Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-Q, Received: 08/07/2014 16:37:39)
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended June 28, 2014
Commission File Number 0-398
SNYDER’S-LANCE, INC.
(Exact name of registrant as specified in its charter)
 
North Carolina
(State or other jurisdiction of
incorporation or organization)
  
56-0292920
(I.R.S. Employer Identification No.)
 
13024 Ballantyne Corporate Place
Suite 900
Charlotte, North Carolina
  
28277
(Address of principal executive offices)
  
(Zip Code)
704-554-1421
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ         No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ         No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer  þ
Accelerated filer 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 Exchange Act).
Yes ¨         No þ

The number of shares outstanding of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock, as of July 29, 2014 , was 70,243,377 shares.



Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

INDEX


  
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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SNYDER'S-LANCE, INC. AND SUBSIDIARIES


CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
This document includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, beliefs, intentions or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, the risks and uncertainties set forth in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 28, 2013 , and those described from time to time in our other reports filed with the Securities and Exchange Commission.
Caution should be taken not to place undue reliance on our forward-looking statements, which reflect our management’s expectations only as of the time such statements are made. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.



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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
For the Quarters and Six Months Ended June 28, 2014 and  June 29, 2013

 
 
Quarter Ended
 
Six Months Ended
(in thousands, except per share data)
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net revenue
 
$
399,596

 
$
378,489

 
$
772,612

 
$
737,030

Cost of sales
 
254,707

 
244,386

 
494,537

 
470,238

Gross margin
 
144,889

 
134,103

 
278,075

 
266,792

 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
121,312

 
118,036

 
237,376

 
223,411

Impairment charges
 
6,503

 
1,900

 
7,503

 
1,900

Gain on sale of route businesses, net
 
(297
)
 
(1,482
)
 
(1,460
)
 
(1,592
)
Other loss/(income), net
 
501

 
(1,476
)
 
581

 
(2,617
)
Income before interest and income taxes
 
16,870

 
17,125

 
34,075

 
45,690

 
 
 
 
 
 
 
 
 
Interest expense, net
 
4,111

 
3,521

 
7,501

 
6,960

Income before income taxes
 
12,759

 
13,604

 
26,574

 
38,730

 
 
 
 
 
 
 
 
 
Income tax expense
 
4,584

 
5,141

 
7,910

 
15,010

Income from continuing operations
 
8,175

 
8,463

 
18,664

 
23,720

Discontinued operations, net of income tax
 
3,523

 
4,567

 
9,845

 
9,218

Net income
 
11,698

 
13,030

 
28,509

 
32,938

Net income attributable to noncontrolling interests
 
21

 
51

 
16

 
116

Net income attributable to Snyder’s-Lance, Inc.
 
$
11,677

 
$
12,979

 
$
28,493

 
$
32,822

 
 
 
 
 
 
 
 
 
Amounts attributable to Snyder's-Lance, Inc.:
 
 
 
 
 
 
 
 
Continuing operations
 
$
8,154

 
$
8,412

 
$
18,648

 
$
23,604

Discontinued operations
 
3,523

 
4,567

 
9,845

 
9,218

Net income
 
$
11,677

 
$
12,979

 
$
28,493

 
$
32,822

 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.12

 
$
0.12

 
$
0.27

 
$
0.34

Discontinued operations
 
0.05

 
0.07

 
0.14

 
0.13

Net income
 
$
0.17

 
$
0.19

 
$
0.41

 
$
0.47

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - Basic
 
70,162

 
69,279

 
70,080

 
69,136

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.11

 
$
0.12

 
$
0.26

 
$
0.34

Discontinued operations
 
0.05

 
0.07

 
0.14

 
0.13

Net income
 
$
0.16

 
$
0.19

 
$
0.40

 
$
0.47

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - Diluted
 
70,905

 
70,086

 
70,820

 
69,922

 
 
 
 
 
 
 
 
 
Cash dividends declared per share
 
$
0.16

 
$
0.16

 
$
0.32

 
$
0.32

See Notes to the condensed consolidated financial statements (unaudited).


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SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Quarters and Six Months Ended June 28, 2014 and  June 29, 2013
 
 
 
Quarter Ended
 
Six Months Ended
(in thousands)
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net income
 
$
11,698

 
$
13,030

 
$
28,509

 
$
32,938

 
 
 
 
 
 
 
 
 
Net unrealized gains/(losses) on derivative instruments, net of income tax
 
91

 
(5
)
 
127

 
(18
)
Foreign currency translation adjustment
 
2,247

 
(2,347
)
 
361

 
(3,905
)
Total other comprehensive income/(loss)
 
2,338

 
(2,352
)
 
488

 
(3,923
)
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
14,036

 
10,678

 
28,997

 
29,015

Comprehensive income attributable to noncontrolling interests
 
(21
)
 
(51
)
 
(16
)
 
(116
)
Total comprehensive income attributable to Snyder’s-Lance, Inc.
 
$
14,015

 
$
10,627

 
$
28,981

 
$
28,899

See Notes to condensed consolidated financial statements (unaudited).



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SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
As of June 28, 2014 and December 28, 2013

(in thousands, except share data)
 
June 28,
2014
 
December 28,
2013
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
18,450

 
$
14,080

Accounts receivable, net of allowances of $1,490 and $1,535, respectively
 
134,322

 
121,599

Inventories
 
126,237

 
100,447

Prepaid income taxes
 
7,079

 
9,094

Deferred income taxes
 
15,874

 
15,391

Assets held for sale
 
14,262

 
15,314

Prepaid expenses and other current assets
 
21,146

 
22,925

Current assets of discontinued operations (Note 3)
 
39,399

 
37,416

Total current assets
 
376,769

 
336,266

 
 
 
 
 
Noncurrent assets:
 
 
 
 
Fixed assets
 
423,379

 
312,527

Goodwill
 
479,502

 
422,318

Other intangible assets, net
 
513,462

 
516,607

Other noncurrent assets
 
22,413

 
22,250

Noncurrrent assets of discontinued operations (Note 3)
 
181,903

 
154,626

Total assets
 
$
1,997,428

 
$
1,764,594

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
8,894

 
$
17,291

Accounts payable
 
56,715

 
45,966

Accrued compensation
 
27,217

 
27,530

Accrued casualty insurance claims
 
5,096

 
6,262

Accrued selling and promotional costs
 
14,174

 
12,636

Other payables and accrued liabilities
 
22,459

 
22,016

Current liabilities of discontinued operations (Note 3)
 
15,219

 
14,503

Total current liabilities
 
149,774

 
146,204

 
 
 
 
 
Noncurrent liabilities:
 
 
 
 
Long-term debt
 
695,208

 
480,082

Deferred income taxes
 
191,498

 
190,393

Accrued casualty insurance claims
 
7,439

 
5,567

Other noncurrent liabilities
 
21,981

 
24,143

Noncurrent liabilities of discontinued operations (Note 3)
 
269

 
305

Total liabilities
 
1,066,169

 
846,694

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Common stock, $0.83 1/3 par value. Authorized 110,000,000 shares; 70,236,168 and 69,891,890 shares outstanding, respectively
 
58,528

 
58,241

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

 

Additional paid-in capital
 
771,673

 
765,172

Retained earnings
 
91,213

 
85,146

Accumulated other comprehensive income
 
10,659

 
10,171

Total Snyder’s-Lance, Inc. stockholders’ equity
 
932,073

 
918,730

Noncontrolling interests
 
(814
)
 
(830
)
Total stockholders’ equity
 
931,259

 
917,900

Total liabilities and stockholders’ equity
 
$
1,997,428

 
$
1,764,594

See Notes to the condensed consolidated financial statements (unaudited).

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 28, 2014 and  June 29, 2013

 
 
Six Months Ended
(in thousands)
 
June 28,
2014
 
June 29,
2013
Operating activities:
 
 
 
 
Net income
 
$
28,509

 
$
32,938

Adjustments to reconcile net income to cash from operating activities:
 
 
 
 
Depreciation and amortization
 
29,742

 
29,641

Stock-based compensation expense
 
3,128

 
2,826

Loss/(gain) on sale of fixed assets, net
 
398

 
(272
)
Gain on sale of route businesses
 
(1,460
)
 
(1,592
)
Impairment charges
 
7,503

 
1,900

Deferred income taxes
 
544

 
3,509

Provision for doubtful accounts
 
811

 
1,302

Changes in operating assets and liabilities, excluding business acquisition
 
(15,994
)
 
(17,658
)
Net cash provided by operating activities
 
53,181

 
52,594

 
 
 
 
 
Investing activities:
 
 
 
 
Purchases of fixed assets
 
(33,891
)
 
(39,869
)
Purchases of route businesses
 
(15,018
)
 
(21,353
)
Proceeds from sale of fixed assets
 
471

 
2,213

Proceeds from sale of route businesses
 
16,258

 
17,533

Proceeds from sale of investments
 

 
921

Business acquisition, net of cash acquired
 
(202,260
)
 

Net cash used in investing activities
 
(234,440
)
 
(40,555
)
 
 
 
 
 
Financing activities:
 
 
 
 
Dividends paid to stockholders
 
(22,426
)
 
(22,135
)
Dividends paid to noncontrolling interests
 

 
(232
)
Debt issuance costs
 
(1,854
)
 

Issuances of common stock
 
4,819

 
7,549

Repurchases of common stock
 
(1,160
)
 
(709
)
Repayments of long-term debt
 
(8,750
)
 
(16,029
)
Net proceeds from existing credit facilities
 
215,000

 
16,870

Net cash provided by/(used in) financing activities
 
185,629

 
(14,686
)
 
 
 
 
 
Effect of exchange rate changes on cash
 

 
(347
)
 
 
 
 
 
Increase/(decrease) in cash and cash equivalents
 
4,370

 
(2,994
)
Cash and cash equivalents at beginning of period
 
14,080

 
9,276

Cash and cash equivalents at end of period
 
$
18,450

 
$
6,282

 
 
 
 
 
Supplemental information:
 
 
 
 
Cash paid for income taxes, net of refunds of $164 and $36, respectively
 
$
13,925

 
$
21,257

Cash paid for interest
 
$
7,159

 
$
8,021

See Notes to the condensed consolidated financial statements (unaudited).


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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)


NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Snyder’s-Lance, Inc. (the Company ) have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in our Form 10-K for the year ended December 28, 2013 , filed with the Securities and Exchange Commission on February 25, 2014. The year-end condensed consolidated financial statement data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In our opinion, these condensed consolidated financial statements reflect all adjustments necessary to present fairly our condensed consolidated financial statements for the interim periods presented herein. The consolidated results of operations for the quarter and six months ended June 28, 2014 , are not necessarily indicative of the results to be expected for the full year.

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

Certain prior year amounts have been reclassified to conform to the current year presentation.

Discontinued Operations Presentation
As discussed in Note 3, amounts included in the Condensed Consolidated Statements of Income and Condensed Consolidated Balance Sheets for prior periods have been reclassified to separate amounts related to discontinued operations from continuing operations. Current year balances also separately present amounts associated with discontinued operations. Accordingly, unless otherwise stated, amounts disclosed within the notes to the condensed consolidated financial statements exclude amounts related to discontinued operations.
NOTE 2. NEW ACCOUNTING STANDARDS
In March 2013, the FASB issued Accounting Standards Update No. 2013-05, Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This accounting standard clarifies the application of GAAP for the release of cumulative translation adjustments related to changes of ownership in or within foreign entities, including step acquisitions. This new guidance became effective for annual reporting periods beginning on or after December 15, 2013 and subsequent interim periods. We plan to apply the new guidance, as applicable, to future derecognitions of certain subsidiaries or groups of assets within a foreign entity or of an investment in foreign entities. This standard did not impact these condensed consolidated financial statements.
On April 10, 2014, the FASB issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this accounting standard raise the threshold for a disposal to qualify as a discontinued operation and require new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This accounting standard update is effective for annual periods beginning on or after December 15, 2014, and related interim periods with early adoption allowed. We are currently evaluating the impact of this standard and plan to adopt this standard on its stated effective date in fiscal year 2015.
On May 28, 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This accounting standard creates common revenue recognition guidance for U.S. GAAP and IFRS. The guidance also requires improved disclosures to help users of the financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. This accounting standard update is effective for annual reporting periods beginning after December 15, 2016, and related interim periods. Early adoption is not permitted. We are currently evaluating the impact of this standard.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 3 . DISCONTINUED OPERATIONS
On May 6, 2014, we entered into a definitive agreement to sell two of our subsidiaries, S-L Snacks IA, LLC and S-L Snacks Private Brands, LLC, as well as certain assets of our Canadian subsidiary, Tamming Foods Ltd., which included the exclusive rights to manufacture and sell the majority of our private brand products and certain contract manufactured products (“Private Brands”) to Shearer’s Foods, LLC (“Shearer’s”). The manufacturing facilities associated with the sale are located in Burlington, Iowa and Guelph, Ontario. On June 30, 2014 , we completed the sale of Private Brands for $430 million in cash, subject to working capital and other customary adjustments, with expected after-tax proceeds of approximately $300 million .
In connection with the sale of Private Brands, we entered into a Manufacturing and Supply Agreement ("Supply Agreement") to contract manufacture certain products as requested by Shearer's for an initial term of two years subsequent to the sale transaction for which we expect to realize revenue and incur expenses from the products sold to Shearer's. Under this agreement, certain manufacturing facilities that were not included in the disposal group will continue to produce certain products for Shearer’s. Accordingly, these revenues are not included in discontinued operations given the continued involvement and length of the Supply Agreement. Additionally, the Company entered into a transition services agreement ("TSA") to provide certain finance, accounting, information technology, supply chain, and other general services to facilitate the orderly transfer of the Private Brands business operations to Shearer's. The impact to net income from continuing operations associated with the TSA is not expected to be material for any future periods.
Beginning in the second quarter of 2014, revenues and expenses that will no longer continue after the sale of Private Brands, and where we have no substantial continuing involvement, were reclassified to discontinued operations in the Condensed Consolidated Statements of Income. All prior period results were retrospectively adjusted to consistently present continuing and discontinued operations.
For the quarter and six months ended June 28, 2014 and June 29, 2013, income statement amounts associated with discontinued operations were as follows:

Quarter Ended
 
Six Months Ended
(in thousands)
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Net revenue
$
60,444

 
$
60,562

 
$
124,256

 
$
120,593

Cost of sales
46,199

 
48,695

 
94,396

 
96,619

Gross margin
14,245

 
11,867

 
29,860

 
23,974

Selling, general and administrative
5,844

 
5,468

 
11,886

 
11,089

Other loss/(income), net
539

 
(552
)
 
205

 
(887
)
Discontinued operations before income taxes
$
7,862

 
$
6,951

 
$
17,769

 
$
13,772

Income tax expense
4,339

 
2,384

 
7,924

 
4,554

Discontinued operations, net of income tax
$
3,523

 
$
4,567

 
$
9,845

 
$
9,218

In the quarter ended June 28, 2014, as a result of the discontinued operations classification of our Canadian subsidiary, we reversed the assertion of indefinite reinvestment of prior year earnings.  Income tax on discontinued operations for the quarter and six months ended June 28, 2014 included $1.3 million of discrete expense related to the reversal of the indefinite reinvestment assertion.
We will record additional tax liability in the third quarter of 2014 when the sale of Private Brands is completed.   The total estimated tax liability associated with the sale of the Canadian assets will be approximately $16 million .
Beginning in the second quarter of 2014, the assets and liabilities of the Private Brands disposal group were considered held-for-sale and presented as discontinued operations in the Company's Condensed Consolidated Balance Sheets as the Company will not have any continuing involvement with the assets included in the disposal group. All prior period results of the Private Brands disposal group have been retrospectively adjusted as discontinued operations. This transaction will be treated as an asset sale for tax purposes in both the United States and Canada. Therefore, deferred tax assets and liabilities are not included in the carrying amount of the assets and liabilities held for sale because they will not be transferred to the buyer and are not a part of the disposal group.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

The major classes of assets reclassified to discontinued operations included in the Company's Condensed Consolidated Balance Sheets were as follows:
(in thousands)
 
June 28,
 2014
 
December 28,
2013
 Accounts receivable, net
 
$
23,273

 
$
23,389

 Inventories
 
15,316

 
13,303

 Prepaid expenses and other current assets
 
810

 
724

Total current assets of discontinued operations
 
39,399

 
37,416

 Fixed assets, net
 
38,989

 
36,729

 Goodwill
 
139,957

 
114,823

 Other intangible assets, net
 
2,938

 
3,062

 Other noncurrent assets
 
19

 
12

Total noncurrent assets of discontinued operations
 
181,903

 
154,626

Total assets of discontinued operations
 
$
221,302

 
$
192,042


 

 

 Accounts payable
 
$
9,391

 
$
8,544

 Accrued compensation
 
2,558

 
2,262

 Accrued selling and promotional costs
 
359

 
621

 Other payables and accrued liabilities
 
2,911

 
3,076

Total current liabilities of discontinued operations
 
15,219

 
14,503

 Other noncurrent liabilities
 
269

 
305

Total noncurrent liabilities of discontinued operations
 
269

 
305

Total liabilities of discontinued operations
 
$
15,488

 
$
14,808

NOTE 4 . BUSINESS ACQUISITIONS
On June 13, 2014 , we completed the acquisition of Baptista's Bakery, Inc. ("Baptista's") and related assets for approximately  $204 million , subject to capital expenditure, working capital and other customary adjustments. Baptista’s is an industry leader in snack food development and innovation, the manufacturer of our fast growing Snack Factory ®  Pretzel Crisps ®  brand and has unique capabilities consistent with our innovation plans. Baptista's results were included in our Condensed Consolidated Statements of Income from June 13, 2014.


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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes the preliminary allocation among the assets acquired and liabilities assumed. We are working to assess the fair value of the assets and liabilities acquired and we plan to complete the purchase price allocation on or before the end of the fourth quarter of 2014. Accordingly, the allocation of values to assets and liabilities represents management's best estimate at this time.

(in thousands)
 
Preliminary Purchase Price Allocation
Cash and cash equivalents
 
$
2,028

Accounts receivable
 
8,324

Inventories
 
8,474

Prepaid expenses and other current assets
 
386

Fixed assets
 
107,324

Goodwill
 
82,309

Other intangible assets
 
5,100

Total assets acquired
 
$
213,945


 

Current portion of long-term debt
 
$
333

Accounts payable
 
6,748

Accrued compensation
 
1,227

Other payables and accrued liabilities
 
682

Long-term debt
 
667

Total liabilities assumed
 
$
9,657


 


Net assets acquired
 
$
204,288

Of the $5.1 million of acquired intangible assets, $0.5 million was assigned to customer relationships, $3.0 million to developed technology, $1.0 million to trademarks and $0.6 million to non-compete agreements. The fair value of all assets acquired is deductible for income tax purposes. We incurred pre-tax acquisition-related transaction and other costs of $0.5 million in selling, general and administrative expense in the second quarter of 2014.
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is attributable to the general reputation, assembled workforce, acquisition synergies and the expected future cash flows of the business.

The impact of the two weeks of operations of Baptista’s was not material to the results included in the Condensed Consolidated Statements of Income.
On October 25, 2013, we acquired the remaining 20% of Michaud Distributors ( Michaud ) and now own all of the outstanding equity. We exchanged 342,212 newly issued unregistered shares of our common stock, approximately $10.2 million in equity consideration, for the remaining 20% equity in Michaud.
On July 29, 2013, we acquired substantially all the assets of a snack food distributor in Massachusetts. Additionally, on November 5, 2013, we acquired substantially all the assets of a snack food distributor in Connecticut. These acquisitions were part of our plans to continue growing and strengthening our Direct-Store-Delivery ( DSD ) network.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 5. MARGIN IMPROVEMENT AND RESTRUCTURING PLAN
On June 27, 2014, we initiated a margin improvement and restructuring plan (the "Restructuring Plan") to reduce overhead costs that remain after the sale of Private Brands (See Note 3 ). The Restructuring Plan includes a combination of operational initiatives and headcount reductions. Severance expenses of $2.5 million and $0.6 million were recognized in selling, general and administrative and cost of sales, respectively, during the quarter ended June 28, 2014, in conjunction with the Restructuring Plan. The liability of $3.1 million was included in accrued compensation on the Condensed Consolidated Balance Sheets as of June 28, 2014. We plan to complete activities associated with the Restructuring Plan by the beginning of the third quarter of 2015.
NOTE 6. EARNINGS PER SHARE
Basic earnings per share from continuing and discontinued is computed by dividing net income from continuing and discontinued operations attributable to Snyder’s-Lance, Inc., respectively, by the weighted average number of shares outstanding during each period. Diluted earnings per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. In the calculation of diluted earnings per share, the denominator includes the number of additional common shares that would have been outstanding if our outstanding dilutive stock options had been exercised, as determined pursuant to the treasury stock method.
For the quarter and six months ended June 28, 2014 , no shares were excluded from the calculation of diluted earnings per share. For the quarter and six months ended June 29, 2013 , approximately 24,000 and 44,000 shares, respectively, were excluded from the calculation of diluted earnings per share because their effects were antidilutive.
NOTE 7. STOCK-BASED COMPENSATION
Stock-based compensation expense recorded in the Condensed Consolidated Statements of Income was $1.6 million for each of the quarters ended June 28, 2014 and  June 29, 2013 . Stock-based compensation expense was $3.0 million and $2.8 million for the six months ended June 28, 2014 and  June 29, 2013 , respectively. During the six months ended June 28, 2014 , we issued 418,272 non-qualified stock options at a weighted average exercise price of $26.66 per share and 134,490 restricted shares to employees and directors. During the six months ended June 29, 2013 , we issued 442,493 non-qualified stock options at a weighted average exercise price of $25.61 per share and 151,737 restricted shares to employees and directors.
For the quarters ended June 28, 2014 and June 29, 2013 , we repurchased 273 and 265 shares, respectively, of common stock from employees to cover withholding taxes payable by employees upon the vesting of restricted stock. For the six months ended June 28, 2014 and June 29, 2013 , we repurchased 43,387 and 27,755 shares, respectively.
In addition, we recorded $2.1 million and $0.4 million in incentive compensation expense for a performance-based cash incentive plan for the six months ended June 28, 2014 and June 29, 2013 , respectively.
NOTE 8. INVENTORIES
Inventories as of June 28, 2014 and December 28, 2013 , consisted of the following:
(in thousands)
 
June 28,
2014
 
December 28,
2013
Finished goods
 
$
77,272

 
$
64,616

Raw materials
 
20,022

 
12,532

Maintenance parts, packaging and supplies
 
28,943

 
23,299

Total inventories
 
$
126,237

 
$
100,447


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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 9. FIXED ASSETS
Fixed assets as of June 28, 2014 and December 28, 2013 , consisted of the following:
(in thousands)
 
June 28,
2014
 
December 28,
2013
Land and land improvements
 
$
28,105

 
$
25,544

Buildings and building improvements
 
145,694

 
129,427

Machinery, equipment and computer systems
 
454,462

 
361,481

Trucks, trailers and automobiles
 
33,172

 
30,629

Furniture and fixtures
 
11,614

 
11,971

Construction in progress
 
33,360

 
21,745

 
 
$
706,407

 
$
580,797

Accumulated depreciation
 
(281,475
)
 
(265,342
)
 
 
424,932

 
315,455

Fixed assets held for sale
 
(1,553
)
 
(2,928
)
Fixed assets, net
 
$
423,379

 
$
312,527

The increase in the value of our fixed assets is primarily attributable to the acquisition of Baptista's.
Depreciation expense related to fixed assets was $12.7 million and $12.4 million during the quarters ended June 28, 2014 and June 29, 2013 , respectively, with $1.5 million for each of the quarters attributed to discontinued operations. For the six months ended June 28, 2014 and June 29, 2013 , depreciation expense was $24.9 million and $24.8 million , respectively, with $2.8 million and $3.0 million attributed to discontinued operations, respectively. There were $2.9 million in fixed asset impairment charges recorded during the second quarter of 2014. The impairment was primarily recorded to write off certain machinery and equipment where expected future cash flows are not expected to support the carrying value due to the sale of Private Brands. These assets were not part of the sale transaction, so the impairment was included in continuing operations. There were $3.9 million in fixed asset impairment charges recorded during the first six months of 2014 . The remaining $1.0 million impairment charge was related to our Corsicana, Texas facility. There were no fixed asset impairment charges recorded during the second quarter and first six months of 2013 .
The majority of the $1.6 million and $2.9 million in assets held for sale in the Condensed Consolidated Balance Sheets as of June 28, 2014 and December 28, 2013 , respectively, was comprised of the land and building in Corsicana, Texas.
NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the six months ended June 28, 2014 , were as follows:
(in thousands)
 
Carrying Amount    
Balance as of December 28, 2013
 
$
422,318

Goodwill acquired in the purchase of Baptista's (Note 4)
 
82,309

Change in goodwill attributable to discontinued operations (Note 3)
 
(25,134
)
Goodwill acquired in the purchase of route businesses
 
4,235

Goodwill attributable to the sale of route businesses
 
(4,571
)
Change in goodwill reclassified to route assets held for sale
 
168

Change in foreign currency exchange rate
 
177

Balance as of June 28, 2014
 
$
479,502


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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

As of June 28, 2014 and December 28, 2013 , other intangible assets consisted of the following:
(in thousands)
 
    Gross
    Carrying
    Amount
 
Accumulated
Amortization
 
Net    
Carrying    
Amount    
As of June 28, 2014:
 
 
 
 
 
 
Customer and contractual relationships – amortized
 
$
145,856

 
$
(21,629
)
 
$
124,227

Non-compete agreement – amortized
 
710

 
(90
)
 
620

Reacquired rights – amortized
 
3,100

 
(1,125
)
 
1,975

Patents – amortized
 
8,600

 
(1,338
)
 
7,262

Developed technology – amortized
 
3,000

 

 
3,000

Routes – unamortized
 
19,717

 

 
19,717

Trademarks – unamortized
 
356,661

 

 
356,661

Balance as of June 28, 2014
 
$
537,644

 
$
(24,182
)
 
$
513,462

 
 
 
 
 
 
 
As of December 28, 2013:
 
 
 
 
 
 
Customer and contractual relationships – amortized
 
$
145,356

 
$
(17,531
)
 
$
127,825

Non-compete agreement – amortized
 
110

 
(62
)
 
48

Reacquired rights – amortized
 
3,100

 
(932
)
 
2,168

Patents – amortized
 
8,600

 
(947
)
 
7,653

Routes – unamortized
 
19,652

 

 
19,652

Trademarks – unamortized
 
359,261

 

 
359,261

Balance as of December 28, 2013
 
$
536,079

 
$
(19,472
)
 
$
516,607

The increase in goodwill, customer relationships, developed technology, and non-compete agreements during the second quarter of 2014 related to the acquisition of Baptista's. These intangible asset values are preliminary and may require adjustment once the purchase price allocation is finalized. In addition, the allocation of goodwill to the sale of Private Brands is preliminary and may require adjustment when the gain on the sale is finalized in the third quarter of 2014.
Amortization expense related to intangibles was $2.3 million for each of the quarters ended June 28, 2014 and  June 29, 2013 , and $4.7 million for each of the six months then ended.
Routes and trademarks are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely. During the second quarter of 2014, we recorded a $3.6 million impairment to write down one of our trademarks to its fair value of $2.5 million. The write down was necessary due to a reduction in projected future cash flows for this trademark, which was determined using a level 3 fair value measurement. This fair value determination was made using the relief from royalty method under the income approach, which required us to estimate unobservable factors such as a royalty rate and discount rate and identify relevant projected revenue.
During the second quarter of 2013, we recorded a $1.9 million impairment charge to write off one of our trademarks. The impairment charge was necessary due to the decision to replace future sales of associated products with a more recognizable brand.
The majority of our trademarks, predominately those acquired in more recent transactions, have a fair value which approximates the book value. Any adverse changes in the use of these trademarks or the sales volumes of the associated products could result in an impairment charge.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

The changes in the carrying amount of route businesses for the six months ended June 28, 2014 , were as follows:
(in thousands)
 
Carrying Amount    
Balance as of December 28, 2013
 
$
19,652

Purchases of route businesses, exclusive of goodwill acquired
 
10,783

Sales of route businesses
 
(10,227
)
Change in route businesses reclassified to assets held for sale
 
(491
)
Balance as of June 28, 2014
 
$
19,717

Route businesses and associated goodwill allocated to assets held for sale represent assets available for sale in their present condition and for which actions to complete a sale have been initiated. As of June 28, 2014 , $8.8 million in route businesses and $3.9 million of goodwill were included in assets held for sale. As of December 28, 2013 , $8.3 million of route businesses and $4.1 million of goodwill were included in assets held for sale.
NOTE 11 . LONG-TERM DEBT
Long-term debt outstanding as of June 28, 2014 and December 28, 2013 , consisted of the following:
(in thousands)
 
June 28,
2014
 
December 28,
2013
Revolving credit facility
 
$
300,000

 
$
85,000

Other long-term debt
 
404,102

 
412,373

Total debt
 
704,102

 
497,373

Less: Current portion of long-term debt
 
(8,894
)
 
(17,291
)
Total long-term debt
 
$
695,208

 
$
480,082

During the second quarter of 2014, we entered into an Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement provides for borrowings under credit facilities consisting of:
a $375 million five -year revolving credit facility with a $30 million sublimit for standby letters of credit;
a $150 million five -year term loan; and
a $150 million ten -year term loan.
Subject to compliance with certain conditions, we have the ability to increase the size of the revolving credit facility by up to $200 million . The revolving credit facility and five-year term loan mature on May 30, 2019, and the ten-year term loan matures on May 30, 2024.
In accordance with the Amended and Restated Credit Agreement, we terminated our prior term loan agreement. A payment of approximately $0.6 million was made to pay the difference between the amount owed on the prior term loan and the amount borrowed under the five-year and ten-year term loans.
Borrowings under the new credit facilities will bear interest at rates equal to a Eurodollar rate plus an applicable margin or a base rate plus applicable margin. The applicable margin on Eurodollar rate loans for the revolving credit facility began at 1.10% . The applicable margin on Eurodollar rates for the five-year term loan and ten-year term loan began at 1.25% and 1.625% , respectively. The applicable margin is subject to quarterly adjustment based on changes in our adjusted net debt-to-EBITDA ratio.
We are required to repay the aggregate principal amount of (a) all loans under the revolving credit facility by May 30, 2019, (b) the five-year term loan in quarterly principal installments of $1.875 million beginning June 30, 2014 with the balance due on May 30, 2019, and (c) the ten-year term loan in quarterly principal installments of $7.5 million beginning September 30, 2019 with the balance due on May 30, 2024. The Amended and Restated Credit Agreement also contains optional prepayment provisions and has financial covenants that are similar to those that were included in the prior credit agreement and term loan agreement. We are currently in compliance with all debt covenants.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

During the six months ended June 28, 2014 , we repaid $71.0 million and received proceeds of $286.0 million from our revolving credit facility. The net proceeds received were primarily used to acquire Baptista's.
Debt issuance costs associated with the new credit facility and term loans of approximately $1.9 million were deferred and will be amortized over the life of the loans. In addition, we recognized $0.8 million in additional interest expense in the second quarter of 2014 due to the write-off of certain unamortized debt issuance costs associated with the previous amendment to the revolving credit facility in 2010 and the prior term loan.
The fair value of outstanding debt, including current maturities, was approximately $710 million and $504 million for June 28, 2014 and December 28, 2013 , respectively. The Level 2 fair value estimates were based on similar debt with the same maturities, company credit rating and interest rates.
NOTE 12. INCOME TAXES
As of June 28, 2014 , we recorded gross unrecognized tax benefits for uncertain tax positions totaling $9.5 million and related interest and penalties of $2.4 million in other noncurrent liabilities on the Condensed Consolidated Balance Sheets. Of this total amount, $4.8 million , which includes interest and penalties, would affect the effective tax rate if subsequently recognized. As of December 28, 2013 , we recorded gross unrecognized tax benefits totaling $10.9 million and related interest and penalties of $2.5 million in other noncurrent liabilities on the Condensed Consolidated Balance Sheets. We expect certain income tax audits will be settled, positions will be resolved through administrative procedures or statutes of limitations will expire for various tax authorities during the next twelve months, resulting in a potential $6.0 million reduction of the unrecognized tax benefit amount. Of the $6.0 million reduction, approximately $0.6 million would impact the effective tax rate. We classify interest and penalties associated with uncertain tax positions within income tax expense.
The unrecognized tax benefit balance, as of June 28, 2014 and December 28, 2013 , includes $5.4 million for tax positions for which the ultimate deductibility was certain, but the timing of the deductibility was uncertain.
The effective tax rate for continuing operations decrease d from 37.8% for the second quarter of 2013 and 38.8% for the first six months of 2013 to 35.9% for the second quarter of 2014 and 29.8% for the first six months of 2014 . The decrease in the effective income tax rate in the first six months of 2014 was primarily due to the recognition of previously established unrecognized tax benefits in the first quarter of 2014 . The decrease in the effective income tax rate in the second quarter of 2014 was primarily due to a higher taxable gain on the sale of route businesses as a result of non-deductible goodwill in the second quarter of 2013.
In the quarter ended June 28, 2014 we recorded additional deferred tax liabilities related to historic earnings of our foreign subsidiary. The operations of this subsidiary are classified as discontinued as of the end of the second quarter of 2014 . Additional discussion of the tax effects of discontinued operations can be found in the disclosure in Note 3 .
NOTE 13. FAIR VALUE MEASUREMENTS
We have classified assets and liabilities required to be measured at fair value into the fair value hierarchy as set forth below:
Level 1
quoted prices in active markets for identical assets and liabilities.
Level 2
observable inputs other than quoted prices for identical assets and liabilities.
Level 3
unobservable inputs for which there is little or no market data available, which required us to develop our own assumptions.
We measure derivative instruments at fair value using Level 2 inputs. See Note 14 for additional information about our derivative instruments. The fair value of our outstanding debt is measured using Level 2 inputs and is disclosed in Note 11 to the condensed consolidated financial statements. Due to an impairment in the second quarter of 2014, the fair value of one of our trademarks was measured using the Level 3 inputs disclosed in Note 10. There were no changes among the levels during the first six months of 2014 .
The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximated fair value due to their short-term nature.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 14 . DERIVATIVE INSTRUMENTS
We are exposed to certain risks relating to our business operations. We use derivative instruments to manage interest rate and foreign exchange risks.
The fair value of the derivative instrument liability in the Condensed Consolidated Balance Sheets using Level 2 inputs was as follows:
(in thousands)
 
Balance Sheet Location
 
June 28,
2014
 
December 28,
2013
Interest rate swaps
 
Other noncurrent liabilities
 
$
(725
)
 
$
(898
)
Foreign currency forwards
 
Current liabilities of discontinued operations
 

 
(31
)
Total fair value of derivative instruments
 
 
 
$
(725
)
 
$
(929
)
Interest Rate Swaps
Our variable-rate debt obligations incur interest at floating rates based on changes in the Eurodollar rate and U.S. base rate interest. To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements to maintain a desirable proportion of fixed to variable-rate debt. The fair value of interest rate swaps was determined utilizing a market approach model using the notional amount of the interest rate swaps and the observable inputs of time to maturity and interest rates. The notional amount of the interest rate swaps designated as hedging instruments as of June 28, 2014 and December 28, 2013 was $50.0 million . The debt modification in the second quarter of 2014 did not result in any changes to our hedge accounting for the interest rate swaps.
Foreign Currency Forwards
We had exposure to foreign exchange rate fluctuations through the operations of our Canadian subsidiary which is included within discontinued operations (see Note 3). A majority of the revenue of our Canadian operations was denominated in U.S. dollars and a substantial portion of its costs, such as raw materials and direct labor, were denominated in Canadian dollars. We entered into derivative forward contracts to mitigate a portion of this foreign exchange rate exposure. The notional amount for foreign currency forwards was zero and $5.6 million as of June 28, 2014 and December 28, 2013 , respectively.
The changes in unrealized losses, net of income tax, included in other comprehensive income due to fluctuations in interest rates and foreign exchange rates were as follows:
 
 
Quarter Ended
 
Six Months Ended
(in thousands)
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Gains on interest rate swaps, net of income tax expense of ($30), ($101), ($66) and ($144), respectively
 
$
48

 
$
161

 
$
106

 
$
230

Gains/(losses) on foreign currency forwards, net of income tax (expense)/benefit of ($14), $75, ($10) and $112, respectively
 
43

 
(166
)
 
21

 
(248
)
Total change in unrealized losses from derivative instruments, net of income tax (effective portion)
 
$
91

 
$
(5
)
 
$
127

 
$
(18
)
NOTE 15. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
In order to mitigate the risks of volatility in commodity markets to which we are exposed, we entered into forward purchase agreements with certain suppliers based on market prices and expected usage levels. Purchase commitments for certain ingredients, packaging materials and energy totaled $156.1 million as of June 28, 2014 , as compared to $117.6 million as of December 28, 2013 . These commitments included $38.8 million associated with discontinued operations as of June 28, 2014. In addition to these commitments, we have contracts for certain ingredients and packaging materials where we have secured a fixed price but do not have a minimum purchase quantity. We currently contract from approximately three to twelve months in advance for certain major ingredients and packaging.
We also maintain standby letters of credit in connection with our self-insurance reserves for casualty claims. The total amount of these letters of credit was $14.6 million as of June 28, 2014 and $14.0 million as of December 28, 2013 .
Guarantees
We currently provide a partial guarantee for loans made to independent business owners ( IBO ) by third-party financial institutions for the purchase of route businesses. The outstanding aggregate balance on these loans was approximately $124.9 million as of June 28, 2014 compared to approximately $117.9 million as of December 28, 2013 . The annual maximum amount of future payments we could be required to make under the guarantee equates to 25% of the outstanding loan balance on the first day of each calendar year plus 25% of the amount of any new loans issued during such calendar year. These loans are collateralized by the route businesses for which the loans are made. Accordingly, we have the ability to recover substantially all of the outstanding loan value upon default, and our liability associated with this guarantee is not significant.
Legal Matters
We are currently subject to various lawsuits and environmental matters arising in the normal course of business. In our opinion, such claims should not have a material effect upon our consolidated financial statements taken as a whole.
NOTE 16. RELATED PARTY TRANSACTIONS
During the fourth quarter of 2013, we acquired the remaining 20% of Michaud and now own all of the outstanding equity. Prior to this acquisition, we had an 80% ownership interest in Michaud, with the remaining 20% ownership held by two employees of the Company.
We own a noncontrolling equity interest in Late July Snacks, LLC (“Late July”), an organic snack food company. This investment is reflected in other noncurrent assets on the Condensed Consolidated Balance Sheets. Equity earnings, which are not material, are included in other income, net on the Condensed Consolidated Statements of Income. We also manufacture and distribute products for Late July. Contract manufacturing revenue from Late July was approximately $0.9 million for each of the quarters ended June 28, 2014 and June 29, 2013 , and $2.0 million and $1.8 million , respectively, for each the six months then ended. In addition, we purchase products from Late July to sell through our DSD network. Purchases from Late July were $2.3 million and $1.1 million during the second quarter of 2014 and 2013 , respectively, and $3.9 million and $1.8 million for the first six months of 2014 and 2013, respectively. Accounts receivable due from Late July totaled $0.3 million and $0.4 million at June 28, 2014 and December 28, 2013 , respectively.
ARWCO Corporation, MAW Associates, LP and Warehime Enterprises, Inc. are significantly owned or controlled by the Chairman of the Board of Snyder’s-Lance, Inc. or direct family members. Among other unrelated business activities, these entities provide financing to IBOs for the purchase of trucks and routes. We have entered into loan service agreements with these related parties that allow us to repurchase certain distribution assets in the event an IBO defaults on a loan with the related party. We are required to repurchase the assets 30 days after default at the value as defined in the loan service agreement which approximates fair market value. As of June 28, 2014 , there were outstanding loans made to IBOs by the related parties of approximately $28.3 million , compared to $30.6 million as of December 28, 2013 . Our Chairman of the Board also serves as an officer and/or director of these entities. Transactions with these related parties are primarily related to the collection and remittance of loan payments on notes receivable held by the affiliates. We are reimbursed for certain overhead and administrative services associated with the services provided to these related parties. The receivables from, payables to and administrative fees from these entities are not significant for any period presented.
One of our directors, C. Peter Carlucci, Jr., is a member of Eckert Seamans Cherin & Mellott, LLC (“Eckert”), which serves as one of our outside legal firms. Expenses incurred for services provided by Eckert wer e $0.2 million in the second quarter of 2014 and $0.1 million in the second quarter of 2013, and $0.3 million and $0.4 million for the first six months of 2014 and 2013, respectively.
We own 51% of Patriot Snacks Real Estate, LLC (“Patriot”) and consolidate its balance sheet and operating results into our consolidated financial statements. The remaining 49% is owned by an employee.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 17 . OTHER COMPREHENSIVE INCOME
Total comprehensive income attributable to Snyder’s-Lance, Inc., determined as net income adjusted by total other comprehensive income, was $14.0 million and $10.6 million for the quarters ended June 28, 2014 and June 29, 2013 , respectively, and $29.0 million and $28.9 million , respectively, for the six months then ended. Total other comprehensive income presently consists of foreign currency translation adjustments and unrealized gains and losses from our derivative financial instruments accounted for as cash flow hedges.
Amounts reclassified out of accumulated other comprehensive income, net of tax, consisted of the following:
 
 
 
 
Quarter Ended
 
Six Months Ended
(in thousands)
 
Income Statement Location
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Losses on cash flow hedges reclassified out of accumulated other comprehensive income:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps, net of tax of $47, $56, $107 and $125, respectively
 
Interest expense, net
 
$
(75
)
 
$
(89
)
 
$
(171
)
 
$
(200
)
Foreign currency forwards
 
Discontinued operations, net of income tax
 
(4
)
 
(148
)
 
(191
)
 
(212
)
Total cash flow hedge reclassifications, net of tax
 
 
 
$
(79
)
 
$
(237
)
 
$
(362
)
 
$
(412
)
During the six months ended June 28, 2014 , changes to the balance in accumulated other comprehensive income were as follows:
(in thousands)
 
Gains/(Losses) on Cash Flow Hedges
 
Foreign Currency Translation Adjustments
 
Total
Balance as of December 28, 2013
 
$
(574
)
 
$
10,745

 
$
10,171

 
 
 
 
 
 
 
Other comprehensive (loss)/income before reclassifications
 
(235
)
 
361

 
126

Losses reclassified from accumulated other comprehensive income
 
362

 

 
362

Net other comprehensive income
 
127

 
361

 
488

 
 
 
 
 
 
 
Balance as of June 28, 2014
 
$
(447
)
 
$
11,106

 
$
10,659

During the six months ended June 29, 2013 , changes to the balance in accumulated other comprehensive income were as follows:
(in thousands)
 
Gains/(Losses) on Cash Flow Hedges
 
Foreign Currency Translation Adjustments
 
Total
Balance as of December 29, 2012
 
$
(842
)
 
$
15,960

 
$
15,118

 
 
 
 
 
 
 
Other comprehensive loss before reclassifications
 
(430
)
 
(3,905
)
 
(4,335
)
Losses reclassified from accumulated other comprehensive income
 
412

 

 
412

Net other comprehensive loss
 
(18
)
 
(3,905
)
 
(3,923
)
 
 
 
 
 
 
 
Balance as of June 29, 2013
 
$
(860
)
 
$
12,055

 
$
11,195


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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 18. SEGMENT REPORTING
We operate in one business segment: the manufacturing, distribution, marketing and sale of snack food products. We define business segments as components of an organization for which discrete financial information is available and operating results are evaluated on a regular basis by the chief operating decision maker (“CODM”) in order to assess performance and allocate resources. Our CODM is the Company’s President and Chief Executive Officer. Characteristics of our organization which were relied upon in making this determination include the similar nature of all of the products that we sell, the functional alignment of our organizational structure, and the reports that are regularly reviewed by the CODM for the purpose of assessing performance and allocating resources.
Revenue by Product Category
Net revenue by product category was as follows:
 
 
Quarter Ended
 
Six Months Ended
(in thousands)
 
June 28,
2014
 
June 29,
2013
 
June 28,
2014
 
June 29,
2013
Branded
 
$
275,083

 
$
269,669

 
$
534,254

 
$
527,856

Partner brand
 
87,852

 
77,630

 
169,898

 
148,039

Other
 
36,661

 
31,190

 
68,460

 
61,135

Net revenue
 
$
399,596

 
$
378,489

 
$
772,612

 
$
737,030

Due to the sale of Private Brands and the reclassification of associated revenues to discontinued operations, the Private brand product category was removed and Private brand revenues not included in the sale transaction were reclassified to Other. The Other product category primarily consists of contract manufactured products.
Significant Customers
Sales to our largest retailer, Wal-Mart Stores, Inc., were approximately 14% of net revenue for the quarter and six months ended June 28, 2014 , and 15% and 16% of net revenue for the quarter and six months ended June 29, 2013 , respectively. Our sales to Wal-Mart Stores, Inc. do not include sales from third-party distributors outside our DSD network. Sales to third-party retail distributors represent approximately 5% of our net revenue and may increase sales to Wal-Mart Stores, Inc. by an amount we are unable to estimate. Accounts receivable as of June 28, 2014 and December 28, 2013 , included receivables from Wal-Mart Stores, Inc. of $17.0 million and $16.9 million , respectively.
NOTE 19 . SUBSEQUENT EVENTS
On August 5, 2014, our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on August 29, 2014 to stockholders of record on August 21, 2014 .
On June 30, 2014 , we completed the sale of Private Brands as previously announced on May 6, 2014 (see Note 3 ) for $430 million in cash, subject to working capital and other customary adjustments, with expected after-tax proceeds of approximately $300 million . We expect to record a gain on the sale transaction in discontinued operations in the third quarter of 2014.

19


SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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


The following discussion provides an assessment of our financial condition, results of operations, and liquidity and capital resources and should be read in conjunction with the accompanying consolidated financial statements and notes to the financial statements. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under Part II, Item 1A—Risk Factors and elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 28, 2013, and those described from time to time in our other reports filed with the Securities and Exchange Commission.
Management’s discussion and analysis of our financial condition and results of operations are based 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 sales and promotional allowances, customer returns, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, goodwill and intangible asset valuations and impairments, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.
Overview
The second quarter of 2014 was another transformational quarter for our Company. We completed the merger of Snyder’s of Hanover, Inc. and Lance, Inc. less than four years ago. We quickly moved to convert our DSD network to an IBO network in order to strengthen our DSD organization, which we accomplished by converting 1,300 company owned routes to IBO’s in only 18 months. In the fourth quarter of 2012, we acquired Snack Factory, adding to our Core brands Snack Factory ® Pretzel Crisps ® pretzel crackers. This acquisition not only expanded our presence in grocery to the deli but also added another premium, “better for you” and differentiated snack food product to our branded portfolio. On May 7, 2014, we announced two separate transactions; the acquisition of Baptista’s Bakery, Inc. ("Baptista's) and the sale of Private Brands. These two transactions in tandem positioned us as a Branded snack food company and enhanced our capabilities to innovate and strategically acquire products that are positioned to meet changing consumer trends. Shortly after closing on the acquisition of Baptista’s, we announced a margin improvement and restructuring plan (the "Restructuring Plan") to improve profitability and operating profit margins. All of these actions are aligned with our strategic plan by supporting long-term branded revenue growth and profitability through investing in advertising, capital expenditures and innovation. The following describes in more detail the activities of the second quarter of 2014:
On June 13, 2014, we completed the acquisition of Baptista’s, an industry leader in highly-differentiated snack food development and innovation including organic, all-natural and gluten-free products. As the manufacturer of our fast-growing Snack Factory ® Pretzel Crisps ® brand, they have unique capabilities consistent with our own innovation plans that will complement our family of brands. This transaction will benefit our Company through incremental product development and innovation while leveraging our marketing and product distribution capabilities.
Shortly after the end of our second quarter, we completed the sale of two of our subsidiaries, S-L Snacks IA, LLC, S-L Snacks Private Brands, LLC, as well as certain assets of our Canadian subsidiary, Tamming Foods Ltd. ("Private Brands"), to Shearer's Foods, LLC ("Shearer's") for $430 million. This transaction included the sale of manufacturing facilities located in Burlington, Iowa and Guelph, Ontario as well as the exclusive right to manufacture and sell the majority of our private brand products and certain contract manufactured products. Shearer’s is a leading provider of private label snacks headquartered in Massillon, OH. In connection with this transaction, we entered into an agreement with Shearer's to contract manufacture certain products previously produced at other manufacturing facilities ("Supply Agreement") for an initial term of two years subsequent to the sale. Additionally, the Company entered into a transition services agreement ("TSA") effective on the first day of the third quarter to provide certain finance, accounting, information technology, supply chain, and other general services to facilitate the orderly transfer of the business operations to Shearer's. The impact to income associated with the TSA is not expected to be material and we expect it to be completed in the fourth quarter of 2014.

20


SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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


Beginning in the second quarter of 2014, the assets and liabilities of the Private Brands disposal group were considered held-for-sale and presented as discontinued operations in our Condensed Consolidated Balance Sheets because we will not have continuing involvement with the assets included in the disposal group. In addition, the revenues and expenses that will no longer continue after the sale of Private Brands, and where we have no substantial continuing involvement, were reclassified to discontinued operations in the Condensed Consolidated Statements of Income. All prior period results were retrospectively adjusted to consistently present continuing and discontinued operations.
On June 27, 2014, we initiated the restructuring plan to reduce overhead costs that remain after the sale of Private Brands. The Restructuring Plan includes a combination of operational initiatives, headcount reductions and more efficient utilization of third-party professional resources. Severance expenses of $2.5 million and $0.6 million were recognized in selling, general and administrative and cost of sales, respectively, during the quarter ended June 28, 2014, in conjunction with the Restructuring Plan. We plan to complete actions associated with the Restructuring Plan by the beginning of the third quarter of 2015. For the remainder of the year, we are expecting between $2 million and $4 million in cost savings associated with the Restructuring Plan.
During the second quarter of 2014, we continued to execute our strategic plan which provides for growth of our Core brands (Snyder’s of Hanover ® , Lance ® , Cape Cod ® and Snack Factory ® Pretzel Crisps ® ) through expanded distribution, innovation and advertising. In addition, the second quarter performance was impacted by the following:
We continued to significantly expand the west coast distribution of our Cape Cod ® kettle-cooked chips and increased these revenues substantially when compared to the second quarter of 2013.
The success of our new product offerings continued, including strong results from our Snyder’s of Hanover ® Sweet and Salty pretzel pieces, new flavors of Cape Cod ® kettle-cooked potato chips and Cape Cod ® popcorn, Lance ® Bolds ® sandwich crackers, as well as Snack Factory ® Pretzel Crisps ® Minis.
There continues to be a significant emphasis on revitalizing our Lance ® sandwich cracker brand. This process began with upgrading our packaging and packaging configurations as well as updating the image and reach of this product. We also have significant innovation plans with new product launches and marketing initiatives set for late in the third quarter of this year and into 2015.
We recognized $6.5 million in impairment charges, including a $3.6 million write-down of one of our trademarks and $2.9 million in fixed asset impairment primarily related to machinery and equipment where expected future cash flows are not expected to support the carrying value due to the sale of Private Brands.
We entered into an Amended and Restated Credit Agreement during the second quarter which increased the amount available under our revolving credit facility from $265 million to $375 million. In addition, our $325 million term loan, of which we still owed $300.6 million, was replaced by two $150 million term loans with reduced interest rates and extended terms. Debt issuance costs associated with the amended credit facility including the new term loans of approximately $1.9 million were deferred and will be amortized over the life of the loans. In addition, we recognized $0.8 million in additional interest expense in the second quarter of 2014 due to the write-off of certain unamortized debt issuance costs associated with the previous amendment to the revolving credit facility in 2010 and the prior term loan.
We continued to show growth in Partner brand revenues through the addition of new partner brand products and increased distribution. The Other product category also showed strong revenue growth as a result of new contract manufacturing obtained in 2014.

21


SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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


Quarter Ended June 28, 2014 Compared to Quarter Ended June 29, 2013  
 
 
Quarter Ended
 
Favorable/
(Unfavorable)
Variance
(in thousands)
 
June 28, 2014
 
June 29, 2013
 
Net revenue
 
$
399,596

 
100.0
 %
 
$
378,489

 
100.0
 %
 
$
21,107

 
5.6
 %
Cost of sales
 
254,707

 
63.7
 %
 
244,386

 
64.6
 %
 
(10,321
)
 
(4.2
)%
Gross margin
 
144,889

 
36.3
 %
 
134,103

 
35.4
 %
 
10,786

 
8.0
 %
Selling, general and administrative
 
121,312

 
30.4
 %
 
118,036

 
31.2
 %
 
(3,276
)
 
(2.8
)%
Impairment charges
 
6,503

 
1.6
 %
 
1,900

 
0.5
 %
 
(4,603
)
 
(242.3
)%
Gain on sale of route businesses, net
 
(297
)
 
(0.1
)%
 
(1,482
)
 
(0.4
)%
 
(1,185
)
 
(80.0
)%
Other loss/(income), net
 
501

 
0.2
 %
 
(1,476
)
 
(0.4
)%
 
(1,977
)
 
nm

Income before interest and income taxes
 
16,870

 
4.2
 %
 
17,125

 
4.5
 %
 
(255
)
 
(1.5
)%
Interest expense, net
 
4,111

 
1.1
 %
 
3,521

 
0.9
 %
 
(590
)
 
(16.8
)%
Income tax expense
 
4,584

 
1.1
 %
 
5,141

 
1.4
 %
 
557

 
10.8
 %
Income from continuing operations
 
8,175

 
2.0
 %
 
8,463

 
2.2
 %
 
(288
)
 
(3.4
)%
Discontinued operations, net of income tax
 
3,523

 
0.9
 %
 
4,567

 
1.2
 %
 
(1,044
)
 
(22.9
)%
Net income
 
11,698

 
2.9
 %
 
13,030

 
3.4
 %
 
(1,332
)
 
(10.2
)%
nm = not meaningful
Net Revenue
Net revenue by product category was as follows:
 
 
Quarter Ended
 
Favorable/
(Unfavorable)
Variance
(in thousands)
 
June 28, 2014
 
June 29, 2013
 
Branded
 
$
275,083

 
68.8
%
 
$
269,669

 
71.2
%
 
$
5,414

 
2.0
%
Partner brand
 
87,852

 
22.0
%
 
77,630

 
20.5
%
 
10,222

 
13.2
%
Other
 
36,661

 
9.2
%
 
31,190

 
8.3
%
 
5,471

 
17.5
%
Net revenue
 
$
399,596

 
100.0
%
 
$
378,489

 
100.0
%
 
$
21,107

 
5.6
%
Branded net revenue increased $5.4 million , or 2.0% , compared to the second quarter of 2013, led by growth in three of our four Core brands. The revenue increase was primarily due to significant volume growth in our Cape Cod ® products and was also supported by continued growth in Snyder's of Hanover ® and Snack Factory ® Pretzel Crisps ® products. The significant growth in our Cape Cod ® kettle-cooked potato chips continued in part as a result of new distribution to retailers on the west coast, an expanding market for this brand. The growth in our Core brands was also supported by product innovation and the release of new flavors and products in 2014. The most successful new products included Snyder’s of Hanover ® Sweet and Salty pretzel pieces, Lance ® Bolds ® sandwich crackers, new flavors of Cape Cod ® kettle-cooked potato chips and Snack Factory ® Pretzel Crisps ® Minis. The net revenue increases in the three Core brands were partially offset by a slight decrease in net revenues from our Lance ® sandwich crackers. Allied branded net revenue remained relatively flat with the prior year.
Partner brand net revenue grew 13.2% compared to the second quarter of 2013. The increase was primarily due to gaining new products for distribution through our DSD network. In addition, our distributor acquisitions in the second half of 2013 brought in additional Partner brand revenue. Adding strong regional partner brands to our portfolio continues to provide opportunities for geographic expansion of our DSD network including our Branded products.
Due to the sale of Private Brands and the reclassification of associated revenues to discontinued operations, the Private brand product category was removed and Private brand revenues not included in the sale transaction were reclassified to Other. Other net revenue increased $5.5 million , or 17.5% , from the second quarter of 2013 primarily due to increased revenue from one contract manufacturing customer. Also, included in Other revenue for the quarter was the addition of two weeks of Baptista's contract manufacturing revenue. This revenue represented approximately half of the Other revenue growth.

22


SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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


Gross Margin
Gross margin increased $10.8 million in the second quarter of 2014 compared to the second quarter of 2013 and increased 0.9% as a percentage of revenue. The majority of the increase in gross margin was due to increased sales volume compared to the prior year across all product categories. The increase in gross margin as a percentage of revenue was driven by lower commodity costs, improved manufacturing efficiencies and a reduction in capital project start-up costs during the quarter compared to the prior year. This increase was partially offset by a greater mix of revenues from Partner brand products which generally have lower margins than our manufactured Branded products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.3 million in the second quarter of 2014 compared to the second quarter of 2013, but decreased 0.8% as a percentage of net revenue. The majority of the increase was due to severance expenses of $2.5 million incurred in 2014 in conjunction with our margin improvement and restructuring plan. In addition, we experienced higher freight costs compared to the prior year due to third-party freight carrier capacity constraints and increased fuel costs.
Impairment Charges
We recognized $6.5 million in impairment charges in the second quarter of 2014 compared to $1.9 million in impairment charges in the second quarter of 2013. The 2014 impairment charges were related to a $3.6 million write-down of one of our trademarks and $2.9 million in impairment of machinery and equipment where expected future cash flows are not expected to support the carrying value due to the sale of Private Brands. This compared to a $1.9 million impairment in the second quarter of 2013 associated with the write-off of one of our trademarks.
Gain on the Sale of Route Businesses, Net
During the second quarter of 2014, we recognized $0.3 million in gains on the sale of route businesses compared with gains of $1.5 million in the second quarter of 2013. The reduction in gains was a result of a decrease in route sale activity in 2014 compared to 2013.
Other Income, Net
Other income declined approximately $2.0 million from the second quarter of 2013 to the second quarter of 2014 due primarily to additional fee income associated with route transfers in the prior year.
Interest Expense, Net
Interest expense increased approximately $0.6 million in the second quarter of 2014 compared to the second quarter of 2013. The increase was due to the $0.8 million write-off of previously capitalized debt issuance costs associated with the debt refinancing.
Income Tax Expense
Our effective income tax rate decrease d to 35.9% for the second quarter of 2014 compared to 37.8% for the second quarter of 2013 . The decrease in the effective income tax rate was primarily due to a higher taxable gain on the sale of route businesses as a result of non-deductible goodwill in the second quarter of 2013.

Discontinued Operations, Net of Income Tax
Income from discontinued operations, net of income tax, reflects results of operations of the Private Brands disposal group for the current quarter. The results of operations for the Private Brands disposal group for the corresponding prior year quarter have been reclassified as discontinued operations. The reduction in income from discontinued operations is primarily due to an additional $1.3 million of discrete income tax expense recorded in the second quarter of 2014 related to the reversal of the indefinite reinvestment assertion on the earnings of our foreign subsidiary prior to December 28, 2013.  We have reversed the assertion of permanent reinvestment of those earnings as a result of the classification of the operations of our Canadian subsidiary as discontinued. 


23


SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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


Six Months Ended June 28, 2014 Compared to Six Months Ended June 29, 2013  
 
 
Six Months Ended
 
Favorable/
(Unfavorable)
Variance
(in thousands)
 
June 28, 2014
 
June 29, 2013
 
Net revenue
 
$
772,612

 
100.0
 %
 
$
737,030

 
100.0
 %
 
$
35,582

 
4.8
 %
Cost of sales
 
494,537

 
64.0
 %
 
470,238

 
63.8
 %
 
(24,299
)
 
(5.2
)%
Gross margin
 
278,075

 
36.0
 %
 
266,792

 
36.2
 %
 
11,283

 
4.2
 %
Selling, general and administrative
 
237,376

 
30.7
 %
 
223,411

 
30.3
 %
 
(13,965
)
 
(6.3
)%
Impairment charges
 
7,503

 
1.0
 %
 
1,900

 
0.3
 %
 
(5,603
)
 
(294.9
)%
Gain on sale of route businesses, net
 
(1,460
)
 
(0.2
)%
 
(1,592
)
 
(0.2
)%
 
(132
)
 
(8.3
)%
Other loss/(income), net
 
581

 
0.1
 %
 
(2,617
)
 
(0.4
)%
 
(3,198
)
 
nm

Income before interest and income taxes
 
34,075

 
4.4
 %
 
45,690

 
6.2
 %
 
(11,615
)
 
(25.4
)%
Interest expense, net
 
7,501

 
1.0
 %
 
6,960

 
1.0
 %
 
(541
)
 
(7.8
)%
Income tax expense
 
7,910

 
1.0
 %
 
15,010

 
2.0
 %
 
7,100

 
47.3
 %
Income from continuing operations
 
18,664

 
2.4
 %
 
23,720

 
3.2
 %
 
(5,056
)
 
(21.3
)%
Discontinued operations, net of income tax
 
9,845

 
1.3
 %
 
9,218

 
1.3
 %
 
627

 
6.8
 %
Net income
 
28,509

 
3.7
 %
 
32,938

 
4.5
 %
 
(4,429
)
 
(13.4
)%
nm = not meaningful
Net Revenue
Net revenue by product category was as follows:
 
 
Six Months Ended
 
Favorable/
(Unfavorable)
Variance
(in thousands)
 
June 28, 2014
 
June 29, 2013
 
Branded
 
$
534,254

 
69.1
%
 
$
527,856

 
71.6
%
 
$
6,398

 
1.2
%
Partner brand
 
169,898

 
22.0
%
 
148,039

 
20.1
%
 
21,859

 
14.8
%
Other
 
68,460

 
9.0
%
 
61,135

 
8.3
%
 
7,325

 
12.0
%
Net revenue
 
$
772,612

 
100.0
%
 
$
737,030

 
100.0
%
 
$
35,582

 
4.8
%
Branded net revenue increased $6.4 million , or 1.2% , compared to the first six months of 2013, led by growth in three of our four Core brands. The revenue increase was primarily due to significant volume growth and increased market share in our Cape Cod ® products and was also supported by revenue growth in Snyder's of Hanover ® and Snack Factory ® Pretzel Crisps ® products. The significant growth in our Cape Cod ® kettle-cooked potato chips continued to be supported by new distribution to retailers on the west coast, an expanding market for this brand. The growth in our Core brands was also supported by product innovation and the release of new flavors and products in 2014. The net revenue increases in the three Core brands were partially offset by a decrease in net revenues from our Lance ® sandwich crackers. Compared to the first six months of 2013, Lance ® sandwich cracker net revenue was negatively impacted by an overall shift in consumer purchases to other categories, as well as higher promotional spending necessary to mitigate the impact of increased competition. However, this brand maintained its market share leader position in the sandwich cracker category. Allied branded net revenue remained relatively flat with the prior year.
Partner brand net revenue grew 14.8% compared to the first six months of 2013. The increase was primarily due to gaining new products for distribution through our DSD network. In addition, our distributor acquisitions in the second half of 2013 brought in additional Partner brand revenue. Adding strong regional partner brands to our portfolio continues to provide opportunities for geographic expansion of our DSD network including our Branded products.
Due to the sale of Private Brands and the reclassification of associated revenues to discontinued operations, the Private brand product category was removed and Private brand revenues not included in the sale transaction were reclassified to Other. Other net revenue increased $7.3 million , or 12.0% , from the first six months of 2013 primarily due to increased revenue from one contract manufacturing customer.

24


SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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


Gross Margin
Gross margin increased $11.3 million in the first six months of 2014 compared to the first six months of 2013 but declined 0.2% as a percentage of revenue. The majority of the increase in gross margin was due to increased sales volume compared to the prior year across all product categories. The decline as a percentage of revenue was primarily the result of an greater mix of revenues from Partner brand products which generally have lower margins than our manufactured Branded products. In addition, we increased promotions in the first quarter of 2014 to support our new product offerings as well as our west coast expansion of Cape Cod ® kettle-cooked potato chips. The decline in gross margin as a percentage of revenue was partially offset by improved manufacturing efficiencies when compared to the first six months of 2013.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $14.0 million in the first six months of 2014 compared to the first six months of 2013, and increased 0.4% as a percentage of net revenue. The majority of the increase was the result of incremental advertising and marketing costs compared to the first six months of 2013. In addition, we experienced higher freight costs compared to the prior year due to adverse weather conditions, third-party freight carrier capacity constraints and increased fuel costs. We also incurred severance expenses of $2.5 million in 2014 in conjunction with our margin improvement and restructuring plan.
Impairment Charges
We recognized $7.5 million in impairment charges in the first six months of 2014 compared to $1.9 million in impairment charges in the first six months of 2013. The 2014 impairment charges were related to a $3.6 million write-down of one of our trademarks, $2.9 million in impairment of machinery and equipment where expected future cash flows are not expected to support the carrying value due to the sale of Private Brands, an