Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-Q, Received: 11/10/2015 13:30:03)
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended October 3, 2015
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.)
 
13515 Ballantyne Corporate Place
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 October 28, 2015 , was 70,805,593 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 January 3, 2015 , and those described from time to time in our other reports filed with the Securities and Exchange Commission.
Caution should be taken not to place undue reliance on our forward-looking statements, which reflect our management’s expectations only as of the time such statements are made. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.



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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
For the Quarters and Nine Months Ended October 3, 2015 and  September 27, 2014

 
 
Quarter Ended
 
Nine Months Ended
(in thousands, except per share data)
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Net revenue
 
$
416,773

 
$
409,308

 
$
1,250,542

 
$
1,181,920

Cost of sales
 
274,287

 
266,088

 
817,211

 
760,625

Gross margin
 
142,486

 
143,220

 
433,331

 
421,295

 
 
 
 
 
 
 
 
 
Selling, general and administrative
 
114,835

 
116,659

 
355,828

 
354,035

Settlements of certain litigation (Note 14)
 
2,900

 

 
5,675

 

Impairment charges
 

 

 

 
7,503

(Gain)/loss on sale of route businesses, net
 
(501
)
 
22

 
(1,368
)
 
(1,438
)
Other expense/(income), net
 
115

 
61

 
(731
)
 
642

Income before interest and income taxes
 
25,137

 
26,478

 
73,927

 
60,553

 
 
 
 
 
 
 
 
 
Interest expense, net
 
2,851

 
2,984

 
7,989

 
10,485

Income before income taxes
 
22,286

 
23,494

 
65,938

 
50,068

 
 
 
 
 
 
 
 
 
Income tax expense
 
6,557

 
9,809

 
22,233

 
17,719

Income from continuing operations
 
15,729

 
13,685

 
43,705

 
32,349

Income from discontinued operations, net of income tax
 

 
124,097

 

 
133,942

Net income
 
15,729

 
137,782

 
43,705

 
166,291

Net income attributable to noncontrolling interests
 
52

 
16

 
63

 
32

Net income attributable to Snyder’s-Lance, Inc.
 
$
15,677

 
$
137,766

 
$
43,642

 
$
166,259

 
 
 
 
 
 
 
 
 
Amounts attributable to Snyder's-Lance, Inc.:
 
 
 
 
 
 
 
 
Continuing operations
 
$
15,677

 
$
13,669

 
$
43,642

 
$
32,317

Discontinued operations
 

 
124,097

 

 
133,942

Net income
 
$
15,677

 
$
137,766

 
$
43,642

 
$
166,259

 
 
 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.22

 
$
0.19

 
$
0.62

 
$
0.46

Discontinued operations
 

 
1.77

 

 
1.91

Total basic earnings per share
 
$
0.22

 
$
1.96

 
$
0.62

 
$
2.37

 
 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.22

 
$
0.19

 
$
0.61

 
$
0.46

Discontinued operations
 

 
1.75

 

 
1.89

Total diluted earnings per share
 
$
0.22

 
$
1.94

 
$
0.61

 
$
2.35

 
 
 
 
 
 
 
 
 
Cash dividends declared per share
 
$
0.16

 
$
0.16

 
$
0.48

 
$
0.48

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


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SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Quarters and Nine Months Ended October 3, 2015 and  September 27, 2014
 
 
 
Quarter Ended
 
Nine Months Ended
(in thousands)
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Net income
 
$
15,729

 
$
137,782

 
$
43,705

 
$
166,291

 
 
 
 
 
 
 
 
 
Net unrealized loss/(gain) on derivative instruments, net of income tax
 
1,138

 
(91
)
 
1,134

 
(218
)
Foreign currency translation adjustment
 
4

 
11,706

 
451

 
11,345

Total other comprehensive loss
 
1,142

 
11,615

 
1,585

 
11,127

 
 
 
 
 
 
 
 
 
Total comprehensive income
 
14,587

 
126,167

 
42,120

 
155,164

Comprehensive income attributable to noncontrolling interests
 
52

 
16

 
63

 
32

Total comprehensive income attributable to Snyder’s-Lance, Inc.
 
$
14,535

 
$
126,151

 
$
42,057

 
$
155,132

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



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SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
As of October 3, 2015 and January 3, 2015

(in thousands, except share data)
 
October 3,
2015
 
January 3,
2015
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
64,316

 
$
35,373

Restricted cash
 
966

 
966

Accounts receivable, net of allowances of $1,262 and $1,778, respectively
 
134,357

 
126,093

Inventories
 
125,065

 
116,236

Prepaid income taxes and income taxes receivable
 
7,028

 
4,175

Deferred income taxes
 
11,544

 
13,189

Assets held for sale
 
14,879

 
11,007

Prepaid expenses and other current assets
 
19,008

 
22,112

Total current assets
 
377,163

 
329,151

 
 
 
 
 
Noncurrent assets:
 
 
 
 
Fixed assets, net
 
415,916

 
423,612

Goodwill
 
539,651

 
541,539

Other intangible assets, net
 
532,296

 
545,212

Other noncurrent assets
 
22,603

 
23,874

Total assets
 
$
1,887,629

 
$
1,863,388

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
8,541

 
$
8,561

Accounts payable
 
65,296

 
57,407

Accrued compensation
 
24,842

 
32,774

Accrued casualty insurance claims
 
4,388

 
4,320

Accrued selling and promotional costs
 
14,267

 
13,141

Other payables and accrued liabilities
 
31,100

 
24,723

Total current liabilities
 
148,434

 
140,926

 
 
 
 
 
Noncurrent liabilities:
 
 
 
 
Long-term debt
 
431,991

 
438,376

Deferred income taxes
 
172,869

 
168,593

Accrued casualty insurance claims
 
12,309

 
13,755

Other noncurrent liabilities
 
16,511

 
15,030

Total liabilities
 
782,114

 
776,680

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Common stock, $0.83 1/3 par value. 110,000,000 shares authorized; 70,794,643 and 70,406,086 shares outstanding, respectively
 
58,993

 
58,669

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

 

Additional paid-in capital
 
787,176

 
776,930

Retained earnings
 
242,571

 
232,812

Accumulated other comprehensive loss
 
(2,592
)
 
(1,007
)
Total Snyder’s-Lance, Inc. stockholders’ equity
 
1,086,148

 
1,067,404

Noncontrolling interests
 
19,367

 
19,304

Total stockholders’ equity
 
1,105,515

 
1,086,708

Total liabilities and stockholders’ equity
 
$
1,887,629

 
$
1,863,388

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

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SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended October 3, 2015 and  September 27, 2014

 
 
Nine Months Ended
(in thousands)
 
October 3,
2015
 
September 27,
2014
Operating activities:
 
 
 
 
Net income
 
$
43,705

 
$
166,291

Adjustments to reconcile net income to cash from operating activities:
 
 
 
 
Depreciation and amortization
 
52,585

 
46,084

Stock-based compensation expense
 
4,255

 
4,962

(Gain)/loss on sale of fixed assets, net
 
(90
)
 
827

Gain on sale of route businesses, net
 
(1,368
)
 
(1,438
)
Gain on sale of investments, net
 
(585
)
 

Gain on sale of Private Brands, excluding transaction costs
 

 
(229,322
)
Impairment charges
 

 
7,503

Deferred income taxes
 
6,627

 
(26,899
)
Provision for doubtful accounts
 
866

 
1,413

Change in inventory reserves
 
647

 
(293
)
Changes in operating assets and liabilities, excluding business acquisition and disposal
 
(12,184
)
 
29,456

Net cash provided by/(used in) operating activities
 
94,458

 
(1,416
)
 
 
 
 
 
Investing activities:
 
 
 
 
Purchases of fixed assets
 
(38,800
)
 
(52,990
)
Purchases of route businesses
 
(19,622
)
 
(19,102
)
Proceeds from sale of fixed assets and insurance recoveries
 
1,524

 
1,843

Proceeds from sale of route businesses
 
23,750

 
21,072

Proceeds from sale of investments
 
826

 

Proceeds from sale of Private Brands
 

 
430,017

Business acquisition, net of cash acquired
 

 
(202,230
)
Net cash (used in)/provided by investing activities
 
(32,322
)
 
178,610

 
 
 
 
 
Financing activities:
 
 
 
 
Dividends paid to stockholders
 
(33,884
)
 
(33,666
)
Debt issuance costs
 

 
(1,854
)
Issuances of common stock
 
7,152

 
5,442

Repurchases of common stock
 
(836
)
 
(1,328
)
Repayments of long-term debt
 
(5,625
)
 
(11,624
)
Net repayments of existing credit facilities
 

 
(35,000
)
Net cash used in financing activities
 
(33,193
)
 
(78,030
)
 
 
 
 
 
Increase in cash and cash equivalents
 
28,943

 
99,164

Cash and cash equivalents at beginning of period
 
35,373

 
14,080

Cash and cash equivalents at end of period
 
$
64,316

 
$
113,244

 
 
 
 
 
Supplemental information:
 
 
 
 
Cash paid for income taxes, net of refunds of $678 and $192, respectively
 
$
18,420

 
$
113,246

Cash paid for interest
 
$
7,008

 
$
8,976

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, ” "we," "us," or "our" ) have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") 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 GAAP 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 January 3, 2015 , filed with the Securities and Exchange Commission on March 4, 2015 (the "2014 Form 10-K"). The year-end condensed consolidated financial statement data was derived from audited financial statements, but does not include all disclosures required by GAAP. In our opinion, these condensed consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly our condensed consolidated financial statements for the interim periods presented herein. The consolidated results of operations for the third quarter and first nine months of 2015 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 with current year presentation.
Discontinued Operations Presentation
As discussed in Note 3 , amounts included in the Condensed Consolidated Statements of Income for prior periods have been reclassified to separate amounts related to discontinued operations from continuing operations. Accordingly, unless otherwise stated, amounts disclosed within the notes to the condensed consolidated financial statements exclude amounts related to discontinued operations. The Condensed Consolidated Statements of Cash Flows were not adjusted for presentation of discontinued operations in prior periods as no adjustment was required by the applicable accounting standards.
NOTE 2. NEW ACCOUNTING STANDARDS
On May 28, 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. This accounting standard creates common revenue recognition guidance for GAAP and International Financial Reporting Standards ("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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU No. 2014-09 by one year, to December 15, 2017 for interim and annual reporting periods beginning after that date. The FASB will permit early adoption of the standard, but not before the original effective date of December 15, 2016. We are currently evaluating the impact of this standard.
On February 18, 2015, the FASB issued Accounting Standards Update No. 2015-02, Amendments to the Consolidation Analysis, which revises the consolidation model used for evaluating whether reporting entities should consolidate certain legal entities. This accounting standard update is effective for annual reporting periods beginning after December 15, 2015, and related interim periods with early adoption permitted. We are currently evaluating the impact of this standard.
On April 7, 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This accounting standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This revised guidance is effective for annual reporting periods beginning after December 15, 2015 and related interim periods, with early adoption permitted. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarified that debt issuance costs related to line-of-credit arrangements can be presented in the balance sheet as an asset and amortized over the term of the line-of-credit arrangement. We do not expect that this guidance will materially impact our financial statements and we plan to adopt these standards in the first quarter of 2016.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

On July 22, 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory. This accounting standard update requires that inventory be measured at the lower of cost or net realizable value. The amendments in this update do not apply to inventory measured using the last-in, first-out method or the retail inventory method. This revised guidance is effective for annual reporting periods beginning after December 15, 2016 and related interim periods, with early adoption permitted. We do not expect this guidance to materially impact our financial statements and we have not early adopted this standard.
On September 25, 2015, the FASB issued Accounting Standards Update No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. This accounting standard simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. This revised guidance is effective for annual reporting periods beginning after December 15, 2015, and related interim periods. The amendments in the Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of the Update with early application permitted for financial statements not yet issued. We are currently evaluating the impact of this standard.
NOTE 3 . DISCONTINUED OPERATIONS
On May 6, 2014, we entered into a definitive agreement to sell two of our United States subsidiaries as well as certain assets of our Canadian subsidiary, which included the exclusive rights to manufacture and sell the majority of our private brand products and certain contract manufactured products (collectively, “Private Brands”) to Shearer’s Foods, LLC (“Shearer’s”). The manufacturing facilities associated with the sale were located in Burlington, Iowa and Guelph, Ontario. On June 30, 2014 , we completed the sale of Private Brands for $430 million in cash with proceeds after taxes of approximately $303 million .
As a result of the sale of Private Brands, revenues and expenses that no longer continued after the sale of Private Brands, and for which we had no substantial continuing involvement, were reclassified to discontinued operations in the Condensed Consolidated Statements of Income. All prior period results, including results for the third quarter and first nine months of 2014 , were adjusted to ensure comparability and consistent presentation of continuing and discontinued operations.
There were no discontinued operations included in the results for the third quarter or first nine months of 2015 . For the third quarter and first nine months of 2014 , income statement amounts associated with discontinued operations were as follows:
 
 
Quarter Ended
 
Nine Months Ended
(in thousands)
 
September 27, 2014
 
September 27, 2014
Net revenue
 
$

 
$
124,256

Cost of sales
 

 
94,396

Gross margin
 

 
29,860

Selling, general and administrative
 

 
11,886

Gain on sale of Private Brands
 
(222,963
)
 
(222,963
)
Other expense, net
 

 
205

Discontinued operations before income taxes
 
222,963

 
240,732

Income tax expense
 
98,866

 
106,790

Discontinued operations, net of income tax
 
$
124,097

 
$
133,942


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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

During the third quarter of 2014, we recorded a pretax gain in discontinued operations of approximately $223 million on the sale of Private Brands, which was calculated as follows:
(in thousands)
 
Total
Cash proceeds
 
$
430,017

 
 
 
Less carrying value of net assets transferred:
 
 
Transaction related expenses
 
6,359

Total current assets
 
40,219

Fixed assets, net
 
39,123

Goodwill (1)
 
141,404

Other intangible assets, net
 
2,938

Total liabilities
 
(11,883
)
Derecognition of cumulative translation adjustment (2)
 
(11,106
)
Gain on sale of Private Brands
 
$
222,963

(1)
The component of goodwill included in the carrying amount of net assets transferred was based on the fair value of Private Brands relative to the fair value of the remaining business in accordance with ASC 350, Intangibles - Goodwill and Other.
(2)
The majority of our cumulative translation adjustment was derecognized as a result of the sale of Private Brands due to the sale of substantially all of the assets and liabilities of our Canadian subsidiary.
As the sale of Private Brands was completed during the third quarter of 2014, there were no remaining assets or liabilities associated with discontinued operations as of October 3, 2015 or January 3, 2015.
In connection with the sale of Private Brands, we entered into a manufacturing and supply agreement with Shearer's (the "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 have realized revenue and incurred expenses from the products sold to Shearer's. Under the Supply Agreement, certain manufacturing facilities that were not included in the disposal group continued to produce products for Shearer’s. Accordingly, previous revenues earned for the production and sale of these products were not included in discontinued operations given the continued involvement and length of the Supply Agreement.
NOTE 4. BUSINESS ACQUISITIONS
On October 30, 2014, we made an additional investment in Late July Snacks LLC ("Late July") of approximately $59.5 million which increased our total ownership interest from approximately 18.7% to 80.0% . Late July is the industry leader for organic and non-GMO tortilla chips and sells a variety of other baked and salty snacks with particular focus on organic and non-GMO snacks. The investment supports our goal of having a stronger presence in healthier snacks. Concurrently with the transaction, we also established a $6.0 million line of credit with Late July, of which $3.9 million was drawn by Late July in order to repay certain obligations.
There have been no changes to the purchase price allocation for Late July presented in our 2014 Form 10-K and the purchase price allocation is now considered final.
On June 13, 2014 , we completed the acquisition of Baptista's Bakery, Inc. ("Baptista's") and related assets for approximately $ 204 million . The purchase price included the effective settlement of $2.6 million in accounts payable owed by us to Baptista's at the time of the acquisition. 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.
There have been no changes to the purchase price allocation for Baptista's presented in our 2014 Form 10-K and the purchase price allocation is now considered final.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

During the third quarter and first nine months of 2014 , prior to obtaining an additional ownership interest, we recognized $ 3.6 million and $ 10.4 million in net revenue from Late July ® contract manufacturing and Partner brand sales of Late July ® products, respectively. The prior year revenue from Late July ® products was reclassified to Branded revenue as reflected in Note 17 in order to be consistent with current year presentation. The majority of Baptista's net revenue is intercompany and, therefore, eliminated in consolidation.
NOTE 5. EARNINGS PER SHARE
Basic earnings per share from continuing and discontinued operations is computed by dividing income from continuing and discontinued operations attributable to us, respectively, by the weighted average number of common 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.
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and are treated as a separate class of securities in calculating earnings per share pursuant to the two-class method. We have granted and expect to continue to grant restricted stock awards with non-forfeitable rights to dividends. As such, these awards have been included in our calculation of basic and diluted earnings per share using the two-class method, as computed in the table below for income from continuing operations:
 
 
Quarter Ended
Nine Months Ended
(in thousands, except per share data)
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Basic EPS:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
15,677

 
$
13,669

 
$
43,642

 
$
32,317

Less: Income from continuing operations allocated to participating securities
 
42

 
41

 
110

 
100

Income from continuing operations allocated to common shares
 
$
15,635

 
$
13,628

 
$
43,532

 
$
32,217

Weighted average shares outstanding – Basic
 
70,548

 
70,043

 
70,411

 
69,902

Earnings per share – Basic
 
$
0.22

 
$
0.19

 
$
0.62

 
$
0.46

 
 
 
 
 
 
 
 
 
Diluted EPS:
 
 
 
 
 
 
 
 
Weighted average shares outstanding – Basic
 
70,548

 
70,043

 
70,411

 
69,902

Effect of dilutive non-qualified stock options on shares outstanding
 
771

 
735

 
723

 
727

Weighted average shares outstanding – Diluted
 
71,319

 
70,778

 
71,134

 
70,629

Earnings per share – Diluted
 
$
0.22

 
$
0.19

 
$
0.61

 
$
0.46

There were no discontinued operations for the third quarter or first nine months of 2015 . Basic and diluted earnings per share from discontinued operations for the third quarter of 2014 were $1.77 and $1.75 , respectively. Basic and diluted earnings per share from discontinued operations for the first nine months of 2014 were $1.91 and $1.89 , respectively.
For both the third quarter and first nine months of 2015 and 2014 , no shares were excluded from the calculation of diluted earnings per share.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 6. STOCK-BASED COMPENSATION
Stock-based compensation expense recorded in the Condensed Consolidated Statements of Income was $1.5 million and $2.0 million for the third quarter s of 2015 and  2014 , respectively. Stock-based compensation expense was $4.3 million and $5.0 million for the first nine months of 2015 and  2014 , respectively. During the first nine months of 2015 , we issued 384,453 non-qualified stock options at a weighted average exercise price of $31.02 per share, 94,874 restricted shares and 24,243 restricted units to employees and directors. During the first nine months of 2014 , we issued 418,272 non-qualified stock options at a weighted average exercise price of $26.66 per share and 149,490 restricted shares to employees and directors.
For the third quarter s of 2015 and 2014 , we repurchased 1,060 and 6,220 shares of common stock, respectively, to cover withholding taxes payable by employees upon the vesting of restricted stock. For the first nine months of 2015 and 2014 , we repurchased 27,235 shares and 49,607 shares, respectively, to cover withholding taxes.
In addition, we recorded $0.3 million and $0.8 million in incentive compensation income for performance-based cash incentives for the third quarter s of 2015 and 2014 , respectively, and $0.4 million and $1.3 million expense for the first nine months of 2015 and 2014 , respectively. The income recorded during the third quarters of 2015 and 2014 was due to adjustments made to lower the expected attainment for these performance-based plans.
NOTE 7. INVENTORIES
Inventories as of October 3, 2015 and January 3, 2015 , consisted of the following:
(in thousands)
 
October 3,
2015
 
January 3,
2015
Finished goods
 
$
79,906

 
$
69,013

Raw materials
 
16,044

 
16,853

Maintenance parts, packaging and supplies
 
29,115

 
30,370

Total inventories
 
$
125,065

 
$
116,236

NOTE 8. FIXED ASSETS
Fixed assets as of October 3, 2015 and January 3, 2015 consisted of the following:
(in thousands)
 
October 3,
2015
 
January 3,
2015
Land and land improvements
 
$
28,131

 
$
27,816

Buildings and building improvements
 
155,826

 
150,339

Machinery, equipment and computer systems
 
507,701

 
490,478

Trucks, trailers and automobiles
 
35,601

 
33,364

Furniture and fixtures
 
4,366

 
6,312

Construction in progress
 
14,737

 
11,848

 
 
$
746,362

 
$
720,157

Accumulated depreciation
 
(330,352
)
 
(296,354
)
 
 
416,010

 
423,803

Fixed assets held for sale
 
(94
)
 
(191
)
Fixed assets, net
 
$
415,916

 
$
423,612

During the second quarter of 2015, certain assets were reclassified from furniture and fixtures to machinery, equipment and computer systems to correct the classification of these items. In order to conform with the current presentation, we revised our prior period presentation and reclassified $6.8 million of furniture and fixtures to machinery, equipment and computer systems as of January 3, 2015. The revision had no impact on the condensed consolidated financial statements and was not material to prior periods.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

Depreciation expense related to fixed assets was $14.8 million and $13.9 million during the third quarter s of 2015 and 2014 , respectively. For the first nine months of 2015 and 2014 , depreciation expense was $44.5 million and $36.0 million , respectively.
There were no fixed asset impairment charges recorded during the third quarter or first nine months of 2015 . There were $3.9 million in fixed asset impairment charges recorded during the first nine months of 2014 . An impairment of $2.9 million was recorded during the second quarter of 2014 to write off certain machinery and equipment where future cash flows were not expected to support the carrying value due to the sale of Private Brands. The remaining $1.0 million impairment charge was recorded in the first quarter of 2014 and was related to our Corsicana, Texas facility, which was subsequently sold in the third quarter of 2014.
NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the first nine months of 2015 were as follows:
(in thousands)
 
Carrying Amount    
Balance as of January 3, 2015
 
$
541,539

Goodwill reclassified to assets held for sale
 
(1,888
)
Balance as of October 3, 2015
 
$
539,651

As of October 3, 2015 and January 3, 2015 , other intangible assets consisted of the following:
(in thousands)
 
    Gross
    Carrying
    Amount
 
Accumulated
Amortization
 
Net    
Carrying    
Amount    
As of October 3, 2015:
 
 
 
 
 
 
Customer and contractual relationships – amortized
 
$
166,756

 
$
(33,121
)
 
$
133,635

Non-compete agreement – amortized
 
710

 
(267
)
 
443

Developed technology – amortized
 
2,700

 
(235
)
 
2,465

Reacquired rights – amortized
 
3,100

 
(1,617
)
 
1,483

Patents – amortized
 
8,600

 
(2,330
)
 
6,270

Routes – unamortized
 
12,039

 

 
12,039

Trademarks – unamortized
 
375,961

 

 
375,961

Balance as of October 3, 2015
 
$
569,866

 
$
(37,570
)
 
$
532,296

 
 
 
 
 
 
 
As of January 3, 2015:
 
 
 
 
 
 
Customer and contractual relationships – amortized
 
$
166,756

 
$
(26,151
)
 
$
140,605

Non-compete agreement – amortized
 
710

 
(173
)
 
537

Developed technology – amortized
 
2,700

 
(100
)
 
2,600

Reacquired rights – amortized
 
3,100

 
(1,327
)
 
1,773

Patents – amortized
 
8,600

 
(1,744
)
 
6,856

Routes – unamortized
 
16,880

 

 
16,880

Trademarks – unamortized
 
375,961

 

 
375,961

Balance as of January 3, 2015
 
$
574,707

 
$
(29,495
)
 
$
545,212

Amortization expense related to intangibles was $2.7 million and $2.5 million for the third quarter of 2015 and 2014 , respectively. For the first nine months of 2015 and 2014 , amortization expense related to intangibles was $8.1 million and $7.2 million , respectively. The increase in amortization expense in 2015 was due to additional intangible assets obtained through the acquisition of Baptista's and additional investment in Late July during 2014.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

Routes and trademarks are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely. Although not amortized, they are reviewed for impairment as conditions change or at least on an annual basis. There were no impairments during the third quarter or first nine months of 2015 . 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.
One of our trademarks, with a book value of $9.8 million as of October 3, 2015 , currently has a fair value which approximates book value. Any adverse changes in the use of this trademark or the sales volumes of the associated products could result in an impairment charge.
The changes in the carrying amount of route intangibles for the first nine months of 2015 were as follows:
(in thousands)
 
Carrying Amount    
Balance as of January 3, 2015
 
$
16,880

Routes reclassified to assets held for sale
 
(4,841
)
Balance as of October 3, 2015
 
$
12,039

Route businesses, including route intangibles 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. The changes in the carrying amount of route businesses held for sale for the first nine months of 2015 were as follows:
(in thousands)
 
Carrying Amount    
Balance as of January 3, 2015
 
$
10,816

Purchases of route businesses held for sale
 
19,622

Sales of route businesses held for sale
 
(22,382
)
Reclassifications from route intangibles and goodwill
 
6,729

Balance as of October 3, 2015
 
$
14,785

Net gains on the sale of route businesses for the third quarter of 2015 consisted of $1.1 million in gains and $0.6 million in losses. Net gains on the sale of route businesses for the first nine months of 2015 consisted of $2.6 million in gains and $1.2 million in losses. The majority of the route business sales were due to the decision to sell certain route businesses that were previously Company-owned as well as route reengineering projects that were initiated in order to maximize the efficiency of route territories for the independent business owners ("IBO").
For the third quarter of 2014 , net gains on the sale of route businesses consisted of $0.4 million in gains and $0.4 million in losses. For the first nine months of 2014 , net gains on sale of route businesses consisted of $3.2 million in gains and $1.8 million in losses. The majority of the route business sales in the first nine months of 2014 were due to the resale of routes purchased because of IBO defaults or route reengineering projects that were initiated in order to maximize the efficiency of route territories for the IBOs. See Note 14 for further information related to IBOs.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 10. LONG-TERM DEBT
Long-term debt outstanding as of October 3, 2015 and January 3, 2015 consisted of the following:
(in thousands)
 
October 3,
2015
 
January 3,
2015
Revolving credit facility
 
$
50,000

 
$
50,000

Other long-term debt
 
390,532

 
396,937

Total debt
 
440,532

 
446,937

Current portion of long-term debt
 
(8,541
)
 
(8,561
)
Total long-term debt
 
$
431,991

 
$
438,376

Our revolving credit facility allows us to make revolving credit borrowings of up to $375 million through May 2019 . As of October 3, 2015 and January 3, 2015 , we had available borrowings on this facility of $325 million . During the first nine months of 2015 , there were no repayments or proceeds from our revolving credit facility. During the first nine months of 2014 , we repaid $321.0 million and received proceeds of $286.0 million from our revolving credit facility. The net repayments were primarily funded by cash received from the sale of Private Brands. We are currently in compliance with all covenants contained in our debt agreements.
NOTE 11. INCOME TAXES
As of October 3, 2015 , we recorded gross unrecognized tax benefits for uncertain tax positions totaling $2.8 million and related interest and penalties of $1.3 million in other noncurrent liabilities on the Condensed Consolidated Balance Sheets. Of this total amount, $2.9 million , which includes interest and penalties, would affect the effective tax rate if subsequently recognized. As of January 3, 2015 , we recorded gross unrecognized tax benefits totaling $3.7 million and related interest and penalties of $1.4 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 $0.8 million reduction of the unrecognized tax benefit amount. We classify interest and penalties associated with uncertain tax positions within income tax expense.
The effective tax rate decreased from 41.8% for the third quarter of  2014 to 29.4% for the third quarter of 2015 . The significantly higher effective tax rate in the third quarter of 2014 was primarily due to the revaluation of deferred tax assets and liabilities due to the sale of Private Brands and the associated impact on various consolidated and unitary state income tax rates.
The effective tax rate decreased from 35.4% for the first nine months of 2014 to 33.7% for the first nine months of 2015 . The higher effective tax rate in the first nine months of 2014 was primarily due to the revaluation of deferred tax assets and liabilities due to the sale of Private Brands and the associated impact on various consolidated and unitary state income tax rates, partially offset by the release of previously established unrecognized tax benefits as a result of the completion of an audit and the related expiration of certain statutes of limitation in the first quarter of 2014.
NOTE 12. FAIR VALUE MEASUREMENTS
We have classified assets and liabilities required to be measured at fair value into the fair value hierarchy as set forth below:
Level 1
quoted prices in active markets for identical assets and liabilities.
Level 2
observable inputs other than quoted prices for identical assets and liabilities.
Level 3
unobservable inputs for which there is little or no market data available, which required us to develop our own assumptions.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes information regarding financial assets and financial liabilities that are measured at fair value as of October 3, 2015 and January 3, 2015 .
(in thousands)
 
Book Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Balance as of October 3, 2015:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
64,316

 
$
64,316

 
$

 
$

Restricted cash
 
966

 
966

 

 

Total assets
 
$
65,282

 
$
65,282

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
2,280

 
$

 
$
2,280

 
$

Total liabilities
 
$
2,280

 
$

 
$
2,280

 
$

 
 
 
 
 
 
 
 
 
Balance as of January 3, 2015:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
35,373

 
$
35,373

 
$

 
$

Restricted cash
 
966

 
966

 

 

Total assets
 
$
36,339

 
$
36,339

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
438

 
$

 
$
438

 
$

Total liabilities
 
$
438

 
$

 
$
438

 
$

There were no changes among the levels during the first nine months of 2015 .
The fair value of outstanding debt, including current maturities, was approximately $445 million and $453 million as of October 3, 2015 and January 3, 2015 , respectively. These Level 2 fair value estimates were based on similar debt with the same maturities, company credit rating and interest rates.
NOTE 13 . DERIVATIVE INSTRUMENTS
We are exposed to certain risks relating to our business operations. We use derivative instruments to manage interest rate 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
 
October 3,
2015
 
January 3,
2015
Interest rate swaps
 
Other current liabilities
 
$
86

 
$
438

Interest rate swaps
 
Other noncurrent liabilities
 
2,194

 

Total fair value of derivative instruments
 
 
 
$
2,280

 
$
438

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 in order to maintain a desired proportion of fixed to variable-rate debt. These swaps are accounted for as cash flow hedges. 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 October 3, 2015 and January 3, 2015 was $125.0 million and $50.0 million , respectively.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

In February 2015, we entered into two interest rate swap agreements to manage the exposure to changing interest rates on long-term debt. We entered into an agreement with a notional amount of $25.0 million in order to fix a portion of our term loan due in May 2019 at an interest rate of 1.58% , plus applicable margins, effective for the interest periods from May 2015 through May 2019. A second agreement with a notional amount of $50.0 million was entered into in order to fix a portion of our term loan due in May 2024 at an interest rate of 1.98% , plus applicable margins, effective for the interest periods from May 2015 through May 2022.

Our remaining interest rate swap with a notional amount of $50.0 million is used to fix the interest rate for a portion of our revolving credit facility and expires in November 2015.

Foreign Currency Forwards
During 2014, we had foreign currency forwards in order to mitigate foreign exchange risk related to our former Canadian operations that were discontinued in the middle of 2014 (see Note 3).

Changes in Other Comprehensive Income
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
 
Nine Months Ended
(in thousands)
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
(Losses)/gains on interest rate swaps, net of income tax benefit/(expense) of $709, ($57), $707 and ($123), respectively
 
$
(1,138
)
 
$
91

 
$
(1,134
)
 
$
197

Gains on foreign currency forwards, net of income tax expense of $0, $0, $0, and $10, respectively
 

 

 

 
21

Total change in unrealized losses from derivative instruments, net of income tax (effective portion)
 
$
(1,138
)
 
$
91

 
$
(1,134
)
 
$
218

NOTE 14 . 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, forward price projections and expected usage levels. Purchase commitments for certain ingredients, packaging materials and energy totaled $104.0 million as of October 3, 2015 , as compared to $105.2 million as of January 3, 2015 . 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 generally 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 $11.6 million as of October 3, 2015 and $11.4 million as of January 3, 2015 .
Guarantees
We currently provide a partial guarantee for loans made to IBOs by third-party financial institutions for the purchase of route businesses. The outstanding aggregate balance on these loans was approximately $138.1 million as of October 3, 2015 compared to approximately $130.3 million as of January 3, 2015 . 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 material.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

Legal Matters
We have certain class action legal proceedings filed against us which allege that certain ingredients in some of our products that are labeled as “natural” and “all natural” are not natural. Although we believe that we have strong defenses against these claims, we reached a tentative settlement agreement in the third quarter in order to avoid the costs and uncertainty of litigation. The tentative settlement amount of $2.8 million was accrued in other payables and accrued liabilities in the Condensed Consolidated Balance Sheets in the second quarter of 2015 and is subject to the preparation, negotiation and execution of definitive settlement agreements. The associated expense of $2.8 million was recorded primarily in the second quarter of 2015 and is included in settlements of certain litigation in the Condensed Consolidated Statements of Income.

In addition, we currently have a purported class action legal proceeding related to the IBO network. With respect to the action that was originally commenced in Massachusetts and is now in the U.S. District Court for the Middle District of Pennsylvania, that matter reached a tentative settlement during the third quarter of 2015 of $2.9 million . The tentative settlement is awaiting court approval. Although we do not admit any fault or liability in this matter, we made the decision to agree to the tentative settlement in the third quarter in order to fully resolve the matter. The tentative settlement amount of $2.9 million was accrued in other payables and accrued liabilities in the Condensed Consolidated Balance Sheets in the third quarter of 2015 as we determined that the payment was probable and reasonably estimable at that time. The $2.9 million expense associated with this matter is included in settlements of certain litigation in the Condensed Consolidated Statements of Income.

With respect to any other class action legal proceedings related to our IBO network, we cannot currently estimate our potential liability, damages or range of potential loss in connection with these outstanding legal proceedings, but the impact could be material to our condensed consolidated financial statements.

We are currently subject to various other legal proceedings and environmental matters arising in the normal course of business which are not expected to have a material effect on our consolidated financial statements. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is possible and a range of the loss can be reasonably estimated, we will disclose the range of the possible loss. Significant judgment is required to determine both likelihood of there being, and the estimated amount of, a loss related to such matters. We cannot currently estimate our potential liability, damages or range of potential loss in connection with our other outstanding legal proceedings.
NOTE 15. RELATED PARTY TRANSACTIONS
ARWCO Corporation, MAW Associates, LP and Warehime Enterprises, Inc. are significantly owned or controlled by Patricia A. Warehime, a member of our Board of Directors and a beneficial owner of more than 5% of our common stock. Among other unrelated business activities, these entities provide financing to IBOs for the purchase of route businesses. 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 October 3, 2015 , there were outstanding loans made to IBOs by the related parties of approximately $28.2 million , compared to $26.4 million as of January 3, 2015 . Michael A. Warehime, our former Chairman of the Board, who passed away in August 2014, served as an officer and/or director of these entities. Patricia A. Warehime is the executrix, trustee and principal beneficiary of Mr. Warehime's estate and trust. 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 were $0.1 million and $0.2 million for the third quarter s of 2015 and 2014 , respectively and $0.6 million and $0.5 million for the first nine months of 2015 and 2014 , respectively.
A facility used to support distribution of our products in the northeastern United States is leased from an entity owned by two of our employees. One of the employees is Peter L. Michaud, Senior Vice President and General Manager of the Clearview Foods™ Division. There were $0.1 million in lease payments made to this entity for the third quarters of both 2015 and 2014 and $0.3 million for the first nine months of both 2015 and 2014.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 16. OTHER COMPREHENSIVE INCOME
Total comprehensive income attributable to us, determined as net income adjusted by total other comprehensive income, was $14.5 million and $126.2 million for the third quarter s of 2015 and 2014 , respectively, and $42.1 million and $155.1 million for the first nine months of 2015 and 2014, respectively. 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
 
Nine Months Ended
(in thousands)
 
Income Statement Location
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Losses on cash flow hedges reclassified out of accumulated other comprehensive income:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps, net of tax of $175, $56, $334 and $163, respectively
 
Interest expense, net
 
$
(280
)
 
$
(91
)
 
$
(536
)
 
$
(262
)
Foreign currency forwards
 
Discontinued operations, net of income tax
 

 

 

 
(191
)
Total cash flow hedge reclassifications, net of tax
 
 
 
$
(280
)
 
$
(91
)
 
$
(536
)
 
$
(453
)
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments reclassified from accumulated other comprehensive income
 
Discontinued operations, net of income tax
 
$

 
$
11,106

 
$

 
$
11,106

Total amounts reclassified from accumulated other comprehensive income
 
 
 
$
(280
)
 
$
11,015

 
$
(536
)
 
$
10,653

During the first nine months of 2015 , 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 January 3, 2015
 
$
(270
)
 
$
(737
)
 
$
(1,007
)
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications
 
(1,670
)
 
(451
)
 
(2,121
)
Losses reclassified from accumulated other comprehensive income
 
536

 

 
536

Net other comprehensive loss
 
(1,134
)
 
(451
)
 
(1,585
)
 
 
 
 
 
 
 
Balance as of October 3, 2015
 
$
(1,404
)
 
$
(1,188
)
 
$
(2,592
)

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

During the first nine months of 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 before reclassifications
 
(235
)
 
(239
)
 
(474
)
Losses/(gains) reclassified from accumulated other comprehensive income
 
453

 
(11,106
)
 
(10,653
)
Net other comprehensive income/(loss)
 
218

 
(11,345
)
 
(11,127
)
 
 
 
 
 
 
 
Balance as of September 27, 2014
 
$
(356
)
 
$
(600
)
 
$
(956
)
NOTE 17. 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 our President and Chief Executive Officer. Characteristics of our organization which were relied upon in making the determination that we operate in one business segment 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
 
Nine Months Ended
(in thousands)
 
October 3,
2015
 
September 27,
2014
 
October 3,
2015
 
September 27,
2014
Branded
 
$
289,664

 
$
276,754

 
$
866,026

 
$
817,876

Partner brand
 
84,174

 
86,232

 
256,535

 
251,241

Other
 
42,935

 
46,322

 
127,981

 
112,803

Net revenue
 
$
416,773

 
$
409,308

 
$
1,250,542

 
$
1,181,920

Due to the acquisition of a controlling interest in Late July in October of 2014, revenue from the sale of Late July ® products are now classified as Branded revenue. For the third quarter and first nine months of 2014 , we have reclassified $2.3 million and $7.2 million , respectively, of Partner brand revenue and $1.2 million and $3.2 million , respectively, of Other revenue associated with Late July ® products to Branded revenue to be consistent with current year presentation.
NOTE 18. SIGNIFICANT CUSTOMERS
Sales to our largest retail customer, Wal-Mart Stores, Inc. ("Wal-Mart"), either through IBOs or direct distribution network, were approximately 13% of net revenue for both the third quarter and first nine months of 2015 and 13% and 14% of net revenue for the third quarter and first nine months of 2014 , respectively. Our sales to Wal-Mart do not include sales of our products that may be made to Wal-Mart by third-party distributors outside our direct-store delivery ("DSD") distribution network. Sales to these third-party distributors represent approximately 6% of our net revenue and may increase sales of our products to Wal-Mart by an amount we are unable to estimate. Accounts receivable as of October 3, 2015 and January 3, 2015 , included receivables from Wal-Mart totaling $15.7 million and $13.8 million , respectively.

20

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 19 . SUBSEQUENT EVENTS
Definitive Agreement to Acquire Diamond Foods
On October 27, 2015, we entered into a definitive agreement (the "Merger Agreement") to acquire all outstanding shares of Diamond Foods, Inc. ("Diamond Foods") in a cash and stock merger transaction for approximately $1.91 billion , including the assumption of approximately $640 million of indebtedness. Under the terms of the Merger Agreement, our wholly owned subsidiary will merge with and into Diamond Foods with Diamond Foods surviving as our wholly-owned subsidiary, which will merge with and into a Delaware limited liability company, which is also our wholly-owned subsidiary with such limited liability company surviving as our wholly-owned subsidiary (collectively, the “Merger”).
Pursuant to the terms of the Merger Agreement, at the effective time of the first Merger, each share of Diamond Foods’ common stock that is issued and outstanding immediately prior to the effective time of the first Merger (other than (i) treasury shares held by Diamond Foods, (ii) shares owned by us or any of our subsidiaries and (iii) shares that are owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law) will be canceled and converted into the right to receive 0.775 shares of our common stock and $12.50 in cash.
The transaction will create an innovative, highly complementary and diversified portfolio of branded products. Diamond Foods is a leading snack food company with a portfolio of five brands including Kettle Brand ® potato chips, KETTLE ® Chips, Pop Secret ® popcorn, Emerald ® snack nuts and Diamond of California ® culinary nuts. The transaction will also expand our "better-for-you" snack category and increase our existing natural food channel presence. In addition, we expect that this transaction will expand and strengthen our DSD network in the United States, and provide a dynamic platform for growth in the United Kingdom and across Europe. The transaction is expected to close in early 2016, subject to stockholder and regulatory approvals and other customary closing conditions. As of the date of this filing, there can be no assurance that the transaction will be completed.
Cash Dividend Declared
On October 27, 2015 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on November 27, 2015 to stockholders of record on November 20, 2015 .




21


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 in our Annual Report on Form 10-K for the year ended January 3, 2015 , and those described from time to time in our other reports filed with the Securities and Exchange Commission, including Item 1A. Risk Factors of Part II of this Quarterly Report on Form 10-Q.
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
Recent Announcements
During 2014, we completed three significant transactions that support our overall strategy and position us to focus on our branded products and national distribution network.  Expanding on these efforts to execute our strategic plan, on October 27, 2015, we entered into a definitive agreement to acquire all of the outstanding stock of Diamond Foods, Inc. ("Diamond Foods"). Under the terms of the agreement, we will acquire all of the outstanding shares of Diamond Foods in a cash and stock merger transaction for approximately $1.91 billion, including the assumption of approximately $640 million in indebtedness. Diamond Foods' stockholders will receive 0.775 shares of Snyder's-Lance common stock and $12.50 in cash for each Diamond Foods' share upon the closing of the transaction, which is expected to occur in early 2016, subject to stockholder and regulatory approvals and other customary closing conditions.

The strategic combination of Snyder's-Lance and Diamond Foods will create an innovative, highly complementary and diversified portfolio of branded snacks. Diamond Foods is a leading snack food company with five brands including Kettle Brand ® potato chips, KETTLE ® Chips, Pop Secret ® popcorn, Emerald ® snack nuts, and Diamond of California ® culinary nuts. Each Diamond Foods brand brings unique strengths that fit with our strategic plan while increasing our annualized net revenue to approximately $2.6 billion, which is net of revenue already generated by the distribution of a Diamond Foods brand through our Direct Store Delivery ("DSD") network.

The transaction will expand our footprint in "better-for-you" snacking and will increase the Company's existing natural food channel presence. We expect that this transaction will expand and strengthen our DSD network in the United States, and provide us with a platform for growth in the United Kingdom and across Europe. 

Third Quarter Performance
We continued to focus our sales efforts on the growth of our branded products during the third quarter of 2015, with emphasis on our Core brands (Snyder’s of Hanover ® , Lance ® , Cape Cod ® , Snack Factory ® Pretzel Crisps ® , and Late July ® ).  Our growth strategy for our Core brands continues to focus on quality, innovation and expanded distribution. We are also achieving our goals regarding the mix of "better for you" products relative to our entire portfolio and continue to be responsive to constantly changing consumer trends.

22


SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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

Results for the third quarter of 2015 were impacted as follows:
We continued to grow sales with existing customers as well as expand the distribution of our Cape Cod ® kettle cooked chips, which resulted in high single-digit revenue growth and increased market share for the Cape Cod ® brand in the third quarter of 2015.
Snack Factory ® Pretzel Crisps ® pretzel crackers experienced revenue and market share growth compared to the third quarter of 2014. We also continued to further develop our production capabilities for pretzel crackers at our Goodyear, Arizona manufacturing facility, which began production in the second quarter of 2015 and provides additional capacity for these products.
Late July ® continued to expand distribution and increase sales to existing customers, resulting in significant market share gains in the third quarter of 2015 compared to the third quarter of 2014.
Snyder's of Hanover ® continued to strengthen its leadership of the pretzel category with strong market share growth compared to the third quarter of 2014.
We increased market share and net revenue for our Lance ® sandwich crackers compared to the third quarter of 2014 as we continued to build on the positive momentum that our Lance ® branded products have generated throughout 2015.
We incurred an expense of $2.9 million during the third quarter of 2015 for a purported class action legal proceeding related to our IBO network.




23


SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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

Quarter Ended October 3, 2015 Compared to Quarter Ended September 27, 2014  
 
 
Quarter Ended
 
Favorable/
(Unfavorable)
Variance
(in thousands)
 
October 3, 2015
 
September 27, 2014
 
Net revenue
 
$
416,773

 
100.0
 %
 
$
409,308

 
100.0
%
 
$
7,465

 
1.8
 %
Cost of sales
 
274,287

 
65.8
 %
 
266,088

 
65.0
%
 
(8,199
)
 
(3.1
)%
Gross margin
 
142,486

 
34.2
 %
 
143,220

 
35.0
%
 
(734
)
 
(0.5
)%
Selling, general and administrative
 
114,835

 
27.6
 %
 
116,659

 
28.5
%
 
1,824

 
1.6
 %
Settlements of certain litigation
 
2,900

 
0.7
 %
 

 
%
 
(2,900
)
 
(100.0
)%
(Gain)/loss on sale of route businesses, net
 
(501
)
 
(0.1
)%
 
22

 
%
 
523

 
nm

Other expense, net
 
115

 
 %
 
61

 
%
 
(54
)
 
(88.5
)%
Income before interest and income taxes
 
25,137

 
6.0
 %
 
26,478

 
6.5
%
 
(1,341
)
 
(5.1
)%
Interest expense, net
 
2,851

 
0.6
 %
 
2,984

 
0.8
%
 
133

 
4.5
 %
Income tax expense
 
6,557

 
1.6
 %
 
9,809

 
2.4
%
 
3,252

 
33.2
 %
Income from continuing operations
 
15,729

 
3.8
 %
 
13,685

 
3.3
%
 
2,044

 
14.9
 %
Income from discontinued operations, net of income tax
 

 
 %
 
124,097

 
30.4
%
 
(124,097
)
 
(100.0
)%
Net income
 
$
15,729

 
3.8
 %
 
$
137,782

 
33.7
%
 
$
(122,053
)
 
(88.6
)%
nm = not meaningful
Net Revenue
Net revenue by product category was as follows:
 
 
Quarter Ended
 
Favorable/
(Unfavorable)
Variance
(in thousands)
 
October 3, 2015
 
September 27, 2014
 
Branded
 
$
289,664

 
69.5
%
 
$
276,754

 
67.6
%
 
$
12,910

 
4.7
 %
Partner brand
 
84,174

 
20.2
%
 
86,232

 
21.1
%
 
(2,058
)
 
(2.4
)%
Other
 
42,935

 
10.3
%
 
46,322

 
11.3
%
 
(3,387
)
 
(7.3
)%
Net revenue
 
$
416,773

 
100.0
%
 
$
409,308

 
100.0
%
 
$
7,465

 
1.8
 %
Overall net revenue increased $7.5 million , or 1.8% , compared to the third quarter of 2014 , led by strong branded revenue growth.
Branded net revenue increased $12.9 million , or 4.7% , compared to the third quarter of 2014, primarily due to incremental Late July ® revenue as well as revenue and market share growth in all our other Core brands. Our Cape Cod ® products increased market share in a growing kettle potato chip market due to higher sales with existing customers and expanded distribution. The continued positive trends led to high single-digit growth in our Cape Cod ® products during the third quarter of 2015. We also experienced low single-digit net revenue increases in our Snack Factory ® Pretzel Crisps ® , Snyder's of Hanover ® , and Lance products, with all three brands increasing market share compared to the third quarter of 2014. The growth in these brands was limited by retailer consolidation and declines in our mass merchandiser channel. Our Lance ® branded products continued to build on the positive momentum they have generated throughout 2015 by achieving revenue growth for the first time since the start of our brand renovation project in early 2014. Revenue from our Allied branded products (Tom's ® , Archway ® , Jays ® , Stella D'oro ® , EatSmart™, Krunchers! ® , and O-Ke-Doke ® ) declined slightly in the third quarter of 2015 compared to the third quarter of 2014 due to softness in certain salty snacks.
Partner brand net revenue declined $2.1 million , or 2.4% compared to the third quarter of 2014. The decrease was primarily due to a reduction in retail demand for certain brands or products that we distribute through our DSD network.
Other net revenue declined $3.4 million , or 7.3% , from the third quarter of 2014 due to a reduction in contract manufacturing revenue from Shearer's as they begin to add the capacity necessary to produce certain products that we were producing under the terms of the Supply Agreement.

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 decreased $0.7 million in the third quarter of 2015 compared to the third quarter of 2014 and also declined 0.8% as a percentage of revenue. The decrease in gross margin compared to the prior year as well as the decline as a percentage of revenue was primarily the result of lower capacity utilization at certain manufacturing locations as well as manufacturing and warehousing inefficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $1.8 million in the third quarter of 2015 compared to the third quarter of 2014, and declined 0.9% as a percentage of net revenue. The decrease in selling, general and administrative expenses in the third quarter of 2015 was due to cost reduction efforts associated with our margin improvement and restructuring plan as well as lower incentive compensation expense. These reductions in selling, general and administrative expenses were partially offset by additional expenses associated with the increased investment in Late July, which occurred in the fourth quarter of 2014 and higher freight costs due to an increase in sales volume of our salty snacks.

Settlements of Certain Litigation
We recognized $2.9 million in expense during the third quarter of 2015 associated with a tentative settlement reached in our purported class action IBO litigation. See Note 14 to the condensed consolidated financial statements for additional information related to this tentative settlement. There were no significant litigation settlements in the third quarter of 2014.
Gain on the Sale of Route Businesses, Net
Net gains on the sale of route businesses for the third quarter of 2015 consisted of $1.1 million in gains and $0.6 million in losses. In the third quarter of 2014 , net gains on the sale of route businesses consisted of $0.4 million in gains and $0.4 million in losses on the sale of route businesses. The majority of the net gains on the sale of route business during the third quarter of 2015 were due to the decision to sell certain route businesses that were previously Company-owned as well as route reengineering projects that were initiated in order to maximize the efficiency of route territories for the IBOs. The route business sales activity in the third quarter of 2014 was due to the resale of routes purchased because of IBO defaults or route reengineering projects that were initiated in order to maximize the efficiency of route territories for the IBOs. We anticipate total net gains on the sale of route businesses of approximately $2 million during 2015 due primarily to the planned sale of certain route businesses that are currently Company-owned.
Interest Expense, Net
Interest expense decreased approximately $0.1 million in the third quarter of 2015 compared to the third quarter of 2014. The decrease was due to slightly lower debt levels in 2015.
Income Tax Expense
Our effective income tax rate decreased to 29.4% for the third quarter of 2015 from 41.8% for the third quarter of 2014 . The significantly higher effective tax rate in the third quarter of 2014 was primarily due to the revaluation of deferred tax assets and liabilities due to the sale of Private Brands and the associated impact on various consolidated and unitary state income tax rates.

Discontinued Operations, Net of Income Tax
Income from discontinued operations primarily represented a gain on the sale of Private Brands during the third quarter of 2014. We sold Private Brands at the beginning of the third quarter of 2014, so there was no remaining activity related to these operations in the third quarter of 2015.


25


SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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

Nine Months Ended October 3, 2015 Compared to Nine Months Ended September 27, 2014  
 
 
Nine Months Ended
 
Favorable/
(Unfavorable)
Variance
(in thousands)
 
October 3, 2015
 
September 27, 2014
 
Net revenue
 
$
1,250,542

 
100.0
 %
 
$
1,181,920

 
100.0
 %
 
$
68,622

 
5.8
 %
Cost of sales
 
817,211

 
65.3
 %
 
760,625

 
64.4
 %
 
(56,586
)
 
(7.4
)%
Gross margin
 
433,331

 
34.7
 %
 
421,295

 
35.6
 %
 
12,036

 
2.9
 %
Selling, general and administrative
 
355,828

 
28.5
 %
 
354,035

 
30.0
 %
 
(1,793
)
 
(0.5
)%
Settlements of certain litigation
 
5,675

 
0.5
 %
 

 
 %
 
(5,675
)
 
(100.0
)%
Impairment charges
 

 
 %
 
7,503

 
0.6
 %
 
7,503

 
100.0
 %
Gain on sale of route businesses, net
 
(1,368
)