Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-Q, Received: 08/09/2017 06:03:47)
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 July 1, 2017
Commission File Number 0-398

SNYDERSLANCELOGONEWA06A08.JPG
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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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)
Emerging growth company o  
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨         No þ

The number of shares outstanding of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock, as of July 30, 2017 , was 96,648,536 shares.


Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

INDEX


  
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

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,” "continues," "could," "designed," “estimates,” “expects,” “forecasts,” "goal," "initiate," "intends," “may,” “objective,” "plan," "potential," "pursue," "should," "target," "will," "would," or the negative of any of these words or similar expressions to identify our forward-looking statements that represent our judgment about possible future events. In making these statements we rely on assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments as well as other factors we consider appropriate under the circumstances. We believe these judgments are reasonable, but these statements are not guarantees of any events or financial results, and our actual results may differ materially due to a variety of important factors, both positive and negative. Factors that could cause these differences include, but are not limited to, the risks and uncertainties set forth in our Annual Report on Form 10-K for the year ended December 31, 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 the expectations of management only as of the time such statements are made. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

3


Table of Contents


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income/(Loss) (Unaudited)
For the Quarters and Six Months Ended July 1, 2017 and  July 2, 2016
 
 
Quarter Ended
 
Six Months Ended
(in thousands, except per share data)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Net revenue
 
$
579,595

 
$
561,292

 
$
1,111,096

 
$
1,009,161

Cost of sales
 
369,308

 
349,736

 
716,043

 
654,515

Gross profit
 
210,287

 
211,556

 
395,053

 
354,646

 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses
 
179,239

 
160,121

 
338,702

 
281,676

Transaction and integration related expenses
 
478

 
9,945

 
1,585

 
58,923

Impairment charges
 
7,920

 
489

 
7,920

 
863

Other operating expense/(income), net
 
205

 
(914
)
 
475

 
(1,419
)
Operating income
 
22,445

 
41,915

 
46,371

 
14,603

 
 
 
 
 
 
 
 
 
Other income, net
 
(218
)
 
(227
)
 
(1,234
)
 
(555
)
Income before interest and income taxes
 
22,663

 
42,142

 
47,605

 
15,158

 
 
 
 
 
 
 
 
 
Loss on early extinguishment of debt
 

 

 

 
4,749

Interest expense, net
 
9,492

 
9,361

 
18,446

 
14,090

Income/(loss) before income taxes
 
13,171

 
32,781

 
29,159

 
(3,681
)
 
 
 
 
 
 
 
 
 
Income tax expense/(benefit)
 
8,270

 
12,381

 
12,932

 
(1,233
)
Income/(loss) from continuing operations
 
4,901

 
20,400

 
16,227

 
(2,448
)
Loss from discontinued operations, net of income taxes
 
(341
)
 
(783
)
 
(341
)
 
(3,329
)
Net income/(loss)
 
4,560

 
19,617

 
15,886

 
(5,777
)
Net income/(loss) attributable to non-controlling interests
 
590

 
(64
)
 
754

 
(27
)
Net income/(loss) attributable to Snyder’s-Lance, Inc.
 
$
3,970

 
$
19,681

 
$
15,132

 
$
(5,750
)
 
 
 
 
 
 
 
 
 
Amounts attributable to Snyder's-Lance, Inc.:
 
 
 
 
 
 
 
 
Continuing operations
 
$
4,311

 
$
20,464

 
$
15,473

 
$
(2,421
)
Discontinued operations
 
(341
)
 
(783
)
 
(341
)
 
(3,329
)
Net income/(loss) attributable to Snyder's-Lance, Inc.
 
$
3,970

 
$
19,681

 
$
15,132

 
$
(5,750
)
 
 
 
 
 
 
 
 
 
Basic earnings/(loss) per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.04

 
$
0.21

 
$
0.16

 
$
(0.03
)
Discontinued operations
 

 

 

 
(0.04
)
Total basic earnings/(loss) per share
 
$
0.04

 
$
0.21

 
$
0.16

 
$
(0.07
)
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic
 
96,448

 
95,679

 
96,321

 
87,816

 
 
 
 
 
 
 
 
 
Diluted earnings/(loss) per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.04

 
$
0.21

 
$
0.16

 
$
(0.03
)
Discontinued operations
 

 
(0.01
)
 

 
(0.04
)
Total diluted earnings/(loss) per share
 
$
0.04

 
$
0.20

 
$
0.16

 
$
(0.07
)
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - diluted
 
97,704

 
96,666

 
97,629

 
87,816

 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.16

 
$
0.16

 
$
0.32

 
$
0.32

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

4


Table of Contents


SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income/(Loss) (Unaudited)
For the Quarters and Six Months Ended July 1, 2017 and  July 2, 2016
 
 
Quarter Ended
 
Six Months Ended
(in thousands)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Net income/(loss)
 
$
4,560

 
$
19,617

 
$
15,886

 
$
(5,777
)
 
 
 
 
 
 
 
 
 
Net unrealized loss on derivative instruments, net of income tax
 
(2,319
)
 
(503
)
 
(1,894
)
 
(1,627
)
Foreign currency translation adjustment
 
7,180

 
(24,066
)
 
10,463

 
(17,415
)
Total other comprehensive income/(loss)
 
4,861

 
(24,569
)
 
8,569

 
(19,042
)
 
 
 
 
 
 
 
 
 
Total comprehensive income/(loss)
 
9,421

 
(4,952
)
 
24,455

 
(24,819
)
Comprehensive income/(loss) attributable to non-controlling interests
 
590

 
(64
)
 
754

 
(27
)
Total comprehensive income/(loss) attributable to Snyder’s-Lance, Inc.
 
$
8,831

 
$
(4,888
)
 
$
23,701

 
$
(24,792
)
See Accompanying Notes to the condensed consolidated financial statements (unaudited).

5


Table of Contents


SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
As of July 1, 2017 and December 31, 2016
(in thousands, except share and per share data)
 
July 1,
2017
 
December 31,
2016
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
18,430

 
$
35,409

Restricted cash
 
446

 
714

Accounts receivable, net of allowances of $1,727 and $1,290, respectively
 
224,401

 
210,723

Receivable from the sale of Diamond of California
 

 
118,577

Inventories, net
 
189,821

 
173,456

Prepaid income taxes and income taxes receivable
 
6,994

 
5,744

Assets held for sale
 
22,051

 
19,568

Prepaid expenses and other current assets
 
34,917

 
27,666

Total current assets
 
497,060

 
591,857

 
 
 
 
 
Noncurrent assets:
 
 
 
 
Fixed assets, net
 
497,064

 
501,884

Goodwill
 
1,322,047

 
1,318,362

Other intangible assets, net
 
1,368,014

 
1,373,800

Other noncurrent assets
 
49,388

 
48,173

Total assets
 
$
3,733,573

 
$
3,834,076

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

 
$
49,000

Accounts payable
 
134,937

 
99,249

Accrued compensation
 
37,826

 
44,901

Accrued casualty insurance claims
 
3,856

 
4,266

Accrued marketing, selling and promotional costs
 
57,755

 
50,179

Other payables and accrued liabilities
 
49,664

 
47,958

Total current liabilities
 
333,038

 
295,553

 
 
 
 
 
Noncurrent liabilities:
 
 
 
 
Long-term debt, net
 
1,084,772

 
1,245,959

Deferred income taxes, net
 
394,271

 
378,236

Accrued casualty insurance claims
 
12,919

 
13,049

Other noncurrent liabilities
 
25,018

 
25,609

Total liabilities
 
1,850,018

 
1,958,406

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Common stock, $0.83 1/3 par value. 110,000,000 shares authorized; 96,634,070 and 96,242,784 shares outstanding, respectively
 
80,525

 
80,199

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

 

Additional paid-in capital
 
1,612,653

 
1,598,678

Retained earnings
 
179,994

 
195,733

Accumulated other comprehensive loss
 
(9,408
)
 
(17,977
)
Total Snyder’s-Lance, Inc. stockholders’ equity
 
1,863,764

 
1,856,633

Non-controlling interests
 
19,791

 
19,037

Total stockholders’ equity
 
1,883,555

 
1,875,670

Total liabilities and stockholders’ equity
 
$
3,733,573

 
$
3,834,076

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

6


Table of Contents


SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended July 1, 2017 and  July 2, 2016
 
 
Six Months Ended
(in thousands)
 
July 1,
2017
 
July 2,
2016
Operating activities:
 
 
 
 
Net income/(loss)
 
$
15,886

 
$
(5,777
)
Adjustments to reconcile net income/(loss) to cash from operating activities:
 
 
 
 
Depreciation and amortization
 
48,929

 
47,452

Stock-based compensation expense
 
8,563

 
19,798

Loss on sale of fixed assets, net
 
405

 
1

Loss on sale of Diamond of California
 
540

 

Gain on sale of route businesses, net
 
(761
)
 
(691
)
Loss on early extinguishment of debt
 

 
4,749

Impairment charges
 
7,920

 
863

Deferred income taxes
 
12,163

 
(4,760
)
Provision for doubtful accounts
 
630

 
235

Changes in operating assets and liabilities, excluding business acquisitions, divestitures and foreign currency translation adjustments
 
(7,242
)
 
20,065

Net cash provided by operating activities
 
87,033

 
81,935

 
 
 
 
 
Investing activities:
 
 
 
 
Purchases of fixed assets
 
(34,741
)
 
(37,317
)
Purchases of route businesses
 
(17,421
)
 
(14,863
)
Purchase of equity method investment
 
(1,500
)
 

Proceeds from sale of fixed assets and insurance recoveries
 
156

 
833

Proceeds from sale of route businesses
 
16,206

 
13,830

Proceeds from sale of investments
 
321

 

Proceeds from sale of discontinued operations
 
121,681

 

Business acquisition, net of cash acquired
 

 
(1,021,434
)
Net cash provided by/(used in) investing activities
 
84,702

 
(1,058,951
)
 
 
 
 
 
Financing activities:
 
 
 
 
Dividends paid to stockholders
 
(30,871
)
 
(26,702
)
Debt issuance costs
 
(2,441
)
 
(6,047
)
Issuances of common stock
 
7,550

 
7,830

Excess tax benefits from stock-based compensation
 

 
299

Share repurchases, including shares surrendered for tax withholding
 
(1,812
)
 
(8,275
)
Payments on capital leases
 
(1,399
)
 
(1,015
)
Repayments of long-term debt
 
(24,500
)
 
(120,295
)
Proceeds from issuance of long-term debt
 

 
1,130,000

Repayments of revolving credit facility
 
(220,000
)
 
(57,000
)
Proceeds from revolving credit facility
 
84,000

 
57,000

Net cash (used in)/provided by financing activities
 
(189,473
)
 
975,795

 
 
 
 
 
Effect of exchange rate changes on cash
 
491

 
(411
)
 
 
 
 
 
Net decrease
 
(17,247
)
 
(1,632
)
Cash, cash equivalents and restricted cash at beginning of period
 
36,123

 
40,071

Cash, cash equivalents and restricted cash at end of period
 
$
18,876

 
$
38,439

 
 
 
 
 
Supplemental information:
 
 
 
 
Cash paid for income taxes, net of refunds of $330 and $1,360, respectively
 
$
4,249

 
$
4,321

Cash paid for interest
 
$
17,594

 
$
13,528

 
 
 
 
 
Non-cash investing activities:
 
 
 
 
Increase in fixed asset expenditures included in accounts payable
 
$
(2,987
)
 
$
(680
)
Liability for dissenters associated with the acquisition of Diamond Foods (Note 4)
 
$

 
$
12,418

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

 
$
800,987

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

7

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 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 unaudited 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 December 31, 2016 , which was filed with the Securities and Exchange Commission (the "SEC") on February 28, 2017 (the "2016 Form 10-K"). Our primary operating currencies, other than U.S. dollar, include British pound and Euro. Our accounting policies did not change in the second quarter of 2017, except as described in Note 2. In our opinion, these unaudited condensed consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly our unaudited condensed consolidated financial statements for the interim periods presented herein:
The results of operations for the 13 and 26 weeks ended July 1, 2017 ("second quarter of 2017" and "first six months of 2017", respectively), and the 13 and 26 weeks ended July 2, 2016 ("second quarter of 2016" and "first six months of 2016", respectively).
Comprehensive income for the second quarter of 2017 and first six months of 2017 and the second quarter of 2016 and first six months of 2016.
The financial position as of July 1, 2017 and December 31, 2016 .
The cash flows for the first six months of 2017 and the first six months of 2016.
The unaudited condensed consolidated results of operations for the second quarter of 2017 and first six months of 2017 are not necessarily indicative of the results to be expected for the full year.

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

Certain prior year amounts have been reclassified to conform to current year presentation. We have elected to separately disclose other operating expense/(income), net and other income, net. In addition, we have included the caption operating income on our Condensed Consolidated Statements of Income/(Loss). The items included in other operating expense/(income), net include: gains or losses on sale of property, plant and equipment; gains or losses on sale of route businesses; and royalty income. The items included in other income, net include: foreign exchange gains or losses and equity income or losses from nonconsolidated entities. These reclassifications had no effect on previously reported results of operations or retained earnings.

Our significant accounting policies are summarized in Note 1 to the consolidated financial statements included in our 2016 Form 10-K.

Discontinued Operations Presentation
As discussed in Note 3 , amounts included in the Condensed Consolidated Statements of Income/(Loss) for prior periods have been reclassified to separate amounts related to discontinued operations from continuing operations. Accordingly, unless otherwise stated, amounts disclosed within the notes to the condensed consolidated financial statements exclude amounts related to discontinued operations. The Condensed Consolidated Statements of Cash Flows were not adjusted for presentation of discontinued operations in prior periods, but certain items are disclosed in Note 3 to the condensed consolidated financial statements.

8

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 2 . NEW ACCOUNTING STANDARDS

Recently Adopted

On November 17, 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-18, Restricted Cash. This accounting standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. The amendment should be adopted retrospectively. We early adopted this guidance in the first quarter of 2017 and the adoption resulted in reclassifications of $0.3 million cash inflows from investing activities to operating activities for each of the six months ended July 1, 2017 and July 2, 2016 .

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Condensed Consolidated Statement of Cash Flows as of July 1, 2017 .
(in thousands)
 
July 1,
2017
 
December 31,
2016
Cash and cash equivalents
 
$
18,430

 
$
35,409

Restricted cash
 
446

 
714

Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statement of Cash Flows
 
$
18,876

 
$
36,123


On August 26, 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This accounting standard is intended to eliminate diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. We adopted this guidance in the first quarter of 2017 and the impact on our Condensed Consolidated Statements of Cash Flows was a reclassification of $6.2 million cash outflows from operating activities to repayments of long-term debt within financing activities for the six months ended July 2, 2016. The table below summarizes the impact on the Statement of Cash Flows for the first six months of 2016.
(in thousands)
 
Previous Classification (1)
 
Impact
 
Current Classification
Operating activities:
 
 
 
 
 
 
Gain on write-off of debt premium
 
$
(1,341
)
 
$
1,341

 
$

Loss on early extinguishment of debt
 

 
4,749

 
4,749

Changes in operating assets and liabilities, excluding business acquisitions, divestitures and foreign currency translation adjustments
 
19,985

 
80

 
20,065

Net cash provided by operating activities
 
75,765

 
6,170

 
81,935

 
 
 
 
 
 
 
Financing activities:
 
 
 
 
 
 
Repayments of long-term debt
 
(114,125
)
 
(6,170
)
 
(120,295
)
Net cash provided by financing activities
 
$
981,965

 
$
(6,170
)
 
$
975,795

(1) The figures Changes in operating assets and liabilities, excluding business acquisitions, divestitures and foreign currency translation adjustments and Net cash provided by operating activities have been revised from the initial presentation to include the impact of the $6.6 million correction of an error described in Note 4.


9

Table of Contents

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. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The updated guidance includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. We adopted the accounting standard in the first quarter of 2017 and the impact to our condensed consolidated financial statements are as follows:
Excess tax benefits for share-based payments were previously recorded through income tax receivable and equity, and presented as a financing cash flow. As a result of adopting this accounting standard, excess tax benefits for share-based payments are recorded as an adjustment to income tax expense and reflected in operating cash flows. We elected to adopt this provision of the accounting standard prospectively which resulted in income tax benefit of $0.2 million and $1.6 million for the second quarter and first six months of 2017, respectively.
The guidance allows the employer to withhold up to the maximum statutory tax rates in the applicable jurisdictions without triggering liability accounting. Our accounting treatment of outstanding equity awards was not impacted by our adoption of this provision of the accounting standard.
The guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. We did not make this election, and continue to account for forfeitures on an estimated basis.

On January 26, 2017 the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. This accounting standard simplifies how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. Instead, entities should perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the excess of carrying amount over the fair value of the respective reporting unit. The guidance is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early application of the ASU is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this standard in the second quarter of 2017 and will apply its guidance on a prospective basis, to the extent that an impairment is identified in step 1 of our testing procedures.

Not Yet Adopted

On May 10, 2017 the FASB issued ASU 2017-09, Scope of Modification Accounting. This accounting standard provides clarity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. According to this accounting standard, an entity should account for the effects of a modification unless the fair value, vesting conditions, and classification of the modified award are the same as the original award. The updated guidance is effective for annual reporting periods, and interim reporting periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted. We are currently evaluating whether we will early adopt this standard during fiscal year 2017. However, there are currently no planned modifications to our share-based payment awards for the remainder of fiscal year 2017.

On January 5, 2017 the FASB issued ASU 2017-01, Clarifying the Definition of a Business. This accounting standard clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted. We are currently evaluating the impact this accounting standard will have on our consolidated financial statements.

On October 24, 2016, the FASB issued ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. This accounting standard is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The updated guidance indicates that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs instead of when the asset has been sold to an outside party. The updated guidance is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, and early adoption is permitted. The amendments are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of the adoption. The Company is still assessing the impact to the financial statements and intends to adopt the standard on December 31, 2017, the first day of our fiscal 2018.


10

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases. This ASU requires us to recognize a lease liability for the obligation to make lease payments, measured at the present value on a discounted basis, and a right-of-use (“ROU”) asset for the right to use the underlying asset for the duration of the lease term, measured at the lease liability amount adjusted for lease prepayments, lease incentives received and initial direct costs. The lease liability and ROU asset are recognized in the balance sheet at the commencement of the lease. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Operating leases will result in straight line expense while finance leases will result in a front-loaded expense pattern. Classification will be based on criteria that are largely similar to those applied in current lease accounting. ASU 2016-02 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2018, and requires the use of a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period presented in the financial statements. Early application of the ASU is permitted. We are currently evaluating the impact this accounting standard will have on our condensed consolidated financial statements.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which provides for a single five-step model to be applied to all revenue from contracts with customers. 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.

In 2016, the FASB issued final amendments clarifying the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting of intellectual property licenses. In addition, the FASB introduced practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on collectability, non-cash consideration and the presentation of sales and other similar taxes.

The impact of adopting the new standard on our net revenue and operating income is not expected to be material. We also do not expect a material impact to our balance sheet. The immaterial impact of adopting ASU No. 2014-09 primarily relates to the following:
Slotting fees, which are currently amortized over the lesser of their arrangement term or 12 months, but under the new standard these slotting fees will be recorded as a reduction in the transaction price as the product is sold. This could lead to a difference in the timing of recognizing revenue.
Licensing of promotional materials to distributors would be a separate performance obligation under the new standard. We believe that this is immaterial in the context of our contracts.
Contract manufacturing arrangements are recognized as revenue when product is delivered to the customer. If any of our contracts create an asset without an alternative use and an enforceable right to payment, then we would recognize revenue over time under the new standard. The right to payment is not enforceable under the contracts we have currently assessed.
We plan to adopt ASC Topic 606, Revenue from Contracts with Customers, on December 31, 2017, the first day of our fiscal year 2018. The guidance permits the use of either a full retrospective or modified retrospective transition method. We are currently evaluating the method of adoption but believe that we will apply the modified retrospective approach.

Other amendments to GAAP in the US that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our condensed consolidated financial statements upon adoption.

11

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 3 . DISCONTINUED OPERATIONS

Sale of Diamond of California
On November 28, 2016, we entered into a definitive agreement to sell our culinary nuts business (comprised primarily of the Diamond of California ® brand and the Stockton, California facility; collectively "Diamond of California"). The sale of Diamond of California represented a strategic shift in our business that will have a significant impact on our operations and financial results, and aligns with our strategy to focus more resources on the growth opportunities for our snack food brands. On December 31, 2016, we completed the sale for estimated net proceeds of $128.6 million , consisting of $118.6 million of cash and $10.0 million in a promissory note. As of December 31, 2016, we had a receivable due from the purchaser of $118.6 million recorded in receivable from the sale of Diamond of California on our Condensed Consolidated Balance Sheet. On January 3, 2017, we received $121.7 million cash proceeds from the sale of Diamond of California. The difference represents adjustments that were made to preliminary working capital and estimated walnut pricing liability. The purchase price is still subject to normal working capital adjustments as well as a post-closing adjustment to working capital based on the final California Department of Food and Agriculture Walnut/Raisin/Prune Report State Summary - 2016 Crop Year, which is expected to be completed in the fourth quarter of 2017. During the second quarter of 2017, we revised the estimated walnut pricing liability to $3.1 million , which resulted in $0.5 million of additional loss on the sale of Diamond of California within discontinued operations during the quarter. This estimate may change throughout 2017 until the final walnut price is determined in the fourth quarter.
The promissory note is due on June 30, 2025 . Interest on the principal balance of this promissory note is payable annually and accrues at a rate per annum equal to the 30-day LIBOR rate, plus 3.00% , provided that in no event shall the applicable rate exceed 6.00% per annum. The note is recorded within other noncurrent assets on our Condensed Consolidated Balance Sheets.
As a result of the sale of Diamond of California, revenues and expenses that no longer continued after the sale of Diamond of California, and where we had no substantial continuing involvement, were reclassified to discontinued operations in the Condensed Consolidated Statements of Income/(Loss).
For the second quarters and first six months of 2017 and 2016, income statement amounts associated with discontinued operations were as follows:
 
 
Quarter Ended
 
Six Months Ended
(in thousands)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Net revenue
 
$

 
$
48,208

 
$

 
$
63,104

Cost of sales
 

 
41,481

 

 
57,313

Gross profit
 

 
6,727

 

 
5,791

Selling, general and administrative expenses
 

 
7,397

 

 
10,031

Transaction and integration related expenses
 

 
689

 

 
1,017

Loss on sale of Diamond of California
 
540

 

 
540

 

Loss from discontinued operations before income taxes
 
(540
)
 
(1,359
)
 
(540
)
 
(5,257
)
Income tax benefit
 
(199
)
 
(576
)
 
(199
)
 
(1,928
)
Loss from discontinued operations, net of income tax
 
$
(341
)
 
$
(783
)
 
$
(341
)
 
$
(3,329
)
The pretax loss from discontinued operations for the second quarter and first six months of 2017 was primarily the result of adjusting the estimated walnut pricing liability in the second quarter of 2017. This liability is subject to further adjustment and is expected to be settled in the fourth quarter of 2017. This loss generated an income tax benefit of $0.2 million , with an effective tax rate of 36.9% , during both the second quarter and first six months of 2017.

The discontinued operations pretax loss activity for the second quarter of 2016 generated an income tax benefit of $0.6 million , with an effective tax rate of 42.4% . The discontinued operations pretax loss activity for the first six months of 2016 generated an income tax benefit of $1.9 million , with an effective tax rate of 36.7% .


12

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

The following table provides depreciation, amortization, capital expenditures, and significant operating noncash items of discontinued operations for the first six months of 2017 and 2016.
 
 
Six Months Ended
(in thousands)
 
July 1,
2017
 
July 2,
2016
Cash flows from discontinued operating activities:
 
 
 
 
Depreciation and amortization
 
$

 
$
1,987

Stock-based compensation expense
 

 
293

Loss on sale of Diamond of California
 
540

 

Payable to growers (1)
 

 
(29,385
)
 
 
 
 
 
Cash flows from discontinued investing activities:
 
 
 
 
Purchases of fixed assets
 
$

 
$
33

(1) The operating cash outflow generated by the decrease in payable to growers from $38.3 million acquired on February 29, 2016 to the balance of $8.9 million on July 2, 2016.
In connection with the sale of Diamond of California, we entered into a Supply Agreement ("Walnut Supply Agreement") to procure walnuts from the purchaser for an initial term of five years subsequent to the sale transaction, which will be used in the manufacture of Emerald ® branded products. Under the Walnut Supply Agreement, the purchaser has the right to match third party offers for sale of such walnuts to us.
Additionally, we entered into a Transition Services Agreement ("Stockton TSA") and a Facility Use Agreement ("Stockton FUA"), both effective immediately subsequent to the sale transaction, to facilitate the orderly transfer of Emerald ® and Pop Secret ® business operations to our Company-owned facilities. The Stockton TSA stipulates certain finance, accounting, sales, marketing, human resources, information technology, supply chain, manufacturing and other general services to be provided between us and the purchaser, during an initial term of 120 days, with extension provisions if necessitated. The Stockton FUA had an initial term of six months, with extension provisions if necessitated, and provides us with the right to access Diamond of California's Stockton, California manufacturing facility, for the purpose of manufacturing certain Emerald ® branded products. Permitted uses under the Stockton FUA include use of certain equipment and storage of inventories related to the Emerald ® production process. Although use of the Stockton TSA and the Stockton FUA has continued through the end of the second quarter of 2017, the services are completed at this time. We have also entered into a contract manufacturing agreement with the purchaser to manufacture certain products for us through September 2017.
NOTE 4 . BUSINESS ACQUISITIONS
Acquisition of Diamond Foods
On February 29, 2016, we acquired Diamond Foods, Inc. ("Diamond Foods") for $1,857.2 million in a cash and stock transaction, including our repayment of  $651.0 million  of Diamond Foods’ indebtedness, accrued interest and related fees. Diamond Foods, a leading snack food company, possessed five brands including Kettle Brand ® potato chips, KETTLE ® Chips, Pop Secret ® popcorn, Emerald ® snack nuts, and Diamond of California ® culinary nuts. As a result of the acquisition, Diamond Foods became our wholly-owned subsidiary. We also obtained 26% of the outstanding shares of Metcalfe's Skinny Limited ("Metcalfe"), owner of Metcalfe's skinny ® , a premium ready-to-eat ("RTE") popcorn brand in the United Kingdom ("U.K."), which is described below.
At the effective time of the acquisition of Diamond Foods, all of its outstanding stock-based compensation awards, then comprised 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, was included in the purchase price to the extent that pre-acquisition services had been rendered. The purchase price also included 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 are being recorded as compensation expense over the applicable future vesting period in the periods following the acquisition date.

13

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

The Diamond Foods acquisition was accounted for as a business combination. Management used its best estimate in the preliminary allocation of the purchase price to assets acquired and liabilities assumed based on the estimated fair value of such assets and liabilities as of April 2, 2016. Subsequent to the quarter ended April 2, 2016, we adjusted our initial purchase price allocation for changes in the valuation of certain assets and liabilities throughout the year ended December 31, 2016. As discussed in our 2016 Form 10-K, included within these adjustments was a correction to acquired cash of $6.6 million and the corresponding amount to accounts payable as a result of Diamond Foods' prior cash accounting, which resulted in a reclassification of a cash outflow from operating activities to investing activities on the Condensed Consolidated Statement of Cash Flows for the six months ended July 2, 2016. The impact of the remaining adjustments on previously presented condensed consolidated financial statements was not significant.
In addition, we recorded payables of $12.4 million for certain dissenting shareholders of Diamond Foods associated with the acquisition as of July 2, 2016, which is reflected as non-cash investing activity for the six months ended July 2, 2016. During the year ended December 31, 2016, a settlement was reached with such dissenting shareholders and we paid such liability and recognized additional $1.6 million and $0.5 million as transaction related expenses in the second quarter and third quarter, respectively, of 2016.
Transaction and integration related expenses associated with the acquisition of Diamond Foods were approximately $9.9 million and $58.9 million for the second quarter and first six months, respectively, of 2016 , and are included in a separate line in the Condensed Consolidated Statements of Income/(Loss). These expenses primarily consisted of severance and retention costs, accelerated stock-based compensation, investment banking fees and other professional fees and legal costs associated with completion of the acquisition and subsequent integration of Diamond Foods.
Diamond Foods' results were included in our Condensed Consolidated Statements of Income/(Loss) from February 29, 2016. Incremental net revenue from Diamond Foods of $135.6 million and $183.9 million was included for the second quarter and first six months, respectively, of 2016. A portion of Diamond Foods' revenue was eliminated in consolidation as it was sold to our other subsidiaries for distribution through our national direct-store-delivery distribution network ("DSD network"). As a result of progress made integrating Diamond Foods, it is impracticable to disclose separately Diamond Foods' contributions to income before income taxes for the second quarter and first six months of 2016.
The following unaudited pro forma condensed consolidated financial information has been prepared as if the acquisition of Diamond Foods had taken place at the beginning of the first quarter of 2016. 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, and reductions of non-recurring transaction-related expenses. 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)
 
Quarter Ended
July 2,
2016
Six Months Ended
July 2,
2016
Net revenue (1)
 
$
609,500

$
1,201,879

Net income attributable to Snyder's-Lance, Inc. (1)
 
$
19,681

$
43,392

(1) The unaudited pro forma condensed consolidated financial information does not reflect the sale of Diamond of California.

Acquisition of Metcalfe's Skinny Limited
In January 2016, Diamond Foods obtained 26% of the outstanding shares of Metcalfe, owner of Metcalfe's skinny ® , a premium RTE popcorn brand in the U.K., which we acquired in the Diamond Foods’ transaction. On September 1, 2016, we completed the acquisition of the remaining 74% interest of Metcalfe for approximately $9.7 million . Metcalfe is a leading premium RTE popcorn brand in the U.K., in addition to a growing range of corn and rice cake products.

Because of our purchase of the remaining 74% interest in Metcalfe, the equity of the entire entity was increased to fair value, which resulted in the revaluation of our prior 26% interest. However, as this 26% interest was recorded at fair value in the Diamond Foods' opening balance sheet on February 29, 2016, the revaluation did not result in a significant gain or loss. The fair value of 100% of Metcalfe was determined to be $13.2 million , of which $1.5 million was preliminarily allocated to current assets, $7.2 million to goodwill, $8.8 million to other intangible assets and $4.3 million to total liabilities. During the six months ended July 1, 2017, we made several immaterial adjustments to the opening balance sheet. Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized.

14

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)


Our 26% share of income for the period subsequent to February 29, 2016, was not material for the second quarter and first six months of 2016, and was included in other income, net, in the Condensed Consolidated Statements of Income/(Loss). Subsequent to our acquisition of the remaining 74% of Metcalfe on September 1, 2016, Metcalfe's results were consolidated into our Condensed Consolidated Statements of Income/(Loss).

Investment in Natural Foodworks Group, LLC
On February 17, 2017, we made a $1.5 million investment for approximately 23% of the ownership in Natural Foodworks Group, LLC, an experienced food manufacturer specializing in natural and organic products. We are accounting for this investment under the equity method.
NOTE 5 . PERFORMANCE TRANSFORMATION PLAN

As announced on April 17, 2017, our Board of Directors and senior management team have been conducting a comprehensive review of our Company’s operations with the goal of significantly improving its financial performance to deliver greater value to shareholders. As a result of this review, we have initiated a Performance Transformation Plan (the "Transformation Plan") focused on six key areas:

SG&A Expense Efficiency. Reduce direct spending and accelerate zero-based budgeting to improve indirect costs.
Manufacturing and Supply Chain Productivity. Reduce manufacturing and distribution network complexity and improve productivity.
Product and Portfolio Optimization. Reduce business complexity through stock keeping unit ("SKU") rationalization and ongoing portfolio maintenance.
Price Realization. Improve trade spend productivity and effectiveness and optimize brand assortment.
Marketing Investment Optimization. Reset working/non-working ratios and increase investment in our core branded portfolio.
Channel Execution Excellence. Elevate the performance of the existing independent business owner direct store delivery partnership.

As a part of the plan, on June 26, 2017, our Board of Directors approved the closure of our manufacturing facility in Perry, Florida and an incremental reduction in workforce across the organization. In total, this will eliminate approximately 300 jobs. The production of products currently manufactured in the Perry facility will be shifted to facilities with available capacity. As a result of these actions, we incurred a non-cash impairment expense of $7.2 million and severance expense of $7.4 million in the first six months of 2017. All of the impairment expense was recorded in the second quarter of 2017. Severance expense of $0.5 million was recorded in the first quarter of 2017 and $6.9 million was recorded in the second quarter of 2017. $4.4 million and $4.8 million of the severance expense was recognized in selling, general and administrative expenses in the second quarter and first six months of 2017, respectively. $2.5 million and $2.6 million was recognized in cost of sales in the second quarter and first six months of 2017, respectively. A liability of $6.9 million is included in accrued compensation on the Condensed Consolidated Balance Sheet as of July 1, 2017. The cash payments related to this liability are expected to occur primarily in the third quarter of 2017.
(in thousands)
 
Severance and Related Costs
 
Asset Impairments
 
Total
Liability balance, December 31, 2016 (1)
 
$

 
$

 
$

Charges
 
7,394

 
7,216

 
14,610

Cash spent
 
(708
)
 

 
(708
)
Non-cash settlements/adjustments
 
209

 
(7,216
)
 
(7,007
)
Liability balance, July 1, 2017 (1)
 
$
6,895

 
$

 
$
6,895

(1) This represents only the accrued severance and related costs for the Transformation Plan. This does not include all severance accrued as of December 31, 2016 or July 1, 2017.


15

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

In addition, and in connection with the Transformation Plan, we announced plans to restructure our sales organization to enable greater alignment of our people, resources and strategies with those of our customers. As part of the restructure, we announced the appointment of John Maples as Chief Customer Officer, effective July 25, 2017. Mr. Maples joined our Company in 2015 and most recently served as President, Direct Sales Division. In addition, and as part of the restructure, Frank Schuster, formerly President, DSD Division, was appointed to President, Sales Execution reporting to Mr. Maples. He will continue to lead our national distribution network and in-store execution.

The full scope of the Transformation Plan and specific actions to be taken are currently being developed by senior management and our Board of Directors. At this point in time, we cannot reasonably estimate the future expenses and cash payments, nor their timing other than those outlined above. The Transformation Plan is targeting completion by 2019.
NOTE 6. EARNINGS PER SHARE
Basic earnings per share from continuing and discontinued operations is computed by dividing income from continuing and discontinued operations attributable to Snyder's-Lance, respectively, by the weighted average number of common shares outstanding during each period.
Diluted earnings per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. In the calculation of diluted earnings per share, the denominator includes the number of additional common shares that would have been outstanding if our outstanding dilutive stock options had been exercised pursuant to the treasury stock method, or if our outstanding dilutive restricted units or performance-based restricted units had vested and 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.

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. We include these awards in our calculation of basic and diluted earnings per share using the two-class method when we have undistributed income after considering the effect of dividends declared during the period.
In the second quarter of 2017 and first six months of 2017 and 2016, we did not have undistributed income and therefore did not include these awards in our calculation of basic and diluted earnings per share as computed in the table below:
 
 
Quarter Ended
 
Six Months Ended
(in thousands, except per share data)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Basic EPS:
 
 
 
 
 
 
 
 
Income/(loss) from continuing operations attributable to Snyder's-Lance, Inc.
 
$
4,311

 
$
20,464

 
$
15,473

 
$
(2,421
)
Less: Income from continuing operations allocated to participating securities
 

 
56

 

 

Income/(loss) from continuing operations allocated to common shares
 
$
4,311

 
$
20,408

 
$
15,473

 
$
(2,421
)
Weighted average shares outstanding – Basic
 
96,448

 
95,679

 
96,321

 
87,816

Earnings/(loss) per share – Basic
 
$
0.04

 
$
0.21

 
$
0.16

 
$
(0.03
)
 
 
 
 
 
 
 
 
 
Diluted EPS:
 
 
 
 
 
 
 
 
Weighted average shares outstanding – Basic
 
96,448

 
95,679

 
96,321

 
87,816

Effect of dilutive stock options, restricted units and performance-based restricted units on shares outstanding
 
1,256

 
987

 
1,308

 

Weighted average shares outstanding – Diluted
 
97,704

 
96,666

 
97,629

 
87,816

Earnings/(loss) per share – Diluted
 
$
0.04

 
$
0.21

 
$
0.16

 
$
(0.03
)


16

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

For the second quarter and first six months of 2017, approximately 638,000 and 617,000 , respectively, in stock options and performance-based restricted units were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive. Due to the net loss incurred during the first six months of 2016 , basic weighted average shares outstanding were required to be used for diluted loss per share. This resulted in approximately 858,000 potentially dilutive restricted units and stock options being excluded from diluted weighted average shares outstanding for the first six months of 2016. For both the second quarter and first six months of 2016, approximately  1.5 million  stock options and performance based restricted units were excluded from the calculation of diluted earnings per share because their effects were anti-dilutive.
NOTE 7. STOCK-BASED COMPENSATION
Stock-based compensation expense recorded in the Condensed Consolidated Statements of Income/(Loss) was $6.1 million and $5.3 million for the second quarters of 2017 and 2016, respectively. Stock-based compensation expense recorded in the Condensed Consolidated Statements of Income/(Loss) was  $8.6 million  and  $19.5 million  for the first six months of 2017 and 2016, respectively. On April 11, 2017, Carl E. Lee, Jr. retired from his positions as President and Chief Executive Officer and a member of the Board of Directors of our Company, as well as from his positions as an officer and/or director of each of our subsidiaries. As part of Mr. Lee's retirement agreement, certain of his stock based compensation awards were modified, which resulted in the recognition of an additional $3.4 million of stock-based compensation expense during the second quarter and first six months of 2017. During 2016, the acquisition of Diamond Foods resulted in a significant amount of prior Diamond Foods stock-based compensation awards converting to replacement Snyder's-Lance awards. Within transaction and integration related expenses on the Condensed Consolidated Statements of Income/(Loss), we recognized  $2.8 million  in stock-based compensation expense for the second quarter of 2016 and  $15.1 million in stock-based compensation expense and $1.0 million  in cash compensation expense in the first six months of 2016 from replacement awards that vested due to acceleration clauses wit hin employment agreements with former Diamond Foods executives.
During the first six months of 2017 , we issued and/or modified 987,922 stock options (this includes the shares modification discussed above) at a weighted average exercise price of $36.73 per share, 111,008 restricted shares, 72,797 performance-based restricted units and 28,482 restricted units to employees and directors. During the first six months of 2016 , we issued 1,090,823 stock options at a weighted average exercise price of $30.71 per share, 118,477 restricted shares, 81,999 performance-based restricted units and 28,393 restricted units to employees and directors.
We account for option awards based on the fair value-method using the Black-Scholes model. The following assumptions were used to determine the weighted average fair value of options granted and/or modified during the first six months of 2017 (inclusive of those issued to our recently appointed President and Chief Executive Officer):
 
Six Months Ended
July 1,
2017
Assumptions used in Black-Scholes pricing model:
 
Expected dividend yield
1.61
%
Risk-free interest rate
1.69
%
Expected life
4.0 years

Expected volatility
19.54
%
Fair value per share of options granted
$
7.41

The fair value of the performance-based restricted units issued during the first six months of 2017 was determined using a Monte Carlo simulation.
To cover withholding taxes payable by employees upon the vesting of restricted shares, in the second quarter and first six months of 2017 , we repurchased 12,496 and 41,199 shares of common stock, respectively. For the second quarter of 2016, we repurchased 43 shares of common stock for the vesting of Snyder's-Lance employee incentive awards and 10,229 shares for the vesting of replacement awards converted from prior Diamond Foods awards. For the first six months of 2016 , we repurchased 22,759 shares of common stock for the vesting of Snyder's-Lance employee incentive awards and 68,986 shares for the vesting of replacement awards converted from prior Diamond Foods awards.

17

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

In addition, we recorded $1.1 million and $1.0 million in incentive compensation expense for our performance-based cash incentive plans for the second quarter s of 2017 and 2016 , respectively. We recorded $0.3 million  and  $1.2 million  in incentive compensation expense for the first six months of 2017 and 2016, respectively.
NOTE 8. INVENTORIES
Inventories consisted of the following:
(in thousands)
 
July 1,
2017
 
December 31,
2016
Finished goods
 
$
115,841

 
$
100,107

Work in process
 
79

 
1,949

Raw materials
 
28,745

 
32,095

Maintenance parts, packaging and supplies
 
45,156

 
39,305

Total inventories, net
 
$
189,821

 
$
173,456


The decrease in work in process is due to the transfer of Emerald ® business operations from Diamond of California's Stockton, California manufacturing facility to our Company-owned facilities. As of the end of the second quarter of 2017, we were utilizing contract manufacturing as the primary means of Emerald ® production.
NOTE 9. FIXED ASSETS
Fixed assets consisted of the following:
(in thousands)
 
July 1,
2017
 
December 31,
2016
Land and land improvements
 
$
38,002

 
$
37,835

Buildings and building improvements
 
191,585

 
192,874

Machinery, equipment and computer systems
 
618,016

 
607,869

Trucks, trailers and automobiles
 
32,595

 
32,723

Furniture and fixtures
 
4,559

 
4,720

Construction in progress
 
41,032

 
22,098

Capital leases  (1)
 
2,725

 
3,303

 
 
928,514

 
901,422

Accumulated depreciation
 
(431,101
)
 
(399,472
)
 
 
497,413

 
501,950

Fixed assets held for sale
 
(349
)
 
(66
)
Fixed assets, net
 
$
497,064

 
$
501,884

(1) Gross amounts of assets recorded under capital leases represent machinery, equipment and computer systems as of July 1, 2017 and December 31, 2016.
Depreciation expense related to fixed assets was $17.4 million and $18.0 million during the second quarter s of 2017 and 2016 , respectively. For the first six months of 2017 and 2016, depreciation expense was $35.1 million and $33.9 million , respectively.
For the second quarter and first six months of 2017, we incurred impairment charges of $7.9 million . Of this, $7.2 million relates to the impending closure of our Perry, Florida manufacturing facility, as a part of our Transformation Plan described in Note 5 . The remaining impairment is related to manufacturing assets for which we no longer had a business use. We recorded  $0.5 million  of fixed asset impairment charges during the second quarter of 2016 related to IT hardware and software as part of our integration with Diamond Foods. For the first six months of 2016, we incurred impairment charges of  $0.9 million  related to IT equipment and other machinery and equipment related to the discontinuation of manufacturing certain products.

18

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 10. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the first six months of 2017 were as follows:
(in thousands)
 
Carrying Amount    
Balance as of December 31, 2016
 
$
1,318,362

Business acquisition measurement period adjustments
 
194

Changes in foreign currency exchange rates
 
3,557

Goodwill reclassified to assets held for sale
 
(66
)
Balance as of July 1, 2017
 
$
1,322,047

As of the date of our 2016 annual impairment analysis, the fair value of our European reporting unit was estimated to be approximately 15% above the carrying value. The carrying value of goodwill associated with this reporting unit is $92.3 million as of July 1, 2017. This reporting unit consists primarily of operations within the U.K. The June 2016 referendum by British voters to exit the European Union (“Brexit”) caused uncertainty in global markets and resulted in economic uncertainty within the region which has driven competitive challenges for our products. While historical performance and current expectations have resulted in the fair value of our reporting unit in excess of the carrying value, if economic uncertainty and competitive challenges continue and our assumptions are not realized, it is possible that an impairment charge may need to be recorded in the future. Given the difference between the fair value and book value of the reporting unit as of the date of our last impairment analysis and our belief that the current challenges do not represent a long-term trend in the operations, we believe the fair value is still in excess of the book value. No triggering events occurred between the most recent annual impairment assessment and July 1, 2017 .
Other intangible assets, except those classified as held for sale consisted of the following:
(in thousands)
 
Gross
Carrying
Amount
 
Cumulative Impairments
 
Accumulated
Amortization
 
Net
Carrying
Amount
As of July 1, 2017:
 
 
 
 
 
 
 
 
Customer and contractual relationships (1)  – amortized
 
$
498,311

 
$

 
$
(71,717
)
 
$
426,594

Non-compete agreement – amortized
 
710

 

 
(477
)
 
233

Developed technology – amortized
 
2,700

 

 
(550
)
 
2,150

Reacquired rights – amortized
 
3,100

 

 
(2,295
)
 
805

Patents – amortized
 
8,600

 

 
(3,699
)
 
4,901

Routes – unamortized
 
10,712

 
(45
)
 

 
10,667

Trademarks (2) – unamortized
 
929,364

 
(6,700
)
 

 
922,664

Balance as of July 1, 2017
 
$
1,453,497


$
(6,745
)

$
(78,738
)

$
1,368,014

 
 
 
 
 
 
 
 
 
As of December 31, 2016:
 
 
 
 
 
 
 
 
Customer and contractual relationships – amortized
 
$
493,026

 
$

 
$
(58,314
)
 
$
434,712

Non-compete agreement – amortized
 
710

 

 
(417
)
 
293

Developed technology – amortized
 
2,700

 

 
(460
)
 
2,240

Reacquired rights – amortized
 
3,100

 

 
(2,101
)
 
999

Patents – amortized
 
8,600

 

 
(3,308
)
 
5,292

Routes – unamortized
 
10,869

 
(45
)
 

 
10,824

Trademarks – unamortized
 
926,140

 
(6,700
)
 

 
919,440

Balance as of December 31, 2016
 
$
1,445,145

 
$
(6,745
)
 
$
(64,600
)
 
$
1,373,800

(1) The translation impact on customer relationships for the first six months of 2017 was an increase of $5.3 million .
(2) The translation impact on trademarks for the first six months of 2017 was an increase of $3.2 million .

19

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Amortization expense related to intangibles was $6.9 million and $7.3 million for the second quarter s of 2017 and 2016 , respectively. For the first six months of 2017 and 2016 , amortization expense related to intangibles was $13.8 million and $11.6 million , respectively.
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 second quarter s or first six months of 2017 and 2016 .
In addition to the $541.1 million in trademarks acquired in the Diamond Foods acquisition, certain trademarks with a total book value of $12.9 million as of July 1, 2017 , currently have a book value which approximates fair value. 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. As discussed in Note 5 , an initiative of our Transformation Plan is SKU rationalization to reduce complexity within the organization. If this process results in significant elimination of SKUs or a strategic shift away from investing in the brands for which the trademarks' book value approximates their fair value, the reduction in future cash flow may result in an impairment of these trademarks. As of July 1, 2017 , no such strategic decisions have been finalized. Included within the $541.1 million of trademarks acquired in the Diamond Foods acquisition is $56.1 million related to a trademark held in the U.K. The facts and circumstances noted above as it relates to our European reporting unit goodwill also apply to the trademarks within that region. Continued economic uncertainty and competitive challenges may impact the future cash flow assumptions and estimated fair value of the impacted trademarks. No triggering events occurred between the most recent annual impairment assessment and July 1, 2017 .
The changes in the carrying amount of route intangibles for the first six months of 2017 were as follows:
(in thousands)
 
Carrying Amount    
Balance as of December 31, 2016
 
$
10,824

Routes reclassified to assets held for sale
 
(157
)
Balance as of July 1, 2017
 
$
10,667

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 six months of 2017 were as follows:
(in thousands)
 
Carrying Amount    
Balance as of December 31, 2016
 
$
19,502

Purchases of route businesses held for sale
 
17,421

Sales of route businesses held for sale
 
(15,445
)
Reclassifications from route intangibles and goodwill
 
223

Balance as of July 1, 2017
 
$
21,701

For the second quarter of 2017 , net gains on the sale of route businesses consisted of $1.8 million in gains and $1.2 million in losses, and are included within other operating income on the Condensed Consolidated Statements of Income/(Loss). Net gains on the sale of route businesses for the first six months of 2017 consisted of $2.5 million in gains and $1.8 million of losses. For the second quarter of 2016 , net gains on the sale of route businesses consisted of $0.3 million in gains and $0.1 million in losses, and are included within other operating income on the Condensed Consolidated Statements of Income/(Loss). Net gains on the sale of route businesses for the first six months of 2016 consisted of $1.3 million in gains and $0.6 million of 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 ("IBOs"). See Note 15 for further information related to IBOs.

20

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

NOTE 11. LONG-TERM DEBT
Long-term debt outstanding consisted of the following:
(in thousands)
 
July 1,
2017
 
December 31,
2016
Revolving credit facility
 
$
91,000

 
$
227,000

Other long-term debt
 
1,053,750

 
1,078,250

Debt issuance costs, net
 
(10,978
)
 
(10,291
)
Total debt, net
 
1,133,772

 
1,294,959

Current portion of long-term debt
 
(49,000
)
 
(49,000
)
Total long-term debt, net
 
$
1,084,772

 
$
1,245,959

In conjunction with our acquisition of Diamond Foods, we entered into a senior unsecured credit agreement as amended with the lenders party (the “Term Lenders”) and Bank of America, N.A., as administrative agent (the "Credit Agreement"). Under the Credit Agreement, the Term Lenders provided (i) senior unsecured term loans in an original aggregate principal amount of $830.0 million maturing five years after the funding date (the “Senior Five Year Term Loans”) and (ii) senior unsecured term loans in an original aggregate principal amount of $300.0 million maturing ten years after the funding date (the “Senior Ten Year Term Loans”). The $1.13 billion in proceeds from the Credit Agreement were used to finance, in part, the cash component of the acquisition consideration, to repay indebtedness of Diamond Foods and us, and to pay certain fees and expenses incurred in connection with the Diamond Foods acquisition.
As a result of the Credit Agreement, we entered into certain amendments to our existing credit agreement (the "Amended and Restated Credit Agreement"). Our Amended and Restated Credit Agreement contains a revolving credit facility which allows us to make revolving credit borrowings of up to $375.0 million through May 2019. As of July 1, 2017 and December 31, 2016 , we had available $284.0 million and $148.0 million , respectively, of unused borrowings. During the first six months of 2017 , we borrowed $84.0 million from our revolving credit facility and repaid $220.0 million primarily with the proceeds from the sale of Diamond of California. During the first six months of 2016 , there were $57.0 million in proceeds from draws on our revolving credit facility which were used to repay our private placement senior notes as discussed below. In addition, we repaid the $57.0 million with cash flows from operations during the six months ended July 2, 2016.
Under certain circumstances and subject to certain conditions, we have the option to increase available credit under the revolving credit facility by up to $200.0 million for the remaining life of the facility. Revolving credit borrowings incur interest based on a Eurodollar rate plus an applicable margin of between 0.795% and 1.450% , or the base rate plus an applicable margin of between 0% and 0.45% . The applicable margin is determined by certain financial ratios and was 1.450% for Eurodollar rate loans and 0.45% for base rate loans as of July 1, 2017 . The revolving credit facility also requires us to pay a facility fee ranging from 0.08% to 0.25% on the entire $375.0 million based on certain financial ratios. The facility fee rate was 0.250% on July 1, 2017 .
Our obligations under the Amended and Restated Credit Agreement are guaranteed by all of our existing and future direct and indirect wholly-owned domestic subsidiaries other than any such subsidiaries that, taken together, do not represent more than 10% of our total domestic assets or domestic revenues and our wholly-owned domestic subsidiaries. The Amended and Restated Credit Agreement contains customary representations, warranties and covenants. The financial covenants pursuant to the Amended and Restated Credit Agreement included a maximum total debt to EBITDA ratio, as defined in the Amended and Restated Credit Agreement, of 4.75 to 1.00 for the second quarter in 2016, decreasing to 4.25 to 1.00 in the fourth quarter in 2016, 4.00 to 1.00 for the second quarter in 2017, 3.75 to 1.00 for the third quarter in 2017 and 3.50 to 1.00 for the fourth quarter in 2017 and all quarters thereafter. On May 8, 2017, to alleviate risk of not complying with our total debt to EBITDA ratio requirement in 2017, as well as to provide additional financial flexibility, we amended our Amended and Restated Credit Agreement to extend the maximum total debt to EBITDA ratio covenant to be 4.25 to 1.00 through the first quarter in 2018, 4.00 to 1.00 for the second quarter in 2018, 3.75 to 1.00 for the third quarter in 2018 and 3.50 to 1.00 for the fourth quarter in 2018 and all quarters thereafter ("Amended Credit Agreement"). For the second quarter of 2017 the maximum ratio allowed was 4.25 to 1.00, and our total debt to EBITDA ratio was 3.96 to 1.00. In addition, our Amended Credit Agreement provides for adjusted EBITDA to include up to $20.0 million , during the lifetime of the Amended Credit Agreement, of non-recurring costs and expenses paid in cash, as defined. There were no other amendments to the original Credit Agreement. We paid approximately  $2.4 million  in Consent and Administrative fees associated with the amendment but there were no revisions to the Amended Credit Agreement that will impact the effective interest rate as originally provided. The $2.4 million in fees were capitalized as debt issuance costs and are being amortized over the life of the loans.

21

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

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 Amended Credit Agreement contains additional 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 Amended Credit Agreement. As of July 1, 2017 , we are in compliance with all our debt covenants.
On February 27, 2017, we entered into an amendment to the Amended and Restated Credit Agreement with the term lenders party to the Credit Agreement and Bank of America, N.A., which amended the definition of EBIT in the Credit Agreement to be EBITDA minus, to the extent included in determining EBITDA, depreciation and amortization of our Company and our subsidiaries for the computation period.
In February 2016, using available borrowings from our existing credit facilities and cash on hand, we repaid our $100.0 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

NOTE 12. INCOME TAXES
As of July 1, 2017 , gross unrecognized tax benefits for uncertain tax positions totaled $5.2 million , in addition to related interest and penalties of $1.0 million . Of the gross unrecognized benefits, $1.5 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, $4.6 million , which includes interest and penalties, would affect the effective tax rate if subsequently recognized. As of December 31, 2016 , gross unrecognized tax benefits totaled $5.8 million in addition to interest and penalties of $1.0 million , in other noncurrent liabilities and noncurrent deferred tax 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 $0.9 million reduction of the unrecognized tax benefit amount. We classify interest and penalties associated with uncertain tax positions within income tax expense.

Our effective tax rate increased from 37.8% for the second quarter of 2016 to 62.8% for the second quarter of 2017 . The increase in our effective income tax rate was due primarily to the write-off of a $3.2 million deferred tax asset for certain executive equity compensation which is no longer deductible due to the appointment of our new president and chief executive officer. Our effective tax rate increased from 33.5% benefit for the first six months of 2016 to 44.3% expense for the first six months of 2017 . The increase in our effective income tax rate was due primarily to the write-off of the deferred tax asset for certain executive equity compensation which is no longer deductible due to the appointment of our new chief executive officer.
NOTE 13. FAIR VALUE MEASUREMENTS
We have classified assets and liabilities required to be measured at fair value into the fair value hierarchy as set forth below:
Level 1
quoted prices in active markets for identical assets and liabilities.
Level 2
observable inputs other than quoted prices for identical assets and liabilities.
Level 3
unobservable inputs for which there is little or no market data available, which required us to develop our own assumptions.

22

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

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 July 1, 2017 and December 31, 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 July 1, 2017
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
18,430

 
$
18,430

 
$

 
$

Restricted cash
 
446

 
446

 

 

Interest rate swaps
 
8,516

 

 
8,516

 

Total assets
 
$
27,392


$
18,876


$
8,516


$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
1,254

 
$

 
$
1,254

 
$

Total liabilities
 
$
1,254


$


$
1,254


$

 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
35,409

 
$
35,409

 
$

 
$

Restricted cash
 
714

 
714

 

 

Interest rate swaps
 
10,748

 

 
10,748

 

Total assets
 
$
46,871

 
$
36,123

 
$
10,748

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
392

 
$

 
$
392

 
$

Total liabilities
 
$
392

 
$

 
$
392

 
$

There were no changes among the levels during the first six months of 2017 .
The fair value of outstanding debt, including current maturities, was approximately $1,145 million and $1,305 million as of July 1, 2017 and December 31, 2016 , respectively. These Level 2 fair value estimates were based on similar debt with the same maturities, company credit rating and interest rates.
NOTE 14 . 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
 
July 1,
2017
 
December 31,
2016
Derivatives designated as hedges:
 
 
 
 
 
 
Interest rate swaps
 
Other noncurrent assets
 
$
8,516

 
$
10,748

Interest rate swaps
 
Other noncurrent liabilities
 
(1,254
)
 
(392
)
Total fair value of derivative instruments
 
 
 
$
7,262

 
$
10,356


23

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Interest Rate Swaps
Our variable-rate debt obligations incur interest at floating rates based on changes in the Eurodollar rate and US 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 July 1, 2017 and December 31, 2016 was $675.0 million and $575.0 million , respectively.
On February 23, 2017 , we entered into an interest rate swap agreement to fix the variable rate on a portion of our $300 million term loans due February 2026. This swap effectively fixes the variable rate to 2.06% on $100.0 million of underlying notional from June 2017 through December 2022.
Changes in Other Comprehensive Loss
The changes in unrealized gains and losses, net of income tax, included in other comprehensive loss due to fluctuations in interest rates were as follows:
 
 
Quarter Ended
 
Six Months Ended
(in thousands)
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
(Losses) on interest rate swaps, net of income tax benefit of $1,485, $319, $1,200 and $1,028, respectively
 
$
(2,319
)
 
$
(503
)
 
$
(1,894
)
 
$
(1,627
)
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 $208.7 million as of July 1, 2017 , compared to $157.2 million as of December 31, 2016 . The increase in purchase commitments was primarily due to timing of raw material purchase contracts for the upcoming year. 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. These contracts can extend out from one to three years. We also have a licensing contract which totaled $12.9 million as of July 1, 2017 , and runs through 2020 .
We have contracts to receive services from our syndicated market data providers through 2023 . Our commitment for these services ranges from $4.6 million to $5.3 million each year throughout the life of the contracts.
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 $12.4 million and $12.6 million as of July 1, 2017 and December 31, 2016 , respectively.
Guarantees
We currently provide a partial guarantee for loans made to IBOs by certain third-party financial institutions for the purchase of route businesses. The outstanding aggregate balance on these loans was $157.9 million and $154.1 million as of July 1, 2017 and December 31, 2016 , respectively. The annual maximum amount of future payments we could be required to make under the guarantee equates to 25.0% of the outstanding loan balance on the first day of each calendar year plus 25.0% 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.

24

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Legal Matters

IBO Litigation
Roxberry, et. al, v. S-L Distribution Company, LLC
On July 25, 2016, plaintiffs comprised of IBOs filed a putative class action against us and our distribution subsidiary, S-L Distribution Company, LLC ("SLD") in the Eastern District Court of Tennessee. The case was subsequently transferred to the Middle District of Pennsylvania. The lawsuit seeks statewide class certification on behalf of a class comprised of IBOs in Tennessee, and nationwide certification for the Federal law collective action. The plaintiffs allege that they were misclassified as independent contractors and should be considered employees. We believe we have strong defenses to all the claims that have been asserted against us. On June 8, 2017, counsel for SLD participated in a mediation with the plaintiffs and their counsel in an attempt to resolve the litigation. On or about June 26, 2017, 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 agreed to pay $1.5 million to fully resolve the litigation in order to avoid the costs and uncertainty of litigation. The settlement amount of $1.5 million is accrued in other payables and accrued liabilities in the Condensed Consolidated Balance Sheets at the end of the second quarter of 2017.

Scheurer v. S-L Distribution Company, LLC
On December 8, 2016, plaintiff served a putative class action on behalf of all similarly situated IBOs in New Jersey against our distribution subsidiary, SLD. Plaintiff is a former IBO whose distribution agreement was terminated pursuant to the re-engineering and buyback of routes in New Jersey in 2011, resulting from the merger of Snyder’s of Hanover, Inc. and Lance, Inc. The lawsuit seeks statewide class certification on behalf of a class comprised of IBOs in New Jersey for alleged violations of the New Jersey Franchise Practices Act relative to various terminations of the distributor agreement. We believe we have strong defenses to all the claims that have been asserted against us. At this time, no demand has been made, and we cannot reasonably estimate the possible loss or range of loss, if any, from this lawsuit.

California Labor Code Matters
Sparks v. Diamond Foods, Inc.
Former employee Patricia Sparks filed a putative class action lawsuit against Diamond Foods on November 25, 2015 in San Francisco Superior Court alleging Diamond Foods’ 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 the 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 occurred on August 1, 2016. On September 19, 2016, the parties to this litigation reached a tentative settlement pursuant to which we have agreed to pay $0.7 million on a class wide basis. We signed a memorandum of understanding reflecting this preliminary settlement amount. The parties submitted a settlement agreement to the court and the court granted preliminary approval of the settlement on February 24, 2017. On July 5, 2017, the parties appeared before the court on Plaintiff’s Motion for Final Approval of the Settlement. At the hearing, the judge requested supplemental briefing from the Plaintiff, which Plaintiff filed on July 14, 2017. On July 19, 2017, the court entered an order granting Final Approval of the Settlement, Attorneys' Fees, and Costs. The judge granted final approval of the maximum settlement amount of $0.7 million .

Bensman v. Diamond Foods, LLC et. al.
Diamond Foods, LLC employee Della Bensman filed a putative class action lawsuit against Diamond Foods, LLC and Snyder’s-Lance, Inc. on April 4, 2017 in San Joaquin Superior Court alleging the companies’ violations of the California Labor Code. Plaintiff alleges the companies' failure to provide third rest breaks when Plaintiff or other employees worked a shift over ten hours and failure to provide accurate itemized wage statements for employees in periods in which they worked more than ten hours and did not receive a third rest break. Plaintiff’s Complaint also includes a claim for penalties under California’s Private Attorneys General Act and an unfair business practices claim pursuant to the California Business and Professions Code based on the same underlying violations. On June 16, 2017, we filed a Demurrer seeking dismissal of Plaintiff’s claim regarding our failure to provide accurate wage statements. The court scheduled a hearing on the Demurrer for September 28, 2017. At this time, no demand has been made and we cannot reasonably estimate the possible loss or range of loss from this lawsuit.


25

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

Employment Tax Audit by the California Employment Development Department
On February 22, 2016, we received notice from the Employment Development Department of the State of California that SLD had been selected for an employment tax audit. On April 27, 2016, an onsite audit was conducted of all payroll records for 2015 as a general matter. In addition, the auditor examined the Forms 1099Misc that we had issued. The audit examined whether the IBOs who received 1099s were bona-fide contractors within the definition of an employer/employee relationship under the relevant statutes and regulations in California. On April 11, 2017, the auditor issued a finding that for the audit period of January 1, 2014 through December 31, 2016, the California IBOs were properly classified as independent contractors. Accordingly, there was no impact to our operations in California, or any other jurisdiction, as a result of the audit.

Food Labeling Litigation
Evaporated Cane Juice Litigation
A putative class action suit was filed against Late July Snacks, LLC on September 18, 2013, and is pending in the District Court for the Northern District of California. The action accuses Late July Snacks, LLC of violating federal and state law by using the term "evaporated cane juice" ("ECJ") in the ingredients list on its products' labels. The plaintiffs' complaint alleges ECJ is not the common and usual name for the ingredient at issue and is misleading. The complaint attempts to state claims for violation of California's Unfair Competition Law, California's False Advertising Law, California's Consumers Legal Remedies Act, and unjust enrichment. Late July Snacks, LLC filed a motion to dismiss the complaint on November 27, 2013, based on the primary jurisdiction doctrine, lack of standing, and failure to state a claim.

On May 22, 2014, the Court stayed the action, applying the doctrine of primary jurisdiction, due to the FDA's ongoing consideration of the issue of using the term ECJ on food labels. On May 26, 2016, the FDA issued its guidance for industry on the topic. As a result, the stay was lifted on July 22, 2016. On August 31, 2016, Plaintiffs filed an amended complaint that, among other things, relies on the FDA's recently issued guidance. Late July filed a motion to dismiss the Amended Complaint, and a hearing on that motion was held on February 16, 2017.

On May 5, 2017, the Court entered an Order granting in part and denying in part Late July’s Motion to Dismiss. The Court dismissed the class allegations and the claim for injunctive relief, but allowed the two individual plaintiffs’ claims for damages to proceed. The Order did allow Plaintiffs leave to amend their complaint, and on June 2, 2017, Plaintiffs filed their Second Amended Complaint. In response, Late July filed a Motion to Dismiss on June 30, 2017. We are presently awaiting a hearing date on that motion. At this time, we cannot reasonably estimate the possible loss or range of loss, if any, from this lawsuit.
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 condensed 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 own 80% of Late July. We also have a $6.0 million line of credit between the Company and Late July, of which $3.9 million was drawn by Late July in order to repay certain obligations. The balance of $3.9 million remains outstanding as of July 1, 2017 , and is eliminated in consolidation.
As part of our acquisition of Diamond Foods, we obtained 51.0% 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 significant influence greater than ours over the financial performance of Yellow Chips. As of July 1, 2017, we have a € 2.4 million loan receivable outstanding with Yellow Chips.
We have two facilities used to support distribution of our products in the northeastern US that are leased from an entity owned by one of our employees. There were $0.1 million in lease payments made for these facilities in the second quarter s of both 2017 and 2016 , and $0.2 million for the first six months of both 2017 and 2016.

26

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

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"), which we began using as our syndicated market data provider at the end of 2015. Total payments made to IRI for these services in the second quarter s of 2017 and 2016 were $1.5 million and $0.8 million , respectively. Total payments made to IRI for these services in the first six months of 2017 and 2016 were $2.3 million and $1.6 million .
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 5.0% 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 requires 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 July 1, 2017 , there were outstanding loans made to IBOs by the related parties of approximately $19.0 million , compared to $21.5 million as of December 31, 2016 . 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 route assets. Revenue from the sale of inventory to these related parties was approximately $0.1 million for the second quarter s of 2017 and 2016 , and $0.3 million for the first six months of 2017 and 2016 . 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 received 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. The expense incurred for services provided by Eckert for the second quarter of 2017 was less than $0.1 million , and $0.1 million for the first six months of 2017 . Expenses incurred for services provided by Eckert for the second quarter of 2016 were $0.1 million , and $0.2 million for the first six months of 2016 .
NOTE 17. OTHER COMPREHENSIVE INCOME
Total comprehensive income attributable to us, determined as net income adjusted by total other comprehensive income, was income of $8.8 million and a loss of $4.9 million for the second quarters of 2017 and 2016 , respectively, and income of $23.7 million and a loss of $24.8 million for the first six months of 2017 and 2016 , 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 loss, net of tax, consisted of the following:
 
 
 
 
Quarter Ended
 
Six Months Ended
(in thousands)
 
Income Statement Location
 
July 1,
2017
 
July 2,
2016
 
July 1,
2017
 
July 2,
2016
Losses on cash flow hedges reclassified out of accumulated other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
Interest rate swaps, net of tax benefit of $67, $104, $148 and $202, respectively
 
Interest expense, net
 
$
(101
)
 
$
(164
)
 
$
(221
)
 
$
(319
)
Total amounts reclassified from accumulated other comprehensive loss
 
 
 
$
(101
)
 
$
(164
)
 
$
(221
)
 
$
(319
)

27

Table of Contents

SNYDER'S-LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

During the first six months of 2017 , changes to the balance in accumulated other comprehensive loss were as follows:
(in thousands)
 
Gains/(Losses) on Cash Flow Hedges
 
Foreign Currency Translation Adjustments
 
Total
Balance as of December 31, 2016
 
$
6,323

 
$
(24,300
)
 
$
(17,977
)
 
 
 
 
 
 
 
Other comprehensive (loss)/income before reclassifications
 
(2,115
)
 
10,463

 
8,348

Losses reclassified from accumulated other comprehensive loss
 
221

 

 
221

Total other comprehensive (loss)/income <