Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-K, Received: 03/01/2016 16:26:48)

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 2, 2016
[   ]
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)
13515 Ballantyne Corporate Place, 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. þ
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 July 3, 2015 , the last business day of the Registrant’s most recently completed second fiscal quarter, was $1,636,196,480 .
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 24, 2016 , was 70,977,324 shares.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 4, 2016 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.
Trademarks in this Annual Report on Form 10-K
The Snyder’s of Hanover ® , Lance ® , Cape Cod ® , Snack Factory ® Pretzel Crisps ® , Late July ® , Tom’s ® , Archway ® , Jays ® , Stella D’oro ® , Eatsmart Snacks , Krunchers! ® and O-Ke-Doke ® and other brands are our Trademarks. Solely for convenience, trademarks and trade names referred to in this Annual Report on Form 10-K may appear without the ® or symbols, but references are not intended to indicate, in any way, that we will not assert our rights to these trademarks and trade names to the fullest extent under applicable law.
Item 1.  Business
General
Snyder's-Lance, Inc., a North Carolina corporation, is 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 and Late July ® is the number one organic and non-GMO tortilla chip. 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.

Recent Acquisitions
In recent years, we acquired several companies and brands and intend to seek future growth both organically as well as through acquisitions.

In October of 2012, we completed the acquisition of Snack Factory, LLC and certain affiliates ("Snack Factory"), which added a fourth Core brand to our portfolio, Snack Factory ® Pretzel Crisps ® . The Snack Factory ® brand is known for its innovative flavor profiles, commitment to providing the highest-quality ingredients and a broadening base of passionate consumers. In June of 2014, we completed the acquisition of Baptista’s Bakery, Inc. ("Baptista's"), which is the sole manufacturer of our Snack Factory ® Pretzel Crisps ® products. In addition, 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.

In October of 2014, we made an additional investment in Late July which increased our total ownership interest to 80%. Late July is a leader in organic and non-GMO baked and salty snacks and the investment supports our goal of having a stronger presence in "better-for-you" snacks.


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On October 27, 2015, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Diamond Foods, Inc. (“Diamond”), pursuant to which we agreed to acquire all of the issued and outstanding shares of common stock of Diamond in a cash and stock transaction for approximately $1.9 billion , based on the closing price of our common stock on February 26, 2016, the last trading day before the closing date and, including our repayment of approximately $651 million of Diamond’s indebtedness, accrued interest and related fees. On February 26, 2016, our stockholders approved the issuance of our shares and the stockholders of Diamond adopted the Merger Agreement. The acquisition closed on February 29, 2016 and, pursuant to the Merger Agreement, Diamond became our wholly-owned subsidiary. For more information about Diamond, please see Item 1 of Diamond’s Annual Report on Form 10-K, as amended, for the year ended July 31, 2015 filed with the SEC, and for more information about the terms and conditions of the Merger Agreement and our acquisition of Diamond, please refer to our Registration Statement on Form S-4 (File No. 333-208214), declared effective on January 25, 2016, and Form 424B3 prospectus (File No. 333-208214) filed with the SEC on January 28, 2016.

The strategic combination of Snyder’s Lance and Diamond brings together two companies, each with strong brands and over 100 years of experience in the snack food industry, and creates an innovative, diversified portfolio of branded snacks. Diamond is a leading snack food company with five brands including Kettle Brand ®  potato chips, KETTLE ®  Chips, Pop Secret ®  popcorn, Emerald ®  snack nuts, and Diamond of California ® culinary nuts.  Our acquisition of Diamond expands our footprint in “better-for-you” snacking and increases our existing natural food channel presence. Each Diamond brand brings unique strengths that fit within our strategic plan while increasing our annualized net revenue to approximately $2.6 billion. The transaction expands our footprint in "better-for-you" snacking and increases our existing natural food channel presence. We expect that this transaction will expand and strengthen our distribution network in the United States, and provide us with a platform for growth in the United Kingdom and across Europe. For a discussion of specific risks and uncertainties that could affect our ability to achieve the strategic objectives of the acquisition, please refer to Part I, Item 1A, “Risk Factors” under the subsection captioned “Risks Relating to our Acquisition of Diamond.”
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 and meat snacks 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 2015 , Branded products represented approximately 70% of net revenue, while Partner brand and Other products represented approximately 20% and 10% of net revenue, respectively. In 2014 , Branded products represented approximately 69% of net revenue, while net revenue from Partner brand and Other products represented approximately 21% and 10% , respectively. In 2013 , Branded products represented 72% of net revenue, while net revenue from Partner brand and Other products represented 20% and 8% , respectively. While Partner brands will continue to be a significant component of net revenue and an important focus within our business strategy, the acquisition of Diamond will result in additional revenue primarily within the Branded product category.

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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 Snacks , 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 focused on established snack food categories where we hold 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” and other offerings. We support the development of our products through marketing and advertising initiatives, while managing our operating costs to support this investment. We make selective acquisitions of other food companies and brands consistent with our strategy to grow and expand our product portfolio.

We support the growth of our business through our distribution network, which includes 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 assist our IBO partners through the utilization of Partner brands providing them with efficiencies in their distribution businesses.

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.
Research and Development
We consider research and development of new products to be a significant part of our overall strategy, and are committed to develop innovative, high-quality products that exceed consumer expectations. A team of professional product developers, including microbiologists, food scientists and culinary experts, 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. Our research and development costs were approximately $6.2 million , $7.6 million and $7.8 million in 2015 , 2014 and 2013 , 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 efforts utilize television, radio, print, digital, mobile and social media aimed at increasing consumer preference and usage of our brands. 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 work with third-party information agencies, such as Information Resources, Inc. ("IRI") and other syndicated market data providers, 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 IRI 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 2015 , approximately 70% of net revenue was generated by products distributed through our DSD network while the remaining 30% was generated by products distributed through our direct distribution network. With the acquisition of Diamond, we expect that a higher percentage of our net revenue will be generated by products distributed through our direct distribution network.

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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 our 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.
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 2015 , 2014 and 2013 , we had capital expenditures of $51.5 million , $72.1 million and $74.6 million , respectively. We have completed the major projects that were required to position us to successfully drive our strategic plan. For 2016 , we expect capital expenditures of approximately $50 to $55 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, in turn, sell 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. ("Wal-Mart"), either through IBOs or our direct distribution network, were approximately 13% of net revenue in 2015 and 14% and 15% of net revenue for 2014 and 2013 , respectively. Our sales to Wal-Mart do not include sales of our products that may be made to Wal-Mart by third-party distributors outside our DSD network. Sales to these third-party distributors represent approximately 6% of our net revenue and may increase sales of our products to Wal-Mart by an amount we are unable to estimate. Our top ten retail customers accounted for approximately 50% of our net revenue during 2015 , 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.

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Competition and Industry
Our products are sold in highly competitive markets. Generally, we compete with companies engaged in the manufacturing, distribution, marketing and sale of snack food products, some of which 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
As of January 2, 2016, we had approximately 5,000 active employees located predominantly in the United States. None of our employees are covered by a collective bargaining agreement.
Available Information
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.
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.

Risks related to our business
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.

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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 than we are and have significantly greater resources than we do. In addition, there is continuing consolidation in the snack food industry and in retail outlets for snack foods, either of 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.
Price increases for our products that we initiate 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. We may be unable to implement price increases driven by higher input costs on a timely basis or at all, either of which may reduce our operating profit. Additionally, if market prices for certain inputs decline significantly below the prices we are required by contract to pay, customer pressure to reduce the prices for our products 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 50% of our net revenue during 2015 , excluding sales of our products made by third-party distributors who are outside of our DSD network, with our largest retail customer, Wal-Mart, representing approximately 13% of our 2015 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.
We may be unable to maintain our profitability in the face of a consolidating retail environment.
Our largest customer, Wal-Mart, accounted for 13% of our fiscal 2015 net sales, and our ten largest customers together accounted for approximately 50% of our fiscal 2015 net sales. As the retail grocery industry 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.
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 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.

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.

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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.
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 2,800 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.

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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.

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 2, 2016 , Patricia A. Warehime beneficially owned in the aggregate approximately 17.3% of our outstanding common stock. Mrs. Warehime serves as one of our directors. After giving effect to the issuance of our shares to the stockholders of Diamond in connection with our acquisition of Diamond, it is expected that Mrs. Warehime will beneficially own approximately 12.8% of our outstanding common stock. 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.

Risk factors associated with the acquisition of Diamond
We may fail to realize the anticipated benefits and cost savings we expect to realize from our acquisition of Diamond, which could adversely affect the value of our common stock.
The success of our acquisition of Diamond will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining Diamond’s business with ours. Our ability to realize these anticipated benefits and cost savings is subject to many risks including but not limited to:
our ability to combine Diamond’s business with ours;
and whether our combined business will perform as expected.
If we are not able to combine Diamond’s business with ours successfully within the anticipated time frame, or at all, the anticipated cost savings and other benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected, we may not perform as expected and the value of our common stock may be adversely affected.

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Prior to the acquisition, Snyder’s-Lance and Diamond operated independently. There can be no assurances that the pre-acquisition businesses can be integrated successfully. It is possible that the integration process could result in the loss of key employees, the loss of customers, or in unexpected integration issues, higher than expected integration costs or an integration process that takes longer than originally anticipated. Specifically, the following issues, among others, must be addressed in integrating Diamond’s operations with ours in order to realize the anticipated benefits of the acquisition:
combining operations and corporate functions;
integrating technologies and information technology infrastructure;
consolidating the companies’ administrative infrastructure;
integrating the product offerings available to customers;
identifying and eliminating redundant or underperforming functions and assets;
harmonizing operating practices, employee development and compensation programs, internal controls and other policies, procedures and processes;
maintaining existing agreements with customers, suppliers, distributors, brokers and vendors and avoiding delays in entering into new agreements with existing and prospective customers, suppliers, distributors, brokers and vendors;
addressing possible differences in business backgrounds, corporate cultures and management philosophies;
coordinating distribution and marketing efforts;
managing the movement of employee positions to different locations; and
coordinating geographically dispersed organizations.

In addition, at times the attention of members of our management and resources may be focused on the integration of the businesses of the two companies and diverted from day-to-day business operations, which may disrupt our ongoing business.
We may have difficulty attracting, motivating and retaining executives and other key employees in light of our acquisition of Diamond.
Uncertainty about the effect of the acquisition on our employees may impair our ability to attract, retain and motivate key personnel. In addition, pursuant to change-in-control provisions in their respective employment agreements with Diamond, key employees of Diamond are entitled to receive severance payments upon a constructive termination of employment. Key employees potentially could terminate their employment and collect severance following specified circumstances set forth in their employment or severance agreements, including changes in such key employees’ duties, positions, compensation and benefits or primary office location. Such circumstances could occur in connection with the integration process and as a result of changes in roles and responsibilities. If key employees depart, the integration of the two companies may be more difficult and our business may be harmed. Furthermore, we may have to incur significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent relating to the businesses of Snyder’s-Lance or Diamond prior to our acquisition of Diamond, and our ability to realize the anticipated benefits of the acquisition may be adversely affected. In addition, there could be distractions for the workforce and management associated with activities of labor unions or integrating employees into our company.
Our business relationships may be subject to disruption due to uncertainty associated with the ongoing integration process.
Parties with which we and Diamond did business prior to our acquisition of Diamond may experience uncertainty associated with the transaction, including with respect to current or future business relationships with us. These business relationships may be subject to disruption as customers, distributors, suppliers, brokers, vendors and others may attempt to negotiate changes in existing business relationships or consider entering into business relationships with parties other than us. These disruptions could have an adverse effect on our business, financial condition, results of operations or prospects, including an adverse effect on our ability to realize the anticipated benefits of the acquisition.
We have incurred and will continue to incur significant transaction and acquisition-related costs in connection with our acquisition of Diamond.
We have incurred and will continue to incur a number of non-recurring costs associated with our acquisition of Diamond and combining Diamond’s operations with ours. The substantial majority of non-recurring expenses is comprised of transaction costs related to the acquisition. We also will incur costs related to formulating and implementing integration plans, including facilities and systems consolidation costs and employment-related costs. We continue to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the integration of the two companies. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the two companies, should allow us to offset integration-related costs over time, this net benefit may not be achieved in the near term, or at all.

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We may not be able to successfully execute our international expansion strategies.
We plan to drive additional growth and profitability through international distribution channels. Consumer demand, behavior, taste and purchasing trends may differ in international markets and, as a result, sales of our products may not be successful or meet expectations, or the margins on those sales may be less than currently anticipated. We may also face difficulties integrating foreign business operations with our current sourcing, distribution, information technology systems and other operations. Any of these challenges could hinder our success in new markets or new distribution channels. There can be no assurance that we will successfully complete any planned international expansion or that any new business will be profitable or meet our expectations.

Risks related to our substantial indebtedness
We have substantial debt, which could adversely affect our financial health, our ability to obtain financing in the future, react to changes in our business, and make payments on our debt.
As of January 2, 2016 we had an aggregate principal amount of $388 million of outstanding debt, which increased to approximately $1.4 billion of outstanding debt upon the closing of the acquisition of Diamond.  Our substantial debt could have important consequences to holders of our common stock, including the following:

Our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements, acquisitions or general corporate purposes may be impaired in the future
A substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes
We are exposed to the risk of increased interest rates because a substantial portion of our borrowings are at variable rates
It may be more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such indebtedness
We may be more vulnerable to general adverse economic and industry conditions
We may be at a competitive disadvantage compared to our competitors with less debt or comparable debt at more favorable interest rates and they, as a result, may be better positioned to withstand economic downturns
Our ability to refinance indebtedness may be limited or the associated costs may increase
Our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited, or we may be prevented from carrying out capital spending that is necessary or important to our growth strategy and efforts to improve operating margins or our business

The agreements and instruments governing our debt contain restrictions and limitations that could significantly impact our ability to operate our business.
Our credit facilities contain covenants that, among other things, restrict our ability to do the following:

Dispose of assets
Incur additional indebtedness (including guarantees of additional indebtedness)
Pay dividends and make certain payments
Create liens on assets
Make investments (including joint ventures)
Engage in mergers, consolidations or sales of all or substantially all of our assets
Engage in certain transactions with affiliates
Change the business conducted by us
Amend specific debt agreements

Our ability to comply with these provisions in future periods will depend on our ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are beyond our control. Our ability to comply with these provisions in future periods will also depend substantially on the pricing of our products, our success at implementing cost reduction initiatives and our ability to successfully implement our overall business strategy.

The restrictions under the terms of our credit facilities may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. We cannot assure you that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all.


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Our ability to comply with the covenants and restrictions contained in our credit facilities may be affected by economic, financial and industry conditions beyond our control. The breach of any of these covenants or restrictions could result in a default under our credit facilities that would permit the applicable lenders or note holders, as the case may be, to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. In any such case, we may be unable to borrow under and may not be able to repay the amounts due under our credit facilities. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.

Our ability to generate the significant amount of cash needed to pay interest and principal on our debt facilities and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.
Our ability to make scheduled payments on, or to refinance our obligations under our debt will depend on our financial and operating performance. This, in turn, will be subject to prevailing economic and competitive conditions and to the financial and business factors, many of which may be beyond our control, as described under “Risk Factors-Risks Relating to Our Business” above.

If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or restructure our debt. In the future, our cash flow and capital resources may not be sufficient for payments of interest on and principal of our debt, and such alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

We cannot be assured that we will be able to refinance any of our indebtedness or obtain additional financing, particularly because of our anticipated high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt, as well as prevailing market conditions. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our credit facilities  restrict our ability to dispose of assets and use the proceeds from any such dispositions. As a result, we cannot assure you we will be able to consummate those sales, or if we do, what the timing of the sales will be, or whether the proceeds that we realize will be adequate to meet the debt service obligations when due.
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 which supports our DSD distribution network. 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 numerous 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 shipment to retail customers.

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The facilities and properties that we own, lease and operate are maintained in good condition and are believed to be suitable and adequate for our present needs. We believe that we have sufficient production capacity or the ability to increase capacity to meet anticipated demand in 2016 .
Item 3.  Legal Proceedings
IBO Litigation
In January 2013, plaintiffs comprised of IBOs filed a putative class action against our distribution subsidiary, S-L Distribution Company, Inc., in the Suffolk Superior Court of the Commonwealth of Massachusetts. The lawsuit was transferred to the United States District Court, Middle District of Pennsylvania. The lawsuit seeks statewide class certification on behalf of a class comprised of IBOs in Massachusetts. The plaintiffs allege that they were misclassified as independent contractors and should be considered employees. The plaintiffs are seeking reimbursement of their out-of-pocket business expenses. We believe we have strong defenses to all the claims that have been asserted against us. On December 22, 2015, the parties to this litigation reached a tentative settlement on a class wide basis. We do not admit any fault or liability in this matter; however, in an effort to resolve these claims, we have agreed to pay $2.9 million to fully resolve the litigation. This amount has been accrued as reflected in other payables and accrued liabilities in the Consolidated Balance Sheets. The settlement is subject to final court approval. It is anticipated that the settlement will fund and be distributed to the class members in the first half of 2016.

Other
We are currently subject to other 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.

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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.
 
56
 
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
 
62
 
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
 
67
 
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       

 
57
 
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.     
Rodrigo F. Troni Pena
 
49
 
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
 
55
 
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 3,162 stockholders of record as of February 24, 2016 .
The following table sets forth the high and low sale price quotations and dividend information for each interim period of the years ended January 2, 2016 and January 3, 2015 :
2015 Interim Periods
 
High
Price
 
Low
Price
 
Dividend
Paid
First quarter (13 weeks ended April 4, 2015)
 
$
32.83

 
$
28.82

 
$
0.16

Second quarter (13 weeks ended July 4, 2015)
 
33.04

 
28.98

 
0.16

Third quarter (13 weeks ended October 3, 2015)
 
35.98

 
31.32

 
0.16

Fourth quarter (13 weeks ended January 2, 2016)
 
39.10

 
32.00

 
0.16

 
 
 
 
 
 
 
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


On February 9, 2016 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on March 4, 2016 to stockholders of record on February 24, 2016 . 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 2, 2016 , our consolidated stockholders’ equity was $1,107.6 million and we were in compliance with this covenant. The private placement agreement for $100 million of senior notes, which was paid off subsequent to the end of our fiscal 2015, had provisions no more restrictive than the Amended and Restated Credit Agreement.

In conjunction with our acquisition of Diamond, we entered into a new senior unsecured credit agreement as amended (the “New Credit Agreement”) on December 16, 2015 with the term lenders and Bank of America, N.A., as administrative agent. The New 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 $500 million.

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. As of January 2, 2016 , there were 266,147 shares remaining available for purchase.

There were no repurchases of common stock made by the Company or any “affiliated purchaser” of the Company as defined in Rule 10b-18(a)(3) under the Exchange Act during the quarter ended January 2, 2016 .

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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 2, 2016 . The selected financial data set forth below should be read in conjunction with “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and the audited financial statements. The prior year amounts have been reclassified as necessary for consistent presentation, including a change to prior year total assets as a result of the reclassification of deferred income tax balances as described further in Note 2 of Item 8.
 
 
 
 
 
 
 
 
 
 
 
Results of Operations (in thousands):
 
2015
 
2014
 
2013
 
2012
 
2011
Net revenue (1) (2) (3) (4) (5)
 
$
1,656,399

 
$
1,620,920

 
$
1,504,332

 
$
1,362,911

 
$
1,361,888

Cost of sales
 
1,077,110

 
1,042,458

 
963,073

 
872,316

 
840,729

Gross margin
 
579,289

 
578,462

 
541,259

 
490,595

 
521,159

Gross margin percentage
 
35.0
%
 
35.7
%
 
36.0
%
 
36.0
%
 
38.3
%
 
 
 
 
 
 
 
 
 
 
 
Income before
income taxes (6) (7) (8) (9) (10)
 
79,603

 
91,508

 
87,900

 
79,408

 
33,580

Income from continuing operations
 
50,718

 
59,217

 
55,603

 
45,489

 
20,950

Income from discontinued operations,
net of income tax (11)
 

 
133,316

 
23,481

 
14,021

 
17,791

Net income attributable to
Snyder’s-Lance, Inc. (11)
 
$
50,685

 
$
192,591

 
$
78,720

 
$
59,085

 
$
38,258

 
 
 
 
 
 
 
 
 
 
 
Average Number of Common Shares
Outstanding (in thousands):
 
 
 
 
 
 
 
 
 
 
Basic
 
70,487

 
69,966

 
69,102

 
68,131

 
67,250

Diluted  
 
71,142

 
70,656

 
69,877

 
68,964

 
68,328

 
 
 
 
 
 
 
 
 
 
 
Per Share of Common Stock:
 
 
 
 
 
 
 
 
 
 
Basic earnings per share from
continuing operations
 
$
0.72

 
$
0.84

 
$
0.80

 
$
0.66

 
$
0.30

Basic earnings per share from discontinued operations (11)
 

 
1.90

 
0.33

 
0.20

 
0.27

Total basic earnings per share (11)
 
$
0.72

 
$
2.74

 
$
1.13

 
$
0.86

 
$
0.57

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
$
0.71

 
$
0.84

 
$
0.79

 
$
0.65

 
$
0.30

Diluted earnings per share from discontinued operations (11)
 

 
1.88

 
0.33

 
0.20

 
0.26

Total diluted earnings per share (11)
 
$
0.71

 
$
2.72

 
$
1.12

 
$
0.85

 
$
0.56

 
 
 
 
 
 
 
 
 
 
 
Cash dividends declared
 
$
0.64

 
$
0.64

 
$
0.64

 
$
0.64

 
$
0.64

 
 
 
 
 
 
 
 
 
 
 
Financial Status at Year-end
(in thousands):
 
 
 
 
 
 
 
 
 
 
Total assets (12) (13)
 
$
1,818,258

 
$
1,850,199

 
$
1,754,169

 
$
1,735,107

 
$
1,445,748

Long-term debt, net of
current portion (13)
 
$
379,855

 
$
438,376

 
$
480,082

 
$
514,587

 
$
253,939

Total debt  (13)
 
$
388,396

 
$
446,937

 
$
497,373

 
$
535,049

 
$
258,195


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Footnotes:
(1)
2015 net revenue increased compared to 2014, in part due to the full year impact of the acquisition of Baptista's Bakery and consolidation of Late July, which occurred in June 2014 and October 2014, respectively. The increase was partially offset by approximately $30 million of net revenue generated during 2014 as a result of the fifty-third week.
(2)
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.
(3)
2013 net revenue increased compared to 2012, in part due to the full year impact of the acquisition of Snack Factory, which occurred in October 2012.
(4)
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.
(5)
2011 net revenue included approximately $8 million from the acquisition of George Greer Company Inc. in August 2011.
(6)
2015 pretax income was impacted by approximately $8 million in transaction-related fees associated with the pending acquisition of Diamond, approximately $12 million in asset impairment charges primarily related to the transfer of production location for certain products and approximately $6 million in settlements of certain litigation.
(7)
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.
(8)
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.
(9)
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.
(10)
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.
(11)
2014 income from discontinued operations, net of income tax, included a $223 million pretax gain on the sale of Private Brands.
(12)
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.
(13)
2012 total assets, long-term debt and total debt increased from 2011 primarily because of the acquisition of Snack Factory.

17


Table of Contents

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
We continued to focus our sales efforts on the growth of our branded products during 2015, with emphasis on our Core brands (Snyder’s of Hanover ® , Lance ® , Cape Cod ® , Snack Factory ® Pretzel Crisps ® , and Late July ® ).  Our growth strategy for our Core brands continues to focus on quality, innovation and expanded distribution. We are also achieving our goals regarding the mix of "better for you" products relative to our entire portfolio, with 29% of our 2015 revenue coming from products considered to be "better for you."
Expanding on these efforts to execute our strategic plan, on February 29, 2016, we completed the acquisition of all the outstanding stock of Diamond. Diamond stockholders received 0.775 shares of Snyder's-Lance common stock and $12.50 in cash for each Diamond share, with the total purchase price expected to be approximately $1.9 billion , based on the closing price of our common stock on February 26, 2016, the last trading day prior to the closing date and including our repayment of approximately $651 million of Diamond's indebtedness, accrued interest and related fees.

The strategic combination of Snyder's-Lance and Diamond brings together two established companies with strong brands and creates an innovative, highly complementary and diversified portfolio of branded snacks. Diamond is a leading snack food company with five brands including Kettle Brand ® potato chips, KETTLE ® Chips, Pop Secret ® popcorn, Emerald ® snack nuts, and Diamond of California ® culinary nuts. Each Diamond brand brings unique strengths that fit with our strategic plan while increasing our annualized net revenue to approximately $2.6 billion.

The transaction expands our footprint in "better-for-you" snacking and increases our existing natural food channel presence. We expect that this transaction will expand and strengthen our National Distribution Network, and provide us with a platform for growth in the United Kingdom and across Europe. 

In conjunction with our acquisition of Diamond, on December 16, 2015, we entered into a new senior unsecured credit agreement as amended (the "New Credit Agreement") with the term lenders and Bank of America, N.A., as administrative agent. Under the New Credit Agreement, the term lenders have committed to provide (i) senior unsecured term loans in an original aggregate principal amount of $830 million and maturing five years after the funding date and (ii) senior unsecured term loans in an original aggregate principal amount of $300 million and maturing ten years after the funding date. The $1.13 billion in proceeds from the New Credit Agreement were used to finance, in part, the cash component of the merger consideration, to repay indebtedness of Diamond and Snyder’s-Lance, and to pay certain fees and expenses incurred in connection with the proposed merger. Additional details regarding the New Credit Agreement are included in the Liquidity and Capital Resources section of Management's Discussion and Analysis. In addition, a copy of the New Credit Agreement is included in our Form 8-K filed with the SEC on December 17, 2015.

18


Table of Contents

2015 Performance
Overall, revenues increased in 2015 compared to 2014; however, revenue began to slow in the second half of 2015 compared to our expectations due to:
Lost contract manufacturing and branded revenue due to an extended power outage at one of our largest bakeries;
Declines related to strategic changes at our largest customer which impacted space, displays and store inventory levels for certain branded products; and
Overall slow growth in the snack food industry which led to declines in revenue from partner brand products and certain branded products.

In spite of these challenges in 2015, we were able grow market share in all of our Core brands. A discussion of the trends for each of our Core brands is included below:
We continued to grow sales with existing customers as well as expand the distribution of our Cape Cod ® kettle cooked chips in 2015, which resulted in double-digit revenue growth compared to 2014 and increased market share for the Cape Cod ® brand in a growing kettle chip category. However, growth in Cape Cod ® kettle cooked chips slowed somewhat at the end of the year due to a reduction in promotional spending.
Net revenue from Snyder’s of Hanover ® pretzels declined slightly in 2015 compared to 2014 due primarily to overall softness in the pretzel category in the second half of 2015. Snyder’s of Hanover ® was still able to grow market share and maintain a substantial lead over our closest competitor in the category.
Net revenue from our Lance ® sandwich crackers increased in 2015 compared to the prior year primarily due to distribution gains in the club channel and the completion of our packaging renovation project in 2014. The Lance ® sandwich cracker brand also gained market share throughout the year with more significant gains at the end of 2015.
Snack Factory ® Pretzel Crisps ® experienced revenue and market share growth in 2015, compared to 2014 in the deli snacks category. We also began production of Pretzel Crisps ® at our Goodyear, Arizona manufacturing facility in the second quarter of 2015. This provides additional capacity for these products in addition to some distribution synergies.
We increased our ownership interest in Late July to 80% in October of 2014. Since we acquired control, Late July ® has expanded distribution and increased sales to existing customers, resulting in significant market share gains in the organic tortilla chips category in 2015, compared to 2014.
In addition to the items affecting net revenue as discussed above, our 2015 results were also impacted by the following:
53rd week in fiscal year 2014 - 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 2015 fiscal year contained 52 weeks and ended on January 2, 2016. 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.
Litigation settlements - During 2015, we recognized $5.7 million in expense associated with the tentative settlements reached in our "all-natural" and IBO class action lawsuits.
Impairment charges - During 2015, we made the decision to move the production of certain products to improve operational efficiency. As a result, we recognized fixed asset impairment charges of $11.5 million.
Diamond transaction costs - We incurred approximately $7.7 million in legal and professional fee expenses in selling, general and administrative expense related to the acquisition of Diamond.
Promotional spending - We increased promotional spending as a percentage of revenue during 2015 which resulted in approximately $13.5 million of additional promotional expense compared to 2014. The increased promotional spending, which is recorded as a reduction to gross revenue, resulted in approximately 80 basis points lower gross margin compared to 2014.
Incentive compensation expense - Due to lower attainment of our incentive targets, we recorded $6.9 million less incentive compensation expense in 2015, compared to 2014.


19


Table of Contents

Results of Operations
Year Ended January 2, 2016 (52 weeks) Compared to Year Ended January 3, 2015 (53 weeks)
(in millions)
 
2015
 
2014
 
Favorable/
(Unfavorable)
Variance
Net revenue
 
$
1,656.4

 
100.0
 %
 
$
1,620.9

 
100.0
 %
 
$
35.5

 
2.2
 %
Cost of sales
 
1,077.1

 
65.0
 %
 
1,042.4

 
64.3
 %
 
(34.7
)
 
(3.3
)%
Gross margin
 
579.3

 
35.0
 %
 
578.5

 
35.7
 %
 
0.8

 
0.1
 %
Selling, general and administrative
 
472.2

 
28.5
 %
 
478.5

 
29.5
 %
 
6.3

 
1.3
 %
Settlement of certain litigation
 
5.7

 
0.3
 %
 

 
 %
 
(5.7
)
 
(100.0
)%
Impairment charges
 
12.0

 
0.7
 %
 
13.0

 
0.8
 %
 
1.0

 
7.7
 %
Gain on sale of route businesses, net
 
(1.9
)
 
(0.1
)%
 
(1.1
)
 
(0.1
)%
 
0.8

 
72.7
 %
Gain on the revaluation of prior equity investment
 

 
 %
 
(16.6
)
 
(1.0
)%
 
(16.6
)
 
(100.0
)%
Other expense/(income), net
 
0.8

 
0.1
 %
 
(0.2
)
 
 %
 
(1.0
)
 
nm

Income before interest and income taxes
 
90.5

 
5.5
 %
 
104.9

 
6.5
 %
 
(14.4
)
 
(13.7
)%
Interest expense, net
 
10.9

 
0.7
 %
 
13.4

 
0.8
 %
 
2.5

 
18.7
 %
Income tax expense
 
28.9

 
1.7
 %
 
32.3

 
2.0
 %
 
3.4

 
10.5
 %
Income from continuing operations
 
50.7

 
3.1
 %
 
59.2

 
3.7
 %
 
(8.5
)
 
(14.4
)%
Income from discontinued operations,
net of income tax
 

 
 %
 
133.3

 
8.2
 %
 
(133.3
)
 
(100.0
)%
Net income
 
$
50.7

 
3.1
 %
 
$
192.5

 
11.9
 %
 
$
(141.8
)
 
(73.7
)%
nm = not meaningful

Net Revenue
Net revenue by product category was as follows:
(in millions)
 
2015
 
2014
 
Favorable/
(Unfavorable)
Variance
Branded
 
$
1,155.4

 
69.8
%
 
$
1,120.9

 
69.2
%
 
$
34.5

 
3.1
 %
Partner brand
 
335.3

 
20.2
%
 
340.0

 
21.0
%
 
(4.7
)
 
(1.4
)%
Other
 
165.7

 
10.0
%
 
160.0

 
9.8
%
 
5.7

 
3.6
 %
Net revenue
 
$
1,656.4

 
100.0
%
 
$
1,620.9

 
100.0
%
 
$
35.5

 
2.2
 %
Net revenue increased $35.5 million , or 2.2% , in 2015 compared to 2014 , primarily due to acquisitions, which was partially offset by the additional revenue generated by the 53rd week in 2014. The following table shows revenue by product category adjusted for amounts attributable to the 53rd week and compares 2015 net revenue to 2014 adjusted net revenue:
(in millions)
 
2015 Net Revenue
 
2014 Net Revenue
 
Estimated
53rd Week
 
2014 Adjusted Net Revenue (1)
 
Favorable/
(Unfavorable)
Variance
Branded
 
$
1,155.4

 
$
1,120.9

 
$
20.6

 
$
1,100.3

 
$
55.1

 
5.0
%
Partner brand
 
335.3

 
340.0

 
6.5

 
333.5

 
$
1.8

 
0.5
%
Other
 
165.7

 
160.0

 
3.3

 
156.7

 
$
9.0

 
5.7
%
Net revenue
 
$
1,656.4

 
$
1,620.9

 
$
30.4

 
$
1,590.5

 
$
65.9

 
4.1
%

20



(1)
The non-GAAP measure 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 of 2014 Adjusted Net Revenue is useful for providing increased transparency and assisting investors in understanding our ongoing operating performance.
Net revenue from branded products increased $34.5 million , or 3.1% , compared to 2014 , primarily due to incremental Late July ® revenue resulting from the consolidation of Late July ® beginning at the end of October 2014, as well as revenue growth in our other Core brands, with the majority of this growth coming from Cape Cod ® branded products. Revenue from branded products increased approximately $55.1 million, or 5.0%, in 2015, when excluding our estimate of the 53rd week in 2014. Revenue growth from our Core brands, excluding the impact of Late July ® , was led by double digit revenue increases in Cape Cod ® branded products as well as revenue increases in our Snack Factory ® Pretzel Crisps ® and Lance ® branded products. Our Cape Cod ® kettle cooked chips experienced strong volume growth and increased market share when compared to 2014 due to growth in core markets and continued expanded distribution. We also continued to experience revenue and market share growth in our Snack Factory ® Pretzel Crisps ® . Our Lance ® branded products performed well compared to 2014, with increased revenue and market share that was driven in part by distribution gains in the second half of the year. These revenue increases were partially offset by slight revenue declines from our Snyder’s of Hanover ® branded products in 2015 compared to 2014, after excluding the impact of the 53rd week in 2014. The volume decline was primarily due to overall softness in the pretzel category in the second half of 2015. Despite these challenges, Snyder’s of Hanover ® pretzels were still able to grow market share and maintain category leadership. Revenue from our Allied branded products was down in 2015 compared to 2014, after adjusting for the 53rd week, primarily due to volume declines in certain salty product lines.
Partner brand net revenue increased 0.5% in 2015 compared to 2014 after adjusting for the 53rd week. During the second half of 2015, we experienced volume declines as a result of lower promotional activities for many of the partner brands that we sell through our DSD distribution network.

Other revenue, which primarily consists of revenue from contract manufactured products, increased $5.7 million , or 3.6% , from 2014 to 2015 , and was up $9.0 million, or 5.7%, after adjusting for the 53rd week in 2014. The increase was primarily due to a full year of revenue from Baptista's, which was acquired in June of 2014. However, this increase was partially offset by a reduction in orders from Shearer's Foods LLC as part of our manufacturing and supply agreement as well as lost revenue due to a power outage at one of our major manufacturing facilities.

In 2015 , approximately 70% of net revenue was generated through our DSD network compared to 71% in the prior year.
Gross Margin
Gross margin increased $0.8 million , but declined 0.7% as a percentage of net revenue compared to 2014 . The dollar increase in gross margin was due to increased sales volume compared to the prior year. The decline as a percentage of revenue was primarily the result of increased promotional spending to support our new product offerings and generate volume for our Branded products. The increase in promotional spending as a percentage of revenue during 2015 resulted in approximately $13.5 million of additional promotional expense compared to 2014, or approximately 80 basis points lower gross margin compared to 2014.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $6.3 million in 2015 compared to 2014 , and decreased 1.0% as a percentage of net revenue. The decrease in selling, general and administrative expenses was primarily due to cost reduction efforts associated with our margin improvement and restructuring plan that was initiated in the third quarter of 2014, declines in fuel and freight costs compared to the prior year, lower incentive compensation expense due to lower attainment of internal targets and lower marketing and advertising costs. These reductions were partially offset by a full year of Baptista's and Late July expense and $7.7 million of expenses related to the acquisition of Diamond.

Settlement of certain litigation
During 2015 , we recognized $5.7 million in expense associated with tentative settlements reached in our "all-natural" and IBO class action lawsuits. See Note 15 to the consolidated financial statements for additional information related to these tentative settlements. There were no significant litigation settlements in 2014 .

21



Impairment Charges
Impairment charges of $12.0 million were recorded during 2015 , compared to $13.0 million during 2014 . During 2015, we made the decision to move the production of certain products and provide additional packaging alternatives to improve operational efficiency. As a result, we recognized fixed asset impairment charges of $11.5 million in 2015, compared to $5.7 million in asset impairment charges in 2014. In addition, in 2015, we recorded $0.5 million of impairments related to route businesses compared to $3.7 million in 2014. We also recorded $3.6 million in trademark impairments in 2014, while no trademark impairments were necessary in 2015.
Gain on the Sale of Route Businesses, Net
During 2015 , we recognized $1.9 million in net gains on the sale of route businesses compared to $1.1 million in 2014. Net gains on the sale of route businesses in 2015 consisted of $3.3 million in gains and $1.4 million in losses. For 2014 , net gains on the sale of route businesses consisted of $3.3 million in gains and $2.2 million in losses.

The majority of the net gains on the sale of route business during 2015 were due to the decision to sell certain route businesses that were previously Company-owned as well as route reengineering projects that were initiated in order to maximize the efficiency of route territories for the IBOs. The majority of the route business sales activity in 2014 was due to the resale of routes purchased because of IBO defaults or route reengineering projects.
Gain on the Revaluation of Prior Equity Investment
During 2014 , 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/Expense, Net
Other income declined from $0.2 million in 2014 to other expense of $0.8 million in 2015 . Other expense in 2015 primarily consisted of $0.7 million associated with the derecognition of our cumulative translation adjustment due to the final liquidation of our Canadian subsidiary. 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 $2.5 million during 2015 compared to 2014 . The decrease was due to lower debt levels in 2015 as well as a $0.8 million write-off of previously capitalized debt issuance costs that occurred in 2014 due to debt refinancing.
Income Tax Expense
The effective income tax rate increased to 36.3% in 2015 from 35.3% in 2014 . The increase in the effective income tax rate in 2015 was primarily due to non-deductible Diamond-related transaction costs in 2015.
Income from Discontinued Operations, Net of Income Tax
Income from discontinued operations, net of income tax, included in 2014 is primarily due to the gain as a result of the completion of the sale of Private Brands. There were no discontinued operations in 2015.

22



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
 
$
1,120.9

 
69.2
%
 
$
1,079.6

 
71.8
%
 
$
41.3

 
3.8
%
Partner brand
 
340.0

 
21.0
%
 
304.2

 
20.2
%
 
35.8

 
11.8
%
Other
 
160.0

 
9.8
%
 
120.5

 
8.0
%
 
39.5

 
32.8
%
Net revenue
 
$
1,620.9

 
100.0
%
 
$
1,504.3

 
100.0
%
 
$
116.6

 
7.8
%
Net 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
 
$
1,120.9

 
$
3.9

 
$
20.6

 
$
1,096.4

 
$
1,079.6

 
$
16.8

 
1.6
 %
Partner brand
 
340.0

 

 
6.5

 
333.5

 
304.2

 
29.3

 
9.6
 %
Other
 
160.0

 
40.5

 
3.3

 
116.2

 
120.5

 
(4.3
)
 
(3.6
)%
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 of 2014 Adjusted Net Revenue is useful for providing increased transparency and assisting investors in understanding the ongoing operating performance of the Company.

23



Branded revenue increased $41.3 million , or 3.8% , compared to 2013, primarily due to additional revenue from the 53rd week included in 2014. Branded revenue increased 1.6% 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 ® . Our Cape Cod ® kettle cooked chips experienced strong volume growth and increased market share 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 modest market share gains, which were primarily a result of increased distribution. Snyder’s of Hanover ® pretzels showed growth in net revenue 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. Revenue from our Allied branded products was relatively flat, after adjusting for the 53rd week.
Partner brand net revenue grew 11.8% compared to 2013, and 9.6% 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.

Other revenue increased $39.5 million , or 32.8% , 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 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 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 the result of adverse weather conditions and third-party freight carrier capacity constraints during the first half of the year. We also incurred severance and other related expenses of $2.8 million 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 in order to fair value one of our trademarks. 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 . We made a decision to discontinue a certain product line resulting in fixed asset impairment charges associated with the related packaging equipment of $1.8 million in 2014. Additional fixed asset impairment charges of $2.9 million were recorded in 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 related to our former Corsicana, Texas facility which was later sold during 2014.
The impairment expense in 2013 of $1.9 million was incurred in order to write-off the remaining value of a trademark that we no longer use.

24



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 sales activity and the lower route values 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.


25



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 throughout the next twelve months as well as over the long-term.
Acquisition of Diamond
On February 29, 2016, we completed the acquisition of all the outstanding stock of Diamond. Diamond's stockholders received 0.775 shares of Snyder's-Lance common stock and $12.50 in cash for each Diamond share, with the total purchase price expected to be approximately $1.9 billion , based on the closing price of our common stock on February 26, 2016, the last trading day prior to the closing date and including our repayment of approximately $651 million of Diamond's indebtedness, accrued interest and related fees. The cash portion of the consideration payable to the stockholders of Diamond was funded through a combination of cash on hand, existing credit facilities, and our incurrence of new debt in connection with the acquisition of Diamond.

In conjunction with our acquisition of Diamond, on December 16, 2015, we entered into a new senior unsecured credit agreement with the term lenders and Bank of America, N.A., as administrative agent. Under the New Credit Agreement, the term lenders have provided (i) senior unsecured term loans in an original aggregate principal amount of $830 million and maturing five years after the funding date and (ii) senior unsecured term loans in an original aggregate principal amount of $300 million and maturing ten years after the funding date. The $1.13 billion in proceeds from the New Credit Agreement were used to finance, in part, the cash component of the merger consideration, to repay indebtedness of Diamond and Snyder's-Lance, and to pay certain fees and expenses incurred in connection with the acquisition.

We believe that we continue to have sufficient liquidity to enable us to meet both our short and long-term needs and we will continue to comply with all debt covenants. Our compliance with debt covenants will continue to be closely monitored particularly with regard to our new debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") covenant.
Cash Flows
The following table sets forth a summary of our cash flows for each of the past three years:
(in thousands)
 
2015
 
2014
 
2013
Net cash provided by/(used in):
 
 
 
 
 
 
Operating activities
 
$
146,154

 
$
13,025

 
$
140,736

Investing activities
 
(44,026
)
 
99,035

 
(64,911
)
Financing activities
 
(98,396
)
 
(90,767
)
 
(71,021
)
Net increase in cash and cash equivalents
 
$
3,732

 
$
21,293

 
$
4,804

Operating Cash Flows
Cash flow provided by operating activities increased $133.1 million in 2015 compared to 2014. The increase in net cash provided by operating activities was primarily driven by taxes paid in 2014 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 favorable by approximately $6 million from 2014 to 2015.
Cash flow provided by operating activities decreased $127.7 million in 2014 compared to 2013 which was again primarily driven by taxes paid due to the gain on the sale of Private Brands in 2014. Excluding the payment of these income taxes, net cash provided by operating activities was reasonably consistent from 2013 to 2014.

26



Investing Cash Flows
Cash used by investing activities totaled $44.0 million i n 2015 compared with cash provided by investing activities of $99.0 million in 2014. The significant decrease in cash provided by investing activities was due to the proceeds received from the sale of Private Brands in 2014 of $430 million , which was partially offset by cash used for 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 from $72.1 million in 2014 to $51.5 million in 2015. The decrease from 2014 to 2015 was due to additional capital expenditures in 2014 used to u pgrade equipment and enhance capacity, while the capital expenditures in 2015 were primarily used to maintain our machinery and equipment and support revenue growth. For 2016, we expect capital expenditures to remain relatively consistent with 2015 with a current estimate of $50 million to $55 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 $4.8 million i n 2015, compared to net proceeds of $1.0 million in 2014. The majority of the net cash flows generated from the sale of routes in 2015 were due to the decision to sell certain route businesses that were previously Company-owned.
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 cash used for 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. Proceeds from the sale of route businesses, net of purchases, generated net cash flows of $1.0 million in 2014, compared to net proceeds of $1.1 million in 2013.
Financing Cash Flows
Net cash used in fi nancing activities of $98.4 million in 2015 was principally due to dividends paid of $45.2 million and debt repayments of $57.5 million . This compared to cash used in financing activities of $90.8 million in 2014, which was principally due to dividends paid of $44.9 million , as well as debt repayments of $50.4 million . Cash used in financing activities in 2013 was $71.0 million , primarily due to dividends paid of $44.9 million as well as debt repayments of $36.6 million .
On February 9, 2016 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on March 4, 2016 to stockholders of record on February 24, 2016 .
Debt
Unused and available borrowings were $375 million under our existing credit facilities at January 2, 2016 , as compared to $325 million at January 3, 2015 . 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 $9.2 million as of January 2, 2016 .

Our existing 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 2, 2016 , our debt to EBITDA ratio was 2.08 , and our interest coverage ratio was 8.14 . We were in compliance with all of these covenants at January 2, 2016 . 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 2015 , 2014 and 2013 was $11.1 million , $13.4 million , and $14.7 million , respectively.

In February of 2016, using available borrowings from our existing credit facilities and cash on hand, we repaid our $100 million private placement senior notes which were due in June 2017. The total repayment was approximately $106 million, and will result in an estimated loss on early extinguishment of approximately $5 million.

New Credit Agreement
In conjunction with our acquisition of Diamond, we entered into a new senior unsecured credit agreement as amended with the lenders party thereto (the “Term Lenders”) and Bank of America, N.A., as administrative agent. Under the New Credit Agreement, the Term Lenders have committed to provide, subject to certain conditions, (i) senior unsecured term loans in an original aggregate principal amount of $830 million and maturing five years after the funding date thereunder (the “Five Year Term Loans”) and (ii) senior unsecured term loans in an original aggregate principal amount of $300 million and maturing ten years after the funding date thereunder (the “Ten Year Term Loans”). The $1.13 billion in proceeds from the New Credit Agreement were used to finance, in part, the cash component of the acquisition consideration, to repay indebtedness of Diamond and Snyder's-Lance, and to pay certain fees and expenses incurred in connection with the acquisition.


27



Loans outstanding under the New Credit Agreement bear interest, at our option, either at (i) a Eurodollar rate plus an applicable margin specified in the New Credit Agreement or (ii) a base rate plus an applicable margin specified in the New Credit Agreement. The applicable margin added to the Eurodollar rate or base rate, as the case may be, is subject to adjustment after the end of each fiscal quarter based on changes in the Company’s adjusted total net debt-to-EBITDA ratio.
The outstanding principal amount of the Five Year Term Loans is payable in equal quarterly installments of $10.375 million beginning after completion of the first full quarter and continuing until the fifth anniversary of the funding date, with the remaining balance payable on the fifth anniversary of the funding date. The outstanding principal amount of the Ten Year Term Loans is payable in quarterly principal installments of $15 million beginning in the twenty-first full fiscal quarter after the funding date. The New Credit Agreement also contains optional prepayment provisions.
The obligations of the Company under the New Credit Agreement are guaranteed by all existing and future direct and indirect wholly-owned domestic subsidiaries of the Company other than any such subsidiaries that, taken together, do not represent more than 10% of the total domestic assets or domestic revenues of the Company and its wholly-owned domestic subsidiaries. The New Credit Agreement contains customary representations, warranties and covenants. The financial covenants include a maximum total debt to EBITDA ratio of 4.75 to 1.00 for the first two quarters following the acquisition and decreasing over the period of the loan to 3.50 to 1.00 in the seventh quarter following the acquisition. The financial covenants also include a minimum interest coverage ratio of 2.50 to 1.00. Other covenants include, but are not limited to, limitations on: (i) liens, (ii) dispositions of assets, (iii) mergers and consolidations, (iv) loans and investments, (v) subsidiary indebtedness, (vi) transactions with affiliates and (vii) certain dividends and distributions. The New Credit Agreement contains customary events of default, including a cross default provision and change of control provisions. If an event of default occurs and is continuing, we may be required to repay all amounts outstanding under the New Credit Agreement.
In addition, the debt to EBITDA covenant associated with our existing credit agreement was adjusted to agree to the New Credit Agreement in order to accommodate this additional debt.
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. In addition, we have a contract to receive services from our syndicated market data provider through 2023. Our commitment for these services ranges from $3 million to $4 million each year throughout the life of the contract.

Contractual obligations as of January 2, 2016 were:  
(in thousands)
 
 
 
Payments Due by Period
Total    
 
2016
 
2017-2018
 
2019-2020
 
Thereafter
Purchase commitments
 
$
123,452

 
$
99,292

 
$
7,610

 
$
7,100

 
$
9,450

Debt, including interest payable  (1)
 
386,875

 
7,500

 
115,000

 
151,875

 
112,500

Operating lease obligations
 
93,040

 
16,126

 
24,265

 
15,593

 
37,056

Accrued long-term incentive plan
 
4,606

 
1,281

 
3,325

 

 

Unrecognized tax benefits  (2)
 
3,646

 

 

 

 

Other liabilities  (3)
 
21,123

 

 

 

 

Total contractual obligations
 
$
632,742

 
$
124,199

 
$
150,200

 
$
174,568

 
$
159,006


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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 certain noncurrent liabilities recorded on our Consolidated Balance Sheets, including the short-term portion of these long-term liabilities. Included in these noncurrent liabilities on our Consolidated Balance Sheets as of January 2, 2016 were $16.2 million in accrued insurance liabilities and $4.9 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 $139.3 million as of January 2, 2016 compared to approximately $130.3 million as of January 3, 2015 . The $9.0 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 estimates and assumptions 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
We recognize revenue when title and risk of loss passes to our customers. Allowances for sales returns, stale products, promotions and discounts are recorded as reductions of revenue in the consolidated financial statements. The timing of revenue recognition varies based on the types of products sold and the distribution method.
Revenue for products sold to IBOs in our DSD network is recognized when the IBO purchases the inventory from our warehouses or the products are shipped to their stockroom. Revenue for products sold to retail customers through routes operated by company associates is recognized when the product is delivered to the customer.
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.

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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.
Shelf space allowances are capitalized and amortized over the lesser of twelve months or the life of the agreement and recorded as a reduction to revenue. Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.
Total allowances for sales returns, rebates, coupons, scan-backs and other promotional activities recorded in the Consolidated Balance Sheets was $25.4 million and $22.8 million as of January 2, 2016 and January 3, 2015, respectively.
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 $0.9 million and $1.8 million as of January 2, 2016 and January 3, 2015 , respectively. The decrease in the allowance for doubtful accounts from 2014 to 2015 was primarily due to write-offs of specifically reserved receivables.
Self-Insurance Reserves
We maintain reserves for the self-funded portions of employee medical insurance benefits. Our portion of employee medical claims is limited to $0.4 million per participant annually by stop-loss insurance coverage. The accrual for incurred but not reported medical insurance claims was $3.8 million and $3.6 million in 2015 and 2014 , respectively.
We maintain self-insurance reserves for workers’ compensation and auto liability for individual losses up to the deductibles which are currently $0.8 million per individual loss for workers' compensation, $0.5 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 2015 , we used a discount rate of 2.0% , the same rate used in 2014 , 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 2015 and 2014 , we had accrued liabilities related to the retained risks of $16.2 million and $18.1 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 $5.2 million and $5.9 million for 2015 and 2014, respectively, which are included in other noncurrent assets in our Consolidated Balance Sheets.
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.

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 our weighted average cost of capital. These projections rely upon historical performance, anticipated market conditions and forward-looking business plans.
The impairment analysis of goodwill performed using a discounted cash flow model, as of January 2, 2016 , assumes combined average annual revenue growth of approximately 3.5% during the valuation period. This compares to a combined average annual revenue growth of approximately 3.7% in the calculation as of January 3, 2015 .

30



We use a combination of internal and external data to develop the weighted average cost of capital, which was 8.0% for 2015, 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, anticipated investments in fixed assets and working capital could be reduced. As of January 2, 2016, the goodwill impairment analysis resulted in excess fair value over carrying value of approximately 84%. 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 unobservable factors such as a royalty rate and discount rate and identify relevant projected revenue. In 2015 , there were no impairments recorded on our trademarks. We recorded impairment charges of $3.6 million and $1.9 million in 2014 and 2013 , respectively, on certain trademarks. Certain trademarks with a total book value of $22.3 million as of January 2, 2016 , currently have a fair value which exceeds the book value by less than 15%. Any adverse changes in the use of these trademarks or the sales volumes of the associated products could result in an impairment charge in the future.
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 $0.5 million and $3.7 million of route intangible asset impairments in 2015 and 2014 , respectively, as a result of this analysis. There were no route intangible asset impairments in 2013 . Some of our route territories have fair values that approximate book value. Any economic declines or other adverse changes such as decreased demand for our products in those areas could result in future impairment charges.
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 2015 , 2014 or 2013 .
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 2015 , 2014 and 2013 , we recognized net gains on the sale of route businesses of $1.9 million , $1.1 million and $2.6 million , respectively. Net gains on the sale of route businesses in 2015 consisted of $3.3 million in gains and $1.4 million in losses. Net gains on the sale of route businesses in 2014 consisted of $3.3 million in gains and $2.2 million in losses. For 2013 , net gains on the sale of route businesses consisted of $6.1 million in gains and $3.5 million in losses.

Impairment Analysis 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 or asset groups are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets or asset groups exceeds the fair value of the assets or asset groups. There were $11.5 million in fixed asset impairment charges recorded during 2015 compared to $5.7 million during 2014 and none during 2013 .
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 .

31



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. In accordance with Accounting Standards Update ("ASU") No. 2015-17, deferred tax assets and liabilities, along with related valuation allowances, are netted by tax jurisdiction and classified as noncurrent on the balance sheet. During the fourth quarter of 2015, we elected to early-adopt ASU No. 2015-17, and the changes to deferred tax assets and liabilities were applied retrospectively. See Note 2 to the consolidated financial statements included in Item  8 for additional information.
New Accounting Standards
See Note 2 to the consolidated financial statements included in Item  8 for a summary of new accounting standards.
Item 7A.  Quantitative and Qualitative Disclosure About Market Risk
We are exposed to certain commodity 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 that 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 that 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 desired 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 agreements. While these interest rate swap agreements fixed a portion of the interest rate at a predictable level, pre-tax interest expense would have been $1.3 million lower without these swaps during 2015 and $0.6 million lower without these swaps for both 2014 and 2013 . Including the effect of the interest rate swap agreement, the weighted average interest rate was 3.14% and 2.34% , respectively, as of January 2, 2016 and January 3, 2015 . A 10% increase in variable interest rates would not have significantly impacted interest expense during 2015 .
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 2015 , 2014 and 2013 , net bad debt expense was $1.1 million , $1.6 million and $1.8 million , respectively. Allowances for doubtful accounts were $0.9 million as of January 2, 2016 , $1.8 million as of January 3, 2015 , and $1.5 million as of December 28, 2013 .

32




Item  8 .  Financial Statements and Supplementary Data
SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Fiscal Years Ended January 2, 2016 (52 weeks),  January 3, 2015 (53 weeks) and December 28, 2013 (52 weeks)
 
(in thousands, except per share data)

2015

2014

2013
Net revenue

$
1,656,399


$
1,620,920


$
1,504,332

Cost of sales

1,077,110


1,042,458


963,073

Gross margin

579,289


578,462


541,259











Selling, general and administrative

472,236


478,532


447,170

Settlements of certain litigation

5,675





Impairment charges

11,997


13,047


1,900

Gain on sale of route businesses, net

(1,913
)

(1,109
)

(2,590
)
Gain on the revaluation of prior equity investment



(16,608
)


Other expense/(income), net

838


(250
)

(7,529
)
Income before interest and income taxes

90,456


104,850


102,308











Interest expense, net

10,853


13,342


14,408

Income before income taxes

79,603


91,508


87,900











Income tax expense

28,885


32,291


32,297

Income from continuing operations

50,718


59,217


55,603

Income from discontinued operations, net of income tax



133,316


23,481

Net income

50,718


192,533


79,084

Net income/(loss) attributable to noncontrolling interests

33


(58
)

364

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

$
50,685


$
192,591


$
78,720











Amounts attributable to Snyder's-Lance, Inc.:









Continuing operations

$
50,685


$
59,275


$
55,239

Discontinued operations



133,316


23,481

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

$
50,685


$
192,591


$
78,720











Basic earnings per share:









Continuing operations

$
0.72


$
0.84


$
0.80

Discontinued operations



1.90


0.33

Total basic earnings per share

$
0.72


$
2.74


$
1.13











Diluted earnings per share:









Continuing operations

$
0.71


$
0.84


$
0.79

Discontinued operations



1.88


0.33

Total diluted earnings per share

$
0.71


$
2.72


$
1.12











Cash dividends declared per share

$
0.64


$
0.64


$
0.64

See Notes to the consolidated financial statements.

33


Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Fiscal Years Ended January 2, 2016 (52 weeks),  January 3, 2015 (53 weeks) and December 28, 2013 (52 weeks)
 
(in thousands)
 
2015
 
2014
 
2013
Net income
 
$
50,718

 
$
192,533

 
$
79,084

 
 
 
 
 
 
 
Net unrealized loss/(gain) on derivative instruments, net of income tax (benefit)/expense of ($247), $186 and $171
 
360

 
(304
)
 
(268
)
Foreign currency translation adjustment
 
(737
)
 
11,482

 
5,215

Total other comprehensive (income)/loss
 
(377
)
 
11,178

 
4,947

 
 
 
 
 
 
 
Total comprehensive income
 
51,095

 
181,355

 
74,137

Comprehensive income/(loss) attributable to noncontrolling interests, net of income tax of $0, $0 and $261
 
33

 
(58
)
 
364

Total comprehensive income attributable to Snyder’s-Lance, Inc.
 
$
51,062

 
$
181,413

 
$
73,773

See Notes to the consolidated financial statements.

34


Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of January 2, 2016 and January 3, 2015  
(in thousands, except share data)

2015

2014
ASSETS

 

 
Current assets:




Cash and cash equivalents

$
39,105


$
35,373

Restricted cash

966


966

Accounts receivable, net of allowances of $917 and $1,778, respectively

131,339


126,093

Inventories

110,994


116,236

Prepaid income taxes and income taxes receivable

2,321


4,175

Assets held for sale

15,678


11,007

Prepaid expenses and other current assets

21,210


22,112

Total current assets

321,613


315,962








Noncurrent assets:






Fixed assets, net

401,465


423,612

Goodwill

539,119


541,539

Other intangible assets, net

528,658


545,212

Other noncurrent assets

27,403


23,874

Total assets

$
1,818,258


$
1,850,199






LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 
Current liabilities:




Current portion of long-term debt

$
8,541


$
8,561

Accounts payable

54,207


57,407

Accrued compensation

26,196


33,154

Accrued casualty insurance claims

4,262


4,320

Accrued marketing, selling and promotional costs

18,806


15,889

Other payables and accrued liabilities

32,248


21,595

Total current liabilities

144,260


140,926








Noncurrent liabilities:






Long-term debt

379,855


438,376

Deferred income taxes, net

157,591


155,404

Accrued casualty insurance claims

11,931


13,755

Other noncurrent liabilities

17,034


15,030

Total liabilities

710,671


763,491








Commitments and contingencies











Stockholders’ equity:




Common stock, $0.83 1/3 par value. 110,000,000 shares authorized; 70,968,054 and 70,406,086 shares outstanding, respectively

59,138


58,669

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




Additional paid-in capital

791,428


776,930

Retained earnings

238,314


232,812