Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-K, Received: 03/04/2015 11:45:08)

Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 2015
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                         
Commission file number 0-398
SNYDER’S-LANCE, INC.
(Exact name of Registrant as specified in its charter)
North Carolina
 
56-0292920
(State of incorporation)
 
(I.R.S. Employer Identification Number)
13024 Ballantyne Corporate Place, Suite 900, Charlotte, North Carolina 28277
(Address of principal executive offices) (zip code)
Post Office Box 32368, Charlotte, North Carolina 28232-2368
(Mailing address of principal executive offices) (zip code)
Registrant’s telephone number, including area code:     (704) 554-1421
Securities Registered Pursuant to Section 12(b) of the Act: 
Title of Each Class
 
Name of Each Exchange on Which Registered
$0.83-1/3 Par Value Common Stock
 
The NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act:   NONE
Indicate by checkmark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by checkmark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ   No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company   o  
 
 
 
 
(do not check if a smaller reporting company)
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of shares of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of voting or nonvoting common equity, held by non-affiliates as of June 27, 2014 , the last business day of the Registrant’s most recently completed second fiscal quarter, was $1,372,275,669 .
The number of shares outstanding of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock, as of February 25, 2015 , was 70,421,923 shares.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 6, 2015 are incorporated by reference into Part III of this Form 10-K.
 



Table of Contents

FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item X
 
 
 
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
 
 
 
Item 9
Item 9A
Item 9B
 
 
 
 
 
Item 10
Directors, Executive Officers and Corporate Governance
 
Item 11
Executive Compensation
 
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13
Certain Relationships and Related Transactions and Director Independence
 
Item 14
Principal Accountant Fees and Services
 
 
 
 
 
 
Item 15
 
 
 
 
Exhibit 12
Ratio of Earnings to Fixed Charges
 
Exhibit 21
Subsidiaries of Snyder’s-Lance, Inc.
 
Exhibit 23.1
Consent of PricewaterhouseCoopers LLP
 
Exhibit 23.2
Consent of KPMG LLP
 
Exhibit 31.1
Section 302 Certification of the CEO
 
Exhibit 31.2
Section 302 Certification of the CFO
 
Exhibit 32
Section 906 Certification of the CEO and CFO
 
Note: Items 10-14 are incorporated by reference to the Proxy Statement and Item X of Part I.



Table of Contents


PART I
Cautionary Information About Forward-Looking Statements
This document includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, beliefs, intentions or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, the factors set forth under Part I, Item 1A - Risk Factors.
Caution should be taken not to place undue reliance on our forward-looking statements, which reflect the expectations of management only as of the time such statements are made. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.  
Item 1.  Business
General
Snyder's-Lance, Inc., a North Carolina corporation, was formed from the merger of Lance, Inc. (“Lance”) and Snyder’s of Hanover, Inc. (“Snyder’s”) in 2010 ("Merger"). We are a national snack food company with category-leading brands, an expansive Branded product portfolio, complementary manufacturing capabilities and a national distribution network. Our brands include Snyder’s of Hanover ® , the market share leader in the pretzel category, and Lance ® , which is the number one ranked sandwich cracker in the United States. In addition, Cape Cod ® kettle cooked chips and Snack Factory ® Pretzel Crisps ® currently rank second in the United States in their respective categories. Our successful history of providing irresistible, high-quality snacks dates back over 100 years.

Snyder’s-Lance, Inc. is headquartered in Charlotte, North Carolina. References to “Snyder’s-Lance,” the “Company,” “we,” “us” or “our” refer to Snyder’s-Lance, Inc. and its subsidiaries, as the context requires.
During 2014, we completed three transactions that helped advance our strategic plan and supported long-term Branded revenue growth.

We determined that the inclusion of private brands in our product mix did not provide tangible synergies for Branded revenue growth and, consistent with our strategic plan, we made the decision to divest the majority of our private brand product portfolio. At the beginning of the third quarter of 2014, we completed the carve-out and sale of two of our United States subsidiaries as well as certain assets of our Canadian subsidiary (collectively "Private Brands") for approximately $430 million to Shearer's Foods, LLC. The 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. This divestiture allowed us to place additional focus on our Branded product portfolio and generated cash flows that were more than sufficient to fund the Baptista's Bakery, Inc. ("Baptista's") and Late July Snacks LLC ("Late July") acquisitions, as discussed below.

On June 13, 2014, we completed the acquisition of Baptista’s for approximately $204 million . Baptista's is an industry leader in the development, innovation and manufacturing of highly-differentiated snack foods including organic, non-GMO, all natural and gluten-free products. As the sole manufacturer of our fast-growing Snack Factory ® Pretzel Crisps ® brand, Baptista's has unique capabilities consistent with our strategies and will complement our family of brands. By leveraging our existing marketing and product distribution capabilities, this transaction benefits us through increased overall gross margin provided by sales of our Snack Factory ® Pretzel Crisps ® products and also provides us incremental product development and innovation.

On October 30, 2014, we made an additional investment in Late July of approximately $59.5 million which increased our total ownership interest from 18.7% to 80% . Late July is a leader in organic and non-GMO baked and salty snacks and has the number one organic and non-GMO tortilla chip in the market today. The investment supports our goal of having a stronger presence in healthier snacks.

In conjunction with our recent acquisitions and our desire to continue to promote "better for you" snacking options, in February of 2015, we introduced our new Clearview Foods division. This new division will combine the strength of our Snack Factory ® Pretzel Crisps ® , Late July ® Organic Snacks and EatSmart brands in order to focus on developing innovative, "better for you" snacking options.

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Products
We operate in one business segment: the manufacturing, distribution, marketing and sale of snack food products. These products include pretzels, sandwich crackers, kettle cooked chips, pretzel crackers, cookies, potato chips, tortilla chips, nuts, restaurant style crackers, and other salty snacks. Additionally, we purchase certain cake products sold under our brands. Our products are packaged in various single-serve, multi-pack and family-size configurations. Our Branded products are principally sold under trademarks owned by us.

We also sell Partner brand products, which consist of other third-party branded products that we sell to our independent business owners ("IBO") through our direct-store-delivery distribution network ("DSD network"), in order to broaden the portfolio of product offerings for our IBOs. In addition, we contract with other branded food manufacturers to produce their products and periodically sell certain semi-finished goods to other manufacturers.
Overall sales of our products are relatively consistent throughout the year, although demand for certain products may be influenced by holidays, changes in seasons, or other annual events. In 2014 , Branded products represented approximately 68% of net revenue, while Partner brand and Other products represented approximately 22% and 10% of net revenue, respectively. Our product mix changed significantly as a result of the acquisition and divestiture transactions that occurred in 2014 and is consistent with our strategy to become more focused on our Branded product portfolio. In 2013 , prior to the sale of Private Brands, which is now classified as discontinued operations, Branded products represented approximately 61% of net revenue, while net revenue from Partner brand, Private brand and Other products represented approximately 18%, 16% and 5%, respectively. In 2012, consistent with 2013, Branded products represented 59% of net revenue, while net revenue from Partner brand, Private brand and Other products represented 17%, 18% and 6%, respectively.
Intellectual Property
Trademarks that are important to our business are protected by registration or other means in the United States and most other markets where the related products are sold. We own various registered trademarks for use with our Branded products including Snyder’s of Hanover ® , Lance ® , Cape Cod ® , Snack Factory ® Pretzel Crisps ® and Late July ® ("Core" brands), and Tom’s ® , Archway ® , Jays ® , Stella D’oro ® , EatSmart , Krunchers! ® , and O-Ke-Doke ® ("Allied" brands) as well as a variety of other marks and designs. On a limited basis, we license trademarks for use on certain products that are classified as Branded products.
Overall Strategy
Our strategy is to win as a provider of premium, differentiated snacks, driven by our national distribution network, which includes our DSD network and our direct distribution network ("National Distribution Network").

We are a focused player in established categories where we build a strong position. We offer differentiated products supported by our quality and brand strength. We seek to continually renovate our core products to remain relevant to our consumers and focus on innovation in order to grow our “better for you” offerings. We support the development of our products through marketing and advertising initiatives, while managing our operating costs to support this investment.

We support the growth of our business through our distribution network, both our IBO business partners as well as our direct distribution network. We make selective acquisitions of other independent distribution companies consistent with our strategy to further enhance and expand our National Distribution Network.

We engage in contract manufacturing for other manufacturers to increase the efficiencies within our manufacturing facilities, enabling better cost structures for our products and competitive prices for our customers.

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We assist our IBO partners through the utilization of Partner brands providing them with efficiencies in their distribution businesses.
Research and Development
We consider research and development of new products to be a significant part of our overall strategy, and we are committed to developing innovative, high-quality products that exceed consumer expectations. A team of professional product developers, including microbiologists, food scientists, and chemists, work in collaboration with innovation, marketing, manufacturing and sales leaders to develop products to meet changing consumer demands. Our research and development staff incorporates product ideas from all areas of our business in order to formulate new products. In addition to developing new products, the research and development staff routinely reformulates and improves existing products based on advances in ingredients and technology, and conducts value engineering to maintain competitive price points. In 2013, we completed construction of a 60,000 square foot Research and Development Center in Hanover, Pennsylvania, where we conduct much of our research and development. We launched over 60 new products during 2014 and plan to introduce approximately 45 new products in 2015. Our research and development costs were approximately $7.6 million , $7.8 million and $6.4 million in 2014 , 2013 and 2012 , respectively.
Marketing
Our marketing efforts are focused on building long-term brand equity through effective consumer marketing. In addition to volume building trade promotions to market our products, our advertising utilizes television, radio, print, digital, mobile and social advertising aimed at increasing consumer preference and usage of our brands. We continue to place a significant focus on our digital, mobile and social advertising to deliver relevant, brand building content to consumers. We also use consumer promotions, sponsorships and partnerships which include free trial offers, targeted coupons and on package offers to generate trial usage and increase purchase frequency.  These marketing efforts are an integral part of our overall strategy to grow our brands and reach more consumers in order to enhance our position as a provider of premium, differentiated snacks. We have steadily increased our advertising and marketing spending over the last few years in an effort to drive more brand recognition, growth and trial of our products.
We work with third-party information agencies, such as Nielsen, to monitor the effectiveness of our marketing and measure product growth. All information regarding our brand market positions in the United States included in this Annual Report on Form 10-K is from Nielsen and is based on retail dollar sales.
Distribution
We distribute snack food products throughout the United States using our DSD network. Our DSD network is made up of approximately 3,100 routes that are primarily owned and operated by IBOs. We also ship products directly to third-party distributors in areas where our DSD network does not operate. Through our direct distribution network, we distribute products directly to retail customers or to third-party distributors using freight carriers or our own transportation fleet. In 2014 , approximately 71% of net revenue was generated by products distributed through our DSD network while the remaining 29% was generated by products distributed through our direct distribution network.
In order to maintain and expand our DSD network, we routinely participate in certain ongoing route business purchase and sales activities. These activities include the following:
Acquisition of regional distributor businesses - As we expand our DSD network, we continue to look for potential regional distributor business acquisition targets in areas where we do not currently have our own DSD network. Upon acquisition, the acquired routes may be reengineered to include Company products and retail locations and are then sold to a new or current IBO, as described below.
Reengineering of zones - Periodically, we undertake a route reengineering project for a particular geography or zone. The reasons for route reengineering projects vary, but are typically due to increased sales volume associated with new retail locations and/or the addition of new Branded or Partner brand products to the routes in that zone. In these cases, we repurchase all of the IBO route businesses in that zone. The repurchased route businesses are then reengineered, which normally results in the addition of new IBO route territories because of the additional volume. Route businesses are then resold, usually to the original IBO, however, the original IBO has no obligation to repurchase. Upon completion, these route reengineering projects usually result in modest net gains on the sale of route businesses due to the value added during the reengineering through additional volume and/or retail locations.
Sale of Company-owned routes - Some routes remain company-owned primarily because they need additional sales volume in order to become sustainable route businesses for IBOs. As we build up the volume on these routes through increased distribution of our Branded and Partner brand products, we may sell these route businesses to IBOs which could result in gains.

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IBO defaults - There are times when IBO route businesses are not successful and the IBO's distributor agreement with us is terminated due to a breach of the distributor agreement or default under the loan agreement. In these instances, if the existing IBO is unable to sell the route business to another third party, we may repurchase the route business at a price defined in the distributor agreement. We generally put the repurchased route business up for sale to another third-party IBO immediately. The subsequent sales transaction generally results in a nominal gain or loss as the value of the route purchased typically approximates the route sale value given the short time duration between the initial purchase and sale.
Capital Expenditures
We have invested significant capital in our facilities to ensure sufficient capacity, efficient production, effective use of technology, excellent quality, and a positive working environment for our associates. In 2014 , 2013 and 2012 , we had capital expenditures of $72 million , $75 million and $80 million , respectively. We have completed the major projects that were required to position us to successfully drive our strategic plan. We expect that the need for this level of capital expenditures will diminish over the next few years. For 2015, we expect capital expenditures to decline to approximately $60 to $65 million. This level of capital spending is believed to be adequate to maintain and support our revenue growth over the next few years.
Customers
Through our DSD network, we sell our Branded and Partner brand products to IBOs that distribute to grocery/mass merchandisers, club stores, discount stores, convenience stores, food service establishments and various other retail customers including drug stores, schools, military and government facilities and “up and down the street” outlets such as recreational facilities, offices and other independent retailers. In addition, we sell our Branded products directly to retail customers and third-party distributors. We also contract with other branded food manufacturers to produce their products or provide semi-finished goods.
Substantially all of our revenue is from sales to customers in the United States. Sales to our largest retail customer, Wal-Mart Stores, Inc., either through IBOs or our direct distribution network, were approximately 14% of net revenue in 2014 and 15% of net revenue for both 2013 and 2012 . Our sales to Wal-Mart Stores, Inc. do not include sales of our products that may be made to Wal-Mart Stores, Inc. by third-party distributors outside our DSD network. Sales to these third-party distributors represent approximately 5% of our total net revenue and may increase sales of our products to Wal-Mart Stores, Inc. by an amount we are unable to estimate. Our top ten retail customers accounted for approximately 48% of our net revenue during 2014 , excluding sales of our products made by third-party distributors who are outside our DSD network.
Raw Materials
The principal raw materials used to manufacture our products are flour, vegetable oil, sugar, peanuts, potatoes, chocolate, other nuts, cheese and seasonings. The principal packaging supplies used are flexible film, cartons, trays, boxes and bags. These raw materials and supplies are normally available in adequate quantities in the commercial market and are currently contracted from three to twelve months in advance, depending on market conditions.
Competition and Industry
Our products are sold in highly competitive markets. Generally, we compete with companies engaged in the manufacturing, marketing and distribution of snack food products, some of whom have greater revenue and resources than we do. The principal methods of competition are price, service, product quality, product offerings and distribution. The methods of competition and our competitive position vary according to the geographic location, the particular product categories and the activities of our competitors.
Environmental Matters
Our operations in the United States are subject to various federal, state and local laws and regulations with respect to environmental matters. We are not a party to any material proceedings arising under these laws or regulations for the periods covered by this Annual Report on Form 10-K. We believe we are in compliance with all material environmental regulations affecting our facilities and operations and that continued compliance will not have a material impact on our capital expenditures, earnings or competitive position.
Employees
At the beginning of 2015, we had approximately 5,000 active employees located predominantly in the United States, including the recent addition of approximately 400 employees from the acquisition of Baptista's. At the beginning of 2014, prior to the sale of Private Brands, we had approximately 5,700 active employees in the United States and in Canada. None of our employees are covered by a collective bargaining agreement.
Other Matters
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, amendments to these reports, and exhibits are available on our website free of charge at www.snyderslance.com. All required reports are made available on the website as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission.

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Item 1A.  Risk Factors
In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition or results of operations may be adversely affected by any of these risks. Additional risks and uncertainties, including risks that we do not presently know of or currently deem insignificant, may also impair our business, financial condition or results of operations.
Our performance may be impacted by general economic conditions or an economic downturn.
An overall decline in U.S. economic activity could adversely impact our business and financial results. Economic uncertainty may reduce consumer spending as consumers make decisions on what to include in their food budgets. This could also result in a shift in consumer preference toward private label products. Shifts in consumer spending could result in increased pressure from competitors or customers to increase promotional spending or reduce the prices of some of our products and/or limit our ability to increase or maintain prices, which could lower our revenue and profitability.
Instability in financial markets may impact our ability or increase the cost to enter into new credit agreements in the future. Additionally, it may weaken the ability of our customers, suppliers, IBOs, third-party distributors, banks, insurance companies and other business partners to perform in the normal course of business, which could expose us to losses or disrupt the supply of inputs we rely upon to conduct our business. If one or more of our key business partners fail to perform as expected or contracted for any reason, our business could be negatively impacted.
Volatility in the price or availability of the inputs we depend on, including raw materials, packaging, energy and labor, could adversely impact our financial results.
Our financial results could be adversely impacted by changes in the cost or availability of raw materials and packaging. While we often obtain substantial commitments for future delivery of certain raw materials, continued long-term increases in the costs of raw materials and packaging, including but not limited to cost increases due to the tightening of supply, could adversely affect our financial results.
Our transportation and logistics system is dependent upon gasoline and diesel fuel, and our manufacturing operations depend on natural gas. While we may enter into forward purchase contracts to reduce the volatility associated with some of these costs, continued long-term changes in the cost or availability of these energy sources could adversely impact our financial results.
Our continued growth requires us to hire, retain and develop a highly skilled workforce and talented management team. Our financial results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs.
We operate in the highly competitive food industry.
Price competition and industry consolidation could adversely impact our financial results. The sales of most of our products are subject to significant competition primarily through promotional discounting and other price cutting techniques by competitors, some of whom are significantly larger and have greater resources than we do. In addition, there is continuing consolidation in the snack food industry, which could increase competition. Significant competition increases the possibility that we could lose one or more major customers, lose existing product authorizations at customer locations, lose market share and/or shelf space, increase expenditures or reduce selling prices, which could have an adverse impact on our business or financial results.
Sales price increases initiated by us may negatively impact our financial results if not properly implemented or accepted by our customers. Future price increases, such as those made in order to offset increased input costs, may reduce our overall sales volume, which could reduce our revenue and operating profit. Price changes driven by higher input costs may not occur, or may not occur in a timely manner, which may reduce our operating profit. Additionally, if market prices for certain inputs decline significantly below our contracted prices, customer pressure to reduce prices could lower our revenue and operating profit.
Changes in our top retail customer relationships could impact our revenue and profitability.
We are exposed to risks resulting from several large retail customers that account for a significant portion of our revenue. Our top ten retail customers accounted for approximately 48% of our net revenue during 2014 , with our largest retail customer representing approximately 14% of our 2014 net revenue. The loss of one or more of our large retail customers could adversely affect our financial results. These customers typically make purchase decisions based on a combination of price, service, product quality, product offerings, consumer demand, as well as distribution capabilities and generally do not enter into long-term contracts. In addition, these significant retail customers may change their business practices related to inventories, product displays, logistics or other aspects of the customer-supplier relationship. Our results of operations could be adversely affected if revenue from one or more of these customers is significantly reduced or if the cost of complying with customers’ demands is significant. If receivables from one or more of these customers become uncollectible, our financial results may be adversely impacted.

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We may be unable to maintain our profitability in the face of a consolidating retail environment.
Our largest customer, Wal-Mart Stores, Inc., accounted for 14% of our fiscal 2014 net sales, and our ten largest customers together accounted for approximately 48% of our fiscal 2014 net sales. As the retail grocery trade continues to consolidate and our retail customers grow larger and become more sophisticated, our retail customers may demand lower pricing and increased promotional programs. Further, these customers are reducing their inventories and increasing their emphasis on products that hold either the number one or number two market position and private label products. If we fail to use our sales and marketing expertise to maintain our category leadership positions to respond to these trends, or if we lower our prices or increase promotional support of our products and are unable to increase the volume of our products sold, our profitability and financial condition may be adversely affected.
Our results may be adversely affected by the failure to execute acquisitions and divestitures successfully.
Our ability to meet our objectives with respect to the acquisition of new businesses or the divestiture of existing businesses may depend in part on our ability to identify suitable buyers and sellers, negotiate favorable financial terms and other contractual terms, and obtain all necessary regulatory approvals. Potential risks of acquisitions also include the inability to integrate acquired businesses efficiently into our existing operations; diversion of management's attention from other business concerns; potential loss of key employees and/or customers of acquired businesses; potential assumption of unknown liabilities; the inability to implement promptly an effective control environment; potential impairment charges if purchase assumptions are not achieved or market conditions decline; and the risks inherent in entering markets or lines of business with which we have limited or no prior experience. Acquisitions outside the U.S. may present unique challenges and increase our exposure to risks associated with foreign operations, including foreign currency risks and risks associated with local regulatory agencies.

Potential risks for divestitures include the inability to separate divested businesses or business units from the Company effectively and efficiently and to reduce or eliminate associated overhead costs. Our inability to generate revenue and earnings to replace those previously generated by Private Brands or to generate cost reductions to offset overhead costs previously absorbed by Private Brands could negatively impact future results from continuing operations. Our business or financial results may be negatively affected if acquisitions or divestitures are not successfully implemented or completed.
The loss of key personnel could have an adverse effect on our financial results and growth prospects.
There are risks associated with our ability to retain key employees. If certain key employees terminate their employment, it could negatively impact manufacturing, sales, marketing or development activities. In addition, we may not be able to locate suitable replacements for key employees or offer employment to potential replacements on acceptable terms.
Efforts to execute and accomplish our strategy could adversely affect our financial results.
We utilize several operating strategies to increase revenue and improve operating performance. If we are unsuccessful due to unplanned events, our ability to manage change or unfavorable market conditions, our financial performance could be adversely affected. If we pursue strategic acquisitions, divestitures, or joint ventures, we may incur significant costs and may not be able to consummate the transactions or obtain financing. Further, the success of our acquisitions will depend on many factors, such as our ability to identify potential acquisition candidates, negotiate satisfactory purchase terms, obtain loans at satisfactory rates to fund acquisitions and successfully integrate and manage the growth from acquisitions. Integrating the operations, financial reporting, disparate technologies and personnel of newly acquired companies involves risks. As a result, we may not be able to realize expected synergies or other anticipated benefits of acquisitions.
Future acquisitions also could result in potentially dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our financial results. In the event we enter into strategic transactions or relationships, our financial results may differ from expectations. We may not be able to achieve expected returns and other benefits as a result of potential acquisitions or divestitures.
Concerns with the safety and quality of certain food products or ingredients could cause consumers to avoid our products.
We could be adversely affected if consumers in our principal markets lose confidence in the safety and quality of certain products or ingredients. Negative publicity about these concerns, whether or not valid, may discourage consumers from buying our products or cause disruptions in production or distribution of our products and negatively impact our business and financial results.


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If our products become adulterated, misbranded or mislabeled, we might need to recall those items and we may experience product liability claims if consumers are injured or become sick.
We may need to recall some of our products if they become adulterated or if they are mislabeled, and may also be liable if the consumption of any of our products causes injury to consumers. A widespread recall could result in significant losses due to the costs of a recall, the destruction of product inventory, and lost sales due to the unavailability of the affected product for a period of time. A significant product recall or product liability claim could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in the safety and/or quality of our products, ingredients or packaging. Such a loss of confidence could occur even in the absence of a recall or a major product liability claim. We also may become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products causes injury or illness. A product recall or an adverse result in any such litigation could have an adverse effect on our operating and financial results. We may also lose customer confidence for our entire Branded portfolio as a result of any such recall or proceeding.
Disruption of our supply chain could have an adverse impact on our business and financial results.
Our ability to manufacture and sell our products may be impaired by damage or disruption to our manufacturing or distribution capabilities, or to the capabilities of our suppliers or contract manufacturers, due to factors that are hard to predict or beyond our control, such as adverse weather conditions, natural disasters, fire, pandemics or other events. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, may adversely affect our business or financial results, particularly in circumstances where a product or ingredient is sourced from a single supplier or location.
We may be adversely impacted by inadequacies in, or security breaches of, our information technology systems.
We increasingly rely on information technology systems to conduct our business. These systems can enhance efficiency and business processes but also present risks of unauthorized access to our networks or data centers. If unauthorized parties gain access to our systems, they could obtain and exploit confidential business, customer, or employee information and harm our competitive position. Further, these information systems may experience damage, failures, interruptions, errors, inefficiencies, attacks or suffer from fires or natural disasters, any of which could have an adverse effect on our business and financial results if not adequately mitigated by our security measures and disaster recovery plans.
Furthermore, with multiple information technology systems as a result of acquisitions, we may encounter difficulties assimilating or integrating data. In addition, we are currently in the process of consolidating systems which could provide additional security or business disruption risks which could have an adverse impact on our business and financial results.
Improper use or misuse of social media may have an adverse effect on our business and financial results.
Consumers are moving away from traditional means of electronic mail towards new forms of electronic communication, including social media. We support new ways of sharing data and communicating with customers using methods such as social networking. However, misuse of social networking by individuals, customers, competitors, or employees may result in unfavorable media attention which could negatively affect our business. Further, our competitors are increasingly using social media networks to market and advertise products. If we are unable to compete in this environment it could adversely affect our financial results.
Demand for our products may be adversely affected by changes in consumer preferences and tastes or if we are unable to innovate or market our products effectively.
We are a consumer products company operating in highly competitive markets and rely on continued demand for our products. To generate revenue and profits, we must sell products that appeal to our customers and consumers. Any significant changes in consumer preferences or any inability on our part to anticipate or react to such changes could result in reduced demand for our products and erosion of our competitive and financial position. Our success depends on the ability to respond to consumer trends, including concerns of consumers regarding health and wellness, obesity, product attributes and ingredients. In addition, changes in product category consumption or consumer demographics could result in reduced demand for our products. Consumer preferences may shift due to a variety of factors, including the aging of the general population, changes in social trends, or changes in travel, vacation or leisure activity patterns. Any of these changes may reduce consumers’ willingness to purchase our products and negatively impact our financial results.
Our continued success also is dependent on product innovation, including maintaining a robust pipeline of new products, and the effectiveness of advertising campaigns, marketing programs and product packaging. Although we devote significant resources to meet this goal, there can be no assurance as to the continued ability to develop and launch successful new products or variants of existing products, or to effectively execute advertising campaigns and marketing programs.

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Our DSD network relies on a significant number of IBOs, and such reliance could affect our ability to efficiently and profitably distribute and market products, maintain existing markets and expand business into other geographic markets.
Our DSD network relies on approximately 2,700 IBOs for the sale and distribution of Branded and Partner brand products.
IBOs must make a commitment of capital and/or obtain financing to purchase a route business and other equipment to conduct their business. Certain financing arrangements, through third-party lending institutions, are made available to IBOs and require us to repurchase a route business if the IBO defaults on their loan and we then are required to collect any shortfall from the IBO to the extent possible. The inability of IBOs, in the aggregate, to make timely payments could require write-offs of accounts receivable or increased provisions made against accounts receivable, either of which could adversely affect our financial results.
The ability to maintain a DSD network depends on a number of factors, many of which are outside of our control. Some of these factors include: (i) the level of demand for the brands and products which are available in a particular distribution area; (ii) the ability to price products at levels competitive with those offered by competing producers; and (iii) the ability to deliver products in the quantity and at the time ordered by IBOs and retail customers. There can be no assurance that we will be able to mitigate the risks related to all or any of these factors in any of the current or prospective geographic areas of distribution. To the extent that any of these factors have an adverse effect on the relationships with IBOs, thus limiting maintenance and expansion of the sales market, our revenue and financial results may be adversely impacted.
Identifying new IBOs can be time-consuming and any resulting delay may be disruptive and costly to the business. There also is no assurance that we will be able to maintain current distribution relationships or establish and maintain successful relationships with IBOs in new geographic distribution areas. There is the possibility that we will have to incur significant expenses to attract and maintain IBOs in one or more geographic distribution areas. The occurrence of any of these factors could result in increased expense or a significant decrease in sales volume through our DSD network and harm our business and financial results.
Continued success depends on the protection of our trademarks and other proprietary intellectual property rights.
We maintain numerous trademarks and other intellectual property rights, which are important to our success and competitive position, and the loss of or our inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademarks and other proprietary intellectual property rights on a worldwide basis. Efforts to establish and protect trademarks and other proprietary intellectual property rights may not be adequate to prevent imitation of products by others or to prevent others from seeking to block sales of our products. In addition, the laws and enforcement mechanisms of some foreign countries may not allow for the protection of proprietary rights to the same extent as in the United States and other countries.
Impairment in the carrying value of goodwill or other intangible assets could have an adverse impact on our financial results.
The net carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities, and the net carrying value of other intangibles represents the fair value of trademarks, customer relationships, route intangibles and other acquired intangibles. Pursuant to generally accepted accounting principles in the United States, we are required to perform impairment tests on our goodwill and indefinite-lived intangible assets annually or at any time when events occur, which could impact the value of our reporting unit or our indefinite-lived intangibles. These values depend on a variety of factors, including the success of our business, market conditions, earnings growth and expected cash flows. Impairments to goodwill and other intangible assets may be caused by factors outside our control, such as increasing competitive pricing pressures, changes in discount rates based on changes in cost of capital or lower than expected sales and profit growth rates. In addition, if we see the need to consolidate certain brands, we could experience impairment of our trademark intangible assets. Significant and unanticipated changes could require a non-cash charge for impairment in a future period which may significantly affect our financial results in the period of such charge.
New regulations or legislation could adversely affect our business and financial results.
Food production and marketing are highly regulated by a variety of federal, state and other governmental agencies. New or increased government regulation of the food industry, including but not limited to areas related to food safety, chemical composition, production processes, traceability, product quality, packaging, labeling, school lunch guidelines, promotions, marketing and advertising (particularly such communications that are directed toward children), product recalls, records, storage and distribution could adversely impact our results of operations by increasing production costs or restricting our methods of operation and distribution. These regulations may address food industry or society factors, such as obesity, nutritional and environmental concerns and diet trends.

We are exposed to interest rate volatility, which could negatively impact our financial results.
We are exposed to interest rate volatility since the interest rates associated with portions of our debt are variable. While we mitigate a portion of this volatility by entering into interest rate swap agreements, those agreements could lock our interest rates above the market rates.

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A significant portion of our outstanding shares of common stock is controlled by a few individuals, and their interests may conflict with those of other stockholders.
As of January 3, 2015, Patricia A. Warehime beneficially owned in the aggregate approximately 18% of our outstanding common stock. Mrs. Warehime serves as one of our directors. Her husband, Michael A. Warehime served as the Chairman of the Board until he passed away in August of 2014. Mrs. Warehime is the executrix, trustee and principal beneficiary of Mr. Warehime's estate and trust. As a result, Mrs. Warehime may be able to exercise significant influence over us and certain matters requiring approval of our stockholders, including the approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This could limit the ability of our other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control of our company. In addition, Mrs. Warehime may have actual or potential interests that diverge from the interests of our other stockholders.
Item 1B.  Unresolved Staff Comments 
None.
Item 2.  Properties
Our corporate headquarters is located in Charlotte, North Carolina. We have an additional administrative office in Hanover, Pennsylvania. Our manufacturing operations are located in Charlotte, North Carolina; Hanover, Pennsylvania; Franklin, Wisconsin; Goodyear, Arizona; Columbus, Georgia; Jeffersonville, Indiana; Hyannis, Massachusetts; Perry, Florida; and Ashland, Ohio. Additionally, our Research and Development Center is located in Hanover, Pennsylvania.
We also lease or own over 100 warehouses as well as multiple stockrooms, sales offices and administrative offices throughout the United States to support our operations and DSD network. A map of our distribution warehouse locations is included below. For areas where we do not have a DSD network, our products are distributed using third-party distributors and direct to retail customers.
The facilities and properties that we own, lease and operate are maintained in good condition and are believed to be suitable and adequate for present needs. We believe that we have sufficient production capacity or the ability to increase capacity to meet anticipated demand in 2015 .

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Item 3.  Legal Proceedings
We are currently subject to various lawsuits and environmental matters arising in the normal course of business. In our opinion, such matters should not have a material effect upon our consolidated financial statements taken as a whole.  
Item 4.  Mine Safety Disclosures
Not applicable.
Item X.  Executive Officers of the Registrant
Information about each of our executive officers, as defined in Rule 3b-7 of the Securities Exchange Act of 1934, is as follows:
Name
 
Age
 
Information About Officers
Carl E. Lee, Jr.
 
55
 
President and Chief Executive Officer of Snyder's-Lance, Inc. since May 2013; President and Chief Operating Officer of Snyder’s-Lance, Inc. from December 2010 to May 2013; President and Chief Executive Officer of Snyder’s of Hanover, Inc. from 2005 to December 2010; President and Chief Executive Officer of WFMS, First Data Corporation, from 2001 to 2005; Regional President for Nabisco International from 1997 to 2001; served in a variety of senior roles with Frito-Lay domestically and internationally from 1986 to 1997.
Rick D. Puckett
 
61
 
Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Snyder's-Lance, Inc. since August 2014; Executive Vice President, Chief Financial Officer and Treasurer of Snyder’s-Lance, Inc. from December 2010 to August 2014; Executive Vice President, Chief Financial Officer, Secretary and Treasurer of Lance, Inc. from 2006 to December 2010; Executive Vice President, Chief Financial Officer, Secretary and Treasurer of United Natural Foods, Inc. from 2005 to January 2006; Senior Vice President, Chief Financial Officer and Treasurer of United Natural Foods, Inc. from 2003 to 2005.
Charles E. Good
 
66
 
President of S-L Distribution Company, Inc. and Senior Vice President of Snyder’s-Lance, Inc. since December 2010; Chief Financial Officer, Secretary and Treasurer of Snyder’s of Hanover, Inc. from 2006 to December 2010.
Patrick S. McInerney       

 
56
 
Senior Vice President and Chief Supply Chain Officer of Snyder’s-Lance, Inc. since January 2013;  Senior Vice President of Manufacturing, Snyder’s-Lance, Inc. from June 2011 to January 2013; Senior Vice President of Branded Manufacturing, Snyder’s-Lance, Inc. from December 2010 to June 2011; Vice President of Manufacturing, Snyder’s of Hanover, Inc. from 1996 to December 2010.     
Daniel J. Morgan
 
49
 
Senior Vice President and Chief Sales Officer of Snyder’s-Lance, Inc. since July 2014; Senior Vice President of Sales, East Division of Snyder’s-Lance, Inc. from December 2010 to July 2014; Regional Vice President of Sales, Snyder’s of Hanover, from 2003 to December 2010; President, Patriot Snacks from 1996 to 2003; President, Bay State Snacks from 1993 to 1996.
Rodrigo F. Troni Pena
 
48
 
Senior Vice President and Chief Marketing Officer of Snyder's-Lance, Inc. since December 2013; Senior Vice President, Birds Eye at Pinnacle Foods from May 2010 to November 2013; Chief Marketing Officer of Sabra Dipping Company (Pepsico Division) from November 2007 to April 2010; Director of International Business Development and a number of senior roles, Cadbury Schweppes PLC from 1992 to 2007.
Margaret E. Wicklund
 
54
 
Vice President, Corporate Controller, Principal Accounting Officer and Assistant Secretary of Snyder’s-Lance, Inc. since December 2010; Vice President, Corporate Controller, Principal Accounting Officer and Assistant Secretary of Lance, Inc. from 2007 to December 2010; Corporate Controller, Principal Accounting Officer and Assistant Secretary of Lance, Inc. from 1999 to 2006.

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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our $0.83-1/3 par value Common Stock trades under the symbol "LNCE" on the NASDAQ Global Select Market. We had 3,305 stockholders of record as of February 25, 2015 .
The following table sets forth the high and low sale price quotations and dividend information for each interim period of the years ended January 3, 2015 and December 28, 2013 :
2014 Interim Periods
 
High
Price
 
Low
Price
 
Dividend
Paid
First quarter (13 weeks ended March 29, 2014)
 
$
28.97

 
$
24.96

 
$
0.16

Second quarter (13 weeks ended June 28, 2014)
 
28.50

 
25.40

 
0.16

Third quarter (13 weeks ended September 27, 2014)
 
28.23

 
24.67

 
0.16

Fourth quarter (14 weeks ended January 3, 2015)
 
31.25

 
25.80

 
0.16

 
 
 
 
 
 
 
2013 Interim Periods
 
High
Price
 
Low
Price
 
Dividend
Paid
First quarter (13 weeks ended March 30, 2013)
 
$
26.29

 
$
23.48

 
$
0.16

Second quarter (13 weeks ended June 29, 2013)
 
28.62

 
24.15

 
0.16

Third quarter (13 weeks ended September 28, 2013)
 
32.49

 
26.53

 
0.16

Fourth quarter (13 weeks ended December 28, 2013)
 
30.52

 
26.73

 
0.16

On February 10, 2015 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on March 6, 2015 to stockholders of record on February 25, 2015 . Our Board of Directors will consider the amount of future cash dividends on a quarterly basis.
Our Amended and Restated Credit Agreement entered into on May 30, 2014, restricts our payment of cash dividends and repurchases of our common stock if, after payment of any such dividends or any such repurchases of our common stock, our consolidated stockholders’ equity would be less than $200 million . As of January 3, 2015 , our consolidated stockholders’ equity was $1,086.7 million and we were in compliance with this covenant. The private placement agreement for $100 million of senior notes has provisions no more restrictive than the Amended and Restated Credit Agreement.
The following table presents information with respect to purchases of common stock of the Company made during the quarter ended January 3, 2015 , by the Company or any “affiliated purchaser” of the Company as defined in Rule 10b-18(a)(3) under the Exchange Act:
Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
September 28, 2014 - October 31, 2014
 
125

 
$
26.50

 

 
293,382

November 1, 2014 - November 30, 2014
 

 

 

 
293,382

December 1, 2014 - January 3, 2015
 

 

 

 
293,382

Total
 
125

 
$
26.50

 

 
293,382

(1)
In February 2014, the Board of Directors authorized the repurchase of up to 300,000 shares of common stock, which authorization expires in March 2016. The primary purpose of the repurchase program is to permit the Company to acquire shares of common stock from employees to cover withholding taxes payable by employees upon the vesting of shares of restricted stock. All of the shares reflected in the table were repurchased pursuant to the repurchase program.



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Item 6.  Selected Financial Data
The following table sets forth selected historical financial data for the five-year period ended January 3, 2015 . The selected financial data set forth below should be read in conjunction with “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and the audited financial statements. Amounts included in the Results of Operations section below for prior periods have been reclassified to separate amounts related to discontinued operations from continuing operations. Current year Results of Operations also separately present amounts associated with discontinued operations. See Note 3 to the consolidated financial statements in Item  8 for additional information regarding discontinued operations.
 
 
 
 
 
 
 
 
 
 
 
Results of Operations (in thousands):
 
2014
 
2013
 
2012
 
2011
 
2010
Net revenue (1) (2) (3) (4)
 
$
1,620,920

 
$
1,504,332

 
$
1,362,911

 
$
1,361,888

 
$
706,932

Cost of sales
 
1,042,458

 
963,073

 
872,316

 
840,729

 
388,332

Gross margin
 
578,462

 
541,259

 
490,595

 
521,159

 
318,600

Gross margin percentage
 
35.7
%
 
36.0
%
 
36.0
%
 
38.3
%
 
45.1
%
 
 
 
 
 
 
 
 
 
 
 
Income/(loss) before
income taxes (5) (6) (7) (8) (9)
 
91,508

 
87,900

 
79,408

 
33,580

 
(20,163
)
Income/(loss) from continuing operations
 
59,217

 
55,603

 
45,489

 
20,950

 
(16,363
)
Income from discontinued operations,
net of income tax (10)
 
133,316

 
23,481

 
14,021

 
17,791

 
18,894

Net income attributable to
Snyder’s-Lance, Inc. (10)
 
$
192,591

 
$
78,720

 
$
59,085

 
$
38,258

 
$
2,512

 
 
 
 
 
 
 
 
 
 
 
Average Number of Common Shares
Outstanding (in thousands):
 
 
 
 
 
 
 
 
 
 
Basic (11)
 
70,200

 
69,383

 
68,382

 
67,400

 
34,128

Diluted  (11)
 
70,890

 
70,158

 
69,215

 
67,478

 
34,348

 
 
 
 
 
 
 
 
 
 
 
Per Share of Common Stock:
 
 
 
 
 
 
 
 
 
 
Basic earnings/(loss) per share from
continuing operations
 
$
0.84

 
$
0.80

 
$
0.66

 
$
0.30

 
$
(0.48
)
Basic earnings per share from discontinued operations (10)
 
1.90

 
0.33

 
0.20

 
0.27

 
0.55

Total basic earnings per share (10)
 
$
2.74

 
$
1.13

 
$
0.86

 
$
0.57

 
$
0.07

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings/(loss) per share from continuing operations
 
$
0.84

 
$
0.79

 
$
0.65

 
$
0.30

 
$
(0.48
)
Diluted earnings per share from discontinued operations (10)
 
1.88

 
0.33

 
0.20

 
0.26

 
0.55

Total diluted earnings per share (10)
 
$
2.72

 
$
1.12

 
$
0.85

 
$
0.56

 
$
0.07

 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared (12)
 
$
0.64

 
$
0.64

 
$
0.64

 
$
0.64

 
$
4.39

 
 
 
 
 
 
 
 
 
 
 
Financial Status at Year-end
(in thousands):
 
 
 
 
 
 
 
 
 
 
Total assets (13)(14)
 
$
1,863,388

 
$
1,769,560

 
$
1,746,732

 
$
1,466,790

 
$
1,462,356

Long-term debt, net of
current portion (14)
 
$
438,376

 
$
480,082

 
$
514,587

 
$
253,939

 
$
227,462

Total debt  (14)
 
$
446,937

 
$
497,373

 
$
535,049

 
$
258,195

 
$
285,229


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Footnotes:
(1)
2014 net revenue increased compared to 2013 approximately $30 million, as a result of the fifty-third week and $44 million as a result of the acquisition of Baptista's in June 2014 and the consolidation of the results of Late July subsequent to our additional investment in October 2014.
(2)
2013 net revenue increased compared to 2012, due to the full year impact of the acquisition of Snack Factory, which occurred in October 2012.
(3)
2012 net revenue included approximately $30 million as a result of acquisitions, including the acquisition of Snack Factory in October 2012. The completion of the conversion to an IBO-based DSD network ("IBO conversion") reduced net revenue by approximately $53 million compared to 2011.
(4)
2011 net revenue is not comparable to 2010 as a result of the Merger. Additionally, 2011 net revenue included approximately $8 million from the acquisition of George Greer Company Inc. in August 2011.
(5)
2014 pretax income was impacted by a gain on the revaluation of our prior equity investment in Late July of approximately $17 million , impairment charges of approximately $13 million and approximately $4 million associated with our margin improvement and restructuring plan.
(6)
2013 pretax income was impacted by certain self-funded medical claims that resulted in approximately $5 million in incremental expenses as well as impairment charges of approximately $2 million associated with one of our trademarks.
(7)
2012 pretax income included the impact of approximately $4 million in severance costs and professional fees related to the Merger and integration activities, approximately $9 million in impairment charges offset by approximately $22 million in gains on the sale of route businesses associated with the IBO conversion.
(8)
2011 pretax income was impacted by approximately $20 million in severance costs and professional fees related to Merger and integration activities, approximately $10 million in asset impairment charges related to the IBO conversion, approximately $3 million in charges related to closing the Corsicana, Texas manufacturing facility, approximately $9 million in expense reductions related to a change in the vacation plan and approximately $9 million in gains on the sale of route businesses associated with the IBO conversion.
(9)
2010 pretax income included the impacts of the change-in-control and other Merger-related expenses incurred in connection with the Merger, totaling approximately $38 million, as well as incremental costs of approximately $3 million for an unsuccessful bid for a targeted acquisition, approximately $3 million for severance costs relating to a workforce reduction, approximately $2 million for a claims buy-out agreement with an insurance company and a pre-tax loss for the additional fifty-third week of approximately $2 million.
(10)
2014 income from discontinued operations, net of income tax, included a $223 million pretax gain on the sale of Private Brands.
(11)
2011 basic and diluted shares outstanding include the full-year impact of shares issued in connection with the Merger.
(12)
2010 includes a special dividend of $3.75 per share in connection with the Merger.
(13)
2014 total assets increased from 2013 primarily due to the acquisition of Baptista's and Late July, partially offset by the sale of Private Brands.
(14)
2012 total assets, long-term debt and total debt increased from 2011 primarily because of the acquisition of Snack Factory.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand Snyder's-Lance, Inc., our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and accompanying notes to the financial statements. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under Part I, Item 1A—Risk Factors and other sections in this report.
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, management’s determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances. We routinely evaluate our estimates, including those related to 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.
Executive Summary
Since the merger of Snyder’s of Hanover, Inc. and Lance, Inc. in late 2010, we have implemented and aggressively focused on our strategic plan. We have made significant progress against our strategic plan and the various capital investments, manufacturing consolidations, acquisitions and divestitures that have occurred since the merger are all consistent with our strategy. On May 7, 2014, we announced two separate transactions: the acquisition of Baptista’s and the sale of Private Brands. We believe these two transactions better positioned us to be an innovative, branded snack food company with capabilities to develop products that are positioned to meet changing consumer trends. In addition, early in the fourth quarter of 2014, we increased our ownership interest from 18.7% to 80% in Late July, a leader in organic and non-GMO snacks. Consistent with our strategy to focus more on "better for you" snacking options, we announced the formation of our new Clearview Foods division in February of 2015, which combines the strength of our Snack Factory ® Pretzel Crisps ® , Late July ® Organic Snacks and EatSmart brands in order to focus on developing innovative, "better for you" snacking options. All of these actions are consistent with our overall strategic plan of supporting long-term focus and alignment with changing consumer trends in order to support branded revenue growth.
Additional details on the recent transactions are below:
On June 13, 2014, we completed the acquisition of Baptista’s for approximately $204 million. Baptista's is an industry leader in the development, innovation and manufacturing of highly-differentiated snack foods, including organic, non-GMO, all natural and gluten-free products. By acquiring the sole manufacturer of our fast-growing Snack Factory ® Pretzel Crisps ® brand, we gained unique capabilities consistent with our own innovation plans that will complement our family of brands. This transaction benefits our Company through increased gross margin on our Snack Factory ® Pretzel Crisps ® products as well as through incremental product development and innovation while leveraging our marketing and product distribution capabilities. We have several new, innovative products in our Core brands that will be introduced in early 2015 that have been made possible through this acquisition.
At the beginning of the third quarter of 2014, we completed the carve-out and sale of Private Brands for approximately $430 million , which included the sale of two of our United States subsidiaries as well as certain assets of our Canadian subsidiary, to Shearer's Foods, LLC. The 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. This divestiture allowed us to place additional focus on our Branded product portfolio and generated cash flows that were more than sufficient to fund the Baptista's and Late July acquisitions.


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Early in the fourth quarter of 2014, we made an additional investment in Late July of approximately $59.5 million which increased our total ownership interest from 18.7% to 80.0% . Late July is a leader in organic and non-GMO baked and salty snacks and has the number one organic and non-GMO tortilla chip in the market today. The investment supports our goal of having a stronger presence in healthier snacks.
In February of 2015, we introduced the Clearview Foods division. This division reinforces our desire to promote growth in "better for you" snacking options. Our Snack Factory ® Pretzel Crisps ® , Late July ® Organic Snacks and EatSmart brands will be included in the Clearview Foods division. These brands will be supported by our strong distribution network and research and development capabilities, particularly those recently obtained through our acquisition of Baptista's.
Our Core brands consist of Snyder's of Hanover ® , Lance ® , Cape Cod ® , and Snack Factory ® Pretzel Crisps ® . With the acquisition of Late July ® , we added another Core brand to our portfolio. During 2014, we experienced overall positive growth in our Core Brands.
Net revenue from our Cape Cod ® kettle cooked chips increased in 2014, compared to 2013. The increase was driven by organic growth in core markets, new consumers due to trial and innovation, quality improvements, digital advertising and west coast expansion -- all resulting in strong distribution and market share gains. In addition, we introduced a new product category for Cape Cod ® in 2014 -- ready to eat popcorn -- to take advantage of growth trends and our brand equity. We will be extending the brand into additional product categories in 2015.
Net revenue from Snyder’s of Hanover ® pretzels increased in 2014, compared to 2013 as new product offerings more than offset declines in certain base products as a result of increased price competition from private brand products. New product offerings included our Sweet and Salty pretzel pieces as well as new gluten-free offerings, which were both very well received by consumers. Snyder’s of Hanover ® continued to maintain its market share and category leadership in this growing market.
Net revenue from our Lance ® sandwich crackers declined in 2014, compared to the prior year and the brand lost market share despite maintaining its position as market share leader in the sandwich cracker category. Throughout the year, we have been renovating our Lance ® sandwich cracker brand by reconfiguring our packaging for the entire sandwich cracker portfolio. With both the old and new packaging designs and configurations available to consumers during most of 2014, our consumer research showed that this caused temporary confusion at the shelf, which led to the volume declines. The packaging renovation was completed by the end of 2014. We also experienced competition from other brands in the sandwich cracker category as well as competition from other snack food products. We continue to address these volume declines with new product launches, including Lance ® Bolds ® sandwich crackers and a new 20-count configuration, as well as aggressive coupon programs and a reintroduction of radio advertising, which we believe will be a better and more cost effective media platform.
Snack Factory ® Pretzel Crisps ® showed strong growth in net revenue in 2014, compared to 2013 primarily from expanded distribution and new product offerings. We continue to gain market share with this brand, and we are focused on driving growth through the introduction of new products within this category. During 2014, we introduced a mini version of our more popular products directed towards a younger consumer, but also for easier snacking for existing customers. These new products have been well received to date and we expect to continue to expand on this success in 2015.
In addition to successes in our Core brands, we believe we have also strengthened our talent base in marketing and sales which has resulted in stronger innovation and better execution in the market. We have also implemented tools and analytics that have helped us deliver more cost effective trade and investment in the growth of the brands. Further, we have developed capabilities that we believe will enable us to more quickly integrate acquired businesses and get to common systems and processes.
As a result of the disposition of Private Brands in 2014, there were stranded operational costs and accordingly, during the third quarter, we announced the Margin Improvement and Restructuring Plan ("Restructuring Plan") to help offset these stranded costs. The Restructuring Plan is expected to be completed by the third quarter of 2015. In addition, the assets and liabilities of the Private Brands disposal group were considered held-for-sale and presented as discontinued operations in our Consolidated Balance Sheets. In addition, the revenues and expenses that will no longer continue after the sale of Private Brands were reclassified to discontinued operations in the Consolidated Statements of Income. All prior year results were retrospectively adjusted to consistently present continuing and discontinued operations.
Our fiscal year ends on the Saturday closest to December 31 and, as a result, a 53rd week is added every fifth or sixth year. Our 2013 and 2012 fiscal years each contained 52 weeks and ended on December 28, 2013 and December 29, 2012 , respectively. Fiscal year 2014 contained 53 weeks and ended on January 3, 2015 . The 53rd week added approximately $30 million to net revenue and $0.02 to diluted earnings per share in fiscal year 2014.

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Table of Contents

Some of the highlights of our 2015 business outlook are as follows:
We expect to introduce approximately 45 new products in 2015 as our focus on research and development and innovation continues. These new products include Snyder’s of Hanover ® Bowties and Poppers , Lance ® Quick Starts , Cape Cod ® Dipping Shells, Snack Factory ® Pretzel Crisps ® gluten-free minis and Late July ® Clásico tortilla chips along with a variety of new flavors in many existing product lines that are designed to attract both new and repeat customers.
We plan to continue to focus on cost savings opportunities in order to reduce overhead costs that remained after the sale of Private Brands and achieve higher margins and greater efficiency as a result of the Restructuring Plan and ongoing initiatives. The Restructuring Plan is expected to be completed by the third quarter of 2015, and we expect to see some improvement in our gross margin percentage as well as other operating costs in the second half of 2015.
We expect to continue to make investments in marketing and advertising, including television, digital campaigns and social media, to support our Core brands. We expect to increase our investment associated with marketing and advertising 12% to 15% when compared to 2014, with the majority of this investment projected to come in the first quarter of 2015.
We expect ingredient costs in 2015 to be reasonably consistent with 2014 and there are currently no significant planned price increases.

16


Table of Contents

Results of Operations
Year Ended January 3, 2015 (53 weeks) Compared to Year Ended December 28, 2013 (52 weeks)
(in millions)
 
2014
 
2013
 
Favorable/
(Unfavorable)
Variance
Net revenue
 
$
1,620.9

 
100.0
 %
 
$
1,504.3

 
100.0
 %
 
$
116.6

 
7.8
 %
Cost of sales
 
1,042.4

 
64.3
 %
 
963.0

 
64.0
 %
 
(79.4
)
 
(8.2
)%
Gross margin
 
578.5

 
35.7
 %
 
541.3

 
36.0
 %
 
37.2

 
6.9
 %
Selling, general and administrative
 
478.5

 
29.5
 %
 
447.2

 
29.7
 %
 
(31.3
)
 
(7.0
)%
Impairment charges
 
13.0

 
0.8
 %
 
1.9

 
0.1
 %
 
(11.1
)
 
(584.2
)%
Gain on sale of route businesses, net
 
(1.1
)
 
(0.1
)%
 
(2.6
)
 
(0.2
)%
 
(1.5
)
 
(57.7
)%
Gain on the revaluation of prior equity investment
 
(16.6
)
 
(1.0
)%
 

 
 %
 
16.6

 
 %
Other income, net
 
(0.2
)
 
 %
 
(7.5
)
 
(0.4
)%
 
(7.3
)
 
(97.3
)%
Income before interest and income taxes
 
104.9

 
6.5
 %
 
102.3

 
6.8
 %
 
2.6

 
2.5
 %
Interest expense, net
 
13.4

 
0.8
 %
 
14.4

 
1.0
 %
 
1.0

 
6.9
 %
Income tax expense
 
32.3

 
2.0
 %
 
32.3

 
2.1
 %
 

 
 %
Income from continuing operations
 
59.2

 
3.7
 %
 
55.6

 
3.7
 %
 
3.6

 
6.5
 %
Income from discontinued operations,
net of income tax
 
133.3

 
8.2
 %
 
23.5

 
1.6
 %
 
109.8

 
467.2
 %
Net income
 
$
192.5

 
11.9
 %
 
$
79.1

 
5.3
 %
 
$
113.4

 
143.4
 %

Net Revenue
Net revenue by product category was as follows:
(in millions)
 
2014
 
2013
 
Favorable/
(Unfavorable)
Variance
Branded
 
$
1,109.3

 
68.4
%
 
$
1,071.4

 
71.2
%
 
$
37.9

 
3.5
%
Partner brand
 
348.1

 
21.5
%
 
308.4

 
20.5
%
 
39.7

 
12.9
%
Other
 
163.5

 
10.1
%
 
124.5

 
8.3
%
 
39.0

 
31.3
%
Net revenue
 
$
1,620.9

 
100.0
%
 
$
1,504.3

 
100.0
%
 
$
116.6

 
7.8
%
Overall revenue increased $116.6 million, or 7.8%, in 2014 compared to 2013 primarily due to acquisitions, the additional week of revenue recognized in 2014 and revenue growth in our Partner brand product category. The following table shows revenue by product category adjusted for amounts attributable to acquisitions and the 53rd week and compares the 2014 adjusted net revenue to 2013 net revenue:
(in millions)
 
2014 Net Revenue
 
Acquisitions
 
Estimated 53rd week
 
2014 Adjusted Net Revenue   (1)
 
2013 Net Revenue
 
Favorable/
(Unfavorable)
Variance
Branded
 
$
1,109.3

 
$
3.9

 
$
20.6

 
$
1,084.8

 
$
1,071.4

 
$
13.4

 
1.3
 %
Partner brand
 
348.1

 

 
6.5

 
341.6

 
308.4

 
33.2

 
10.8
 %
Other
 
163.5

 
40.5

 
3.3

 
119.7

 
124.5

 
(4.8
)
 
(3.9
)%
Net revenue
 
$
1,620.9

 
$
44.4

 
$
30.4

 
$
1,546.1

 
$
1,504.3

 
$
41.8

 
2.8
 %
(1)
The non-GAAP measures and related comparisons in the table above should be considered in addition to, not as a substitute for, our net revenue disclosure, as well as other measures of financial performance reported in accordance with GAAP, and may not be comparable to similarly titled measures used by other companies. Our management believes the presentation

17



of 2014 Adjusted Net Revenue is useful for providing increased transparency and assisting investors in understanding the ongoing operating performance of the Company.
Branded revenue increased $37.9 million , or 3.5% , compared to 2013 , primarily due to additional revenue from the 53rd week included in 2014. Branded revenue increased 1.3% excluding acquisitions and the 53rd week. However, there were significant positive trends in revenues from three of our Core brands. Total Core brand revenue growth was approximately 2%, after adjusting for the 53rd week, and was led by revenue increases in Cape Cod ® kettle cooked chips and Snack Factory ® Pretzel Crisps ® which were partially offset by revenue declines in Lance ® sandwich crackers. Our Cape Cod ® kettle cooked chips experienced strong volume growth and increased market share when compared to 2013. This increase in Cape Cod volume was driven by organic growth in core markets, new consumers due to trial and innovation, quality improvements, digital advertising and expansion to the west coast during 2014. We also continued to experience revenue growth in our Snack Factory ® Pretzel Crisps ® as well as market share gains, which were primarily a result of increased distribution. Snyder’s of Hanover ® pretzels showed some growth in net revenue when compared to 2013. This increase was primarily due to a strong performance by certain new products, including Sweet and Salty pretzel pieces, partially offset by declines in certain base products. The revenue gains in these Core brands were largely offset by a decline in revenue from Lance ® sandwich crackers. This decrease in net revenue from Lance ® sandwich crackers was primarily a result of volume declines due to packaging changes, competition from other brands in the sandwich cracker category and competition from other snack food products. We are working to address these volume declines with new product launches, radio advertising and aggressive coupon programs which began in the fourth quarter of 2014 and will continue into 2015. Revenue from our Allied branded products was relatively flat, after adjusting for the 53rd week.
Partner brand net revenue grew 12.9% compared to 2013 , and 10.8% after adjusting for the 53rd week in 2014. The increase was primarily due to volume growth in our existing Partner brand product portfolio. In addition, our distributor acquisitions in the second half of 2013 brought in additional Partner brand revenue. Adding strong regional partner brands to our product portfolio continues to provide opportunities for geographic expansion of our DSD network, which in turn expands the distribution of our Branded products and benefits our IBOs.

Due to the sale of Private Brands and the reclassification of associated revenue to discontinued operations, the Private brand product category was removed and Private brand revenue not included in the sale transaction was reclassified to Other. The Other product category primarily consists of revenue from contract manufactured products. Other revenue increased $39.0 million , or 31.3% , from 2013 to 2014 , primarily because of the acquisition of Baptista's. However, this increase was partially offset by a reduction in orders for certain contract manufactured products.

In 2014 , approximately 71% of net revenue was generated through our DSD network as compared to 73% in the prior year. The decline as a percentage of revenue was due to a higher mix of Other products which are sold through our direct distribution network, largely due to the acquisition of Baptista's.
Gross Margin
Gross margin increased $37.2 million , but declined 0.3% as a percentage of net revenue compared to 2013 . The majority of the dollar increase in gross margin was due to increased sales volume compared to the prior year including the impact of the 53rd week. However, the decrease in gross margin as a percentage of revenue was driven by an increase in promotional spending for our Core brands and a greater mix of revenues from Partner brand and Other products which generally have lower margins than our manufactured Branded products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $31.3 million in 2014 compared to 2013 , but decreased 0.2% as a percentage of net revenue. The majority of the increase was the result of incremental advertising and marketing costs as well as higher freight costs compared to 2013. We increased our investment in marketing and advertising costs by approximately 12% in 2014 to further support new product introductions during the year as well as to maintain and grow our market share for our Core branded products. The higher freight costs in 2014 were primarily due to increased sales volume, but were also due to adverse weather conditions and third-party freight carrier capacity constraints, most of which were in the first half of the year. We also incurred $2.8 million in additional expenses in 2014 in conjunction with our Margin Improvement and Restructuring Plan.
Impairment Charges
During 2014 , we recorded $13.0 million in total impairment charges, with $7.3 million in impairment of intangible assets and $5.7 million in impairment of fixed assets. We recorded a $3.6 million impairment to write down one of our trademarks to its fair value of $2.5 million . This impairment was necessary due to a reduction in projected future cash flows for this trademark. We also recorded a $3.7 million impairment of our route intangible assets during 2014 . There were $5.7 million in fixed asset impairment charges recorded during 2014 . Fixed asset impairment charges of $1.8 million were recorded in the fourth quarter of 2014 to write off certain packaging equipment where a decision was made to discontinue the associated product line during the fourth quarter.

18



Additional fixed asset impairment charges of $2.9 million were recorded in the second quarter of 2014 primarily to write off certain machinery and equipment where expected 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 during the first quarter of 2014 and related to our former Corsicana, Texas facility.
The impairment expense in 2013 of $1.9 million was incurred in order to write-off the remaining value of a trademark for which we have substantially discontinued use.
Gain on the Sale of Route Businesses, Net
During 2014 , we recognized $1.1 million in net gains on the sale of route businesses compared with net gains of $2.6 million in 2013 . The decrease in net gains on the sale of route businesses in 2014 is primarily due to less route business sales activity and the sale of lower value routes in 2014 when compared to 2013. The majority of the route business sales activity in both years 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.
Net gains on the sale of route businesses in 2014 consisted of $3.3 million in gains and $2.2 million in losses on the sale of route businesses. For 2013, net gains on the sale of route businesses consisted of $6.1 million in gains and $3.5 million in losses on the sale of route businesses.
Gain on the Revaluation of Prior Equity Investment
We recognized a $16.6 million gain on the revaluation of our prior 18.7% equity investment in Late July. Because of our purchase of a controlling interest in Late July, the equity of the entire entity was increased to fair value, which resulted in a $16.6 million increase in the value of our prior investment.
Other Income, Net
Other income declined from $7.5 million in 2013 to $0.2 million in 2014 . Other income in 2013 included a settlement of a business interruption claim for lost profits during the year of approximately $4.0 million. The remaining income in 2013 was primarily the result of gains on sales of fixed assets and certain cost method investments. Other income in 2014 principally consisted of income from a Transition Services Agreement associated with the sale of Private Brands offset by losses on sales of fixed assets.
Interest Expense, Net
Interest expense decreased $1.0 million during 2014 compared to 2013 . The decrease was due to lower average debt levels and interest rates in 2014, and was partially offset by additional interest expense in 2014 of $0.8 million due to the write-off of previously capitalized debt issuance costs.
Income Tax Expense
The effective income tax rate decreased to 35.3% in 2014 from 36.7% in 2013 . The decrease in the effective income tax rate in 2014 was primarily due to the recognition of previously established unrecognized tax benefits in the first quarter of 2014.
Income from discontinued operations, net of income tax
Income from discontinued operations, net of income tax, increased in 2014 primarily due to the gain as a result of the completion of the sale of Private Brands.

19



Year Ended December 28, 2013 Compared to Year Ended December 29, 2012
(in millions)
 
2013
 
2012
 
Favorable/
(Unfavorable)
Variance
Net revenue
 
$
1,504.3

 
100.0
 %
 
$
1,362.9

 
100.0
 %
 
$
141.4

 
10.4
 %
Cost of sales
 
963.0

 
64.0
 %
 
872.3

 
64.0
 %
 
(90.7
)
 
(10.4
)%
Gross margin
 
541.3

 
36.0
 %
 
490.6

 
36.0
 %
 
50.7

 
10.3
 %
Selling, general and administrative
 
447.2

 
29.7
 %
 
415.6

 
30.5
 %
 
(31.6
)
 
(7.6
)%
Impairment charges
 
1.9

 
0.1
 %
 
9.4

 
0.7
 %
 
7.5

 
79.8
 %
Gain on sale of route businesses, net
 
(2.6
)
 
(0.2
)%
 
(22.3
)
 
(1.6
)%
 
(19.7
)
 
(88.3
)%
Other income, net
 
(7.5
)
 
(0.4
)%
 
(1.0
)
 
(0.1
)%
 
6.5

 
650.0
 %
Income before interest and income taxes
 
102.3

 
6.8
 %
 
88.9

 
6.5
 %
 
13.4

 
15.1
 %
Interest expense, net
 
14.4

 
1.0
 %
 
9.5

 
0.7
 %
 
(4.9
)
 
(51.6
)%
Income tax expense
 
32.3

 
2.1
 %
 
33.9

 
2.5
 %
 
1.6

 
4.7
 %
Income from continuing operations
 
55.6

 
3.7
 %
 
45.5

 
3.3
 %
 
10.1

 
22.2
 %
Income from discontinued operations,
net of income tax
 
23.5

 
1.6
 %
 
14.0

 
1.1
 %
 
9.5

 
67.9
 %
Net income
 
$
79.1

 
5.3
 %
 
$
59.5

 
4.4
 %
 
$
19.6

 
32.9
 %

Net Revenue
Net revenue by product category was as follows:
(in millions)
 
2013
 
2012
 
Favorable/
(Unfavorable)
Variance
Branded
 
$
1,071.4

 
71.2
%
 
$
955.5

 
70.1
%
 
$
115.9

 
12.1
%
Partner brand
 
308.4

 
20.5
%
 
283.1

 
20.8
%
 
25.3

 
8.9
%
Other
 
124.5

 
8.3
%
 
124.3

 
9.1
%
 
0.2

 
0.2
%
Net revenue
 
$
1,504.3

 
100.0
%
 
$
1,362.9

 
100.0
%
 
$
141.4

 
10.4
%
Branded revenue increased $115.9 million , or 12.1% , compared to 2012 , led by strong Core brand growth, primarily driven by the full-year impact of our acquisition of Snack Factory. We also had double-digit revenue growth and increased our market share in our Snyder’s of Hanover ® brand products. Cape Cod ® kettle cooked chips also achieved growth in both revenue and market share. We increased our promotional spending as a percentage of revenue during 2013. This resulted in $5.1 million of additional promotional expense when compared to 2012. Our Lance ® branded sandwich cracker revenue was negatively impacted by this significantly higher promotional spending which was necessary to mitigate the impact of increased competition. This resulted in a decline in revenue for our Lance ® branded sandwich crackers compared to 2012 but this brand maintained its market share leader position in the sandwich cracker category. We also experienced a decline in revenue in certain Allied brands.
Partner brand net revenue grew 8.9% compared to 2012 . This increase was due to the acquisition of new third-party distributors and new product offerings to support our DSD network. Adding strong regional partner brands to our portfolio continues to provide opportunities for geographic expansion of our DSD network, which in turn expands the distribution of our Branded products and benefits our IBOs.

Due to the sale of Private Brands and the reclassification of associated revenue to discontinued operations, the Private brand product category was removed and Private brand revenue not included in the sale transaction was reclassified to Other. The Other product category primarily consists of revenue from contract manufactured products. Other revenue remained relatively flat compared to 2012.

In 2013 , approximately 73% of net revenue was generated through our DSD network as compared to 78% in 2012. The decline as a percentage of revenue was due to a higher mix of Snack Factory ® Pretzel Crisps ® pretzel crackers, which are sold through our direct distribution network.

20



Gross Margin
Gross margin increased $50.7 million , or 10.3% , in 2013 compared to 2012 . The majority of the increase in gross margin was due to the full year impact of sales of our Snack Factory ® Pretzel Crisps ® pretzel crackers. Much of the favorability in gross margin as a percentage of revenue was due to a higher mix of Branded product sales, offset by increased promotional spending to support our Branded portfolio and start-up costs associated with the installation of two major capital projects that provided additional capacity.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $31.6 million in 2013 compared to 2012 , but decreased 0.8% as a percentage of net revenue. A majority of the increase was due to incremental expenses associated with the operations of Snack Factory, which included additional investment in advertising and marketing to support this as well as our other Core brands. The decrease as a percentage of revenue was due to the full-year impact of the IBO conversion, which resulted in lower compensation, benefits and other route related expenses. However, we did have certain items that unfavorably impacted selling, general and administrative expenses, which included higher display costs to support our new product offerings, sales development and incremental expenses associated with certain self-funded medical claims. In 2012 , we recognized severance charges and professional fees associated with Merger and integration activities and costs associated with the acquisition of Snack Factory.
Impairment Charges
In 2013 , we recorded an impairment of $1.9 million to write-off the remaining value of a trademark for which we have substantially discontinued use. The $9.4 million of impairment expense in 2012 consisted primarily of a $7.6 million impairment of two of our trademarks. The impairment of trademarks was necessary as we continued to optimize our brand portfolio following the Merger and made a decision to replace a portion of the sales of these Branded products with other, more recognizable, brands in our portfolio.
Gain on the Sale of Route Businesses, Net
During 2013 , we recognized $2.6 million in net gains on the sale of route businesses compared with net gains of $22.3 million in 2012 . The net gains in 2012 primarily represented gains as a result of the IBO conversion which was completed during 2012 . As many of the route businesses sold in the IBO conversion were partially legacy Lance routes that were internally created and had no basis on our balance sheet, there were substantial net gains associated with the sale of most of these route businesses. In 2013 , the net gains were a result of ongoing routine route business sales activity such as route reengineering and the resale of route businesses we had repurchased due to IBO defaults.
Net gains on the sale of route businesses in 2013 consisted of $6.1 million in gains and $3.5 million in losses on the sale of route businesses. For 2012, net gains on the sale of route businesses consisted of $29.5 million in gains and $7.2 million in losses on the sale of route businesses.
Other Income, Net
Other Income increased $ 6.5 million from 2012 to 2013 due primarily to a settlement of a business interruption claim for lost profits during the fiscal year of approximately $4.0 million. The remaining increase is primarily the result of gains on sales of fixed assets and certain cost method investments.
Interest Expense, Net
Interest expense increased $4.9 million during 2013 compared to 2012 , primarily due to the full-year impact of the additional debt used to fund the Snack Factory acquisition.
Income Tax Expense
The effective income tax rate decreased to 36.7% for 2013 from 42.7% for 2012 . In 2012 , the effective tax rate was higher due to goodwill associated with the sale of route businesses which had no tax basis. The impact on the effective tax rate was an increase of 6.1% in 2012 . As expected, the effective tax rate declined as subsequent route sale activity decreased.
Income from discontinued operations, net of income tax
Income from Discontinued Operations, net of income tax, increased approximately $9.5 million from 2012 to 2013. The primary driver of this increase was the decision to close our Cambridge, Ontario manufacturing facility in 2012, which resulted in approximately $4.8 million of expense associated with impairment of fixed assets and severance in the fourth quarter of 2012. The remaining increase was primarily due to price increases realized on our Private brand products in 2013, which resulted in increased gross margin.

21



Liquidity and Capital Resources
Liquidity
Liquidity represents our ability to generate sufficient cash flows from operating activities to meet our obligations as well as our ability to obtain appropriate financing. Therefore, liquidity should not be considered separately from capital resources that consist primarily of current and potentially available funds for use in achieving our objectives. Currently, our liquidity needs arise primarily from acquisitions, working capital requirements, capital expenditures for fixed assets and dividends. We believe we have sufficient liquidity available to enable us to meet these demands.
The following table sets forth a summary of our cash flows for each of the past three years:
(in thousands)
 
2014
 
2013
 
2012
Net cash provided by/(used in):
 
 
 
 
 
 
Operating activities
 
$
13,025

 
$
140,736

 
$
92,768

Investing activities
 
99,035

 
(64,911
)
 
(348,344
)
Financing activities
 
(90,767
)
 
(71,021
)
 
243,848

Effect of exchange rate changes on cash
 

 
$

 
163

Net increase/(decrease) in cash and cash equivalents
 
$
21,293

 
$
4,804

 
$
(11,565
)
Operating Cash Flows
Cash flow provided by operating activities decreased $127.7 million in 2014 when compared to 2013. The decrease in net cash provided by operating activities was primarily driven by taxes paid due to the gain on the sale of Private Brands. Approximately $127 million in income taxes related to the gain on the sale of Private Brands were paid in 2014. Excluding the payment of these income taxes, net cash provided by operating activities was reasonably consistent from 2013 to 2014.
Cash flow provided by operating activities increased $48.0 million in 2013 when compared to 2012. The increase was largely driven by an increase in net income in 2013 as well as additional income generated by operating activities, as a higher percentage of the 2012 net income was generated by gains on the sale of route businesses.
Investing Cash Flows
Cash provided by investing activities totaled $99.0 million i n 2014 compared with cash used in investing activities of $64.9 million in 2013. The significant increase in cash provided by investing activities was due to the proceeds received from the sale of Private Brands of $430 million , which was partially offset by the acquisition of Baptista's and our additional investment in Late July totaling $262.3 million . Capital expenditures for fixed assets, principally manufacturing equipment, decreased slightly from $74.6 million in 2013 to $72.1 million in 2014. We expect that the need for this level of capital expenditures will diminish over the next few years. For 2015, we expect capital expenditures to decline to approximately $60 to $65 million. This level of capital spend is believed to be adequate to maintain and support our revenue growth over the next few years. Proceeds from the sale of route businesses, net of purchases, generated cash flows of $1.0 million i n 2014, compared to net proceeds of $1.1 million in 2013.
Cash used in investing activities totaled $64.9 million in 2013 compared to cash used in investing activities of $348.3 million in 2012. The significant reduction in cash used in investing activities was primarily due to the acquisition of Snack Factory for $343.4 million in 2012. Capital expenditures for fixed assets, principally manufacturing equipment, decreased from $80.3 million in 2012 to $74.6 million in 2013. Proceeds from the sale of route businesses, net of purchases, generated net cash flows of $1.1 million in 2013, compared to net proceeds of $65.4 million in 2012. While we continued the purchase and sale of route businesses in 2013, these activities slowed substantially to a more normal level when compared to 2012 due to the completion of the IBO conversion.
Financing Cash Flows
Net cash used in fi nancing activities of $90.8 million in 2014 was principally due to dividends paid of $44.9 million and the continued debt repayment of $50.4 million . This compared to cash used in financing activities of $71.0 million in 2013, which was principally due to dividends paid of $44.9 million , as well as debt repayment of $36.6 million . During 2012, we had net cash provided by financing activities of $243.8 million , primarily due to proceeds from a $325 million term loan used to acquire Snack Factor y.
On February 10, 2015 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on March 6, 2015 to stockholders of record on February 25, 2015 .

22



Debt
During the second quarter of 2014, we entered into an Amended and Restated Credit Agreement ("Credit Agreement"). The Credit Agreement provides for borrowings under credit facilities consisting of:
a $375 million five-year revolving credit facility;
a $150 million five-year term loan; and
a $150 million ten-year term loan.
In accordance with the 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.
We are required to repay the aggregate principal amount of (a) all loans under the revolving credit facility on May 30, 2019, (b) the five-year term loan in quarterly principal installments of $1.9 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.
Unused and available borrowings were $325 million under our existing credit facilities at January 3, 2015 , as compared to $180 million at December 28, 2013 . Under certain circumstances and subject to certain conditions, we have the option to increase available credit under the Credit Agreement by up to $200 million during the life of the facility. We also maintain standby letters of credit in connection with our self-insurance reserves for casualty claims. The total amount of these letters of credit was $11.4 million as of January 3, 2015 .
The Credit Agreement requires us to comply with certain defined covenants, such as a maximum debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio of 3.50 , or 3.75 for four consecutive periods following a material acquisition, and a minimum interest coverage ratio of 2.50 . At January 3, 2015 , our debt to EBITDA ratio was 1.11 , and our interest coverage ratio was 24.09 . These calculations were significantly impacted by the $223 million pretax gain on the sale of Private Brands. Excluding this gain, our debt to EBITDA ratio would have been 2.49 , and our interest coverage ratio would have been 7.71 . In addition, the Credit Agreement restricts our payment of cash dividends and repurchases of our common stock if, after payment of any such dividends or any such repurchases of our common stock, our consolidated stockholders’ equity would be less than $200 million . As of January 3, 2015 , our consolidated stockholders’ equity was $1,086.7 million . We were in compliance with all of these covenants at January 3, 2015 . The private placement agreement for $100 million of senior notes has provisions no more restrictive than the Credit Agreement. Total interest expense under all credit agreements for 2014 , 2013 and 2012 was $13.4 million , $14.7 million , and $9.7 million , respectively.
Contractual Obligations
We lease certain facilities and equipment classified as operating leases. We also have entered into agreements with suppliers for the purchase of certain ingredients, packaging materials and energy used in the production process. These agreements are entered into in the normal course of business and consist of agreements to purchase a certain quantity over a certain period of time. These purchase commitments range in length from three to twelve months.


23



Contractual obligations as of January 3, 2015 were:  
(in thousands)
 
 
 
Payments Due by Period
Total    
 
2015
 
2016-2017
 
2018-2019
 
Thereafter
Purchase commitments
 
$
105,213

 
$
105,213

 
$

 
$

 
$

Debt, including interest payable  (1)
 
485,791

 
18,217

 
133,032

 
187,448

 
147,094

Operating lease obligations
 
74,471

 
16,557

 
21,420

 
9,797

 
26,697

Unrecognized tax benefits  (2)
 
5,144

 

 

 

 

Other liabilities  (3)
 
26,225

 

 

 

 

Total contractual obligations
 
$
696,844

 
$
139,987

 
$
154,452

 
$
197,245

 
$
173,791

Footnotes:
(1)
Variable interest will be paid in future periods based on the outstanding balance at that time.
(2)
Unrecognized tax benefits relate to uncertain tax positions recorded under accounting guidance that we have adopted and include associated interest and penalties. As we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the "Payments Due by Period" section of the table.
(3)
Amounts represent future cash payments to satisfy other noncurrent liabilities recorded on our Consolidated Balance Sheets, including the short-term portion of these long-term liabilities. Included in noncurrent liabilities on our Consolidated Balance Sheets as of January 3, 2015 were $18.1 million in accrued insurance liabilities, $5.0 million in accrued incentives, and $3.2 million in other liabilities. As the specific payment dates for these liabilities is unknown, the related balances have not been reflected in the "Payments Due by Period" section of the table.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity or cash flows.
We currently provide a partial guarantee for loans made to IBOs by certain third-party financial institutions for the purchase of route businesses. The outstanding aggregate balance on these loans was approximately $130.3 million as of January 3, 2015 compared to approximately $117.9 million as of December 28, 2013 . The $12.4 million increase in the guarantee was primarily due to new IBO loans as a result of transactions between former IBOs and new IBOs where the principal outstanding on the repaid loans was lower than the principal of the new loans. The annual maximum amount of future payments we could be required to make under the guarantees 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.
Critical Accounting Estimates
Preparing the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We believe the following estimates and assumptions to be critical accounting estimates. These assumptions and estimates may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and may have a material impact on our financial condition or operating performance. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Our policy on revenue recognition varies based on the types of products sold and the distribution method. We recognize revenue when title and risk of loss passes to our customers. Allowances for sales returns, stale products, promotions and discounts are also recorded as reductions of revenue in the consolidated financial statements.
Revenue for products sold to IBOs in our DSD network is recognized when the IBO purchases the inventory from our warehouses. Revenue for products sold to retail customers through routes operated by company associates is recognized when the product is delivered to the customer.

24



Revenue for products shipped directly to customers from our warehouse is recognized based on the shipping terms listed on the shipping documentation. Products shipped with terms FOB shipping point are recognized as revenue at the time the product leaves our warehouses. Products shipped with terms FOB destination are recognized as revenue based on the anticipated receipt date by the customer.
We allow certain customers to return products under agreed upon circumstances. We record a returns allowance for damaged products and other products not sold by the expiration date on the product label. This allowance is estimated based on a percentage of historical sales returns and current market information.
We record certain reductions to revenue for promotional allowances. There are several different types of promotional allowances such as off-invoice allowances, rebates and shelf space allowances. An off-invoice allowance is a reduction to the sales price that is directly deducted from the invoice amount. We record the amount of the deduction as a reduction to revenue when the transaction occurs. Rebates are offered to retail customers based on the quantity of product purchased over a period of time. Based on the nature of these allowances, the exact amount of the rebate is not known at the time the product is sold to the customer. An estimate of the expected rebate amount is recorded as a reduction to revenue at the time of the sale and a corresponding accrued liability is recorded. The accrued liability is monitored throughout the time period covered by the promotion, and is based on historical information and the progress of the customer against the target amount. We also record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue. The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion.
Total allowances for sales returns, rebates, coupons, scan-backs and other promotional activities increased from $22.4 million at the end of 2013 to $22.8 million at the end of 2014 due primarily to the timing of promotional activities.
Shelf space allowances are capitalized and amortized over the lesser of the life of the agreement or up to a maximum of three years and recorded as a reduction to revenue. Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.
Allowance for Doubtful Accounts
The determination of the allowance for doubtful accounts is based on management’s estimate of uncollectible accounts receivable. We record a general reserve based on analysis of historical data and aging of accounts receivable. In addition, management records specific reserves for receivable balances that are considered at higher risk due to known facts regarding the customer. The assumptions for this determination are reviewed quarterly to ensure that business conditions or other circumstances are consistent with the assumptions. The allowance for doubtful accounts was $1.8 million and $1.5 million as of January 3, 2015 and December 28, 2013 , respectively.
Self-Insurance Reserves
We maintain reserves for the self-funded portions of employee medical insurance benefits. Our portion of employee medical claims is generally limited to $0.4 million per participant annually by stop-loss insurance coverage. Our 2014 stop-loss insurance coverage limit was $4.0 million in aggregate for a specific portion of our self-funded claims. The entire amount associated with these claims was recorded in pre-tax expenses during 2014. This specific stop-loss is no longer necessary in 2015. The accrual for incurred but not reported medical insurance claims was $3.6 million and $4.4 million in 2014 and 2013 , respectively.
We maintain self-insurance reserves for workers’ compensation and auto liability for individual losses up to the deductibles which are currently $0.5 million per individual loss for workers' compensation, $0.4 million for auto liability per accident and $0.3 million for auto physical damage per accident. In addition, certain general and product liability claims are self-funded for individual losses up to the $0.5 million insurance deductible. Claims in excess of the deductible are fully insured up to $100 million per individual claim. We evaluate input from a third-party actuary in the estimation of the casualty insurance obligation on an annual basis. In determining the ultimate loss and reserve requirements, we use various actuarial assumptions including compensation trends, healthcare cost trends and discount rates. In 2014 , we used a discount rate of 2.0% , the same rate used in 2013 , based on treasury rates over the estimated future payout period.
We also use historical information for claims frequency and severity in order to establish loss development factors. For 2014 and 2013 , we had accrued liabilities related to the retained risks of $18.1 million and $16.8 million , respectively, included in the accruals for casualty insurance claims in our Consolidated Balance Sheets. The liabilities related to our casualty insurance claims were partially offset by estimated reimbursements for amounts in excess of our deductibles associated with these claims of $5.9 million and $4.9 million for 2014 and 2013, respectively, which are included in other noncurrent assets in our Consolidated Balance Sheets.

25



Impairment Analysis of Goodwill and Intangible Assets
Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. We are provided the option to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount prior to performing the two-step goodwill impairment test. However, we have continued to perform the two-step impairment test rather than the qualitative assessment.

The annual impairment analysis of goodwill requires us to project future financial performance, including revenue and profit growth, fixed asset and working capital investments, income tax rates and cost of capital.
The impairment analysis of goodwill, as of January 3, 2015 , assumes combined average annual revenue growth of approximately 3.7% during the valuation period. This compares to a combined average annual revenue growth of approximately 3.9% in the calculation as of December 28, 2013 . These projections rely upon historical performance, anticipated market conditions and forward-looking business plans.
We use a combination of internal and external data to develop the weighted average cost of capital, which was 8.0% for both 2014 and 2013. Significant investments in fixed assets and working capital to support the assumed revenue growth are estimated and factored into the analysis. If the assumed revenue growth is not achieved, the required investments in fixed assets and working capital could be reduced. As of January 3, 2015, the goodwill impairment analysis resulted in excess fair value over carrying value of approximately 65%. Even with a significant amount of excess fair value over carrying value, major changes in assumptions or changes in conditions could result in a goodwill impairment charge in the future.
Our trademarks are valued using the relief-from-royalty method under the income approach, which requires us to estimate a royalty rate, identify relevant projected revenue, and select an appropriate discount rate. In 2014 , we recorded a $3.6 million impairment to write down one of our trademarks. This impairment was necessary due to a reduction in projected future cash flows for this trademark, which was determined using a level 3 fair value measurement. In 2013 , we incurred $1.9 million in impairment charges on one of our trademarks. In 2012, we incurred $7.6 million in impairment charges on two of our trademarks. The 2013 and 2012 impairments were necessary as we made a decision to replace future sales of associated products with other, more recognizable, brands in our portfolio. One of our trademarks, with a book value of $9.8 million as of January 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.
Our route intangible assets are valued by comparing the current fair market value for the route assets to the associated book value. The fair market value is computed using the route sales average for each route multiplied by the market multiple for the area in which the route is located. We recognized $3.7 million of route intangible asset impairment in 2014 as a result of this analysis.
Other intangible assets, primarily customer and contractual relationships and patents, are tested for impairment if events or changes in circumstances indicate that it is more likely than not that fair value is less than book value. No event-driven impairment assessments were deemed necessary for 2014 , 2013 or 2012 . See Note 9 to the consolidated financial statements in Item  8 for additional information regarding goodwill and intangible assets.
Route Intangible Purchase and Sale Transactions
We purchase and sell route businesses as a part of maintenance of our DSD network. Route businesses subject to purchase and sale transactions represent integrated sets of inputs, activities and processes that are capable of being conducted and managed for the purpose of providing a return directly to the IBOs and meet the definition of a business in accordance with FASB ASC 805, Business Combinations . Upon acquisition of a route business, we allocate the purchase price based on the fair value of the indefinite-lived route intangible, representing our perpetual and exclusive distribution right in the route territory, with any excess purchase price attributed to goodwill. We recognize a gain or a loss on the sale of a route business upon completion of the sales transaction and signing of the relevant documents. Gain or loss on sale is determined by comparing the basis of the route business sold, which includes a relative fair value allocation of goodwill in accordance with FASB ASC 350, Intangibles-Goodwill and Other , to the proceeds received from the IBO. For 2014, 2013 and 2012, we recognized net gains on the sale of route businesses of $1.1 million, $2.6 million and $22.3 million, respectively. The significantly larger net gain on the sale of route businesses in 2012 was due to the completion of the IBO conversion during that year. Net gains on the sale of route businesses in 2014 consisted of $3.3 million in gains and $2.2 million in losses on the sale of route businesses. For 2013, net gains on the sale of route businesses consisted of $6.1 million in gains and $3.5 million in losses on the sale of route businesses. For 2012, net gains on the sale of route businesses consisted of $29.5 million in gains and $7.2 million in losses on the sale of route businesses.

26



Impairment of Fixed Assets
Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets or asset groups to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future net cash flows expected to be generated by the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. There were $5.7 million in fixed asset impairment charges recorded during 2014 compared to no fixed asset impairment charges recorded during 2013 and $1.8 million during 2012 . Fixed asset impairment charges of $1.8 million were recorded during the fourth quarter of 2014 to write off certain packaging equipment where a decision was made to discontinue the associated product line. Additional fixed asset impairment charges of $2.9 million were recorded in the second quarter of 2014 primarily to write off certain machinery and equipment where expected future cash flows were 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. The remaining $1.0 million impairment charge was recorded during the first quarter of 2014 and related to our former Corsicana, Texas facility. The $1.8 million impairment in 2012 primarily related to machinery and equipment where a decision was made to discontinue the associated product lines.
Equity-Based Incentive Compensation Expense
Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term, expected stock price volatility, risk-free interest rate and expected dividends. Judgment is required in estimating the amount of share-based awards that are expected to be forfeited before vesting. In addition, our long-term equity incentive plans require assumptions and projections of future operating results and financial metrics. Actual results may differ from these assumptions and projections, which could have a material impact on our financial results. Information regarding assumptions can be found in Note 1 to the consolidated financial statements in Item 8 .
Discontinued Operations
Discontinued Operations are reported when a component of an entity (“component”) that can be clearly distinguished operationally and for financial reporting purposes from the rest of the entity meets the threshold for reporting in discontinued operations, provided that a) the component meets the “held for sale” criteria; b) the operations and cash flows of the component have been, or will be, eliminated from the ongoing operations of the entity as a result of the disposal transaction; and, c) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.  In the Consolidated Statements of Income, income from discontinued operations is reported separately from income and expenses from continuing operations and prior periods are presented on a comparable basis.  In the Consolidated Balance Sheets, the assets and liabilities of discontinued operations are presented separately from assets and liabilities of continuing operations and prior periods are presented on a comparable basis.  Many provisions of reporting discontinued operations involve judgment in determining whether results from operations, assets and liabilities will be reported as continuing or discontinued operations. During 2014, assets, liabilities and results of operations related to Private Brands disposal were carved out in accordance with this guidance. While performing this carve-out, judgments included identifying assets and liabilities of the component held for sale, reclassifying income and expense amounts from consolidated accounts that were eliminated from our ongoing operations, eliminating the impact of inter-company overhead allocations, and performing a relative fair value allocation of goodwill to assets of discontinued operations.
Provision for Income Taxes
Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates, business credits available in the various jurisdictions in which we operate and permanent tax differences. Significant judgment is required in evaluating tax positions that affect the annual tax rate. We recognize the effect of income tax positions only if these positions are more likely than not of being sustained. We adjust these liabilities in light of changing facts and circumstances, such as the progress of a tax audit.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage.
New Accounting Standards
See Note 2 to the consolidated financial statements included in Item  8 for a summary of new accounting standards.

27




Item 7A.  Quantitative and Qualitative Disclosure About Market Risk
We are exposed to certain commodity and interest rate risks as part of our ongoing business operations. We may use derivative financial instruments, where appropriate, to manage some of these risks related to interest rates. We do not use derivatives for trading purposes.
Commodity Risk
We purchase certain raw materials which are subject to price volatility caused by weather, market conditions, growing and harvesting conditions, governmental actions and other factors beyond our control. Our most significant raw material requirements include flour, peanuts, oil, sugar, potatoes, tree nut seeds and corn. We also purchase packaging materials which are subject to price volatility. In the normal course of business, in order to mitigate the risks of volatility in commodity markets to which we are exposed, we enter into forward purchase agreements with certain suppliers based on market prices, forward price projections and expected usage levels. Amounts committed under these forward purchase agreements are discussed in Note 15 to the consolidated financial statements in Item 8.
Interest Rate Risk
Our variable-rate debt obligations incur interest at floating rates based on changes in the Eurodollar rate and U.S. base rate interest. To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements to maintain a desirable proportion of fixed to variable-rate debt. See Note 13 to the consolidated financial statements in Item  8 for further information related to our interest rate swap agreement. While this interest rate swap agreement fixed a portion of the interest rate at a predictable level, pre-tax interest expense would have been $0.6 million lower without this swap during 2014 . Including the effect of the interest rate swap agreement, the weighted average interest rate was 2.34% and 2.72% , respectively, as of January 3, 2015 and December 28, 2013 . A 10% increase in variable interest rates would not have significantly impacted interest expense during 2014 .
Credit Risk
We are exposed to credit risks related to our accounts receivable. We perform ongoing credit evaluations of our customers to minimize the potential exposure. For the years ended January 3, 2015 , December 28, 2013 and December 29, 2012 , net bad debt expense was $1.6 million , $1.8 million and $1.5 million , respectively. Allowances for doubtful accounts were $1.8 million as of January 3, 2015 , $1.5 million as of December 28, 2013 , and $2.1 million as of December 29, 2012.

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Table of Contents


Item  8 .  Financial Statements and Supplementary Data
SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Fiscal Years Ended January 3, 2015 December 28, 2013 and December 29, 2012
 
(in thousands, except per share data)
 
2014
 
2013
 
2012
Net revenue
 
$
1,620,920

 
$
1,504,332

 
$
1,362,911

Cost of sales
 
1,042,458

 
963,073

 
872,316

Gross margin
 
578,462

 
541,259

 
490,595

 
 
 
 
 
 
 
Selling, general and administrative
 
478,532

 
447,170

 
415,610

Impairment charges
 
13,047

 
1,900

 
9,416

Gain on sale of route businesses, net
 
(1,109
)
 
(2,590
)
 
(22,335
)
Gain on the revaluation of prior equity investment
 
(16,608
)
 

 

Other income, net
 
(250
)
 
(7,529
)
 
(991
)
Income before interest and income taxes
 
104,850

 
102,308

 
88,895

 
 
 
 
 
 
 
Interest expense, net
 
13,342

 
14,408

 
9,487

Income before income taxes
 
91,508

 
87,900

 
79,408

 
 
 
 
 
 
 
Income tax expense
 
32,291

 
32,297

 
33,919

Income from continuing operations
 
59,217

 
55,603

 
45,489

Income from discontinued operations, net of income tax (Note 3)
 
133,316

 
23,481

 
14,021

Net income
 
192,533

 
79,084

 
59,510

Net (loss)/income attributable to noncontrolling interests
 
(58
)
 
364

 
425

Net income attributable to Snyder’s-Lance, Inc.
 
$
192,591

 
$
78,720

 
$
59,085

 
 
 
 
 
 
 
Amounts attributable to Snyder's-Lance, Inc.:
 
 
 
 
 
 
Continuing operations
 
$
59,275

 
$
55,239

 
$
45,064

Discontinued operations
 
133,316

 
23,481

 
14,021

Net income attributable to Snyder's-Lance, Inc.
 
$
192,591

 
$
78,720

 
$
59,085

 
 
 
 
 
 
 
Basic earnings per share:
 
 
 
 
 
 
Continuing operations
 
$
0.84

 
$
0.80

 
$
0.66

Discontinued operations
 
1.90

 
0.33

 
0.20

Total basic earnings per share
 
$
2.74

 
$
1.13

 
$
0.86

 
 
 
 
 
 
 
Weighted average shares outstanding – Basic
 
70,200

 
69,383

 
68,382

 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
Continuing operations
 
$
0.84

 
$
0.79

 
$
0.65

Discontinued operations
 
1.88

 
0.33

 
0.20

Total diluted earnings per share
 
$
2.72

 
$
1.12

 
$
0.85

 
 
 
 
 
 
 
Weighted average shares outstanding – Diluted
 
70,890

 
70,158

 
69,215

 
 
 
 
 
 
 
Cash dividends declared per share
 
$
0.64

 
$
0.64

 
$
0.64

See Notes to the consolidated financial statements.

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Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Fiscal Years Ended January 3, 2015 December 28, 2013 and December 29, 2012
 
(in thousands)
 
2014
 
2013
 
2012
Net income
 
$
192,533

 
$
79,084

 
$
59,510

 
 
 
 
 
 
 
Net unrealized gains/(losses) on derivative instruments, net of income tax
 
304

 
268

 
(372
)
Foreign currency translation adjustment
 
(11,482
)
 
(5,215
)
 
1,771

Total other comprehensive (loss)/income
 
(11,178
)
 
(4,947
)
 
1,399

 
 
 
 
 
 
 
Total comprehensive income
 
181,355

 
74,137

 
60,909

Comprehensive loss/(income) attributable to noncontrolling interests, net of income tax of $0, $261 and $263
 
58

 
(364
)
 
(425
)
Total comprehensive income attributable to Snyder’s-Lance, Inc.
 
$
181,413

 
$
73,773

 
$
60,484

See Notes to the consolidated financial statements.



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Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of January 3, 2015 and December 28, 2013  
(in thousands, except share data)
 
2014
 
2013
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
35,373

 
$
14,080

Restricted cash
 
966

 

Accounts receivable, net of allowances of $1,778 and $1,535, respectively
 
126,093

 
121,599

Inventories
 
116,236

 
100,447

Prepaid income taxes
 
4,175

 
9,094

Deferred income taxes
 
13,189

 
15,391

Assets held for sale
 
11,007

 
15,314

Prepaid expenses and other current assets
 
22,112

 
22,925

Current assets of discontinued operations (Note 3)
 

 
37,416

Total current assets
 
329,151

 
336,266

 
 
 
 
 
Noncurrent assets:
 
 
 
 
Fixed assets, net
 
423,612

 
312,527

Goodwill
 
541,539

 
422,318

Other intangible assets, net
 
545,212

 
516,607

Other noncurrent assets
 
23,874

 
27,216

Noncurrent assets of discontinued operations (Note 3)
 

 
154,626

Total assets
 
$
1,863,388

 
$
1,769,560

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
8,561

 
$
17,291

Accounts payable
 
57,407

 
45,966

Accrued compensation
 
32,774

 
27,530

Accrued casualty insurance claims
 
4,320

 
6,262

Accrued selling and promotional costs
 
13,141

 
12,636

Other payables and accrued liabilities
 
24,723

 
22,016

Current liabilities of discontinued operations (Note 3)
 

 
14,503

Total current liabilities
 
140,926

 
146,204

 
 
 
 
 
Noncurrent liabilities:
 
 
 
 
Long-term debt
 
438,376

 
480,082

Deferred income taxes
 
168,593

 
190,393

Accrued casualty insurance claims
 
13,755

 
10,533

Other noncurrent liabilities
 
15,030

 
24,143

Noncurrent liabilities of discontinued operations (Note3)
 

 
305

Total liabilities
 
776,680

 
851,660

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Common stock, $0.83 1/3 par value. 110,000,000 shares authorized; 70,406,086 and 69,891,890 shares outstanding, respectively
 
58,669

 
58,241

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

 

Additional paid-in capital
 
776,930

 
765,172

Retained earnings
 
232,812

 
85,146

Accumulated other comprehensive (loss)/income
 
(1,007
)
 
10,171

Total Snyder’s-Lance, Inc. stockholders’ equity
 
1,067,404

 
918,730

Noncontrolling interests
 
19,304

 
(830
)
Total stockholders’ equity
 
1,086,708

 
917,900

Total liabilities and stockholders’ equity
 
$
1,863,388

 
$
1,769,560


See Notes to the consolidated financial statements.

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Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the Fiscal Years Ended January 3, 2015 December 28, 2013 and December 29, 2012
 
(in thousands, except share and per share data)
 
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Non-controlling
Interests
 
Total
Balance, December 31, 2011
 
67,820,798

 
$
56,515

 
$
730,338

 
$
35,539

 
$
13,719

 
$
2,480

 
$
838,591

Total comprehensive income
 
 
 
 
 
 
 
59,085

 
1,399

 
425

 
60,909

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

 
 
 
 
 
 
 
2,132

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

 
757

 
11,571

 
 
 
 
 
 
 
12,328

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

 
124

 
2,437

 
 
 
 
 
 
 
2,561

Repurchases of common stock
 
(14,866
)
 
(12
)
 
(323
)