Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-Q, Received: 05/12/2016 16:18:20)
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended April 2, 2016
Commission File Number 0-398

SNYDER’S-LANCE, INC.
(Exact name of registrant as specified in its charter)
North Carolina
(State or other jurisdiction of
incorporation or organization)
  
56-0292920
(I.R.S. Employer Identification No.)
 
13515 Ballantyne Corporate Place
Charlotte, North Carolina
  
28277
(Address of principal executive offices)
  
(Zip Code)
704-554-1421
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ         No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ         No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 
Large accelerated filer  þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o  
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨         No þ

The number of shares outstanding of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock, as of May 4, 2016 , was 95,833,191 shares.


Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

INDEX


  
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

CAUTIONARY INFORMATION ABOUT FORWARD-LOOKING STATEMENTS
This document includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, beliefs, intentions or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, the risks and uncertainties set forth in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended January 2, 2016 , and those described from time to time in our other reports filed with the Securities and Exchange Commission.
Caution should be taken not to place undue reliance on our forward-looking statements, which reflect our management’s expectations only as of the time such statements are made. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.



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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
For the Quarters Ended April 2, 2016 and  April 4, 2015

 
 
Quarter Ended
(in thousands, except per share data)
 
April 2,
2016
 
April 4,
2015
Net revenue
 
$
462,765

 
$
402,341

Cost of sales
 
320,611

 
262,979

Gross margin
 
142,154

 
139,362

 
 
 
 
 
Selling, general and administrative
 
124,189

 
121,924

Transaction-related expenses
 
49,306

 

Impairment charges
 
374

 

Gain on sale of route businesses, net
 
(536
)
 
(793
)
Other income, net
 
(297
)
 
(736
)
(Loss)/income before interest and income taxes
 
(30,882
)
 
18,967

 
 
 
 
 
Loss on early extinguishment of debt
 
4,749

 

Interest expense, net
 
4,729

 
2,467

(Loss)/income before income taxes
 
(40,360
)
 
16,500

 
 
 
 
 
Income tax (benefit)/expense
 
(14,966
)
 
5,918

Net (loss)/income
 
(25,394
)
 
10,582

Net income/(loss) attributable to noncontrolling interests
 
37

 
(54
)
Net (loss)/income attributable to Snyder’s-Lance, Inc.
 
$
(25,431
)
 
$
10,636

 
 
 
 
 
Basic (loss)/earnings per share (Note 4)
 
$
(0.32
)
 
$
0.15

Weighted average basic shares outstanding
 
79,953

 
70,259

 
 
 
 
 
Diluted (loss)/earnings per share (Note 4)
 
$
(0.32
)
 
$
0.15

Weighted average diluted shares outstanding
 
79,953

 
71,002

 
 
 
 
 
Cash dividends declared per share
 
$
0.16

 
$
0.16

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


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SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Quarters Ended April 2, 2016 and  April 4, 2015
 
 
 
Quarter Ended
(in thousands)
 
April 2,
2016
 
April 4,
2015
Net (loss)/income
 
$
(25,394
)
 
$
10,582

 
 
 
 
 
Net unrealized loss on derivative instruments, net of income tax
 
1,124

 
841

Foreign currency translation adjustment
 
(6,651
)
 
447

Total other comprehensive (income)/loss
 
(5,527
)
 
1,288

 
 
 
 
 
Total comprehensive (loss)/income
 
(19,867
)
 
9,294

Comprehensive income/(loss) attributable to noncontrolling interests
 
37

 
(54
)
Total comprehensive (loss)/income attributable to Snyder’s-Lance, Inc.
 
$
(19,904
)
 
$
9,348

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



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SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
As of April 2, 2016 and January 2, 2016

(in thousands, except share and per share data)
 
April 2,
2016
 
January 2,
2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
40,209

 
$
39,105

Restricted cash
 
714

 
966

Accounts receivable, net of allowances of $1,117 and $917, respectively
 
215,715

 
131,339

Inventories, net
 
256,742

 
110,994

Prepaid income taxes and income taxes receivable
 
4,015

 
2,321

Assets held for sale
 
17,025

 
15,678

Prepaid expenses and other current assets
 
34,786

 
21,210

Total current assets
 
569,206

 
321,613

 
 
 
 
 
Noncurrent assets:
 
 
 
 
Fixed assets, net
 
533,563

 
401,465

Goodwill
 
1,409,951

 
539,119

Other intangible assets, net
 
1,429,299

 
528,658

Other noncurrent assets
 
23,536

 
19,849

Total assets
 
$
3,965,555

 
$
1,810,704

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Current portion of long-term debt
 
$
49,000

 
$
8,541

Accounts payable
 
94,768

 
54,207

Payable to growers
 
38,265

 

Accrued compensation
 
40,111

 
26,196

Accrued casualty insurance claims
 
4,798

 
4,262

Accrued marketing, selling and promotional costs
 
45,881

 
18,806

Other payables and accrued liabilities
 
66,743

 
32,248

Total current liabilities
 
339,566

 
144,260

 
 
 
 
 
Noncurrent liabilities:
 
 
 
 
Long-term debt, net
 
1,354,950

 
372,301

Deferred income taxes
 
332,565

 
157,591

Accrued casualty insurance claims
 
13,804

 
11,931

Other noncurrent liabilities
 
36,092

 
17,034

Total liabilities
 
2,076,977

 
703,117

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Common stock, $0.83 1/3 par value. 110,000,000 shares authorized; 95,676,031 and 70,968,054 shares outstanding, respectively
 
79,727

 
59,138

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

 

Additional paid-in capital
 
1,583,052

 
791,428

Retained earnings
 
201,528

 
238,314

Accumulated other comprehensive income/(loss)
 
4,897

 
(630
)
Total Snyder’s-Lance, Inc. stockholders’ equity
 
1,869,204

 
1,088,250

Noncontrolling interests
 
19,374

 
19,337

Total stockholders’ equity
 
1,888,578

 
1,107,587

Total liabilities and stockholders’ equity
 
$
3,965,555

 
$
1,810,704

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

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Table of Contents


SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Unaudited)
For the Quarters Ended April 2, 2016 and  April 4, 2015

(in thousands, except share and per share data)
 
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Non-controlling
Interests
 
Total
Balance, January 2, 2016
 
70,968,054

 
$
59,138

 
$
791,428

 
$
238,314

 
$
(630
)
 
$
19,337

 
$
1,107,587

Total comprehensive (loss)/income
 
 
 
 
 
 
 
(25,431
)
 
5,527

 
37

 
(19,867
)
Dividends paid to stockholders ($0.16 per share)
 
 
 
 
 
 
 
(11,355
)
 
 
 
 
 
(11,355
)
Issuance of common stock and stock-based awards assumed in the Diamond Foods acquisition
 
24,363,738

 
20,302

 
780,685

 
 
 
 
 
 
 
800,987

Amortization of stock options, restricted units and performance-based restricted units
 
 
 
 
 
11,530

 
 
 
 
 
 
 
11,530

Stock options exercised and restricted units vested, including $176 tax benefit
 
323,785

 
270

 
(747
)
 
 
 
 
 
 
 
(477
)
Issuance and amortization of restricted shares, net of cancellations
 
101,927

 
85

 
2,654

 
 
 
 
 
 
 
2,739

Repurchases of common stock
 
(81,473
)
 
(68
)
 
(2,498
)
 
 
 
 
 
 
 
(2,566
)
Balance, April 2, 2016
 
95,676,031

 
$
79,727

 
$
1,583,052

 
$
201,528

 
$
4,897

 
$
19,374

 
$
1,888,578


(in thousands, except share and per share data)
 
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Non-controlling
Interests
 
Total
Balance, January 3, 2015
 
70,406,086

 
$
58,669

 
$
776,930

 
$
232,812

 
$
(1,007
)
 
$
19,304

 
$
1,086,708

Total comprehensive income
 
 
 
 
 
 
 
10,636

 
(1,288
)
 
(54
)
 
9,294

Dividends paid to stockholders ($0.16 per share)
 
 
 
 
 
 
 
(11,264
)
 
 
 
 
 
(11,264
)
Amortization of stock options
 
 
 
 
 
589

 
 
 
 
 
 
 
589

Stock options exercised, including $490 tax benefit
 
124,930

 
104

 
2,484

 
 
 
 
 
 
 
2,588

Issuance, amortization and vesting of restricted shares and restricted units, net of cancellations
 
79,111

 
66

 
695

 
 
 
 
 
 
 
761

Repurchases of common stock
 
(22,783
)
 
(19
)
 
(782
)
 
 
 
 
 
 
 
(801
)
Balance, April 4, 2015
 
70,587,344

 
$
58,820

 
$
779,916

 
$
232,184

 
$
(2,295
)
 
$
19,250

 
$
1,087,875

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


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Table of Contents


SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Quarters Ended April 2, 2016 and  April 4, 2015

 
 
Quarter Ended
(in thousands)
 
April 2,
2016
 
April 4,
2015
Operating activities:
 
 
 
 
Net (loss)/income
 
$
(25,394
)
 
$
10,582

Adjustments to reconcile net (loss)/income to cash from operating activities:
 
 
 
 
Depreciation and amortization
 
20,558

 
17,413

Stock-based compensation expense
 
14,270

 
1,350

(Gain)/loss on sale of fixed assets, net
 
(25
)
 
12

Gain on sale of route businesses, net
 
(536
)
 
(793
)
Gain on sale of investments, net
 

 
(436
)
Gain on write-off of debt premium
 
(1,341
)
 

Impairment charges
 
374

 

Deferred income taxes
 
(15,734
)
 
524

Provision for doubtful accounts
 
252

 
236

Changes in operating assets and liabilities, excluding business acquisitions and foreign currency translation adjustments
 
24,284

 
(28,903
)
Net cash provided by/(used in) operating activities
 
16,708

 
(15
)
 
 
 
 
 
Investing activities:
 
 
 
 
Purchases of fixed assets
 
(11,976
)
 
(13,495
)
Purchases of route businesses
 
(11,909
)
 
(6,731
)
Proceeds from sale of fixed assets
 
153

 
302

Proceeds from sale of route businesses
 
11,785

 
7,870

Proceeds from sale of investments
 

 
436

Business acquisition, net of cash acquired
 
(1,013,559
)
 

Changes in restricted cash
 
252

 

Net cash used in investing activities
 
(1,025,254
)
 
(11,618
)
 
 
 
 
 
Financing activities:
 
 
 
 
Dividends paid to stockholders
 
(11,355
)
 
(11,264
)
Debt issuance costs
 
(6,048
)
 

Issuances of common stock
 
2,775

 
2,589

Excess tax benefits from stock-based compensation
 
176

 

Share repurchases, including shares surrendered for tax withholding
 
(5,995
)
 
(801
)
Repayments of long-term debt
 
(100,000
)
 
(1,875
)
Proceeds from issuance of long-term debt
 
1,130,000

 

Net cash provided by/(used in) financing activities
 
1,009,553

 
(11,351
)
 
 
 
 
 
Effect of exchange rate changes on cash
 
97

 

 
 
 
 
 
Increase in cash and cash equivalents
 
1,104

 
(22,984
)
Cash and cash equivalents at beginning of period
 
39,105

 
35,373

Cash and cash equivalents at end of period
 
$
40,209

 
$
12,389

 
 
 
 
 
Supplemental information:
 
 
 
 
Cash paid for income taxes, net of refunds of $217 and $425, respectively
 
$
1,444

 
$
10,412

Cash paid for interest
 
$
4,614

 
$
1,246

 
 
 
 
 
Non-cash investing activities:
 
 
 
 
Liability for dissenters and other future cash payments associated with the acquisition of Diamond (Note 3)
 
$
13,688

 
$

 
 
 
 
 
Non-cash financing activities:
 
 
 
 
Common stock and stock-based compensation issued for business acquisitions
 
$
800,987

 
$

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

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Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)


NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Snyder’s-Lance, Inc. (the Company, ” "we," "us," or "our" ) have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. All significant intercompany balances and transactions have been eliminated. We use the equity method to account for investments over which we exercise significant influence but do not control. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in our Form 10-K for the year ended January 2, 2016 , filed with the Securities and Exchange Commission on March 1, 2016 (the "2015 Form 10-K"). In our opinion, these condensed consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly our condensed consolidated financial statements for the interim periods presented herein. The condensed consolidated results of operations for the first quarter of 2016 are not necessarily indicative of the results to be expected for the full year.
The preparation of these financial statements requires us to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, management’s determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances. We routinely evaluate our estimates, including those related to sales and promotional allowances, customer returns, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, goodwill and intangible asset valuations and impairments, payable to growers, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.
As discussed further in these notes to the condensed consolidated financial statements, certain prior year amounts have been reclassified to conform with current year presentation.
Our significant accounting policies are summarized in Note 1 to the consolidated financial statements included in our 2015 Form 10-K. An update to these accounting policies associated with our acquisition of Diamond Foods, Inc. ("Diamond") is below.

Inventories (Walnut)
All inventories are accounted for on a lower of cost or market basis, with cost historically determined using a combination of first-in first-out ("FIFO") and weighted average cost. Through our acquisition of Diamond, we have walnut purchase agreements with growers, under which they deliver their walnut crop from the contracted acres to us during the fall harvest season, and pursuant to our walnut purchase agreements, we determine the price for this inventory after receipt. This purchase price is determined by us based on our discretion provided in the agreements, taking into account market conditions, crop size, and quality and nut varieties, among other relevant factors. Since the ultimate purchase price to be paid will be determined subsequent to receiving the walnut crop from the contracted acres, the amount presented as "Payable to growers" requires us to make an estimate of the final purchase price for our financial statements. Those estimates may subsequently change due to changes in the factors described above, and the effect of the change could be significant. Any such changes in estimates are accounted for in the period of change by adjusting inventory on hand or cost of goods sold if the inventory is sold through. Changes in estimates may affect the ending inventory balances, as well as gross profit.

During the first quarter of 2016, we determined the final purchase price to be paid to the walnut growers for the current crop year. Accordingly, we were not required to estimate the purchase price.  However, beginning in the third quarter, we will estimate the purchase price as we receive the new crop of walnut inventory.

Foreign Currency Translation
The functional currency of our foreign operations is the applicable local currency, the British pound and Euro. The functional currency is translated into U.S. dollars for balance sheet accounts using currency exchange rates in effect as of the balance sheet date and for revenue and expense accounts using an average exchange rate in effect during the applicable period.





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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Employee Benefits
We incur various employment-related benefit costs with respect to qualified pension and deferred compensation plans. We utilize assumptions developed by third-party actuaries when estimating the liabilities for pension and other employee benefit plans. These assumptions, where applicable, include the discount rates used to determine the actuarial present value of projected benefit obligations, the rate of increase in future compensation levels, employee turnover and mortality rates. We review our assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when it is deemed appropriate. The benefit expense is generally recognized in the consolidated financial statements on an accrual basis over the average remaining lifetime of participants, and the accrued benefits are reported in current and noncurrent liabilities on the consolidated balance sheets, as appropriate.

Business combinations
We account for business combinations under the provisions of Accounting Standards Codification ("ASC") Topic 805-10, Business Combinations ("ASC 805-10"), which requires that the purchase method of accounting be used for all business combinations. Assets acquired and liabilities assumed, including non-controlling interests, are recorded at the date of acquisition at their respective fair values. ASC 805-10 also specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported apart from goodwill. Goodwill represents the excess purchase price over the fair value of the tangible net assets and intangible assets acquired in a business combination. Acquisition-related expenses are recognized separately from the business combinations and are expensed as incurred.
NOTE 2 . NEW ACCOUNTING STANDARDS
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. This accounting standard creates common revenue recognition guidance for GAAP and International Financial Reporting Standards ("IFRS"). The guidance also requires improved disclosures to help users of the financial statements better understand the nature, amount, timing and uncertainty of revenue that is recognized. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU No. 2014-09 by one year, to December 15, 2017 for interim and annual reporting periods beginning after that date. The FASB will permit early adoption of the standard, but not before the original effective date of December 15, 2016. ASU 2014-09 can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption. In March 2016, FASB issued Accounting Standards Update No. 2016-08 to clarify the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued Accounting Standards Update No. 2016-10 to clarify guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. We are currently evaluating the impact of these standards.
On February 18, 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis, which revises the consolidation model used for evaluating whether reporting entities should consolidate certain legal entities. This accounting standard update is effective for annual reporting periods beginning after December 15, 2015, and related interim periods with early adoption permitted. We applied this beginning in 2016 and it had no impact on our financial statements.
On April 7, 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs. This accounting standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This revised guidance is effective for annual reporting periods beginning after December 15, 2015 and related interim periods, with early adoption permitted. In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarified that debt issuance costs related to line-of-credit arrangements can be presented in the balance sheet as an asset and amortized over the term of the line-of-credit arrangement. The following table summarizes the adjustments made to conform prior period classifications with the new guidance:
 
 
January 2, 2016
(in thousands)
 
As Filed
 
Reclass
 
As Adjusted
Other noncurrent assets
 
$
27,403

 
$
(7,554
)
 
$
19,849

Long-term debt, net
 
$
(379,855
)
 
$
7,554

 
$
(372,301
)



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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

On July 22, 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. This accounting standard update requires that inventory be measured at the lower of cost or net realizable value. The amendments in this update do not apply to inventory measured using the last-in, first-out method or the retail inventory method. This revised guidance is effective for annual reporting periods beginning after December 15, 2016 and related interim periods, with early adoption permitted. We do not expect this guidance to materially impact our financial statements and we have not early adopted this standard.
On July 31, 2015, the FASB issued ASU No. 2015-12, a three-part update with the objective of simplifying benefit plan reporting to make the information presented more useful to the reader. Part I designates contract value as the only required measure for fully benefit-responsive investment contracts (“FBRIC”). A FBRIC is a guaranteed investment contract between the plan and an issuer in which the issuer agrees to pay a predetermined interest rate and principal for a set amount deposited with the issuer. Part II simplifies the investment disclosure requirements for employee benefit plans. Part III provides an alternative measurement date for fiscal periods that do not coincide with a month-end date. This guidance is effective for fiscal years beginning after December 15, 2015. The amendments in Parts I and II of this standard are effective retrospectively. We adopted this guidance in the first quarter of 2016.
On September 25, 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. This accounting standard simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. This revised guidance is effective for annual reporting periods beginning after December 15, 2015, and related interim periods. The amendments in the update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of the update with early application permitted for financial statements not yet issued. We have adopted this guidance and will apply it as necessary in our financial statements.
On November 20, 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This accounting standard requires deferred tax assets and liabilities, along with related valuation allowances, to be classified as noncurrent on the balance sheet. As a result, each tax jurisdiction will now only have one net noncurrent deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. During the fourth quarter of 2015, we elected to early-adopt this guidance.
On January 5, 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. This accounting standard retains the current accounting for classifying and measuring investments in debt securities and loans, but requires equity investments to be measured at fair value with subsequent changes recognized in net income, except for those accounted for under the equity method or requiring consolidation. This guidance also changes the accounting for investments without a readily determinable fair value and that do not qualify for the practical expedient to estimate fair value. A policy election can be made for these investments whereby estimated fair value may be measured at cost and adjusted in subsequent periods for any impairment or changes in observable prices of identical or similar investments. This revised guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact this standard will have on our consolidated financial statements.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases. This accounting standard requires lessees to recognize assets and liabilities related to lease arrangements longer than 12 months on the balance sheet. This standard also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements.

On March 16, 2016, the FASB issued ASU No.2016-07, Simplifying the Transition to the Equity Method of Accounting. This accounting standard eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The updated guidance which should be applied prospectively, is effective for interim and annual periods beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements.


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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

On March 30, 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This accounting standard identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. We are currently evaluating the impact this standard will have on our consolidated financial statements.
NOTE 3 . BUSINESS ACQUISITIONS
On October 27, 2015, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Diamond Foods, Inc. ("Diamond"). 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. Pursuant to the Merger Agreement, we agreed to acquire all of the issued and outstanding shares of common stock of Diamond in a cash and stock transaction, including our repayment of $651.0 million of Diamond’s indebtedness, accrued interest and related fees, subject to the approval of our stockholders of the issuance of our shares and the approval of the stockholders of Diamond of the adoption of the Merger Agreement.
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.
At the effective time of the merger, each share of Diamond common stock that was issued and outstanding immediately prior to the effective time (other than (i) treasury shares held by Diamond, (ii) shares owned by Snyder’s-Lance or any of our subsidiaries and (iii) shares that are owned by stockholders who have perfected and not withdrawn a demand for appraisal rights pursuant to Delaware law) were cancelled and converted into the right to receive $12.50 in cash and 0.775 shares of Snyder’s-Lance common stock, par value $0.83-1/3 per share. Diamond shares have ceased trading on the NASDAQ stock exchange.
Additionally, at the effective time, all outstanding Diamond stock-based compensation awards, then comprising of restricted shares, restricted units, performance-based restricted units, and stock options, converted to replacement Snyder's-Lance awards or were settled with merger consideration as described within the Registration Statement on Form S-4 we filed with the SEC on January 20, 2016. The fair value of the replacement awards, whether vested or unvested, is included in the purchase price to the extent that pre-acquisition services have been rendered. The purchase price also includes the fair value of accelerated vesting for awards that vested at the acquisition date due to change in control provisions. The remainder of the fair value of the unvested outstanding replacement awards will be recorded as compensation expense over the applicable future vesting period in the periods following the acquisition date.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

The following is a summary of consideration transferred in the acquisition of Diamond:
 
 
Conversion Calculation
 
Fair Value
(in thousands)
Diamond common shares outstanding as of February 29, 2016
 
31,062,164

 
 
Multiplied by 0.775 as per the Merger Agreement
 
0.775

 
 
Total Snyder's-Lance common shares issued to Diamond stockholders
 
24,071,839

 
 
Multiplied by Snyder's-Lance closing stock price as of February 26, 2016
 
$
32.34

 
 
Total stock consideration for outstanding common shares
 
 
 
$
778,483

Cash consideration of $12.50 per Diamond common share outstanding as of February 29, 2016, including cash paid in lieu of fractional converted shares
 
 
 
388,318

Total cash and stock consideration to stockholders
 
 
 
1,166,801

Fair value of replacement cash awards and stock-based awards attributable to pre-acquisition service, including awards that accelerated vesting at acquisition date due to change in control provisions (1)
 
 
 
28,211

Repayment of Diamond’s outstanding debt due to change in control provisions (2)
 
 
 
651,044

Liability for value of Dissenters' merger consideration (3)
 
 
 
12,418

Total fair value of consideration transferred
 
 
 
$
1,858,474

Effective settlement of accounts payable owed by us to Diamond at acquisition date
 
 
 
(1,295
)
Total purchase consideration
 
 
 
$
1,857,179

(1) The fair value of the Snyder's-Lance replacement cash awards, settled common stock, restricted share awards, restricted unit awards and stock options was calculated as of February 29, 2016 using conversion terms outlined in the Merger Agreement. The closing stock price on February 26, 2016, the last trading day before closing, was used in the fair valuation of settled common stock, restricted share awards and restricted unit awards. The fair value of the stock options was estimated using the Black-Scholes valuation model utilizing the assumptions noted below:
Assumptions used for the valuation of replacement Snyder's-Lance stock options:
 
Stock price as of February 26, 2016
$32.34
Post-conversion exercise price
$11.75 - $80.24
Average expected volatility
31.18%
Expected dividend yield
1.98%
Weighted average risk-free interest rate
0.33%
Weighted average expected life
0.3 years
Black-Scholes weighted average value per option
$15.22

The expected volatility of the Snyder’s-Lance stock price is based on average historical volatility which is based on observations and a duration consistent with the expected life assumption. The weighted average expected life of the option is calculated using the simplified method by using the vesting term of the option and the option expiration date. The risk-free interest rate is based on U.S. treasury securities with maturities equal to the expected life of the option.
(2) Repayment of Diamond’s outstanding debt is required as part of the consideration to be transferred due to change in control provisions which are triggered upon acquisition. The repayment amount was calculated as of February 29, 2016 by taking Diamond’s outstanding long-term debt and current portion of long-term debt of $633.2 million plus accrued interest of $9.0 million and a prepayment penalty of $8.8 million .
(3) Estimate of merger consideration unpaid and owed to certain Diamond stockholders that would otherwise have received $12.50 in cash and 0.775 shares of Snyder’s-Lance common stock for each share of Diamond common stock held (see 'Appraisal Proceedings' within Note 15 ).

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

The acquisition was accounted for as a business combination. Management has used its best estimate in the allocation of the purchase price to assets acquired and liabilities assumed based on the estimated preliminary fair value of such assets and liabilities. The following table summarizes the preliminary allocation of assets acquired and liabilities assumed as part of the acquisition:
(in thousands)
 
Purchase Price Allocation
Cash and cash equivalents
 
$
28,945

Accounts receivable
 
77,445

Inventories
 
168,089

Prepaid expenses and other current assets
 
12,111

Fixed assets
 
136,340

Goodwill
 
868,443

Other intangible assets
 
902,500

Equity investments
 
8,607

Other long term assets
 
1,018

Total assets acquired
 
$
2,203,498

 
 
 
Accounts payable, including payable to growers
 
$
89,287

Other current liabilities
 
45,428

Deferred income tax liability
 
191,425

Other long term liabilities
 
20,179

Total liabilities assumed
 
$
346,319

 
 
 
Net assets acquired  (1)
 
$
1,857,179

(1) Net assets acquired includes the effective settlement of $1.3 million in accounts payable owed by us to Diamond at the time of the acquisition.
As of April 2, 2016, the purchase price allocation is considered preliminary. Of the estimated $902.5 million of acquired intangible assets, $403.5 million was preliminarily assigned to customer relationships and will be amortized over 20 years. The remaining value of acquired intangible assets of $499.0 million was preliminarily assigned to trademarks, which are not subject to amortization because they have indefinite lives. The increase in the carrying value of assets to fair value as a result of purchase price adjustments are not deductible for income tax purposes.
The majority of our estimates used in the purchase price allocation remain preliminary at this time. We anticipate that adjustments will be made to the fair values of identifiable assets acquired and liabilities assumed and that those adjustments may or may not be material to our financial statements.
Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill is attributable to the general reputation, assembled workforce, acquisition synergies and the expected future cash flows of the business.
The Company has recorded a net deferred tax liability related to the acquisition of $191.4 million . Deferred tax liabilities of $381.4 million relate primarily to basis differences in intangible assets acquired. A deferred tax asset of approximately $139.2 million was recorded for federal and state net operating losses. The Company has recorded a deferred tax liability of $54.7 million on un-repatriated foreign earnings based on management’s preliminary assessment of the amount of earnings considered to be indefinitely reinvested. The Company has recorded deferred tax assets for federal and state net operating loss carryforwards and state tax credit carryforwards of $147.2 million . A valuation allowance of $9.7 million has been recorded based on management’s preliminary assessment of the ability to utilize these deferred tax assets.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

Transaction-related expenses associated with the acquisition and subsequent integration were approximately $49.3 million for the first quarter of 2016, and are included in a separate line in the Condensed Consolidated Statements of Income. These expenses included $13.0 million of severance and retention benefits and $13.3 million of accelerated stock-based compensation which was recognized due primarily to change in control provisions and severance agreements with the Diamond executive team. The remaining costs were primarily investment banking fees as well as other professional fees and legal costs associated with completion of the acquisition and subsequent integration of Diamond.
Additionally, we deferred $11.0 million of debt issuance costs associated with the new $1.13 billion term loans used to fund the acquisition, and these costs are being amortized over the term of the loans. Approximately $6.0 million of these debt issuance costs were paid in the first quarter of 2016, with the remainder paid in the fourth quarter of 2015. See Note 10 for additional information regarding the new term loans.
Diamond's results were included in our Condensed Consolidated Statements of Income from February 29, 2016. External net revenue from Diamond of $63.2 million was included for the first quarter of 2016. As a result of progress we have made integrating Diamond, it is impracticable to disclose separately Diamond's contributions to income before income taxes for the first quarter of 2016.
The following unaudited pro forma consolidated financial information has been prepared as if the acquisition of Diamond had taken place at the beginning of 2015. The unaudited pro forma results include estimates and assumptions regarding increased amortization of intangible assets related to the acquisition, reduced interest expense related to debt due to lower interest rates associated with the new combined debt and the related tax effects. Pro forma results are not necessarily indicative of the results that would have occurred if the acquisition had occurred on the date indicated, or that may result in the future for various reasons including the potential impact of revenue and cost synergies on the business.
(in thousands, except per share data)
 
Q1 2016
 
Q1 2015
Net revenue
 
$
592,379

 
$
625,219

Net income/(loss) attributable to Snyder's-Lance, Inc.
 
$
23,711

 
$
(32,135
)

The pro forma consolidated financial information for the first quarters of 2016 and 2015 includes increased amortization expense of $2.1 million and $3.1 million , respectively, as a result of acquired intangible assets. In addition, the pro forma financial information for the first quarters of 2016 and 2015 includes $1.3 million and $3.3 million , respectively, of reduced interest expense related to debt. The reduction is due to the lower interest rates associated with our new combined debt, as more fully described in Note 10 .

We also included a reduction in cost of goods sold of $15.9 million in the pro forma financial information for the first quarter of 2016 related to the elimination of a portion of the inventory step-up recorded during the quarter in connection with the Diamond acquisition. We included additional cost of goods sold in the pro forma financial information for the first quarter of 2015 of $20.7 million . These incremental expenses represent financial impact of the total inventory step-up recorded in connection with the Diamond acquisition.

For the first quarter of 2016, we included a reduction in non-recurring transaction-related expenses which were directly related to the acquisition of $50.2 million . These transaction-related expenses, and additional transaction-related expenses incurred prior to the end of 2015, were included as additional expenses of $60.4 million in the pro forma consolidated financial information for the first quarter of 2015.
NOTE 4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income attributable to Snyder's-Lance by the weighted average number of common shares outstanding during each period.
Diluted earnings per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. In the calculation of diluted earnings per share, the denominator includes the number of additional common shares that would have been outstanding if our outstanding dilutive stock options had been exercised pursuant to the treasury stock method, or if our outstanding dilutive restricted units or performance-based restricted units had converted to common stock. Anti-dilutive shares are excluded from the dilutive earnings calculation. No adjustment to reported net income is required when computing diluted earnings per share.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and are treated as a separate class of securities in calculating earnings per share pursuant to the two-class method. We have granted and expect to continue to grant restricted shares with non-forfeitable rights to dividends and restricted units with non-forfeitable rights to dividend equivalents. As such, these awards have been included in our calculation of basic and diluted earnings per share using the two-class method, as computed in the table below:
 
 
Quarter Ended
(in thousands, except per share data)
 
April 2,
2016
 
April 4,
2015
Basic EPS:
 
 
 
 
Net (loss)/income
 
$
(25,431
)
 
$
10,636

Less: Income allocated to participating securities
 

 
19

(Loss)/income allocated to common shares
 
$
(25,431
)
 
$
10,617

Weighted average shares outstanding – Basic
 
79,953

 
70,259

(Loss)/earnings per share – Basic
 
$
(0.32
)
 
$
0.15

 
 
 
 
 
Diluted EPS:
 
 
 
 
Weighted average shares outstanding – Basic
 
79,953

 
70,259

Effect of dilutive stock options, restricted units and performance-based restricted units on shares outstanding
 

 
743

Weighted average shares outstanding – Diluted
 
79,953

 
71,002

(Loss)/earnings per share – Diluted
 
$
(0.32
)
 
$
0.15

Due to the net loss incurred during the first quarter of 2016 , basic weighted average shares outstanding were required to be used for diluted earnings per share. This resulted in approximately 849,000 potentially dilutive shares and approximately 137,000 anti-dilutive shares excluded from diluted weighted average shares outstanding for the first quarter of 2016. For the first quarter of 2015, approximately  383,000  shares were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive.
NOTE 5. STOCK-BASED COMPENSATION
Stock-based compensation expense recorded in the Condensed Consolidated Statements of Income was $14.3 million and $1.4 million for the first quarter of 2016 and  2015 , respectively.
During the first quarter of 2016 , we issued 787,956 stock options at an exercise price of $30.60 per share, 102,477 restricted shares, 81,999 performance-based restricted units and 123 restricted units to employees and directors. During the first quarter of 2015 , we issued 384,453 stock options at an exercise price of $31.02 per share and 74,874 restricted shares to employees.
The acquisition of Diamond, as discussed further in Note 3 , resulted in a significant amount of prior Diamond stock-based compensation awards converting to replacement Snyder's-Lance awards. Many of these awards accelerated vesting at the acquisition date due to change in control provisions. In addition, within transaction-related expenses on the Condensed Consolidated Statements of Income, we recognized $12.3 million in stock-based compensation expense and $1.0 million in cash compensation expense in the first quarter of 2016 from replacement awards that vested due to acceleration clauses wit hin employment agreements with former Diamond executives. At the end of the first quarter of 2016, the replacement Snyder's-Lance stock-based awards that remained outstanding were as follows:
2,682 restricted shares with unrecognized compensation expense of $0.1 million and vesting dates ranging from June 15, 2016 to July 15, 2017 .
395,040 restricted units with unrecognized compensation expense of $9.5 million and vesting dates ranging from April 21, 2016 to January 18, 2020 .
924,132 stock options which are fully vested and have exercise prices that range from $11.75 to $80.24 . The total intrinsic value of these options was $13.7 million at the end of the first quarter.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

To cover withholding taxes payable by employees upon the vesting of restricted shares, in the first quarter of 2016 , we repurchased 22,716 shares of common stock for the vesting of Snyder's-Lance employee incentive awards and 58,757 shares for the vesting of replacement awards converted from prior Diamond awards. For the first quarter of 2015, we repurchased 22,783 shares to cover withholding taxes.
In addition, we recorded $0.2 million and $0.6 million in incentive compensation expense for a performance-based cash incentive plan for the first quarter of 2016 and 2015 , respectively.
NOTE 6. INVENTORIES
Inventories as of April 2, 2016 and January 2, 2016 , consisted of the following:
(in thousands)
 
April 2,
2016
 
January 2,
2016
Finished goods
 
$
126,995

 
$
66,143

Raw materials
 
71,921

 
14,736

Work in process
 
19,254

 

Maintenance parts, packaging and supplies
 
38,572

 
30,115

Total inventories, net
 
$
256,742

 
$
110,994

The significant increase in total inventories was primarily due to the acquisition of Diamond.
NOTE 7. FIXED ASSETS
Fixed assets as of April 2, 2016 and January 2, 2016 consisted of the following:
(in thousands)
 
April 2,
2016
 
January 2,
2016
Land and land improvements
 
$
43,494

 
$
28,508

Buildings and building improvements
 
199,361

 
156,725

Machinery, equipment and computer systems
 
566,093

 
506,649

Trucks, trailers and automobiles
 
33,602

 
33,760

Furniture and fixtures
 
5,156

 
4,210

Construction in progress
 
36,182

 
11,503

Capital leases  (1)
 
3,269

 

 
 
$
887,157

 
$
741,355

Accumulated depreciation
 
(353,528
)
 
(339,802
)
 
 
533,629

 
401,553

Fixed assets held for sale
 
(66
)
 
(88
)
Fixed assets, net
 
$
533,563

 
$
401,465

(1) Gross amounts of assets recorded under capital leases represent machinery, equipment and computer systems as of April 2, 2016.
The significant increase in fixed assets was primarily due to the acquisition of Diamond. The preliminary fair value of the fixed assets acquired is still being evaluated and could change in subsequent quarters. Depreciation expense related to fixed assets was $16.2 million and $14.7 million during the first quarter of 2016 and 2015 , respectively.
There were $0.4 million of fixed asset impairment charges recorded during the first quarter of 2016 . There were no fixed asset impairment charges recorded during the first quarter of 2015 .

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the first quarter of 2016 were as follows:
(in thousands)
 
Carrying Amount    
Balance as of January 2, 2016
 
$
539,119

Business acquisitions
 
868,443

Changes in foreign currency exchange rates
 
2,560

Goodwill reclassified to assets held for sale
 
(171
)
Balance as of April 2, 2016
 
$
1,409,951

As of April 2, 2016 and January 2, 2016 , other intangible assets consisted of the following:
(in thousands)
 
    Gross
    Carrying
    Amount
 
Cumulative Impairments
 
Accumulated
Amortization
 
Net    
Carrying    
Amount    
As of April 2, 2016:
 
 
 
 
 
 
 
 
Customer and contractual relationships – amortized
 
$
572,285

 
$

 
$
(39,373
)
 
$
532,912

Non-compete agreement – amortized
 
710

 

 
(327
)
 
383

Developed technology – amortized
 
2,700

 

 
(325
)
 
2,375

Reacquired rights – amortized
 
3,100

 

 
(1,811
)
 
1,289

Patents – amortized
 
8,600

 

 
(2,721
)
 
5,879

Routes – unamortized
 
10,526

 

 

 
10,526

Trademarks – unamortized
 
882,635

 
(6,700
)
 

 
875,935

Balance as of April 2, 2016
 
$
1,480,556

 
$
(6,700
)
 
$
(44,557
)
 
$
1,429,299

 
 
 
 
 
 
 
 
 
As of January 2, 2016:
 
 
 
 
 
 
 
 
Customer and contractual relationships – amortized
 
$
166,756

 
$

 
$
(35,415
)
 
$
131,341

Non-compete agreement – amortized
 
710

 

 
(297
)
 
413

Developed technology – amortized
 
2,700

 

 
(280
)
 
2,420

Reacquired rights – amortized
 
3,100

 

 
(1,714
)
 
1,386

Patents – amortized
 
8,600

 

 
(2,526
)
 
6,074

Routes – unamortized
 
11,063

 

 

 
11,063

Trademarks – unamortized
 
382,661

 
(6,700
)
 

 
375,961

Balance as of January 2, 2016
 
$
575,590

 
$
(6,700
)
 
$
(40,232
)
 
$
528,658

The increase in goodwill, customer relationships and trademarks during the first quarter of 2016 is related to the acquisition of Diamond. These intangible asset values are preliminary and may require adjustment once the purchase price allocation is finalized. The newly acquired customer relationships are expected to have a useful life of 20 years, while the trademarks are deemed to have an indefinite useful life.
Amortization expense related to intangibles was $4.3 million and $2.7 million for the first quarter of 2016 and 2015 , respectively. The increase in amortization expense in 2016 was due to additional intangible assets obtained through the acquisition of Diamond in the first quarter of 2016.
Routes and trademarks are deemed to have indefinite useful lives because they are expected to generate cash flows indefinitely. Although not amortized, they are reviewed for impairment as conditions change or at least on an annual basis. There were no impairments during the first quarter of 2016 .


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Notes to the Condensed Consolidated Financial Statements (Unaudited)

Certain trademarks, in addition to those acquired in the Diamond acquisition, with a total book value of $25.4 million as of April 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. No triggering events occurred between the most recent annual impairment assessment and April 2, 2016 .
The changes in the carrying amount of route intangibles for the first quarter of 2016 were as follows:
(in thousands)
 
Carrying Amount    
Balance as of January 2, 2016
 
$
11,063

Routes reclassified to assets held for sale
 
(537
)
Balance as of April 2, 2016
 
$
10,526

Route businesses, including route intangibles and associated goodwill, allocated to assets held for sale represent assets available for sale in their present condition and for which actions to complete a sale have been initiated. The changes in the carrying amount of route businesses held for sale for the first quarter of 2016 were as follows:
(in thousands)
 
Carrying Amount    
Balance as of January 2, 2016
 
$
15,590

Purchases of route businesses held for sale
 
11,909

Sales of route businesses held for sale
 
(11,249
)
Reclassifications from route intangibles and goodwill
 
708

Balance as of April 2, 2016
 
$
16,958

Net gains on the sale of route businesses for the first quarter of 2016 consisted of $1.0 million in gains and $0.5 million in losses. The majority of the route business purchases and sales were due to route reengineering projects that were initiated in order to maximize the efficiency of route territories for the independent business owners ("IBO").
For the first quarter of 2015 , net gains on the sale of route businesses consisted of $1.1 million in gains and $0.3 million in losses. The majority of the route business purchases and sales were due to the reengineering of route businesses in a certain zone because of additional Partner brand business obtained in that area. See Note 15 for further information related to IBOs.
NOTE 9. EQUITY METHOD INVESTMENTS
As part of our acquisition of Diamond, we obtained 51% of the outstanding shares of Yellow Chips Holding B.V. (“Yellow Chips”), which produces vegetable chips and organic potato chips primarily for the Dutch and other European markets. The investment is accounted for under the equity method as the other owners have substantive participating rights that provide them with the more significant influence over the financial performance of Yellow Chips. The investment was measured at fair value as part of the purchase price allocation when we purchased Diamond. However, the initial valuation of Yellow Chips is preliminary and may be adjusted in future quarters. The carrying value of the investment as of April 2, 2016 is $3.2 million . We also have a loan receivable outstanding with Yellow Chips of $1.7 million as of April 2, 2016. Our share of income from Yellow Chips for the period subsequent to February 29, 2016 is not material and is included in other income in the Condensed Consolidated Statements of Income.

The agreement with Yellow Chips includes call and put options on the remaining 49% outstanding equity that we or the other Yellow Chips shareholders can exercise if a certain EBITDA target is met after 2018 or under other circumstances. The agreement also includes rights for us to sell our ownership interest and require the remaining shareholders to sell their holdings to the same buyer in the event that we want to sell our shares if the EBITDA threshold is not met. There are similar rights for the other shareholders to sell their shares and requires us to also sell our shares to the same buyer if we have not first exercised our right to initiate a sale. If the party initiating such a sale does not require the other shareholder(s) to sell, the other shareholder(s) can in any case choose to require the same buyer to also buy their shares.


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Notes to the Condensed Consolidated Financial Statements (Unaudited)

We also obtained 26% of the outstanding shares of Metcalfe’s Skinny Limited (“Metcalfe”), owner of Metcalfe’s Skinny Popcorn, a premium ready-to-eat popcorn brand in the UK, in conjunction with our acquisition of Diamond. The investment is accounted for under the equity method. The investment was measured at fair value as part of the purchase price allocation when we purchased Diamond. However, the initial valuation of Meltcalfe is preliminary and may be adjusted in future quarters. The carrying value of the investment at April 2, 2016 is $5.6 million . Our share of income from Meltcalfe for the period subsequent to February 29, 2016 is not material and is included in other income in the Condensed Consolidated Statements of Income. The agreement with Meltcalfe also includes a call option on the remaining 74% outstanding equity that we or the other shareholders can exercise.
NOTE 10 . LONG-TERM DEBT
Long-term debt outstanding as of April 2, 2016 and January 2, 2016 consisted of the following:
(in thousands)
 
April 2,
2016
 
January 2,
2016
Revolving credit facility
 
$

 
$

Other long-term debt
 
1,416,875

 
388,396

Debt issuance costs, net  (1)
 
(12,925
)
 
(7,554
)
Total debt, net
 
1,403,950

 
380,842

Current portion of long-term debt
 
(49,000
)
 
(8,541
)
Total long-term debt, net
 
$
1,354,950

 
$
372,301

(1) We retrospectively adopted new accounting guidance requiring debt issuance costs to be presented as a direct reduction of the associated liability. See Note 2 for further details.

In February 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 resulted in a loss on early extinguishment of approximately $4.7 million . The loss on early extinguishment of debt was calculated as follows:
(in thousands)
 
Amount
Repayment of private placement senior notes
 
$
100,000

Penalty on early extinguishment
 
6,170

Book value of private placement debt, including unamortized fair value adjustment
 
(101,421
)
   Loss on early extinguishment of debt
 
$
4,749

Our revolving credit facility allows us to make revolving credit borrowings of up to $375 million through May 2019 . As of April 2, 2016 and January 2, 2016 , we had available borrowings on this facility of $375 million . During the first quarter of 2016 , we borrowed $57 million from our revolving credit facility and repaid $57 million with the proceeds from our new credit agreement. During the first quarter of 2015 , there were no repayments or proceeds from our revolving credit facility.
In conjunction with our acquisition of Diamond, we entered into a new senior unsecured credit agreement as amended (the "New Credit Agreement") 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 provided (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.
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.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

The outstanding principal amount of the Five Year Term Loans is payable in equal quarterly installments of $10.375 million on the last business day of each quarter beginning in the second quarter of 2016 and continuing through December 2020. The remaining unamortized balance is payable on February 28, 2021. The outstanding principal amount of the Ten Year Term Loans is payable in quarterly principal installments of $15.0 million beginning in the second quarter of 2021. 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, as defined in the New Credit Agreement 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 eighth 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, certain covenants and terms associated with our pre-existing credit agreement were amended to agree to the New Credit Agreement in order to accommodate this additional debt. As of April 2, 2016, we are in compliance with all debt covenants.
Total debt issuance costs associated with the New Credit Agreement of approximately $11.0 million were capitalized in late 2015 and the first quarter of 2016 and will be amortized over the life of the loans.
NOTE 11. INCOME TAXES
As of April 2, 2016 , we recorded gross unrecognized tax benefits for uncertain tax positions totaling $4.7 million and related interest and penalties of $1.2 million . Of the gross unrecognized benefits, $1.4 million are recorded net with the tax attributes that would be offset. The remainder are recorded in other noncurrent liabilities in the Condensed Consolidated Balance Sheets. Of this total amount, $3.7 million , which includes interest and penalties, would affect the effective tax rate if subsequently recognized. As of January 2, 2016 , we recorded gross unrecognized tax benefits totaling $2.7 million and related interest and penalties of $0.9 million in other noncurrent liabilities on the Condensed Consolidated Balance Sheets. We expect certain income tax audits will be settled, positions will be resolved through administrative procedures or statutes of limitations will expire for various tax authorities during the next twelve months, resulting in a potential $0.8 million reduction of the unrecognized tax benefit amount. We classify interest and penalties associated with uncertain tax positions within income tax expense.

The effective tax rate increased from 35.9% for the first quarter of  2015 to 37.1% for the first quarter of 2016 . The increase in the effective income tax rate was due primarily to the transaction costs incurred in the first quarter of 2016 which are not deductible for tax purposes.

We recorded interim tax expense for the first quarter of 2016 using a forecasted annual effective tax rate applied to ordinary income. Certain non deductible transaction costs and other items related to the acquisition discussed in Note 3 have been included in the forecasted effective tax rate. The effects of changes in anticipated rates applicable to existing deferred tax liabilities have been recorded discretely in the first quarter of 2016.
NOTE 12. FAIR VALUE MEASUREMENTS
We have classified assets and liabilities required to be measured at fair value into the fair value hierarchy as set forth below:
Level 1
quoted prices in active markets for identical assets and liabilities.
Level 2
observable inputs other than quoted prices for identical assets and liabilities.
Level 3
unobservable inputs for which there is little or no market data available, which required us to develop our own assumptions.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes information regarding financial assets and financial liabilities that are measured at fair value as of April 2, 2016 and January 2, 2016 .
(in thousands)
 
Book Value
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Balance as of April 2, 2016
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
40,209

 
$
40,209

 
$

 
$

Restricted cash
 
714

 
714

 

 

Total assets
 
$
40,923

 
$
40,923

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
2,879

 
$

 
$
2,879

 
$

Total liabilities
 
$
2,879

 
$

 
$
2,879

 
$

 
 
 
 
 
 
 
 
 
Balance as of January 2, 2016
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
39,105

 
$
39,105

 
$

 
$

Restricted cash
 
966

 
966

 

 

Total assets
 
$
40,071

 
$
40,071

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
1,045

 
$

 
$
1,045

 
$

Total liabilities
 
$
1,045

 
$

 
$
1,045

 
$

There were no changes among the levels during the first quarter of 2016 .
The fair value of outstanding debt, including current maturities, was approximately $1,417 million and $391 million as of April 2, 2016 and January 2, 2016 , respectively. These Level 2 fair value estimates were based on similar debt with the same maturities, company credit rating and interest rates. Refer to Note 14 for the fair value of the plan assets and benefit obligation associated with the defined benefit pension plan assumed in the acquisition of Diamond.
NOTE 13 . DERIVATIVE INSTRUMENTS
We are exposed to certain risks relating to our business operations. We use derivative instruments to manage interest rate risks. The fair value of the derivative instrument liability in the Condensed Consolidated Balance Sheets using Level 2 inputs was as follows:
(in thousands)
 
Balance Sheet Location
 
April 2,
2016
 
January 2,
2016
Derivatives designated as hedges:
 
 
 
 
 
 
Interest rate swaps
 
Other noncurrent liabilities
 
$
(2,879
)
 
$
(1,045
)
Total fair value of derivative instruments
 
 
 
$
(2,879
)
 
$
(1,045
)
Interest Rate Swaps
Our variable-rate debt obligations incur interest at floating rates based on changes in the Eurodollar rate and U.S. base rate interest. To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements in order to maintain a desired proportion of fixed to variable-rate debt. These swaps are accounted for as cash flow hedges. The fair value of interest rate swaps was determined utilizing a market approach model using the notional amount of the interest rate swaps and the observable inputs of time to maturity and interest rates. The notional amount of the interest rate swaps designated as hedging instruments as of both April 2, 2016 and January 2, 2016 was $75.0 million .

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

In February 2015, we entered into two interest rate swap agreements to manage the exposure to changing interest rates on long-term debt. We entered into an agreement with a notional amount of $25.0 million in order to fix a portion of our term loan due in May 2019 at an interest rate of 1.58% , plus applicable margins, effective for the interest periods through May 2019. A second agreement with a notional amount of $50.0 million was entered into in order to fix a portion of our term loan due in May 2024 at an interest rate of 1.98% , plus applicable margins, effective for the interest periods through May 2022.
Changes in Other Comprehensive Income
The changes in unrealized losses, net of income tax, included in other comprehensive income due to fluctuations in interest rates were as follows:
 
 
Quarter Ended
(in thousands)
 
April 2,
2016
 
April 4,
2015
(Losses)/gains on interest rate swaps, net of income tax benefit/(expense) of $709 and $525, respectively
 
$
(1,124
)
 
$
(841
)
Total change in unrealized losses from derivative instruments, net of income tax (effective portion)
 
$
(1,124
)
 
$
(841
)
NOTE 14. RETIREMENT PLANS
As part of our purchase of Diamond, we acquired a retiree medical plan as well as a defined benefit pension plan. The defined benefit pension plan is a qualified plan covering all bargaining unit employees. Plan assets are held in trust and primarily include mutual funds and money market accounts. Employees who joined Diamond subsequent to January 15, 1999 are not entitled to retiree medical benefits. In addition, the defined benefit pension plan was frozen on July 31, 2010 in conjunction with the execution of a new union contract.
The liability associated with the defined benefit pension plan was revalued in purchase accounting to approximately $8.6 million as of February 29, 2016. This consisted of a benefit obligation of $24.2 million which was partially offset by plan assets of $15.6 million . The weighted-average discount rate assumption used to determine the benefit obligation was 4.00% . Other assumptions remained consistent with those used in Diamond's most recent valuation as of July 31, 2015. The liability associated with the defined benefit pension plan was $8.6 million as of April 2, 2016 and is included in other noncurrent liabilities on the Condensed Consolidated Balance Sheets.
The value assigned to the defined benefit pension plan is still preliminary and subject to change as we finalize purchase accounting associated with the acquisition of Diamond. Amounts recognized in the Condensed Consolidated Statements of Income were not material for the first quarter of 2016.
The liability associated with the retiree medical plan and the associated impact on the income statement are not material.
NOTE 15 . COMMITMENTS AND CONTINGENCIES
Contractual Obligations
In order to mitigate the risks of volatility in commodity markets to which we are exposed, we entered into forward purchase agreements with certain suppliers based on market prices, forward price projections and expected usage levels. Purchase commitments for certain ingredients, packaging materials and energy totaled $183.2 million as of April 2, 2016 , as compared to $97.2 million as of January 2, 2016 . The increase in purchase commitments was due to additional commitments from Diamond. In addition to these commitments, we have contracts for certain ingredients and packaging materials where we have secured a fixed price but do not have a minimum purchase quantity. We generally contract from approximately three to twelve months in advance for certain major ingredients and packaging.

We have a contract to receive services from our syndicated market data provider through 2023 . Our commitment for these services range from $3 million to $4 million each year throughout the life of the contract.
We also maintain standby letters of credit in connection with our self-insurance reserves for casualty claims. The total amount of these letters of credit was $11.9 million as of April 2, 2016 and $9.2 million as of January 2, 2016 .

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

As a result of the acquisition of Diamond, we obtained certain non-cancelable operating leases and capital leases. As of April 2, 2016, the future minimum payments under the acquired operating leases (primarily for real property) were as follows:
Acquired operating leases (in thousands)
 
Amount
Remainder of 2016
 
$
3,667

2017
 
4,625

2018
 
4,282

2019
 
4,223

2020
 
4,246

Thereafter
 
10,846

   Total operating lease commitments
 
$
31,889

Future minimum payments under the legacy Snyder's-Lance operating leases remain consistent with our disclosure in our 2015 Form 10-K.
As of April 2, 2016, the future minimum payments under the acquired capital leases (primarily for real property) were as follows:
Acquired capital leases   (in thousands)
 
Amount
Remainder of 2016
 
$
2,324

2017
 
1,740

2018
 
1,572

2019
 
1,043

2020
 
333

Thereafter
 

   Total minimum payments
 
7,012

   Less amount representing interest
 
(663
)
   Present value of capital lease obligations
 
$
6,349

Guarantees
We currently provide a partial guarantee for loans made to IBOs by third-party financial institutions for the purchase of route businesses. The outstanding aggregate balance on these loans was approximately $143.9 million as of April 2, 2016 compared to approximately $139.3 million as of January 2, 2016 . The annual maximum amount of future payments we could be required to make under the guarantee equates to 25% of the outstanding loan balance on the first day of each calendar year plus 25% of the amount of any new loans issued during such calendar year. These loans are collateralized by the route businesses for which the loans are made. Accordingly, we have the ability to recover substantially all of the outstanding loan value upon default, and our liability associated with this guarantee is not material.

Legal Matters

All Natural Litigation
We have certain class action legal proceedings filed against us which allege that certain ingredients in some of our products that are labeled as “natural” and “all natural” are not natural. Although we believe that we have strong defenses against these claims, we reached a tentative settlement agreement in the third quarter of 2015 in order to avoid the costs and uncertainty of litigation. The settlement amount of $2.8 million is accrued in other payables and accrued liabilities in the Condensed Consolidated Balance Sheets at the end of the first quarter of 2016 and is subject to the execution of definitive settlement agreements.


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Notes to the Condensed Consolidated Financial Statements (Unaudited)

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 has been approved by the court and settlement funds are scheduled to be distributed to class members in June 2016.
Shareholder Derivative Litigation
Beginning on November 14, 2011, putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond Foods, Inc. (“Diamond”) and naming certain executive officers and the members of its board of directors as individual defendants. These lawsuits, which related principally to accounting for certain payments to walnut growers, were subsequently consolidated as In re Diamond Foods Inc., Shareholder Derivative Litigation and purport to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement. Following mediation efforts, the parties agreed to the terms of a proposed settlement and the Court entered an order granting final approval of the settlement on August 19, 2013. On September 23, 2013, a Notice of Appeal from the order granting final approval was filed by a single stockholder in the California Court of Appeal.

On February 19, 2016, the Court set oral argument for March 15, 2016. On February 25, 2016, Diamond informed the Court of its pending merger with Snyder’s-Lance, Inc. and filed a request to continue oral argument. On February 29, 2016, the Court issued an order removing oral argument from the Court’s calendar and ordered the parties to submit letters to the Court on the status of the merger. On March 3, 2016, Diamond submitted a letter in response to the Court’s Order, informing the Court that Diamond Foods, Inc. no longer exists as a corporate entity due to the completion of the merger. On March 25, 2016, Diamond submitted to the Court the parties’ agreed upon briefing schedule for a motion to dismiss, setting Diamond’s motion filing for April 4, 2016; Appellants’ opposition for May 4, 2016; and Diamond’s reply for May 18, 2016. On April 4, 2016, Diamond filed its Motion to Dismiss and is currently awaiting the Court’s ruling.

Merger-related Litigation
On November 10, 2015, a putative class action lawsuit was filed on behalf of Diamond stockholders in the Court of Chancery of the State of Delaware. The complaint names as defendants Diamond, the members of Diamond’s board of directors, Snyder’s-Lance, Merger Sub I and Merger Sub II. The complaint generally alleges, among other things, that the members of Diamond’s board of directors breached their fiduciary duties to Diamond’s stockholders in connection with negotiating, entering into and approving the merger agreement with Snyder’s-Lance, Inc. The complaint additionally alleges that Diamond, Snyder’s-Lance, Merger Sub I and Merger Sub II aided and abetted such breaches of fiduciary duties. The complaint sought injunctive relief, including the enjoinment of the merger, certain other declaratory and equitable relief, damages, costs and fees. An amended complaint was filed on December 21, 2015. The amended complaint adds further allegations related to the merger process and disclosures contained in the Registration Statement on Form S-4 filed by Snyder’s-Lance on November 25, 2015. On January 15, 2016, plaintiff filed a motion for expedited proceedings requesting a preliminary injunction and expedited discovery, which the Court denied on February 3, 2016. On January 19, 2016, another action was filed in Delaware similar to the above matter. A schedule has not yet been set for briefing of anticipated motions to dismiss the complaints. If we determine that a loss is possible and a range of the loss can be reasonably estimated, we will disclose the range of the possible loss.


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Notes to the Condensed Consolidated Financial Statements (Unaudited)

Appraisal Proceedings
On February 25, 2016, Cede & Co., on behalf of Blueblade Capital Opportunities LLC (“Blueblade I”), sent an appraisal demand letter to Diamond with respect to 211,574 shares of Diamond common stock, purportedly held in connection with our acquisition of Diamond. On the same date, Cede & Co., on behalf of Blueblade Capital Opportunities II LLC ("Blueblade II," and together with Blueblade I, "Blueblade"), sent a second appraisal demand letter to Diamond with respect to 119,008 shares of Diamond common stock.  Under Section 262 of the Delaware General Corporation Law, certain stockholders may be entitled to an appraisal of the fair value of the stockholders’ shares. Blueblade claims that the price we paid for Diamond was less than its fair value. Though no complaint has yet been filed in this matter, adjudication or resolution of Blueblade’s claims could have a material impact on Snyder’s-Lance’s business or financial condition. As of April 2, 2016, we have accrued $12.4 million associated with these claims in other payables and accrued liabilities in our Condensed Consolidated Balance Sheets, which is equal to the amount of merger consideration these shareholders would have received in the Diamond acquisition. We are unable to determine at this time if an additional liability is probable and reasonably estimable.
California Labor Code Litigation
Former employee Patricia Sparks filed a putative class action lawsuit against Diamond on November 25, 2015 in San Francisco Superior Court alleging Diamond’s violation of the California Labor Code by failing to include on wage statements the start date of the pay period and by failing to include on wage statements the name and address of legal entity that is the employer.  Plaintiff amended her complaint on January 4, 2016 to add a claim for penalties under California’s Private Attorneys General Act based on the same underlying violations.  Diamond Foods timely answered the First Amended Complaint on March 7, 2016.  The parties attended the initial case management conference on May 2, 2016 and a further case management conference is scheduled for August 1, 2016.  No other dates are currently on calendar.  Following our acquisition of Diamond, adjudication or resolution of Patricia Sparks’ claims could have a material impact on Snyder’s-Lance’s business or financial condition. We accrued $8.3 million associated with this outstanding claim in the Diamond opening balance sheet as that represents our best estimate of the probable liability at that time. This accrual remains outstanding and is included in other payables and accrued liabilities in our Condensed Consolidated Balance Sheets as of April 2, 2016. We will adjust this accrual as we obtain additional information related to this estimate.

Other
We are currently subject to various other legal proceedings and environmental matters arising in the normal course of business which are not expected to have a material effect on our consolidated financial statements. We record a liability when we believe that it is probable that a loss has been incurred and the amount can be reasonably estimated. If we determine that a loss is possible and a range of the loss can be reasonably estimated, we will disclose the range of the possible loss. Significant judgment is required to determine both likelihood of there being, and the estimated amount of, a loss related to such matters. We cannot currently estimate our potential liability, damages or range of potential loss in connection with our other outstanding legal proceedings beyond amounts accrued, if any.
NOTE 16. RELATED PARTY TRANSACTIONS
We have two facilities used to support distribution of our products in the northeastern United States that are leased from an entity owned by two of our employees. One of the employees is Peter L. Michaud, Senior Vice President and General Manager of the Clearview Foods™ Division. There were $0.1 million in lease payments made for these facilities in the first quarter of both 2016 and 2015 .
One of the members of our Board of Directors, Lawrence Jackson, is also a member of the Board of Directors of Information Resources, Inc. ("IRI"), who we began using as our syndicated market data provider at the end of 2015. Total payments made to IRI for these services in the first quarter of 2016 were $0.8 million .

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

ARWCO Corporation, MAW Associates, LP and Warehime Enterprises, Inc. are significantly owned or controlled by Patricia A. Warehime, a member of our Board of Directors and a beneficial owner of more than 5% of our common stock. Among other unrelated business activities, these entities provide financing to IBOs for the purchase of route businesses. We have entered into loan service agreements with these related parties that allow us to repurchase certain distribution assets in the event an IBO defaults on a loan with the related party. We are required to repurchase the assets 30 days after default at the value as defined in the loan service agreement, which approximates fair market value. As of April 2, 2016 , there were outstanding loans made to IBOs by the related parties of approximately $26.0 million , compared to $28.0 million as of January 2, 2016 . Michael A. Warehime, our former Chairman of the Board, who passed away in August 2014, served as an officer and/or director of these entities. Patricia A. Warehime is the executrix, trustee and principal beneficiary of Mr. Warehime's estate and trust. Transactions with these related parties are primarily related to the collection and remittance of loan payments on notes receivable held by the affiliates. If IBOs default on loans, the related parties will purchase inventory in order to service the routes prior to our requirement to repurchase the routes assets. Revenue from the sale of inventory to these related parties was approximately $0.2 million and $0.1 million for the first quarter of 2016 and 2015 , respectively. In addition, we are reimbursed for certain overhead and administrative services associated with the services provided to these related parties. The receivables from, payables to and administrative fees from these entities are not significant for any period presented.
One of our directors, C. Peter Carlucci, Jr., is a member of Eckert Seamans Cherin & Mellott, LLC (“Eckert”), which serves as one of our outside legal firms. Expenses incurred for services provided by Eckert were $0.1 million and $0.4 million for the first quarter of 2016 and 2015 , respectively.
NOTE 17. OTHER COMPREHENSIVE INCOME
Total comprehensive income attributable to us, determined as net income adjusted by total other comprehensive income, was a loss of $19.9 million and income of $9.3 million for the first quarter of 2016 and 2015 , respectively. Total other comprehensive income presently consists of foreign currency translation adjustments and unrealized gains and losses from our derivative financial instruments accounted for as cash flow hedges.
Amounts reclassified out of accumulated other comprehensive income, net of tax, consisted of the following:
 
 
 
 
Quarter Ended
(in thousands)
 
Income Statement Location
 
April 2,
2016
 
April 4,
2015
Losses on cash flow hedges reclassified out of accumulated other comprehensive income:
 
 
 
 
 
 
Interest rate swaps, net of tax of $98 and $56, respectively
 
Interest expense, net
 
$
(155
)
 
$
(89
)
Total amounts reclassified from accumulated other comprehensive income
 
 
 
$
(155
)
 
$
(89
)
During the first quarter of 2016 , changes to the balance in accumulated other comprehensive income were as follows:
(in thousands)
 
Gains/(Losses) on Cash Flow Hedges
 
Foreign Currency Translation Adjustments
 
Total
Balance as of January 2, 2016
 
$
(630
)
 
$

 
$
(630
)
 
 
 
 
 
 
 
Other comprehensive (loss)/gain before reclassifications
 
(1,279
)
 
6,651

 
5,372

Losses reclassified from accumulated other comprehensive income
 
155

 

 
155

Net other comprehensive (loss)/income
 
(1,124
)
 
6,651

 
5,527

 
 
 
 
 
 
 
Balance as of April 2, 2016
 
$
(1,754
)
 
$
6,651

 
$
4,897


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Notes to the Condensed Consolidated Financial Statements (Unaudited)

During the first quarter of 2015 , changes to the balance in accumulated other comprehensive income were as follows:
(in thousands)
 
Gains/(Losses) on Cash Flow Hedges
 
Foreign Currency Translation Adjustments
 
Total
Balance as of January 3, 2015
 
$
(270
)
 
$
(737
)
 
$
(1,007
)
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications
 
(930
)
 
(447
)
 
(1,377
)
Losses reclassified from accumulated other comprehensive income
 
89

 

 
89

Net other comprehensive loss
 
(841
)
 
(447
)
 
(1,288
)
 
 
 
 
 
 
 
Balance as of April 4, 2015
 
$
(1,111
)
 
$
(1,184
)
 
$
(2,295
)
NOTE 18. SEGMENT REPORTING
We operate in one business segment: the manufacturing, distribution, marketing and sale of snack food products. We define business segments as components of an organization for which discrete financial information is available and operating results are evaluated on a regular basis by the chief operating decision maker (“CODM”) in order to assess performance and allocate resources. Our CODM is our President and Chief Executive Officer. Characteristics of our organization which were relied upon in making the determination that we operate in one business segment include the similar nature of all of the products that we sell, the functional alignment of our organizational structure, and the reports that are regularly reviewed by the CODM for the purpose of assessing performance and allocating resources.
Revenue by Product Category
Net revenue by product category was as follows:
 
 
Quarter Ended
(in thousands)
 
April 2,
2016
 
April 4,
2015
Branded
 
$
326,616

 
$
284,690

Culinary
 
14,375

 

Partner brand
 
76,828

 
77,082

Other
 
44,946

 
40,569

Net revenue
 
$
462,765

 
$
402,341


Due to the acquisition of Diamond, prior year Partner brand revenues from the sale of Kettle Brand ® potato chips are now classified as Branded revenues. For the first quarter of 2015, we have reclassified $8.0 million of Partner brand revenue associated with Kettle Brand ® potato chips to Branded revenue to be consistent with current year presentation.

In addition, we added "Culinary" as a new product category during the first quarter of 2016. This new product category will include all revenue from our newly acquired Diamond of California ® brand, which is primarily focused on culinary nuts. The separate category was added due to the nature of the brand and its seasonality and price fluctuations.

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Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 19. SIGNIFICANT CUSTOMERS
Sales to our largest retail customer, Wal-Mart Stores, Inc. ("Wal-Mart"), either through IBOs or direct distribution network, were approximately 13% of net revenue for the first quarter of both 2016 and 2015 . Our sales to Wal-Mart do not include sales of our products that may be made to Wal-Mart by third-party distributors outside our direct-store delivery ("DSD") distribution network. Sales to these third-party distributors represent approximately 5% of our net revenue for the first quarters of both 2016 and 2015 and may increase sales of our products to Wal-Mart by an amount we are unable to estimate. Accounts receivable as of April 2, 2016 and January 2, 2016 , included receivables from Wal-Mart totaling $23.5 million and $19.0 million , respectively.
NOTE 20 . SUBSEQUENT EVENTS
Cash Dividend Declared
On May 4, 2016 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on May 27, 2016 to stockholders of record on May 19, 2016 .




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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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

The following discussion provides an assessment of our financial condition, results of operations, and liquidity and capital resources and should be read in conjunction with the accompanying consolidated financial statements and notes to the financial statements. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in our Annual Report on Form 10-K for the year ended January 2, 2016 , and those described from time to time in our other reports filed with the Securities and Exchange Commission, including Item 1A. Risk Factors of Part II of this Quarterly Report on Form 10-Q.
Management’s discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, management’s determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances. We routinely evaluate our estimates, including those related to sales and promotional allowances, customer returns, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, goodwill and intangible asset valuations and impairments, payable to growers, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.
Overview

Diamond Acquisition
On February 29, 2016, we completed the acquisition of all the outstanding stock of Diamond Foods, Inc. ("Diamond"). Diamond stockholders received 0.775 shares of Snyder's-Lance common stock and $12.50 in cash for each Diamond share, with a total purchase price of approximately $1.86 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. 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. We believe we are now even better positioned in the growing snack food industry, and we continue to see significant opportunities for both cost and revenue synergies which we expect to deliver earnings accretion and support further investment behind our brands.

In conjunction with our acquisition of Diamond, 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 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 our acquisition of Diamond.










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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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

First Quarter Performance
The first quarter financial results include the financial results of Diamond beginning on February 29, 2016. All financial comparisons to the prior year are compared against the legacy Snyder’s-Lance results, where the prior year does not include any impact from the Diamond Foods acquisition.

Despite closing over halfway through the first quarter of 2016, the acquisition of Diamond had a significant impact on the results, including the following:

Diamond provided incremental net revenue of $63.2 million. Note that a portion of Diamond revenue was eliminated in consolidation as it was sold to other Snyder's-Lance subsidiaries for distribution through our DSD network.
Our gross margins were negatively impacted by the step-up of inventory to fair value required in purchase accounting, which drove additional cost of sales of $15.9 million during the quarter.
We recognized transaction-related expenses associated with the acquisition of Diamond of $49.3 million.
We realized a loss of $4.7 million on the extinguishment of our private placement senior notes.

Although we generated additional revenue from the acquisition of Diamond, we incurred a net loss for the first quarter of 2016 due to the incremental transaction-related costs. We expect to continue to incur certain transaction-related expenses throughout the remainder of 2016, including incremental cost of sales in the second quarter of 2016 associated with the remaining step-up of Diamond inventory as well as further integration costs including professional fees and expected severance and retention costs. However, the magnitude of these costs will be much less than those incurred in the first quarter.

The snack food industry as a whole remains strong as consumers continue a shift in behavior toward additional snacks throughout the day, many times as a meal replacement. However, this trend has led to additional brands and snack food categories joining the market, which is providing consumers with more snacking choices than ever before. The more established snack food brands have been under pressure to compete as consumers expand their purchases of snack foods to include these new snack food categories and brands. This is leading to additional promotional activity necessary to remain competitive in this environment. As a result, our 1.2% increase in sales volume for the legacy Snyder's-Lance business during the first quarter of 2016 was more than offset by increased promotional activity, leading to a slight decline in net revenue.

Our performance in the quarter was led by our Lance ® , Cape Cod ® , and Late July ® brands, all of which drove net revenue and market share gains. However, competitive pressure and a shift in advertising spend to the second quarter contributed to the revenue decline in our Snyder's of Hanover ® brand compared to the first quarter of 2015.

For the legacy Diamond brands, Kettle Brand ® and KETTLE ® Chips are leading the way with strong momentum and opportunities for innovation. Emerald ® recently completed a significant renovation of packaging and flavor profiles and the preliminary results are encouraging for the future. Pop Secret ® is currently tasked with overcoming category declines despite a continued healthy number of occasions for microwave popcorn. Diamond of California ® branded products, which are largely focused on culinary nuts, have been under competitive pressures on price due to the increased supply of walnuts.
 
We are working diligently to manage costs and drive operational efficiencies, which resulted in positive results for the first quarter of 2016. Our manufacturing plants are running more efficiently and our selling, general and administrative expenses were down as a percentage of revenue compared to the prior year.

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SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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

Quarter Ended April 2, 2016 Compared to Quarter Ended April 4, 2015  
 
 
Quarter Ended
 
Favorable/
(Unfavorable)
Variance
(in thousands)
 
April 2, 2016
 
April 4, 2015
 
Net revenue
 
$
462,765

 
100.0
 %
 
$
402,341

 
100.0
 %
 
$
60,424

 
15.0
 %
Cost of sales
 
320,611

 
69.3
 %
 
262,979

 
65.4
 %
 
(57,632
)
 
(21.9
)%
Gross margin
 
142,154

 
30.7
 %
 
139,362

 
34.6
 %
 
2,792

 
2.0
 %
Selling, general and administrative
 
124,189

 
26.8
 %
 
121,924

 
30.3
 %
 
(2,265
)
 
(1.9
)%
Transaction-related expenses
 
49,306

 
10.7
 %
 

 
 %
 
(49,306
)
 
(100.0
)%
Impairment charges
 
374

 
0.1
 %
 

 
 %
 
(374
)
 
(100.0
)%
Gain on sale of route businesses, net
 
(536
)
 
(0.1
)%
 
(793
)
 
(0.2
)%
 
(257
)
 
(32.4
)%
Other income, net
 
(297
)
 
(0.1
)%
 
(736
)
 
(0.2