities, and the net carrying value of other intangibles represents the fair value of trademarks, customer relationships and other acquired intangibles. Pursuant to generally accepted accounting principles in the United States, we are required to perform impairment tests on our goodwill and indefinite-lived intangible assets annually or at any time when events occur which could impact the value of our reporting units or our indefinite-lived intangibles. These values depend on a variety of factors, including the success of our business, market conditions, earnings growth and expected cash flows. Impairments to goodwill and other intangible assets may be caused by factors outside our control, such as increasing competitive pricing pressures, changes in discount rates based on changes in cost of capital or lower than expected sales and profit growth rates. Significant and unanticipated changes could require a non-cash charge for impairment in a future period which may significantly affect our financial results in the period of such charge.
New regulations or legislation could adversely affect our business and financial results.
Food production and marketing are highly regulated by a variety of federal, state and other governmental agencies. New or increased government regulation of the food industry, including but not limited to areas related to food safety, chemical composition, production processes, traceability, product quality, packaging, labeling, school lunch guidelines, promotions, marketing and advertising (particularly such communications that are directed toward children), product recalls, records, storage and distribution could adversely impact our results of operations by increasing production costs or restricting our methods of operation and distribution. These regulations may address food industry or society factors, such as obesity, nutritional and environmental concerns and diet trends.
We are exposed to interest and foreign currency exchange rate volatility, which could negatively impact our financial results.
We are exposed to interest rate volatility since the interest rates associated with portions of our debt are variable. While we mitigate a portion of this volatility by entering into interest rate swap agreements, those agreements could lock our interest rates above the market rates.
We also are exposed to foreign exchange rate volatility primarily through the operations of our Canadian subsidiary. We mitigate a portion of the volatility impact on our results of operations by entering into foreign currency derivative contracts. Because our consolidated financial statements are presented in U.S. dollars, we must translate the Canadian subsidiary’s financial statements at the then-applicable exchange rates. Consequently, changes in the value of the U.S. dollar may impact our financial results, even if the value has not changed in the original currency.
A significant portion of our outstanding shares of common stock is controlled by a few individuals, and their interests may conflict with those of other stockholders.
As of December 29, 2012 , Michael A. Warehime and his wife, Patricia A. Warehime, beneficially owned in the aggregate approximately 16% of the outstanding common stock of the Company. Mr. and Mrs. Warehime serve as directors of the Company, with Mr. Warehime serving as the Chairman of the Board. As a result, the Warehimes may be able to exercise significant influence over the Company and certain matters requiring approval of its stockholders, including the approval of significant corporate transactions, such as a merger or other sale of the Company or its assets. This could limit the ability of other stockholders of the Company to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control of the Company. In addition, the Warehimes may have actual or potential interests that diverge from the interests of the other stockholders of the Company.
As a condition to the execution of the Merger agreement, the Warehimes entered into a standstill agreement. The standstill agreement generally provides that, until December 6, 2013, the third anniversary of the Merger, the Warehimes will not (i) acquire any additional shares of the Company’s common stock, except upon the exercise of stock options, directly from a family member, pursuant to certain permitted acquisitions from grantor retained annuity trusts (“GRATs”), or upon dividend reinvestments; (ii) sell or transfer any of their shares of the Company’s stock, except to the same extent and in the same manner as an “affiliate” (as defined in Rule 144 of the Securities Act) of the Company would be permitted to transfer such shares pursuant to Rule 144, to a family member for estate planning purposes, or pursuant to certain permitted transfers to GRATs or bona fide pledges as collateral for loans; or (iii) take any action contrary to maintaining certain aspects of the proposed governance structure for the Company through 2012, including plans for the reduction of the total number of directors over time and the re-election of the Snyder’s-

7

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Lance directors eligible for re-election in 2012. The standstill agreement further provides that at no time may the Warehimes’ aggregate beneficial ownership exceed 30% of the issued and outstanding shares of the Company’s common stock. Upon the expiration of the standstill agreement, all of the Warehimes’ shares will be available for sale in the public market, subject (to the extent the Warehimes remain affiliates of the Company) to volume, manner of sale and other limitations under Rule 144, and there will be no restrictions on the Warehimes’ ability to acquire additional shares of the Company’s stock or influence the governance structure of the Company. As such, upon expiration of the standstill agreement, the Warehimes may have the ability to obtain or exercise increased control of the Company. Sales by the Warehimes of their shares into the public market after the standstill agreement expires, or the perception that such sales could occur, could cause the market price of our common stock to decline.
Item 1B.  Unresolved Staff Comments 
None.
Item 2.  Properties
Our corporate headquarters is located in Charlotte, North Carolina. We have an additional administrative office in Hanover, Pennsylvania. Our manufacturing operations are located in Charlotte, North Carolina; Hanover, Pennsylvania; Goodyear, Arizona; Burlington, Iowa; Columbus, Georgia; Jeffersonville, Indiana; Hyannis, Massachusetts; Perry, Florida; Ashland, Ohio; Cambridge, Ontario; and Guelph, Ontario. During the fourth quarter of 2012, we made the decision to close our Cambridge, Ontario manufacturing facility in order to consolidate the operations of our two Canadian manufacturing locations in May 2013.
We also own or lease stockrooms, warehouses, sales offices and administrative offices throughout the United States to support our operations and distribution network. A map of our distribution warehouse locations is included below. For areas where we do not have a distribution network, our products are distributed using third party distributors.
The facilities and properties that we own and operate are maintained in good condition and are believed to be suitable and adequate for present needs. We believe that we have sufficient production capacity or the ability to increase capacity to meet anticipated demand in 2013.


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Item 3.  Legal Proceedings
On January 19, 2012, a purported class action was filed in the United States District Court for the District of New Jersey by Joseph A. McPeak individually and allegedly on behalf of other similarly situated individuals against S-L Distribution Company, Inc., a subsidiary of the Company. The complaint alleges a single cause of action for damages for violations of New Jersey’s Franchise Practices Protection Act. The Company's motion to dismiss the Plaintiff's complaint was granted on December 20, 2012, but the Court permitted the Plaintiff to file a motion to amend his complaint. The Plaintiff filed a motion to amend on January 5, 2013, and the Company filed an objection. The Court denied the Plaintiff's motion to amend as the Plaintiff had appealed. The Company intends to vigorously defend this action.
We are also 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 consolidated financial statements taken as a whole.  
Item 4.  Mine Safety Disclosures
Not applicable.
Item X.  Executive Officers of the Registrant
Information about each of our “executive officers,” as defined in Rule 3b-7 of the Securities Exchange Act of 1934, is as follows:
Name
 
Age
 
Information About Officers
David V. Singer
 
57
 
Chief Executive Officer of Snyder’s-Lance, Inc. since December 2010; President and Chief Executive Officer of Lance, Inc. from 2005 to December 2010; Executive Vice President and Chief Financial Officer of Coca-Cola Bottling Co. Consolidated, a beverage manufacturer and distributor, from 2001 to 2005.
Carl E. Lee, Jr.
 
53
 
President and Chief Operating Officer of Snyder’s-Lance, Inc. since December 2010; President and Chief Executive Officer of Snyder’s of Hanover, Inc. from 2005 to December 2010. From 2001 to 2005, Mr. Lee worked for First Data Corporation as President and Chief Executive Officer of Wells Fargo Merchant Services.
Rick D. Puckett
 
59
 
Executive Vice President, Chief Financial Officer and Treasurer of Snyder’s-Lance, Inc. since December 2010; Executive Vice President, Chief Financial Officer, Secretary and Treasurer of Lance, Inc. from 2006 to December 2010; Executive Vice President, Chief Financial Officer, Secretary and Treasurer of United Natural Foods, Inc., a wholesale distributor of natural and organic products, from 2005 to January 2006; and Senior Vice President, Chief Financial Officer and Treasurer of United Natural Foods, Inc. from 2003 to 2005.
Kevin A. Henry
 
45
 
Senior Vice President and Chief Human Resources Officer of Snyder’s-Lance, Inc. since December 2010; Senior Vice President and Chief Human Resources Officer of Lance, Inc. from January 2010 to December 2010; Chief Human Resources Officer of Coca-Cola Bottling Co. Consolidated, a beverage manufacturer and distributor, from September 2007 to 2009; and Senior Vice President of Human Resources at Coca-Cola Bottling Co. Consolidated from February 2001 to 2009.
Margaret E. Wicklund
 
52
 
Vice President, Corporate Controller, Principal Accounting Officer and Assistant Secretary of Snyder’s-Lance, Inc. since December 2010; Vice President, Corporate Controller, Principal Accounting Officer and Assistant Secretary of Lance, Inc. from 2007 to December 2010; Corporate Controller, Principal Accounting Officer and Assistant Secretary of Lance, Inc. from 1999 to 2006.
Charles E. Good
 
64
 
President, S-L Distribution Company, Inc. and Senior Vice President of Snyder’s-Lance, Inc. since December 2010; Chief Financial Officer, Secretary and Treasurer of Snyder’s of Hanover, Inc. from 2006 to December 2010.

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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our $0.83-1/3 par value Common Stock is traded on the NASDAQ Global Select Market under the symbol LNCE. We had 3,780 stockholders of record as of February 15, 2013.
The following table sets forth the high and low sales prices and dividends paid during the interim periods in fiscal 2012 and 2011 :
2012 Interim Periods
 
High
Price
Low
Price
Dividend
Paid
First quarter (13 weeks ended March 31, 2012)
 
$
26.18

$
21.84

$
0.16

Second quarter (13 weeks ended June 30, 2012)
 
26.88

24.43

0.16

Third quarter (13 weeks ended September 29, 2012)
 
25.72

22.45

0.16

Fourth quarter (13 weeks ended December 29, 2012)
 
26.03

23.01

0.16

 
 
 
 
 
2011 Interim Periods
 
High
Price
Low
Price
Dividend
Paid
First quarter (13 weeks ended April 2, 2011)
 
$
24.26

$
17.06

$
0.16

Second quarter (13 weeks ended July 2, 2011)
 
22.74

18.45

0.16

Third quarter (13 weeks ended October 1, 2011)
 
22.50

18.92

0.16

Fourth quarter (13 weeks ended December 31, 2011)
 
22.94

18.78

0.16

On February 8, 2013, our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on March 6, 2013 to stockholders of record on February 27, 2013. Our Board of Directors will consider the amount of future cash dividends on a quarterly basis.
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 December 29, 2012 , our consolidated stockholders’ equity was $872.2 million and we were in compliance with these covenants. The private placement agreement for $100 million of senior notes assumed as part of the Merger and the $325 million 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, which expires in February 2014. 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. During 2012, we repurchased 14,866 shares of common stock. We did not repurchase any shares of common stock during 2011. The remaining number of shares authorized for repurchase is 185,134.

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Item 6.  Selected Financial Data
The following table sets forth selected historical financial data for the five-year period ended December 29, 2012 . The selected financial data set forth below should be read in conjunction with “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and the audited financial statements. The prior year amounts have been reclassified for consistent presentation.
 
 
2012
 
2011
 
2010
 
2009
 
2008
Results of Operations (in thousands):
 
 
 
 
 
 
 
 
 
 
Net revenue (1) (2) (3) (4) (5)
 
$
1,618,634

 
$
1,635,036

 
$
979,835

 
$
918,163

 
$
852,468

Income before income taxes (6) (7) (8) (9)
 
99,653

 
59,845

 
8,162

 
53,331

 
28,788

Net income
 
59,510

 
38,741

 
2,531

 
35,028

 
18,828

Net income attributable to noncontrolling interests,
net of income tax
 
425

 
483

 
19

 

 

Net income attributable to Snyder’s-Lance, Inc.
 
$
59,085

 
$
38,258

 
2,512

 
$
35,028

 
$
18,828

 
 
 
 
 
 
 
 
 
 
 
Average Number of Common Shares
Outstanding (in thousands):
 
 
 
 
 
 
 
 
 
 
Basic
 
68,382

 
67,400

 
34,128

 
31,565

 
31,202

Diluted
 
69,215

 
68,478

 
34,348

 
32,384

 
31,803

 
 
 
 
 
 
 
 
 
 
 
Per Share of Common Stock:
 
 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.86

 
$
0.57

 
$
0.07

 
$
1.11

 
$
0.60

Diluted earnings per share
 
$
0.85

 
$
0.56

 
$
0.07

 
$
1.08

 
$
0.59

Cash dividends declared (10)
 
$
0.64

 
$
0.64

 
$
4.39

 
$
0.64

 
$
0.64

 
 
 
 
 
 
 
 
 
 
 
Financial Status at Year-end (in thousands):
 
 
 
 
 
 
 
 
 
 
Total assets (11)(12)
 
$
1,746,732

 
$
1,466,790

 
$
1,462,356

 
$
540,114

 
$
470,735

Long-term debt, net of current portion
 
$
514,587

 
$
253,939

 
$
227,462

 
$
113,000

 
$
91,000

Total debt  (11)(12)
 
$
535,049

 
$
258,195

 
$
285,229

 
$
113,000

 
$
98,000

Footnotes:
(1)
2012 net revenue included approximately $30 million as a result of acquisitions, including the acquisition of Snack Factory in October 2012. The completion of the conversion to an IBO distribution structure also reduced net revenue by approximately $53 million compared to 2011.
(2)
2011 net revenue is not comparable to prior years as a result of the Merger and the conversion to an IBO distribution structure. Additionally, 2011 net revenue included approximately $8 million from the Greer acquisition in August 2011.
(3)
2010 net revenue included approximately $49 million as a result of the Merger with Snyder’s in December 2010 and approximately $18 million from the acquisition of Stella D’oro in October 2009. In addition, 2010 was a 53-week year. There was approximately $11 million of incremental net revenue related to the additional week.
(4)
2009 net revenue included approximately $27 million from both Archway (acquired in December 2008) and Stella D’oro.
(5)
2008 net revenue included approximately $15 million from Brent & Sam’s (acquired in March 2008).
(6)
2012 pre-tax income was significantly impacted by approximately $6 million in severance costs and professional fees, approximately $12 million in impairment charges and approximately $22 million in gains on the sale of route businesses.

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(7)
2011 pre-tax income was significantly impacted by approximately $20 million in severance costs and professional fees related to Merger and integration activities, approximately $10 million in asset impairment charges related to the conversion to an IBO distribution structure, approximately $3 million in charges related to closing the Corsicana manufacturing facility, approximately $10 million in expense reductions related to a change in the vacation plan and approximately $9 million in gains on the sale of route businesses.
(8)
2010 pre-tax income was significantly impacted by change-in-control and other Merger-related expenses incurred in connection with the Merger, totaling approximately $38 million as well as incremental costs of approximately $3 million for an unsuccessful bid for a targeted acquisition, $3 million for severance costs relating to a workforce reduction, $2 million for a claims buy-out agreement with an insurance company and a pre-tax loss for the additional fifty-third week of approximately $2 million.
(9)
2008 pre-tax income was significantly impacted by unprecedented ingredient costs increases, such as flour and vegetable oil, not fully offset by our selling price increases during the year.
(10)
2010 includes a special dividend of $3.75 in connection with the Merger.
(11)
2010 total assets and total debt increased substantially from 2009 primarily because of the Merger.
(12)
2012 total assets and total debt increased from 2011 primarily because of the acquisition of Snack Factory.

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Item 7.  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 I, Item 1A—Risk Factors and other sections in this report.
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, management’s determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances. We routinely evaluate our estimates, including those related to customer returns and promotions, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, intangible asset valuations, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.
Executive Summary
During 2012, we began to implement our strategic plan, which provides for growth of our existing core brands through expanded distribution, innovation and advertising. In addition, we were able to increase our core product offerings through the strategic acquisition of Snack Factory, LLC and certain affiliates ("Snack Factory"). For allied branded products, our primary focus was on improving profit margins through pricing strategies and enhanced packaging and product configuration.
Our most significant accomplishments during 2012 included the following:
Completion of the IBO Conversion - We completed our conversion of approximately 1,300 direct-store-delivery ("DSD") routes to an independent business owner ("IBO") distribution structure at the end of the second quarter. As a result, we realized significant reductions in selling, general and administrative expenses and substantially increased the Company's profitability over 2011.
Acquisition of Snack Factory - On October 11, 2012, we completed the acquisition of Snack Factory for $343.4 million . Snack Factory develops, markets and distributes snack food products under the Pretzel Crisps ® brand name. The acquisition provides us with an additional core brand that we believe has strong growth potential. The results of Snack Factory's operations since the acquisition date are included in the Company’s consolidated financial statements as of and for the year ended December 29, 2012, which included approximately $27.3 million of net revenue and an additional $0.02 in diluted earnings per share after reduction for additional amortization and interest expense associated with the transaction.
Optimization of Manufacturing Capacity - During 2012, many efficiency improvements were made to our operations in order to deliver future success. The closure of the Corsicana, TX manufacturing facility and the Greenville, TX distribution facility helped to consolidate operations to increase efficiency in the future without sacrificing necessary capacity. In addition, the announced closure of the Cambridge, Ontario manufacturing facility will provide significant benefits for our Canadian operations, again without sacrificing capacity needs. In addition, we improved our operational efficiency by consolidating production of certain products and by investing in capital projects targeted at improved packaging and manufacturing automation.

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An overview of changes by income statement line item for 2012 when compared to 2011 is as follows:
Net revenue - As anticipated, total branded revenue decreased compared to 2011 primarily because of lower revenue per unit sold as the majority of our distribution network shifted from a company-owned to an IBO distribution structure. However, we were able to largely offset this decline in branded revenue through increased product distribution and new product introductions. Private brand revenues declined when compared to 2011, primarily because of the planned loss of certain retailers who did not accept price increases and a decline in sales volume with certain large retailers.
Gross margin - Throughout the year, the IBO conversion has been driving lower revenue per unit sold, and accordingly lower gross margin as a percentage of net revenue compared to 2011.
Selling, general and administrative expenses - Significant reductions in selling, general and administrative expenses were realized during 2012 primarily as a result of the IBO conversion and other Merger-related synergies. These reductions more than offset the declines in gross margin resulting from the IBO conversion.
Gain on the sale of route businesses - We recorded net gains of $22.3 million from the sale of route businesses to IBOs in 2012. Although the IBO conversion is complete, we will continue to have route purchase and sale transactions as we expand our distribution network.
In addition, some of the unusual items that impacted our results for 2012 were as follows:
As a result of our strategic initiatives and focus on core brands, we made the decision to replace a portion of net revenues from allied brands with other, more recognizable, core branded products. This decision resulted in our recognition of an impairment of trademark intangible assets of $7.6 million .
Impairment of fixed assets and severance expenses totaling $4.8 million were recorded in the fourth quarter, as a result of the decision to close our Cambridge, Ontario manufacturing facility.
Professional fees and severance of $3.8 million was incurred in order to accomplish certain Merger related activities.
Expenses of $2.0 million were recorded in cost of sales due to the relocation of assets from our Corsicana, TX facility to other manufacturing locations.
Snack Factory acquisition costs of $1.8 million were incurred and have been recognized as selling, general and administrative expenses.
For fiscal 2011, as a result of the Merger and the conversion to an IBO distribution structure, we recognized the following items:
Severance expense of $16.3 million was incurred associated with the Merger and the IBO conversion.
Impairment of fixed assets of $10.1 million was recognized related to our planned disposition of route trucks.
Impairment of fixed assets and other costs totaling $2.6 million were recognized in the fourth quarter as a result of the decision to close and sell our Corsicana, Texas plant.
Professional fees and other related expenses of $3.4 million were incurred in order to accomplish certain Merger-related activities.
A $9.9 million reduction in expense was recorded as an offset to cost of sales and selling, general and administrative expenses in the fourth quarter resulting from the adoption of a revised vacation plan for the combined Company.
Gains on the sale of routes of $9.4 million were realized primarily associated with the conversion to an IBO distribution structure.

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Results of Operations
Year Ended December 29, 2012 Compared to Year Ended December 31, 2011  
(in millions)
 
2012
 
2011
 
Favorable/
(Unfavorable)
Variance
Net revenue
 
$
1,618.6

 
100.0
 %
 
$
1,635.0

 
100.0
 %
 
$
(16.4
)
 
(1.0
)%
Cost of sales
 
1,079.7

 
66.7
 %
 
1,065.1

 
65.1
 %
 
(14.6
)
 
(1.4
)%
Gross margin
 
538.9

 
33.3
 %
 
569.9

 
34.9
 %
 
(31.0
)
 
(5.4
)%
Selling, general and administrative
 
440.6

 
27.2
 %
 
495.2

 
30.3
 %
 
54.6

 
11.0
 %
Impairment charges
 
11.9

 
0.7
 %
 
12.7

 
0.8
 %
 
0.8

 
6.3
 %
Gain on sale of route businesses, net
 
(22.3
)
 
(1.3
)%
 
(9.4
)
 
(0.6
)%
 
12.9

 
137.2
 %
Other (income)/expense, net
 
(0.4
)
 
 %
 
1.0

 
0.1
 %
 
1.4

 
140.0
 %
Income before interest and income taxes
 
109.1

 
6.7
 %
 
70.4

 
4.3
 %
 
38.7

 
55.0
 %
Interest expense, net
 
9.5

 
0.5
 %
 
10.6

 
0.6
 %
 
1.1

 
10.4
 %
Income tax expense
 
40.1

 
2.5
 %
 
21.1

 
1.3
 %
 
(19.0
)
 
(90.0
)%
Net income
 
$
59.5

 
3.7
 %
 
$
38.7

 
2.4
 %
 
$
20.8

 
53.7
 %

Net Revenue
Net revenue by product category for the years ended December 29, 2012 and December 31, 2011 was as follows:
(in millions)
 
2012
 
2011
 
Favorable/
(Unfavorable)
Variance
Branded
 
$
955.5

59.0
%
 
$
943.2

57.7
%
 
$
12.3

 
1.3
 %
Partner brands
 
283.1

17.5
%
 
283.4

17.3
%
 
(0.3
)
 
(0.1
)%
Private brands
 
291.1

18.0
%
 
312.5

19.1
%
 
(21.4
)
 
(6.8
)%
Other
 
88.9

5.5
%
 
95.9

5.9
%
 
(7.0
)
 
(7.3
)%
Net revenue
 
$
1,618.6

100.0
%
 
$
1,635.0

100.0
%
 
$
(16.4
)
 
(1.0
)%
As anticipated, net revenue for 2012 declined $16.4 million , or 1.0% , compared to 2011 . The decline in revenues compared to the prior year, was driven primarily by lower revenue per unit sold as a result of the IBO conversion and planned private brand volume declines. The declines were partially offset by additional revenues from acquired businesses during 2012 of approximately $29.5 million .
Compared to 2011 , net revenue from our branded products declined approximately 1.5% when excluding the impact of acquisitions. However, approximately 5.5% of the net revenue decline was a direct result of the IBO conversion. Branded revenues increased approximately 3.9% when excluding the impact of Snack Factory and the IBO conversion, due primarily to increased product distribution and the introduction of new products. This volume growth was partially offset by net revenue declines in our allied brands which were primarily related to replacement of allied brands with core brands in certain areas.
Partner brand net revenues were largely consistent with 2011, although they were negatively impacted in the fourth quarter by the loss of certain brands. This resulted in an $8.1 million decline in fourth quarter net revenues from partner brand products when comparing 2012 to 2011.
Net revenues from private brand products declined $21.4 million , or 6.8% , from 2011 to 2012. Much of this decline was anticipated as we recognized that necessary price increases would not be accepted by all retailers. In addition, there was a decline in volume with certain large retailers, as the gap between private and branded pricing narrowed for a portion of the year, which resulted in additional net revenue declines when compared to the prior year. During the fourth quarter of 2012, net revenues from private brand products began to recover as revenues from certain large retailers began to improve and new sources of revenues were obtained. The decline in the fourth quarter of 2012 was $2.5 million, or 3.1%, when compared to the fourth quarter of 2011.
Other revenues declined $7.0 million , or 7.3% , from 2011 to 2012 primarily because of a sale of bulk peanuts for approximately $4.0 million in 2011 which did not recur in 2012.

15


In 2012 , approximately 66% of net revenue was generated through our DSD network as compared to 2011 , where approximately 65% of net revenue was generated through our DSD network while the remaining sales were generated through our direct sales network. Pretzel Crisps ® are sold through our direct sales network, so sales through this channel are expected to increase as a percentage of total sales in 2013. In total, net revenues are expected to increase 10% to 12% in 2013 due to increased distribution, the addition of Snack Factory for the entire year, and increased pricing necessary to offset commodity cost increases.

Gross Margin
As expected, gross margin decreased $31.0 million during 2012 compared to 2011 and declined 1.6% as a percentage of net revenue. The overall decrease in gross margin and as a percentage of net revenue was driven by the conversion to an IBO distribution structure which accounted for a decline of approximately 3.3% as a percentage of net revenue. This decline was partially offset by price increases on certain products and improved manufacturing efficiencies. Gross margin for 2012 was also favorably impacted by acquisitions, which contributed approximately $13.3 million in additional gross margin. Costs that negatively impacted gross margin in 2012 include $2.3 million in severance expense associated with the recently announced closure of our Cambridge, Ontario manufacturing facility and $2.0 million in additional expenses due to the relocation of assets from our Corsicana, TX facility to other manufacturing locations. In 2011, gross margin was favorably impacted by a $4.9 million adjustment to our vacation accrual due to a vacation policy change.

Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $54.6 million in 2012 compared to 2011 and decreased 3.1% as a percentage of net revenue. The decrease is primarily driven by reduced infrastructure costs and lower compensation and benefit expenses due to the conversion to an IBO distribution structure and synergies recognized as a result of the Merger and integration activities. During 2012, we recognized $3.5 million of severance charges and professional fees associated with the Merger and integration activities and $1.8 million in costs associated with the acquisition of Snack Factory. In addition, we incurred incremental costs for the operations of Snack Factory and increased advertising expenses associated with new marketing campaigns.
In 2011, we adopted a new vacation plan, which reduced selling, general and administrative expenses by $5.0 million, but this was more than offset by $18.5 million in severance charges and professional fees associated with the Merger and integration activities.

Impairment Charges
Impairment charges decreased $0.8 million from 2011 to 2012. The $11.9 million of impairment expense in 2012 consisted primarily of a $7.6 million impairment of two of our trademarks and a $2.5 million impairment of machinery and equipment at our Cambridge, Ontario manufacturing facility. The impairment of trademarks was necessary as the Company continues to optimize its brand portfolio following the Merger and made a decision to replace a portion of the sales of these branded products with other, more recognizable, brands in our portfolio. The impairment of the machinery and equipment was recorded to write these assets down as they will no longer be used when the facility closes in May 2013. In order to determine the fair market value of this equipment, we reviewed market pricing for similar assets from external sources. The $12.7 million of impairment expense in 2011 consisted primarily of $10.1 million associated with our planned disposition of route trucks and $2.3 million in connection with the closure of our Corsicana, TX manufacturing facility.

Gain on the Sale of Route Businesses, Net
During 2012, we recognized $22.3 million in gains on the sale of route businesses compared with gains of $9.4 million in 2011. The increase was due to increased activity associated with the IBO conversion in 2012 as compared to 2011. This activity slowed substantially in the fourth quarter of 2012 as gains on the sale of route businesses were only $0.7 million , and we expect the fourth quarter trend to continue into 2013 as gains on the sale of route businesses are expected to be between $1 and $2 million for 2013.
Interest Expense, Net
Interest expense decreased $1.1 million during 2012 compared to 2011 as a result of lower outstanding long-term debt throughout the majority of the year. The $325 million addition of long-term debt used to fund the Snack Factory acquisition increased interest expense by $1.6 million in the last quarter of 2012.
Income Tax Expense
The effective income tax rate increased to 40.3% for 2012 from 35.3% for 2011 . During 2011, the Company undertook a comprehensive restructuring of the legal entities within the Snyder’s-Lance consolidated group to align the legal entity structure with the Company’s business. As a result of this restructuring, our net deferred tax liability is expected to reverse at a state rate which is lower than the rate at which the liabilities were established. This resulted in a benefit recorded to our deferred state tax expense in 2011 that did not recur in 2012.

16


In 2011 and 2012 the effective tax rate was higher than usual due to book losses recognized from goodwill associated with the sale of route businesses which had no tax basis. The impact on the effective tax rate was an increase of 4.8% and 4.7% in 2012 and 2011, respectively. This unfavorable rate impact will decline in subsequent years as route sale activity decreases.
Year Ended December 31, 2011 Compared to Year Ended January 1, 2011
Fiscal 2011 reflects the results of operations of the combined company while fiscal 2010 reflects the full fiscal year results of operations for Lance, but the operations of Snyder’s are included only from December 6, 2010 to January 1, 2011.
(in millions)
 
2011
 
2010
 
Favorable/
(Unfavorable)
Variance
Net revenue
 
$
1,635.0

 
100.0
 %
 
$
979.8

 
100.0
%
 
$
655.2

 
66.9
 %
Cost of sales
 
1,065.1

 
65.1
 %
 
601.0

 
61.3
%
 
(464.1
)
 
(77.2
)%
Gross margin
 
569.9

 
34.9
 %
 
378.8

 
38.7
%
 
191.1

 
50.4
 %
Selling, general and administrative
 
495.2

 
30.3
 %
 
359.6

 
36.7
%
 
(135.6
)
 
(37.7
)%
Impairment charges
 
12.7

 
0.8
 %
 
0.6

 
0.1
%
 
(12.1
)
 
(2,016.7
)%
Gain on sale of route businesses, net
 
(9.4
)
 
(0.6
)%
 

 
%
 
9.4

 
 %
Other expense, net
 
1.0

 
0.1
 %
 
6.5

 
0.6
%
 
5.5

 
84.6
 %
Income before interest and income taxes
 
70.4

 
4.3
 %
 
12.1

 
1.3
%
 
58.3

 
481.8
 %
Interest expense, net
 
10.6

 
0.6
 %
 
3.9

 
0.4
%
 
(6.7
)
 
(171.8
)%
Income tax expense
 
21.1

 
1.3
 %
 
5.7

 
0.6
%
 
(15.4
)
 
(270.2
)%
Net income
 
$
38.7

 
2.4
 %
 
$
2.5

 
0.3
%
 
$
36.2

 
1,448.0
 %

Net Revenue
Net revenue by product category for the years ended December 31, 2011 and January 1, 2011 was as follows:
(in millions)
 
2011
 
2010
 
Favorable/
(Unfavorable)
Variance
Branded Products
 
$
943.2

57.7
%
 
$
569.5

58.1
%
 
$
373.7

 
65.6
%
Partner brands
 
283.4

17.3
%
 
19.5

2.0
%
 
263.9

 
1,353.3
%
Private brands
 
312.5

19.1
%
 
303.2

30.9
%
 
9.3

 
3.1
%
Other
 
95.9

5.9
%
 
87.6

9.0
%
 
8.3

 
9.5
%
Net revenue
 
$
1,635.0

100.0
%
 
$
979.8

100.0
%
 
$
655.2

 
66.9
%
Net revenue for the 2011 fifty-two week fiscal year increased $655.2 million, or 66.9%, compared to the fifty-three week 2010 fiscal year. The additional week in 2010 increased net revenue by $11.1 million compared to 2011. The comparability of our net revenue is significantly impacted by the Merger primarily due to the incremental branded and partner brand revenue from the Merger. In addition, during 2011 we acquired a distributor which accounted for approximately $8 million of our net revenue.
Compared to 2010 and including only legacy Lance products:
We had approximately 2% net revenue growth in our branded products primarily from increased distribution as a result of the Merger and new product innovation, despite an approximate 1% reduction in selling prices due to the conversion to an IBO distribution structure. Declines in certain allied brand net revenues offset net revenue increases in certain core branded products.
We experienced approximately 7% net revenue growth in our private brand and other products primarily due to selling price increases, sales to new customers and new product offerings.
  In 2011, approximately 65% of net revenue was generated through our DSD network as compared to 2010, where approximately 38% of net revenue was generated through our DSD network. The increase from 2010 is primarily due to the partner brand revenue obtained as a result of the Merger that is sold through our DSD network.




17


Gross Margin
Gross margin increased $191.1 million during fiscal 2011 compared to fiscal 2010 but declined 3.8% as a percentage of net revenue. The overall increase in gross margin dollars was driven by the increase in sales volume primarily as a result of the Merger. Despite certain price increases, lower promotional spending and lower vacation expense, gross margin declined as a percentage of net revenue due to the following:
Higher commodity costs for our products;
Manufacturing inefficiencies at certain manufacturing operations due to the start-up of new machinery and equipment;
Higher portion of sales to IBOs where we realize lower selling prices compared to direct sales to retailers; and
Severance costs as a result of the Merger and the planned closing of the Corsicana facility.
 
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $135.6 million during fiscal 2011 compared to fiscal 2010 but decreased 6.4% as a percentage of net revenue. The dollar increase was primarily driven by incremental expenses incurred due to the Merger. Additionally, we recognized $18.5 million of severance charges and professional fees associated with the IBO conversion and other Merger integration activities. This amount was compared to $35.2 million in expenses recognized in fiscal 2010 associated with the Merger. We also introduced several media campaigns during 2011 as an investment in our core brands, which resulted in an approximately $15.1 million increase in advertising costs over fiscal 2010 or a 1.2% increase as a percentage of branded revenue. In addition, during fiscal 2011, we continued to experience duplicate costs as a part of the integration and conversion to IBOs including workforce duplication, warehouse rent and other selling and distribution expenses. Offsetting these increased costs was a reduction in bad debt expense of $2.2 million in 2011 primarily due to a customer bankruptcy that occurred in 2010. In addition, in 2011 we adopted a new vacation plan, which reduced selling, general and administrative expenses by $5.0 million, and we experienced reductions in salaries and benefits as we converted to an IBO distribution structure.
Impairment Charges
Impairment charges increased $12.1 million from 2010 to 2011. During 2011, the $12.7 million in impairment expense consisted primarily of $10.1 million associated with our planned disposition of route trucks and $2.3 million in connection with the closure of our Corsicana, TX manufacturing facility.
Gain on the Sale of Route Businesses, Net
During 2011, we recognized $9.4 million in gains on the sale of route businesses compared with no gains on the sale of route businesses in 2010. The increase was due to activities associated with the IBO conversion in 2011 as we operated only company-owned routes for the majority of 2010.
Other Expense, Net
During fiscal 2011, we recognized $1.0 million in other expense, net compared to $6.5 million in 2010. The $6.5 million expense in 2010 consisted mostly of financing commitment fees in the first quarter of 2010 of $2.7 million associated with an unsuccessful bid for a targeted acquisition, $2.1 million of insurance settlement charges which occurred during the fourth quarter, foreign currency transaction losses due to the unfavorable impact of exchange rates in 2010, as well as losses on the sale of fixed assets.
Interest Expense, Net
Interest expense increased $6.7 million during 2011 compared to 2010 as a result of higher debt levels due to the Merger.
Income Tax Expense
The effective income tax rate decreased from 69.0% for 2010 to 35.3% for 2011. The decrease in the effective tax rate was due to lower non-tax deductible expenses related to the Merger and a reduction in deferred tax liabilities as a result of a legal entity reorganization.
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.

18


We permanently reinvest earnings from our Canadian subsidiary. As of December 29, 2012 , $8.2 million of our cash and cash equivalents balance is held by our Canadian subsidiary and cannot be repatriated without unfavorable tax consequences.
Operating Cash Flows
Cash flow provided by operating activities decreased $18.8 million in 2012 when compared to 2011 . Excluding the impact of business acquisitions, the decline was largely driven by decreases in accounts payable and accrued profit sharing and retirement plans in 2012 , partially offset by a decrease in accounts receivable. The decrease in the accrual for our profit sharing plan was due to a change in benefits to a 401(k) plan in 2012 when compared to 2011.

Investing Cash Flows
Cash used in investing activities in 2012 totaled $348.3 million compared with cash used in investing activities of $52.7 million in 2011 . The significant increase in cash used in investing activities was due to the acquisition of Snack Factory for $343.4 million completed in the fourth quarter of 2012. Additionally, we acquired certain distributors during 2012 for a total of $2.0 million. During the third quarter of 2011, we acquired the George Greer Co., Inc. for $15.0 million .
Capital expenditures for fixed assets, principally manufacturing equipment, increased from $57.7 million in 2011 to $80.3 million in 2012 . The increased investment in capital expenditure projects for 2012, which will continue into 2013, is being used to upgrade equipment and enhance capacity, as well as building the new research and development facility. These expenditures were partially offset by proceeds received from the sale of fixed assets of $9.3 million in 2012, as compared to $4.4 million in 2011 . Capital expenditures are expected to continue at a level sufficient to support our strategic and operating needs. In 2013, capital expenditures are projected to be between $78 and $83 million.
Proceeds from the sale of route businesses generated cash flows of $93.9 million in 2012 ; these proceeds were partially offset by purchases of route businesses of $28.5 million . This is compared to proceeds of $42.3 million , mostly offset by purchases of $31.4 million , in 2011 . We will continue the purchases and sales of route businesses in 2013 as we expand our distribution network. However, these activities will slow substantially when compared to 2011 and 2012 due to the completion of the IBO conversion.
Financing Cash Flows
Net cash provided by financing activities of $243.8 million in 2012 was principally due to proceeds from long-term debt of $325.2 million . This compared to net cash used in financing activities of $65.7 million in 2011 . The additional long-term debt was primarily related to the new $325 million term loan used to fund the Snack Factory acquisition. This was partially offset by an increase in net repayments of long-term debt and the revolving credit facilities. During 2012 , repayments of debt and the revolving credit facilities totaled $47.3 million as compared to $27.2 million in 2011 , which was primarily funded by cash provided by operations and proceeds from the sale of route businesses. During 2013, we plan to continue to utilize cash provided by operations to repay the current portion of long-term debt and reduce the balance on our revolving credit facilities.
On February 8, 2013, our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on March 6, 2013 to stockholders of record on February 27, 2013.
Debt
In December 2010, we amended our existing credit agreement and entered into a new credit agreement, which allows us to make revolving credit borrowings of up to $265.0 million through December 2015. As of December 29, 2012 , and December 31, 2011 , we had $100.0 million and $145.0 million outstanding under the revolving credit agreement, respectively.
Unused and available borrowings were $165 million under our existing credit facilities at December 29, 2012 , as compared to $120 million at December 31, 2011 . Under certain circumstances and subject to certain conditions, we have the option to increase available credit under the credit agreement by up to $100 million during the life of the 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 $18.9 million as of December 29, 2012 .
The credit agreement requires us to comply with certain defined covenants, such as a maximum debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 3.25 , or 3.50 for four consecutive periods following a material acquisition, and a minimum interest coverage ratio of 2.50 . At December 29, 2012 , our debt to EBITDA ratio was 3.1 , and our interest coverage ratio was 11.1 . In addition, 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 December 29, 2012 , our consolidated stockholders’ equity was $872.2 million and we were in compliance with this covenant. The private placement agreement for $100 million of senior notes has provisions no more restrictive than the revolving credit agreement. Total interest expense under all credit agreements for 2012 , 2011 and 2010 was $9.7 million , $10.7 million and $3.9 million , respectively.

A new unsecured term loan ("Term Loan") of $325 million that matures in September 2016 was entered into to fund the acquisition of Snack Factory. The Term Loan has covenants that are no more restrictive than our current outstanding loan agreements. The Term Loan requires quarterly principal payments of approximately $4.1 million and incurs interest based on the 30-day Eurodollar rate plus the applicable margin between 1.00% and 1.70% . The applicable margin is dependent upon our total debt to EBITDA ratio and begins at 1.70% . Financing costs associated with the Term Loan of $2.0 million were deferred and are being amortized over the life of the loan.
Contractual Obligations
We lease certain facilities and equipment classified as operating leases. We also have entered into agreements with suppliers for the purchase of certain ingredients, packaging materials and energy used in the production process. These agreements are entered into in the normal course of business and consist of agreements to purchase a certain quantity over a certain period of time. These purchase commitments range in length from a few weeks to twelve months.
Contractual obligations as of December 29, 2012 were:  
(in thousands)
 
 
 
Payments Due by Period
 
 
Total    
 
2013
 
2014-2015
 
2016-2017
 
Thereafter
Purchase commitments
 
$
201,952

 
$
201,952

 
$

 
$

 
$

Debt, including interest payable*
 
589,120

 
35,329

 
165,154

 
388,637

 

Operating lease obligations
 
58,225

 
16,657

 
24,424

 
11,152

 
5,992

Total contractual obligations
 
$
849,297

 
$
253,938

 
$
189,578

 
$
399,789

 
$
5,992

*
Variable interest will be paid in future periods based on the outstanding balance at that time.
Because we are uncertain as to when resolution may occur, this table does not reflect our liability for gross unrecognized tax benefits of $6.0 million and related interest and penalties of $2.3 million . Details regarding this liability are presented in Note 12 to the consolidated financial statements included in Item 8.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity or cash flows.
Critical Accounting Estimates
Preparing the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We believe the following estimates and assumptions to be critical accounting estimates. These assumptions and estimates may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and may have a material impact on the financial condition or operating performance. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Our policy on revenue recognition varies based on the types of products sold and the distribution method. We recognize revenue when title and risk of loss passes to our customers. Allowances for sales returns, stale products, promotions and discounts are also recorded as reductions of revenue in the consolidated financial statements.
Revenue for products sold to our IBOs in our DSD network is recognized when the IBO purchases the inventory from our warehouses. Revenue for products sold to retailers through our company-owned routes in our DSD network is recognized when the product is delivered to the customer. Our sales representatives create an invoice at time of delivery using a handheld computer. These invoices are transmitted electronically each day and revenue is recognized.
Revenue for products shipped directly to the customer from our warehouse is recognized based on the shipping terms listed on the shipping documentation. Products shipped with terms FOB-shipping point are recognized as revenue at the time the shipment leaves our warehouses. Products shipped with terms FOB-destination are recognized as revenue based on the anticipated receipt date by the customer.
We allow certain customers to return products under agreed upon circumstances. We record a returns allowance for damaged products and other products not sold by the expiration date on the product label. This allowance is estimated based on a percentage of sales returns using historical and current market information.


19


We record certain reductions to revenue for promotional allowances. There are several different types of promotional allowances such as off-invoice allowances, rebates and shelf space allowances. An off-invoice allowance is a reduction of the sales price that is directly deducted from the invoice amount. We record the amount of the deduction as a reduction to revenue when the transaction occurs. Rebates are offered to retailers based on the quantity of product purchased over a period of time. Based on the nature of these allowances, the exact amount of the rebate is not known at the time the product is sold to the customer. An estimate of the expected rebate amount is recorded as a reduction to revenue at the time of the sale and a corresponding accrued liability is recorded. The accrued liability is monitored throughout the time period covered by the promotion. The accrued liability is based on historical information and the progress of the customer against the target amount. We also record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue. The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion.
Total allowances for sales returns, rebates, coupons, scan-backs and other promotional activities increased from $23.2 million at the end of 2011 to $26.5 million at the end of 2012 due to increased promotional activities and the acquisition of Snack Factory.
Shelf space allowances are capitalized and amortized over the lesser of the life of the agreement or up to a maximum of three years and recorded as a reduction to revenue. Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.
Allowance for Doubtful Accounts
The determination of the allowance for doubtful accounts is based on management’s estimate of uncollectible accounts receivable. We record a general reserve based on analysis of historical data and aging of accounts receivable. In addition, management records specific reserves for receivable balances that are considered at higher risk due to known facts regarding the customer. The assumptions for this determination are reviewed quarterly to ensure that business conditions or other circumstances are consistent with the assumptions. Allowances for doubtful accounts increased from $1.9 million at the end of 2011 to $2.2 million at the end of 2012 , primarily due to increased risk in receivables from IBOs compared to the prior year.
Self-Insurance Reserves
We maintain reserves for the self-funded portions of employee medical insurance benefits. The employer’s portion of employee medical claims is limited by stop-loss insurance coverage to $0.3 million per person per year. The accrual for incurred but not reported medical insurance claims declined slightly from $4.5 million in 2011 to $4.4 million in 2012.
We maintain self-insurance reserves for workers’ compensation and auto liability for individual losses up to the deductibles which range from $0.3 million to $0.5 million per individual loss. In addition, certain general and product liability claims are self-funded for individual losses up to the $0.1 million insurance deductible. Claims in excess of the deductible are fully insured up to $100 million per individual claim. We evaluate input from a third-party actuary in the estimation of the casualty insurance obligation on an annual basis. In determining the ultimate loss and reserve requirements, we use various actuarial assumptions including compensation trends, healthcare cost trends and discount rates. We also use historical information for claims frequency and severity in order to establish loss development factors. The estimate of discounted loss reserves ranged from $14.2 million to $16.9 million in 2012 . In 2011 , the estimate of discounted loss reserves ranged from $14.2 million to $17.9 million .
During 2012 and 2011 , we determined that the best estimate of our outstanding liability was the midpoint in the range. Accordingly, we selected the midpoint of the range as our estimated liability. In addition, we kept the discount rate constant at 1.5% from 2011 to 2012 based on projected investment returns over the estimated future payout period. If the discount rate were to decline by one percentage point from 1.5% to 0.5%, the impact would be an increase in our accrual of approximately $0.3 million.
In December 2010, we assumed a liability for workers’ compensation relating to claims that had originated prior to 1992 and been insured by a third-party insurance company. Due to the uncertainty of that insurer’s ability to continue paying claims, we entered into an agreement where we assumed the full liability of insurance claims under the pre-existing workers’ compensation policies. The net liability for these claims was estimated at $2.2 million and $2.1 million for 2012 and 2011 , respectively.
Impairment Analysis of Goodwill and Other Indefinite-Lived Intangible Assets
The annual impairment analysis of goodwill and other indefinite-lived intangible assets requires us to project future financial performance, including revenue and profit growth, fixed asset and working capital investments, income tax rates and cost of capital. During 2011, the FASB issued an ASU regarding testing for goodwill impairment which we adopted. However, for both 2011 and 2012, we elected to perform a quantitative analysis of goodwill rather than support the balance qualitatively as the new standard allows.
The analysis of goodwill, as of December 29, 2012 , assumes combined average annual revenue growth of approximately 4.40% during the valuation period. This compares to a combined average annual revenue growth of approximately 2.37% in the calculation as of December 31, 2011. The increase in growth is primarily due to the acquisition of Snack Factory in late 2012. These projections rely upon historical performance, anticipated market conditions and forward-looking business plans.

20



We use a combination of internal and external data to develop the weighted average cost of capital. Significant investments in fixed assets and working capital to support the assumed revenue growth are estimated and factored into the analysis. If the assumed revenue growth is not achieved, the required investments in fixed assets and working capital could be reduced. Even with a significant amount of excess fair value over carrying value, major changes in assumptions or changes in conditions could result in a goodwill impairment charge in the future.
In July 2012, the FASB issued new impairment testing requirements for indefinite-lived intangible assets. Under the updated standard an entity would first perform a qualitative impairment test for indefinite-lived intangible assets to determine whether a quantitative assessment is necessary. The requirements are effective for annual and interim impairment tests for fiscal years beginning after September 15, 2012. We adopted these requirements during fiscal year 2012, but elected to continue to perform a quantitative impairment analysis for our indefinite-lived intangibles.
Our trademarks are valued using the relief-from-royalty method under the income approach, which requires us to estimate a reasonable royalty rate, identify relevant projected revenues, and select an appropriate discount rate. During our testing in 2012, we incurred $7.6 million in impairment charges related to two of our trademarks. This impairment was necessary as the Company made a decision to replace a portion of the sales of these branded products with other, more recognizable, brands in our portfolio. While our annual impairment testing did not result in any additional impairment, there continue to be certain trademarks, including the two which were partially impaired, that 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. In addition, the trademark acquired in the Snack Factory acquisition will require significant revenue growth in future years in order to maintain its current fair value. Although we believe this rate of revenue growth is reasonable, any reduction in growth or growth expectations could result in impairment of the associated trademark.
Our route intangible assets are valued by comparing the current fair market value for the route assets to the associated book value. The fair market value is computed using the route sales average for each route multiplied by the market multiple for the area in which the route is located. No impairments were recognized in 2012 as a result of this analysis.
Depreciation and Impairment of Fixed Assets
Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used in computing depreciation are based on estimates of the period over which the assets will provide economic benefits. Estimated lives are based on historical experience, maintenance practices, technological changes and future business plans. Depreciation expense was $47.9 million , $51.3 million and $39.1 million during 2012 , 2011 and 2010 , respectively. Changes in these estimated lives and increases in capital expenditures could significantly affect depreciation expense in the future.
Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets or asset groups to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future net cash flows expected to be generated by the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. During the year ended December 29, 2012 , fixed asset impairment charges of $4.3 million were recognized in the Consolidated Statements of Income. The majority of asset impairment was recorded due to our decision to close our Cambridge, Ontario manufacturing facility in order to consolidate the operations of our two Canadian manufacturing facilities. See Note 4 to the consolidated financial statements in Item 8 for additional information regarding this impairment charge.
Equity-Based Incentive Compensation Expense
Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term, expected stock price volatility, risk-free interest rate and expected dividends. Judgment is required in estimating the amount of share-based awards that are expected to be forfeited before vesting. In addition, our long-term equity incentive plans require assumptions and projections of future operating results and financial metrics. Actual results may differ from these assumptions and projections, which could have a material impact on our financial results. Information regarding assumptions can be found in Note 1 to the consolidated financial statements in Item 8.

21


Provision for Income Taxes
Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates, business credits available in the various jurisdictions in which we operate and permanent tax differences. Significant judgment is required in evaluating tax positions that affect the annual tax rate. We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage. Unrecognized tax benefits for uncertain tax positions are established when, despite the fact that the tax return positions are supportable, we believe these positions may be challenged and the results are uncertain. We adjust these liabilities in light of changing facts and circumstances, such as the progress of a tax audit.
New Accounting Standards
See Note 2 to the consolidated financial statements included in Item 8 for a summary of new accounting standards.
Item 7A.  Quantitative and Qualitative Disclosure About Market Risk
We are exposed to certain commodity, interest rate and foreign currency exchange rate risks as part of our ongoing business operations and may use derivative financial instruments, where appropriate, to manage some of these risks. We do not use derivatives for trading purposes. Other than immaterial investments acquired in the Merger, there are no market risk sensitive instruments held for trading purposes.
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. As of December 29, 2012 and December 31, 2011 , we had no outstanding commodity futures contracts or other derivative contracts related to ingredients and energy.
Our variable-rate debt obligations incur interest at floating rates based on changes in the Eurodollar rate and U.S. base rate interest. To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements to maintain a desirable proportion of fixed to variable-rate debt. See Note 11 to the consolidated financial statements in Item 8 for further information related to our interest rate swap agreements. While these interest rate swap agreements fixed a portion of the interest rate at a predictable level, pre-tax interest expense would have been $0.8 million lower without these swaps during 2012 . Including the effect of interest rate swap agreements, the weighted average interest rates for 2012 and 2011 were 2.70% and 3.80% , respectively. A 10% increase in the variable interest rate would not have significantly impacted interest expense during 2012 .
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 matured in December 2012. Foreign currency fluctuations unfavorably impacted 2012 pre-tax earnings by $1.5 million compared to 2011 . However this decrease in pre-tax earnings was offset by the favorable effect of derivative forward contracts of $0.4 million in 2012 compared to 2011 , resulting in a net unfavorable impact of $1.1 million in 2012 .
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 years ended December 29, 2012 and December 31, 2011 , net bad debt expense was $1.5 million and $0.4 million , respectively. The higher level of expense in 2012 is due to increased turnover of IBOs. Allowances for doubtful accounts were $2.2 million at December 29, 2012 and $1.9 million at December 31, 2011 .

22


Item 8.  Financial Statements and Supplementary Data
SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Fiscal Years Ended December 29, 2012 December 31, 2011 and January 1, 2011
 
(in thousands, except per share data)
 
2012
 
2011
 
2010
Net revenue
 
$
1,618,634

 
$
1,635,036

 
$
979,835

Cost of sales
 
1,079,777

 
1,065,107

 
601,015

Gross margin
 
538,857

 
569,929

 
378,820

 
 
 
 
 
 
 
Selling, general and administrative
 
440,597

 
495,267

 
359,629

Impairment charges
 
11,862

 
12,704

 
584

Gain on sale of route businesses, net
 
(22,335
)
 
(9,440
)
 

Other (income)/expense, net
 
(407
)
 
993

 
6,524

Income before interest and income taxes
 
109,140

 
70,405

 
12,083

 
 
 
 
 
 
 
Interest expense, net
 
9,487

 
10,560

 
3,921

Income before income taxes
 
99,653

 
59,845

 
8,162

 
 
 
 
 
 
 
Income tax expense
 
40,143

 
21,104

 
5,631

Net income
 
59,510

 
38,741

 
2,531

Net income attributable to noncontrolling
interests, net of income tax of $263, $322 and $4, respectively
 
425

 
483

 
19

Net income attributable to Snyder’s-Lance, Inc.
 
$
59,085

 
$
38,258

 
$
2,512

 
 
 
 
 
 
 
Basic earnings per share
 
$
0.86

 
$
0.57

 
$
0.07

Weighted average shares outstanding – basic
 
68,382

 
67,400

 
34,128

 
 
 
 
 
 
 
Diluted earnings per share
 
$
0.85

 
$
0.56

 
$
0.07

Weighted average shares outstanding – diluted
 
69,215

 
68,478

 
34,348

 
 
 
 
 
 
 
Cash dividends declared per share
 
$
0.64

 
$
0.64

 
$
4.39

See Notes to consolidated financial statements.



23

Table of Contents


SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Fiscal Years Ended December 29, 2012 December 31, 2011 and January 1, 2011
 
(in thousands)
 
2012
 
2011
 
2010
Net income
 
$
59,510

 
$
38,741

 
$
2,531

 
 
 
 
 
 
 
Net unrealized (losses)/gains on derivative instruments, net of income tax*
 
(372
)
 
382

 
700

Foreign currency translation adjustment
 
1,771

 
(1,767
)
 
3,611

  Total other comprehensive income
 
1,399

 
(1,385
)
 
4,311

 
 
 
 
 
 
 
Total comprehensive income
 
60,909

 
37,356

 
6,842

Comprehensive income attributable to noncontrolling interests, net of income tax of $263, $322 and $4, respectively
 
425

 
483

 
19

  Total comprehensive income attributable to Snyder’s-Lance, Inc.
 
$
60,484

 
$
36,873

 
$
6,823

* See Note 11 to the consolidated financial statements for amounts realized in net income.
See Notes to consolidated financial statements.



24

Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 29, 2012 and December 31, 2011  
(in thousands, except share data)
 
2012
 
2011
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
9,276

 
$
20,841

Accounts receivable, net of allowances of $2,159 and $1,884, respectively
 
141,862

 
143,238

Inventories
 
118,256

 
106,261

Income tax receivable
 

 
18,119

Deferred income taxes
 
11,625

 
21,042

Assets held for sale
 
11,038

 
57,822

Prepaid expenses and other current assets
 
28,676

 
20,705

Total current assets
 
320,733

 
388,028

 
 
 
 
 
Noncurrent assets:
 
 
 
 
Fixed assets, net
 
331,385

 
313,043

Goodwill
 
540,389

 
367,853

Other intangible assets, net
 
531,735

 
376,062

Other noncurrent assets
 
22,490

 
21,804

Total assets
 
$
1,746,732

 
$
1,466,790

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
20,462

 
$
4,256

Accounts payable
 
52,753

 
52,930

Accrued compensation
 
31,037

 
29,248

Accrued profit-sharing and retirement plans
 
354

 
9,249

Accrual for casualty insurance claims
 
4,779

 
6,957

Accrued selling and promotional costs
 
16,240

 
21,465

Income tax payable
 
1,263

 

Other payables and accrued liabilities
 
27,735

 
31,041

Total current liabilities
 
154,623

 
155,146

 
 
 
 
 
Noncurrent liabilities:
 
 
 
 
Long-term debt
 
514,587

 
253,939

Deferred income taxes
 
176,037

 
196,244

Accrual for casualty insurance claims
 
9,759

 
7,724

Other noncurrent liabilities
 
19,551

 
15,146

Total liabilities
 
874,557

 
628,199

 
 
 
 
 
Commitments and contingencies
 

 

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Common stock, $0.83 1/3 par value. Authorized 75,000,000 shares;
68,863,974 and 67,820,798 shares outstanding, respectively
 
57,384

 
56,515

Preferred stock, $1.00 par value. Authorized 5,000,000 shares; no shares outstanding
 

 

Additional paid-in capital
 
746,155

 
730,338

Retained earnings
 
50,847

 
35,539

Accumulated other comprehensive income
 
15,118

 
13,719

Total Snyder’s-Lance, Inc. stockholders’ equity
 
869,504

 
836,111

Noncontrolling interests
 
2,671

 
2,480

Total stockholders’ equity
 
872,175

 
838,591

Total liabilities and stockholders’ equity
 
$
1,746,732

 
$
1,466,790


See Notes to consolidated financial statements.

25

Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Fiscal Years Ended December 29, 2012 December 31, 2011 and January 1, 2011
 
(in thousands, except share and per share data)
 
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Non-controlling
Interests
 
Total
Balance, December 26, 2009
 
32,093,193

 
$
26,743

 
$
60,829

 
$
180,145

 
$
10,793

 
$

 
$
278,510

Total comprehensive income
 
 
 
 
 
 
 
2,512

 
4,311

 
19

 
6,842

Stock issued in connection with Merger
 
32,652,949

 
27,209

 
649,002

 
 
 
 
 
 
 
676,211

Noncontrolling interests assumed in Merger
 
 
 
 
 
 
 
 
 
 
 
4,008

 
4,008

Dividends paid to stockholders ($4.39 per share)
 
 
 
 
 
 
 
(142,458
)
 
 
 
 
 
(142,458
)
Amortization of non-qualified stock options
 
 
 
 
 
3,665

 
 
 
 
 
 
 
3,665

Equity-based incentive reclassified to a liability plan
 
 
 
 
 
(4,199
)
 
 
 
 
 
 
 
(4,199
)
Restricted stock units settled in common stock, net of repurchases
 
172,650

 
144

 
(3,551
)
 
 
 
 
 
 
 
(3,407
)
Stock options exercised, including $3,199 tax benefit
 
1,456,615

 
1,214

 
11,888

 
 
 
 
 
 
 
13,102

Issuance and amortization of restricted stock, net of cancellations
 
97,279

 
81

 
7,372

 
 
 
 
 
 
 
7,453

Repurchases of common stock
 
(135,879
)
 
(113
)
 
(2,999
)
 
 
 
 
 
 
 
(3,112
)
Balance, January 1, 2011
 
66,336,807

 
$
55,278

 
$
722,007

 
$
40,199

 
$
15,104

 
$
4,027

 
$
836,615

Total comprehensive income
 
 
 
 
 
 
 
38,258

 
(1,385
)
 
483

 
37,356

Acquisition of remaining interest in Melisi Snacks, Inc.
 
 
 
 
 
(1,157
)
 
 
 
 
 
(2,343
)
 
(3,500
)
Dividends paid to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
(281
)
 
(281
)
Dividends paid to stockholders ($0.64 per share)
 
 
 
 
 
 
 
(42,918
)
 
 
 
 
 
(42,918
)
Purchase price adjustments
 
 
 
 
 
 
 
 
 
 
 
594

 
594

Amortization of non-qualified stock options
 
 
 
 
 
1,372

 
 
 
 
 
 
 
1,372

Stock options exercised, including $49 tax benefit
 
1,295,589

 
1,080

 
7,111

 
 
 
 
 
 
 
8,191

Issuance and amortization of restricted stock, net of cancellations
 
188,402

 
157

 
1,005

 
 
 
 
 
 
 
1,162

Balance, December 31, 2011
 
67,820,798

 
$
56,515

 
$
730,338

 
$
35,539

 
$
13,719

 
$
2,480

 
$
838,591

Total comprehensive income
 
 
 
 
 
 
 
59,085

 
1,399

 
425

 
60,909

Dividends paid to noncontrolling interests
 
 
 
 
 
 
 
 
 
 
 
(234
)
 
(234
)
Dividends paid to stockholders ($0.64 per share)
 
 
 
 
 
 
 
(43,777
)
 
 
 
 
 
(43,777
)
Amortization of non-qualified stock options
 
 
 
 
 
2,132

 
 
 
 
 
 
 
2,132

Stock options exercised, including $2,618 tax benefit
 
908,751

 
757

 
11,571

 
 
 
 
 
 
 
12,328

Issuance and amortization of restricted stock, net of cancellations
 
149,291

 
124

 
2,437

 
 
 
 
 
 
 
2,561

Repurchases of common stock
 
(14,866
)
 
(12
)
 
(323
)
 
 
 
 
 
 
 
(335
)
Balance, December 29, 2012
 
68,863,974

 
$
57,384

 
$
746,155

 
$
50,847

 
$
15,118

 
$
2,671

 
$
872,175

See Notes to consolidated financial statements.

26

Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Fiscal Years Ended December 29, 2012 December 31, 2011 and January 1, 2011
(in thousands)
 
2012
 
2011
 
2010
Operating activities:
 
 
 
 
 
 
Net income
 
$
59,510

 
$
38,741

 
$
2,531

Adjustments to reconcile net income to cash from operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
53,764

 
55,337

 
40,100

Stock-based compensation expense
 
4,693

 
2,535

 
19,524

Loss on sale of fixed assets, net
 
597

 
1,851

 
682

Gain on sale of route businesses
 
(22,335
)
 
(9,440
)
 

Impairment charges
 
11,862

 
12,704

 
584

Change in vacation plan
 

 
(9,916
)
 

Deferred income taxes
 
(15,279
)
 
6,026

 
18,228

Provision for doubtful accounts
 
1,479

 
402

 
2,649

Changes in operating assets and liabilities, excluding business acquisitions and foreign currency translation adjustments:
 
 
 
 
 
 
Accounts receivable
 
9,869

 
(15,773
)
 
4,376

Inventory
 
(2,598
)
 
(8,680
)
 
7,496

Other current assets
 
19,496

 
17,022

 
(30,885
)
Accounts payable
 
(5,393
)
 
11,665

 
(6,032
)
Other accrued liabilities
 
(18,539
)
 
12,585

 
(19,562
)
Other noncurrent assets
 
(103
)
 
(2,882
)
 
2,519

Other noncurrent liabilities
 
(4,255
)
 
(649
)
 
2,234

Net cash provided by operating activities
 
92,768

 
111,528

 
44,444

 
 
 
 
 
 
 
Investing activities:
 
 
 
 
 
 
Purchases of fixed assets
 
(80,304
)
 
(57,726
)
 
(33,347
)
Purchases of route businesses
 
(28,523
)
 
(31,418
)
 

Proceeds from sale of fixed assets
 
9,324

 
4,351

 
2,731

Proceeds from sale of route businesses
 
93,896

 
42,294

 

Proceeds from sale of investments
 
1,444

 
960

 

Proceeds from federal grant for solar farm
 

 
4,212

 

Business acquisitions, net of cash acquired
 
(344,181
)
 
(15,394
)
 
96,336

Net cash (used in)/provided by investing activities
 
(348,344
)
 
(52,721
)
 
65,720

 
 
 
 
 
 
 
Financing activities:
 
 
 
 
 
 
Dividends paid to stockholders
 
(43,777
)
 
(42,918
)
 
(142,458
)
Dividends paid to noncontrolling interests
 
(234
)
 
(281
)
 

Acquisition of remaining interest in Melisi Snacks, Inc.
 

 
(3,500
)
 

Debt issuance costs
 
(2,028
)
 

 

Issuances of common stock
 
9,710

 
8,142

 
9,903

Excess tax benefits from stock-based compensation
 
2,618

 
49

 
3,199

Repurchases of common stock
 
(335
)
 

 
(6,519
)
Repayments of long-term debt
 
(2,476
)
 
(62,309
)
 

Proceeds from long-term debt
 
325,211

 

 

Net (repayments)/proceeds from existing credit facilities
 
(44,841
)
 
35,098

 
47,762

Net cash provided by/(used in) financing activities
 
243,848

 
(65,719
)
 
(88,113
)
 
 
 
 
 
 
 
Effect of exchange rate changes on cash
 
163

 
(124
)
 
408

 
 
 
 
 
 
 
(Decrease)/increase in cash and cash equivalents
 
(11,565
)
 
(7,036
)
 
22,459

Cash and cash equivalents at beginning of fiscal year
 
20,841

 
27,877

 
5,418

Cash and cash equivalents at end of fiscal year
 
$
9,276

 
$
20,841

 
$
27,877

 
 
 
 
 
 
 
Non-cash investing activities:
 
 
 
 
 
 
Common stock and options issued for business combinations
 
$