Snyder's-Lance, Inc.
LANCE INC (Form: 10-Q, Received: 11/02/2007 10:33:19)
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 and nine months ended September 29, 2007
Commission File Number 0-398
LANCE, INC.
(Exact name of registrant as specified in its charter)
     
North Carolina   56-0292920
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)    
     
14120 Ballantyne Corporate Place, Suite 350    
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o            Accelerated filer þ            Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o            No þ
The number of shares outstanding of the registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock as of October 26, 2007, was 31,204,418 shares.
 
 

 


 

LANCE, INC. AND SUBSIDIARIES
INDEX
         
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    17  
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
For the Quarters and Nine Months Ended September 29, 2007 and September 30, 2006

(in thousands, except share and per share data)
                                 
    Quarter Ended     Nine Months Ended  
    September 29,     September 30,     September 29,     September 30,  
    2007     2006     2007     2006  
 
Net sales and other operating revenue
  $ 198,052     $ 188,628     $ 577,515     $ 557,714  
 
                               
Cost of sales and operating expenses:
                               
Cost of sales
    115,692       106,768       328,104       317,294  
Selling, marketing and delivery
    58,985       60,571       175,328       185,901  
General and administrative
    11,268       9,296       36,008       32,525  
Other expense/(income), net
    522       (243 )     1,405       436  
 
                       
Total costs and expenses
    186,467       176,392       540,845       536,156  
 
                       
 
                               
Income from continuing operations before interest and income taxes
    11,585       12,236       36,670       21,558  
Interest expense, net
    550       901       1,768       2,398  
 
                       
Income from continuing operations before income taxes
    11,035       11,335       34,902       19,160  
Income tax expense
    3,448       3,940       12,174       6,795  
 
                       
Net income from continuing operations
    7,587       7,395       22,728       12,365  
 
                               
(Loss)/income from discontinued operations
    (146 )     129       45       797  
Income tax (benefit)/expense
    (54 )     45       16       289  
 
                       
Net (loss)/income from discontinued operations
    (92 )     84       29       508  
 
                       
 
                               
Net income
  $ 7,495     $ 7,479     $ 22,757     $ 12,873  
 
                       
 
                               
Basic earnings per share:
                               
From continuing operations
  $ 0.24     $ 0.24     $ 0.74     $ 0.41  
From discontinued operations
                      0.01  
 
                       
Basic earnings per share
  $ 0.24     $ 0.24     $ 0.74     $ 0.42  
 
                       
 
                               
Weighted average shares outstanding — basic
    31,034,000       30,716,000       30,921,000       30,370,000  
 
                               
Diluted earnings per share:
                               
From continuing operations
  $ 0.24     $ 0.24     $ 0.72     $ 0.40  
From discontinued operations
                      0.02  
 
                       
Diluted earnings per share
  $ 0.24     $ 0.24     $ 0.72     $ 0.42  
 
                       
 
                               
Weighted average shares outstanding — diluted
    31,693,000       31,154,000       31,506,000       30,803,000  
See Notes to the Condensed Consolidated Financial Statements (Unaudited).

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LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
As of September 29, 2007 (Unaudited) and December 30, 2006

(in thousands, except share data)
                 
    September 29,     December 30,  
    2007     2006  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 14,313     $ 5,504  
Accounts receivable, net
    68,845       61,690  
Inventories
    38,729       36,838  
Deferred income tax asset
    9,697       8,811  
Assets held for sale
    505       6,552  
Prepaid expenses and other current assets
    9,739       6,298  
 
           
Total current assets
    141,828       125,693  
 
               
Other assets
               
Property, plant & equipment, net
    202,152       193,009  
Goodwill
    55,251       49,091  
Other intangible assets, net
    13,181       13,209  
Other assets
    6,752       4,450  
 
           
Total assets
  $ 419,164     $ 385,452  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Accounts payable
  $ 22,057     $ 18,194  
Accrued compensation
    20,536       20,471  
Accrued retirement plans
    4,270       5,192  
Accrual for casualty insurance claims
    8,163       6,783  
Accrual for medical insurance claims
    2,664       3,488  
Accrued selling costs
    4,850       4,860  
Other payables and accrued liabilities
    14,009       12,632  
 
           
Total current liabilities
    76,549       71,620  
 
               
Other liabilities
               
Long-term debt
    50,000       50,000  
Deferred income taxes
    26,474       26,562  
Accrual for casualty insurance claims
    8,428       9,418  
Other long-term liabilities
    8,462       5,452  
 
           
Total liabilities
    169,913       163,052  
 
           
 
               
Commitments and contingencies
           
 
               
Stockholders’ equity
               
Common stock, 31,201,207 and 30,855,891 shares outstanding, respectively
    25,999       25,714  
Preferred stock, no shares outstanding
           
Additional paid-in capital
    40,389       32,129  
Retained earnings
    167,269       159,329  
Accumulated other comprehensive income
    15,594       5,228  
 
           
Total stockholders’ equity
    249,251       222,400  
 
           
Total liabilities and stockholders’ equity
  $ 419,164     $ 385,452  
 
           
See Notes to the Condensed Consolidated Financial Statements (Unaudited).

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LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited)
For the Nine Months Ended September 29, 2007 and September 30, 2006

(in thousands, except share data)
                                                         
                            Unamortized                      
                            Portion of             Accumulated        
                    Additional     Restricted             Other        
            Common     Paid-in     Stock     Retained     Comprehensive        
    Shares     Stock     Capital     Awards     Earnings     Income     Total  
     
 
Balance, December 31, 2005
    29,808,705     $ 24,841     $ 13,870     $ (2,490 )   $ 160,407     $ 5,081     $ 201,709  
 
                                                       
Comprehensive income:
                                                       
Net loss
                            12,873             12,873  
Foreign currency translation adjustment
                                  2,614       2,614  
Unrealized gain on forward exchange contracts, net of tax effect of $(25)
                                  46       46  
 
                                                     
Total comprehensive income
                                                    15,533  
 
                                                     
 
                                                       
Cash dividends paid to stockholders
                            (14,617 )           (14,617 )
 
                                                       
Stock options exercised, including excess tax benefit of $3,293
    994,330       829       17,033                         17,862  
 
                                                       
Conversion of a liability to equity instrument
                634                         634  
 
                                                       
Stock-based compensation
                (1,831 )     2,490                   659  
 
                                                       
Cancellation, issuance and amortization of restricted stock, net
    28,425       23       1,078                         1,101  
     
Balance, September 30, 2006
    30,831,460     $ 25,693     $ 30,784     $     $ 158,663     $ 7,741     $ 222,881  
     
 
                                                       
Balance, December 30, 2006
    30,855,891     $ 25,714     $ 32,129     $     $ 159,329     $ 5,228     $ 222,400  
 
                                                       
Comprehensive income:
                                                       
Net income
                            22,757             22,757  
Foreign currency translation adjustment
                                  10,315       10,315  
Net unrealized losses on derivative instruments, net of tax effect of $101
                                  203       203  
Amortization of gains from post- retirement medical plan, net of tax effect of $73
                                  (152 )     (152 )
 
                                                     
Total comprehensive income
                                                    33,123  
 
                                                     
 
                                                       
Cash dividends paid to stockholders
                            (14,878 )           (14,878 )
 
                                                       
Stock options exercised, including excess tax benefit of $997
    262,316       216       4,384                         4,600  
 
                                                       
Cumulative adjustment from adoption of FIN 48
                            61             61  
 
                                                       
Stock-based compensation previously recognized under a liability plan
                316                         316  
 
                                                       
Stock-based compensation
                1,228                         1,228  
 
                                                       
Cancellation, issuance and amortization of restricted stock, net
    83,000       69       2,332                         2,401  
     
Balance, September 29, 2007
    31,201,207     $ 25,999     $ 40,389     $     $ 167,269     $ 15,594     $ 249,251  
     
See Notes to the Condensed Consolidated Financial Statements (Unaudited).

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LANCE, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 29, 2007 and September 30, 2006

(in thousands)
                 
    Nine Months Ended  
    September 29,     September 30,  
    2007     2006  
Operating activities
               
Net income
  $ 22,757     $ 12,873  
Adjustments to reconcile net income to cash from operating activities:
               
Depreciation and amortization
    21,839       20,096  
Equity-based compensation expense
    2,680       1,762  
(Gain)/loss on dispositions of property, net
    (839 )     69  
Changes in operating assets and liabilities
    (3,991 )     (15,751 )
 
           
Net cash from operating activities
    42,446       19,049  
 
           
 
               
Investing activities
               
Purchases of property and equipment
    (28,299 )     (34,678 )
Proceeds from sales of property
    6,895       3,382  
Purchase of investment
    (2,090 )      
 
           
Net cash used in investing activities
    (23,494 )     (31,296 )
 
           
 
               
Financing activities
               
Dividends paid
    (14,878 )     (14,617 )
Issuances of common stock
    4,600       17,862  
Net proceeds from revolving credit facilities
          8,396  
 
           
Net cash flow (used in)/from financing activities
    (10,278 )     11,641  
 
           
 
               
Effect of exchange rate changes on cash
    135       253  
 
           
 
               
Increase/(decrease) in cash and cash equivalents
    8,809       (353 )
Cash and cash equivalents at beginning of period
    5,504       3,543  
 
           
Cash and cash equivalents at end of period
  $ 14,313     $ 3,190  
 
           
 
               
Supplemental information:
               
Cash paid for income taxes, net of refunds of $7 and $21, respectively
  $ 10,397     $ 4,240  
Cash paid for interest
  $ 2,193     $ 2,701  
See Notes to the Condensed Consolidated Financial Statements (Unaudited).

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LANCE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
1.  
The accompanying unaudited condensed consolidated financial statements of Lance, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These condensed financial statements should be read in conjunction with the audited financial statements and notes included in our Form 10-K for the year ended December 30, 2006 filed with the Securities and Exchange Commission on March 13, 2007. In our opinion, these condensed consolidated financial statements reflect all adjustments (consisting of only normal, recurring accruals) necessary to present fairly our condensed consolidated financial position as of September 29, 2007 and December 30, 2006 and the condensed consolidated statements of income for the quarters and nine months ended September 29, 2007 and September 30, 2006 and the condensed consolidated statements of stockholders’ equity and comprehensive income and cash flows for the nine months ended September 29, 2007 and September 30, 2006. Prior year amounts shown in the accompanying condensed consolidated financial statements have been reclassified for consistent presentation.
2.  
The consolidated results of operations for the quarter and nine months ended September 29, 2007 are not necessarily indicative of the results to be expected for the year ending December 29, 2007.
3.  
Preparing financial statements requires management to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Examples include customer returns and promotions, provisions for bad debts, inventory valuations, useful lives of fixed assets, hedge transactions, supplemental retirement benefits, intangible asset valuations, incentive compensation, income taxes, insurance, post-retirement benefits, contingencies and legal proceedings. Actual results may differ from these estimates under different assumptions or conditions.
4.  
The principal raw materials used in the manufacture of our snack food products are flour, vegetable oil, sugar, potatoes, peanuts, nuts, cheese and seasonings. The principal supplies used are flexible film, cartons, trays, boxes and bags. These raw materials and supplies are generally available in adequate quantities in the open market either from sources in the United States or from other countries. Depending on market conditions and commodity prices, these raw materials may be contracted up to a year in advance of delivery.
5.  
We utilize the dollar value last-in, first-out (“LIFO”) method of determining the cost of approximately 40% of our inventories. Because inventory valuations under the LIFO method are based on annual determinations, the interim LIFO valuations require management to estimate year-end costs and levels of inventories. The variation between estimated year-end costs and levels of LIFO inventories compared to the actual year-end amounts may materially affect the results of operations for the full year.
 
    Inventories consist of:
                 
    September 29,     December 30,  
(in thousands)   2007     2006  
 
Finished goods
  $ 21,462     $ 18,630  
Raw materials
    7,433       7,968  
Supplies, etc.
    14,417       14,077  
 
           
Total inventories at FIFO cost
    43,312       40,675  
Less adjustments to reduce FIFO cost to LIFO cost
    (4,583 )     (3,837 )
 
           
Total inventories
  $ 38,729     $ 36,838  
 
           

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LANCE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
6.    
The following tables provide a reconciliation of the common shares used for basic earnings per share and diluted earnings per share:
                                 
    Quarter Ended     Nine Months Ended  
    September 29,     September 30,     September 29,     September 30,  
(in thousands)   2007     2006     2007     2006  
 
Weighted average number of common shares used for basic earnings per share
    31,034       30,716       30,921       30,370  
Effect of potential dilutive shares
    659       438       585       433  
 
                       
Weighted average number of common shares and potential dilutive shares used for diluted earnings per share
    31,693       31,154       31,506       30,803  
 
                       
Anti-dilutive shares excluded from the above reconciliation
                15        
 
                       
7.    
Sales to our largest customer, Wal-Mart Stores, Inc. (“Wal-Mart”), were approximately 20% and 19% of revenue for the third quarters of 2007 and 2006, respectively, and 20% and 19% of revenue for the nine months ended September 29, 2007 and September 30, 2006, respectively. Accounts receivable at September 29, 2007 and December 30, 2006 included receivables from Wal-Mart totaling $16.7 million and $13.6 million, respectively.
8.    
During the quarter and nine months ended September 29, 2007, net bad debt expense was $0.2 million and $0.1 million, respectively. Net bad debt expense was $0.6 million in both the quarter and nine months ended September 30, 2006. Net bad debt expense is included in selling, marketing and delivery in the accompanying condensed consolidated statements of income.
9.    
During the first quarter of 2007, we granted 114,000 vested nonqualified stock options that were previously accounted for as a liability. This resulted in a year-to-date increase in additional paid-in capital and a decrease in accrued compensation of $0.3 million on the September 29, 2007 condensed consolidated balance sheet.
10.  
Net periodic benefit income for our post-retirement medical benefit plan consists of the following:
                                 
    Quarter Ended     Nine Months Ended  
    September 29,     September 30,     September 29,     September 30,  
(in thousands)   2007     2006     2007     2006  
 
Components of net periodic postretirement benefit cost/(income):
                               
Service cost
  $     $ 1     $     $ 2  
Interest cost
    4       12       12       37  
Gain amortization
    (75 )     (181 )     (225 )     (543 )
 
                       
Net periodic postretirement benefit income
  $ (71 )   $ (168 )   $ (213 )   $ (504 )
 
                       
 
                               
Retiree benefit claims paid
  $     $ 186     $ 26     $ 627  
Plan participant contributions
  $ 57     $ 102     $ 185     $ 301  
11.  
At September 29, 2007 and December 30, 2006, we had $0.5 million and $6.6 million, respectively, of assets held for sale. The Fresno, CA facility and discontinued vending assets held for sale were disposed of during the nine months ended September 29, 2007. The remaining assets held for sale at September 29, 2007 are primarily related to certain facilities acquired from Tom’s Foods Inc. and subsequently closed. These assets are expected to be sold during 2007.

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LANCE, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
12.  
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 was adopted at the beginning of 2007. The $0.1 million cumulative effect of applying FIN 48 was reported as an increase to the opening balance of retained earnings. Additionally, we reclassified a $1.9 million net liability for uncertain tax positions from other payables and accrued liabilities to other long-term liabilities of $2.2 million and $0.3 million of deferred tax assets on the condensed consolidated balance sheet during the first quarter of 2007.
 
   
We have recorded gross unrecognized tax benefits totaling $1.8 million as of September 29, 2007 in other long-term liabilities on the condensed consolidated balance sheet. Of this amount, $1.5 million would affect the effective tax rate if subsequently recognized. Various taxing authorities’ statutes of limitations expired during the third quarter of 2007 resulting in a $0.5 million reduction of the unrecognized tax benefit amount. We do not anticipate any significant future changes in our gross unrecognized tax benefits for the remainder of 2007. We classify interest and penalties associated with income tax positions within income tax expense. The interest and penalty component of the unrecognized tax benefits as of September 29, 2007 was $0.4 million.
 
   
We have open years for income tax audit purposes in our major taxing jurisdictions according to statutes as follows:
     
Jurisdiction   Open years
US federal
  2004 and forward
Canada federal
  2003 and forward
Ontario provincial
  2002 and forward
Massachusetts
  2001 and forward
North Carolina
  2004 and forward
Iowa
  2004 and forward
13.  
The FASB also issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” in September 2006. SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a single-employer defined benefit post-retirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end balance sheet, with limited exceptions. We adopted SFAS No. 158 at the end of 2006, which resulted in a reclassification of the unrealized gain component of the accrued post-retirement healthcare costs liability to accumulated other comprehensive income, net of tax, at December 30, 2006. There will be no impact from the adoption of the remaining provisions of SFAS No. 158 since we already measure the funded status of our post-retirement medical plan at the year-end balance sheet date.
14.  
On June 25, 2007, we purchased a non-controlling equity interest in an organic snack food company for $2.1 million. This investment has been reflected in other assets on the Condensed Consolidated Balance Sheet. The equity method loss for the third quarter of 2007 was less than $0.1 million and has been recorded in other expense on the Condensed Consolidated Statement of Income. As of September 29, 2007, prepaid expenses and other current assets on the Condensed Consolidated Balance sheet includes a $1.5 million receivable from this related party that is expected to be paid during the fourth quarter of 2007.
15.  
In an effort to streamline our overall supply chain and increase manufacturing efficiency, we announced in June 2007 our plan to consolidate our sugar wafer manufacturing operations in Canada, which is expected to begin in November 2007. Of the $0.5 million total consolidation costs expected to be incurred, $0.3 million has been recognized during 2007.

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LANCE, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of our financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. This discussion should be read in conjunction with our recent SEC filings, including Form 10-K for the year ended December 30, 2006. 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 customer returns and promotions, provisions for bad debts, inventory valuations, useful lives of fixed assets, hedge transactions, supplemental retirement benefits, intangible asset valuations, incentive compensation, income taxes, insurance, post-retirement benefits, contingencies and legal proceedings. Actual results may differ from these estimates under different assumptions or conditions and such differences may be material.
Results of Operations
Quarter Ended September 29, 2007 Compared to Quarter Ended September 30, 2006
                                                 
          Favorable/  
    Quarter Ended     (Unfavorable)  
($ in thousands)   September 29, 2007     September 30, 2006     Variance  
     
 
Revenue
  $ 198,052       100.0 %   $ 188,628       100.0 %   $ 9,424       5.0 %
Cost of sales
    115,692       58.4 %     106,768       56.6 %     (8,924 )     (8.4 %)
     
Gross margin
    82,360       41.6 %     81,860       43.4 %     500       0.6 %
Selling, marketing and delivery
    58,985       29.8 %     60,571       32.1 %     1,586       2.6 %
General and administrative
    11,268       5.7 %     9,296       4.9 %     (1,972 )     (21.2 %)
Other expense/(income), net
    522       0.3 %     (243 )     (0.1 %)     (765 )   nm
     
Earnings before interest and taxes
    11,585       5.8 %     12,236       6.5 %     (651 )     (5.3 %)
Interest expense, net
    550       0.3 %     901       0.5 %     351       39.0 %
Income tax expense
    3,448       1.7 %     3,940       2.1 %     492       12.5 %
     
Income from continuing operations
    7,587       3.8 %     7,395       3.9 %     192       2.6 %
(Loss)/income from discontinued operations
    (146 )     (0.1 %)     129       0.1 %     (275 )   nm
Income tax (benefit)/expense
    (54 )           45             99     nm
     
Net (loss)/income from discontinued operations
    (92 )           84             (176 )   nm
     
Net income
  $ 7,495       3.8 %   $ 7,479       4.0 %   $ 16       0.2 %
     
nm = not meaningful.
For the third quarter of 2007, revenue increased $9.4 million or 5.0% compared to the third quarter of 2006. For both quarters presented, branded product revenue represented approximately 64% of total revenue, while private label revenue represented 26% and contract manufacturing revenue represented 10% of total revenue.
Branded product revenue increased $5.1 million or 4.1% for the quarter ended September 29, 2007 compared to the quarter ended September 30, 2006 due to revenue growth in Lance ® home pack sandwich crackers, Cape Cod ® potato chips and Tom’s ® salty snacks. This increase in revenue was partially offset by declines in revenue from cakes and meat products. Revenue from the mass merchandiser channel increased approximately 15% due to revenue growth from existing and new product offerings. In addition, the grocery channel continued to generate strong revenue growth of 11%. These increases were slightly offset by planned declines in revenue from less profitable sales channels.

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LANCE, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Non-branded product revenue for the quarter ended September 29, 2007 increased $4.3 million or 6% as compared to the same quarter last year. Private label revenue increased $2.8 million or 5% partially due to increased revenue from a significant customer, and contract manufacturing revenue increased $1.5 million or 8% due to additional product offerings as compared to the third quarter of 2006.
As a percentage of revenue, gross margin declined from 43.4% in the third quarter of 2006 to 41.6% in the third quarter of 2007. Compared to the third quarter of 2006, commodity costs increased $6.6 million, which was more than offset by higher pricing, increased sales volume and improvements in operating efficiencies.
During the third quarter of 2007, we experienced record increases in flour costs as compared to the second quarter of 2007. Wheat is used as the primary ingredient for flour, a basic raw material for most of our baked products. The higher wheat costs are being driven by many market factors including world inventory levels, poor yields from the current year’s crops due to weather in the United States, and the increased demand for exports resulting from a weaker U.S. dollar and poor yields in other wheat producing countries. Current wheat pricing is approximately three times that of the ten-year average cost for this commodity. Based on current market prices, we expect that certain commodity costs, especially for wheat, will continue to remain at record levels throughout the fourth quarter of 2007. We do not anticipate that price increases, operational efficiencies or cost reduction efforts will offset these higher commodity costs during the fourth quarter of 2007. Therefore, we expect gross margin as a percentage of revenue to decline further during the fourth quarter of 2007. We recently developed and have begun implementing price increases, which will begin to take effect late in the fourth quarter of 2007 and in the first half of 2008. If our commodity costs continue at these unprecedented levels, additional pricing actions may be necessary.
Selling, marketing and delivery expenses decreased $1.6 million or 2.6% as compared to the third quarter of 2006. The operational efficiencies and cost reduction initiatives in our direct distribution and DSD system more than offset the costs associated with the increase in sales volume. Route truck expense and other shipping expenses decreased approximately $1.9 million due to lower maintenance costs from newer route trucks and more efficient distribution capacity from larger over-the-road trailers.
General and administrative expenses increased $2.0 million or 21.2% due to reductions in prior year equity compensation accruals, increased professional fees and higher compensation costs from additional employees in the current year.
For the quarter ended September 29, 2007, other expense increased $0.8 million primarily due to the impact of foreign currency exchange rate fluctuations compared to the same quarter of the prior year.
The effective tax rate decreased from 34.8% during the third quarter of 2006 to 31.2% during the third quarter of 2007 principally due to a reduction in the gross unrecognized tax benefit amount related to various statute expirations.
During the quarter ended September 29, 2007, the net loss from discontinued operations was $0.1 million as compared to net income of $0.1 million in the quarter ended September 30, 2006. As of September 29, 2007, all vending assets have been disposed of and the vending operations have been fully discontinued.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Nine Months Ended September 29, 2007 Compared to the Nine Months Ended September 30, 2006
                                                 
          Favorable/  
    Nine Months Ended     (Unfavorable)  
($ in thousands)   September 29, 2007     September 30, 2006     Variance  
     
 
Revenue
  $ 577,515       100.0 %   $ 557,714       100.0 %   $ 19,801       3.6 %
Cost of sales
    328,104       56.8 %     317,294       56.9 %     (10,810 )     (3.4 %)
     
Gross margin
    249,411       43.2 %     240,420       43.1 %     8,991       3.7 %
Selling, marketing and delivery
    175,328       30.4 %     185,901       33.3 %     10,573       5.7 %
General and administrative
    36,008       6.2 %     32,525       5.8 %     (3,483 )     (10.7 %)
Other expense, net
    1,405       0.2 %     436       0.1 %     (969 )     (222.2 %)
     
Earnings before interest and taxes
    36,670       6.3 %     21,558       3.9 %     15,112       70.1 %
Interest expense, net
    1,768       0.3 %     2,398       0.4 %     630       26.3 %
Income tax expense
    12,174       2.1 %     6,795       1.2 %     (5,379 )     (79.2 %)
     
Income from continuing operations
    22,728       3.9 %     12,365       2.2 %     10,363       83.8 %
Income from discontinued operations
    45             797       0.1 %     (752 )     (94.4 %)
Income tax expense
    16             289       0.1 %     273       94.5 %
     
Net income from discontinued operations
    29             508       0.1 %     (479 )     (94.3 %)
     
Net income
  $ 22,757       3.9 %   $ 12,873       2.3 %   $ 9,884       76.8 %
     
For the nine months ended September 29, 2007, revenue increased $19.8 million, or 3.6% and income from continuing operations increased $10.4 million, or 83.8% compared to the nine months ended September 30, 2006. The results of operations for the prior year were impacted by the acquisition of substantially all of the assets of Tom’s Foods Inc., which occurred during the fourth quarter of 2005. Because of this acquisition, incremental overhead costs were incurred during the nine months ended September 30, 2006, including retention incentives and other integration costs of $2.8 million.
For the nine months ended September 29, 2007 and September 30, 2006, branded product revenue represented approximately 64% of total revenue. Private label revenue represented 26% of total revenue, and contract manufacturing revenue represented 10% of total revenue.
Branded product revenue increased $9.7 million or 2.6% during the nine months ended September 29, 2007 as compared to the nine months ended September 30, 2006, primarily due to increased revenues from Lance ® home pack sandwich crackers, Cape Cod ® potato chips and Tom’s ® salty snacks. These increases in revenue were offset by declines due to the discontinuation of certain product offerings and the consolidation of direct-store delivery routes during the first half of 2006 related to the integration of the Tom’s acquisition, as well as declines in cakes and meat products. Revenue from the mass merchandiser channel increased approximately 21% due to revenue growth from existing and new product offerings and an incremental sales promotion with a significant customer. In addition, revenue from the grocery channel increased approximately 10%. These increases in branded product revenue were slightly offset by planned declines in revenue from less profitable sales channels.
Non-branded product revenue increased $10.1 million or 5.0%, as a result of increased revenue from existing private label customers of $5.3 million or 3.5% and a $4.8 million or 8.3% increase in revenue from contract manufacturing customers as compared to the nine months ended September 30, 2006.
Gross margin increased $9.0 million compared to the same nine months in the prior year. Price increases, improved operating efficiency, increased sales volume and positive product mix more than offset increased commodity costs of approximately $12.3 million.
Selling, marketing and delivery expenses decreased $10.6 million or 5.7% as compared to the nine months ended September 29, 2006. The decrease in expenses was primarily driven by lower compensation costs of $3.1 million, reductions in shipping expenses of $2.8 million, reductions in route truck expense of $2.6 million, lower travel costs of $0.8 million and reductions in various other expenses due to the efficiencies gained from the integration of the Tom’s operations and continued supply chain improvement initiatives.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
General and administrative expenses increased $3.5 million or 10.7% principally due to increased cash and equity incentive compensation due to improved performance factors and higher professional fees incurred for legal, accounting, recruiting and consulting services.
Other expense increased $1.0 million due to the impact of foreign currency exchange rate fluctuations during the nine months ended September 29, 2007 compared to the nine months ended September 30, 2006. The $0.6 million decrease in net interest expense reflects higher interest income from invested cash and cash equivalents.
Income tax expense on continuing operations increased $5.4 million due to higher earnings. However, the effective tax rate decreased from 35.5% as of September 30, 2006 to 34.9% for the nine months ended September 29, 2007 principally due to a reduction in the gross unrecognized tax benefit amount related to various statute expirations.
Net income from discontinued operations decreased $0.5 million for the nine months ended September 29, 2007 compared to same period ended September 30, 2006 as a result of declining revenue associated with exiting the vending business.
Liquidity and Capital Resources
Liquidity
For the nine months ended September 29, 2007, the principal sources of liquidity for operating needs were provided by operating activities. Cash flow from operating activities, cash on hand and existing borrowing facilities are believed to be sufficient for the near future to enable us to meet our obligations, fund capital expenditures and pay cash dividends. As of September 29, 2007, cash and cash equivalents totaled $14.3 million.
Cash Flow
Net cash flow from operating activities was $42.4 million and $19.0 million for the nine months ended September 29, 2007 and September 30, 2006, respectively. Working capital other than cash and cash equivalents increased to $51.0 million from $48.6 million at December 30, 2006.
Net cash flow used in investing activities was $23.5 million for the nine months ended September 29, 2007. During the nine months ended September 29, 2007, cash expenditures for fixed assets, principally delivery vans and handheld computers for field sales representatives, manufacturing equipment, computer software and hardware, and tractors and trailers, totaled $28.3 million, partially funded by proceeds from the sale of assets of $6.9 million. Approximately $2.1 million was used to purchase a non-controlling equity interest in an organic snack food company during the second quarter of 2007.
Capital expenditures are expected to continue at a level sufficient to support our strategic and operating needs. We believe that capital expenditures and other investing activities for 2007 will be between $42 and $44 million and will be funded by net cash flow from operating activities, cash on hand and borrowing facilities as necessary. Capital expenditures for purchases of property and equipment were $47 million for the year ended December 30, 2006.
Cash used in financing activities for the nine months ended September 29, 2007 totaled $10.3 million. Cash from financing activities for the nine months ended September 30, 2006 totaled $11.6 million. During the nine months ended September 29, 2007 and September 30, 2006, dividends of $0.48 per share totaling $14.9 million and $14.6 million, respectively, were paid to stockholders. In addition, we received cash and related tax benefits of $4.6 million and $17.9 million during the nine months ended September 29, 2007 and September 30, 2006, respectively, as a result of the exercise of stock options by employees. Net proceeds from our revolving credit facility totaled $8.4 million during the nine months ended September 30, 2006.
Additional borrowings available under all existing credit facilities totaled $96.6 million as of September 29, 2007. We have complied with all financial covenants contained in the credit facilities. 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 $18.5 million as of September 29, 2007.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Dividends
On November 1, 2007, the Board of Directors declared a quarterly cash dividend of $0.16 per share, payable on November 20, 2007 to stockholders of record on November 12, 2007.
Market Risks
The principal market risks that may adversely impact our results of operations and financial position are changes in raw material prices, energy and fuel costs, interest rates, foreign exchange rates and credit risks. We selectively use derivative financial instruments to manage these risks. There are no market risk sensitive instruments held for trading purposes.
At times, we may enter into commodity futures and option contracts to manage fluctuations in prices of anticipated purchases of commodities. Our policy is to use these commodity derivative financial instruments only to the extent necessary to manage these exposures. We do not use these financial instruments for trading purposes. As of September 29, 2007, there were no outstanding commodity futures or option contracts. For the nine months ended September 29, 2007, the increase in commodity costs increased our cost of sales by $12.3 million as compared to the same period last year.
Our debt obligations incur interest at floating rates, based on changes in the Eurodollar rate, Canadian Bankers’ Acceptance discount rate, Canadian prime rate and U.S. base rate interest. To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements to maintain a desirable proportion of fixed to variable rate debt. In November 2006, we entered into an interest rate swap agreement in order to manage the risk associated with variable interest rates. The variable-to-fixed interest rate swap was accounted for as a cash flow hedge. The notional amount, interest payment and maturity date of the swap matched the principal, interest payment and maturity dates of the related debt. The interest rate on the swap was 5.3%, including applicable margin. The underlying notional amount of the swap agreement was $35.0 million. The fair value of the interest rate swap liability as determined by a third-party financial institution was $0.4 million on September 29, 2007. Without the favorable impact of the interest rate swap, pretax interest expense would have been $0.1 million higher during the nine months ended September 29, 2007.
We are exposed to credit risks related to our accounts receivable. We perform ongoing credit evaluations of our customers to minimize the potential exposure. As of September 29, 2007 and December 30, 2006, we had allowances for doubtful accounts of $0.6 million and $1.0 million, respectively.
Through the operations of our Canadian subsidiary, there is an exposure to foreign exchange rate fluctuations, primarily between U.S. dollars and Canadian dollars. A majority of the revenue of our Canadian operations is denominated in U.S. dollars and a substantial portion of the operations’ costs, such as raw materials and direct labor, are denominated in Canadian dollars. We have entered into a series of forward contracts to mitigate a portion of this foreign exchange rate exposure. These contracts have maturities through June 2008. As of September 29, 2007, the fair value of the asset related to the forward contracts as determined by a third party financial institution was $0.4 million.
Due to foreign currency fluctuations during the nine months ended September 29, 2007 and September 30, 2006, we recorded gains of $10.3 million and $2.6 million, respectively, in other comprehensive income because of the translation of the subsidiary’s financial statements into U.S. dollars.
Pretax earnings during the nine months ended September 29, 2007 were reduced by $1.4 million from foreign currency exchange rate fluctuations as compared to the nine months ended September 30, 2006. This reduction in pretax earnings includes the favorable effect of forward contracts of $0.5 million in 2007.
Forward-Looking Statements and Risk Factors
We, from time to time, make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, beliefs, intentions, or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, those set forth under Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 30, 2006.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Caution should be taken not to place undue reliance on our forward-looking statements, which reflect our management’s expectations only as of the time such statements are made. We undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The principal market risks to which we are exposed that may adversely impact results of operations and financial position include changes in raw material prices, energy and fuel costs, interest rates, foreign exchange rates and credit risks. Quantitative and qualitative disclosures about these market risks are included under “Market Risks” in Item 2 above, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities and Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for the purpose of providing reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
There have been no changes in our internal controls over financial reporting during the quarter ended September 29, 2007 that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Lance, Inc. was one of several companies sued in August 2005 in the Superior Court for the State of California for the County of Los Angeles by the Attorney General of the State of California for alleged violations of California Proposition 65. California Proposition 65 is a state law that, in part, requires companies to warn California residents if a product contains chemicals listed within the statute. The plaintiff seeks injunctive relief and penalties but has made no specific demands. We intend to vigorously defend this suit.
In addition, we are subject to routine litigation and claims incidental to our business. In the opinion of management, such routine litigation and claims should not have a material adverse effect upon our consolidated financial statements taken as a whole.
Item 1A. Risk Factors
There have been no material changes to the factors disclosed in Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Our Credit Agreement, dated October 20, 2006, restricts our payment of cash dividends and repurchases of common stock if, after payment of any dividends or any repurchases of common stock, our consolidated stockholders’ equity would be less than $125.0 million. At September 29, 2007, our consolidated stockholders’ equity was $249.3 million.

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Item 6. Exhibits
Exhibit Index
     
No.   Description
 
   
3.1
 
Restated Articles of Incorporation of Lance, Inc. as amended through April 17, 1998, incorporated herein by reference to Exhibit 3 to the Registrant’s Quarterly Report on Form 10-Q for the twelve weeks ended June 13, 1998 (File No. 0-398).
 
   
3.2
 
Articles of Amendment of Lance, Inc. dated July 14, 1998 designating rights, preferences and privileges of the Registrant’s Series A Junior Participating Preferred Stock, incorporated herein by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 26, 1998 (File No. 0-398).
 
   
3.3
 
Bylaws of Lance, Inc., as amended through April 25, 2002, incorporated herein by reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q for the thirteen weeks ended June 29, 2002 (File No. 0-398).
 
   
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), filed herewith.
 
   
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a), filed herewith.
 
   
32
 
Certification pursuant to Rule 13a-14(b), as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Items 3, 4 and 5 are not applicable and have been omitted.

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Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized.
         
 
  LANCE, INC.
 
       
 
  By:   /s/ Rick D. Puckett
 
       
 
      Rick D. Puckett
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary
 
       
Dated: November 2, 2007
       

17

 

EXHIBIT 31.1
MANAGEMENT CERTIFICATION
I, David V. Singer, certify that:
1.  
I have reviewed this Quarterly Report on Form 10-Q of Lance, Inc.;
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
 
Date: November 2, 2007
 
   
 
/s/ David V. Singer
 
 
 
David V. Singer
President and Chief Executive Officer

 

 

EXHIBIT 31.2
MANAGEMENT CERTIFICATION
I, Rick D. Puckett, certify that:
1.  
I have reviewed this Quarterly Report on Form 10-Q of Lance, Inc.;
2.  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.  
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)  
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.  
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)  
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
     
 
Date: November 2, 2007
 
   
 
/s/ Rick D. Puckett
 
 
 
Rick D. Puckett
Executive Vice President,
Chief Financial Officer,
Treasurer and Secretary

 

 

EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Lance, Inc. (the “Company”) on Form 10-Q for the period ended September 29, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, David V. Singer, President and Chief Executive Officer of the Company, and Rick D. Puckett, Executive Vice President, Chief Financial Officer, Treasurer and Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
  (1)  
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)  
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to Lance, Inc. and will be retained by Lance, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
       
/s/ David V. Singer
  /s/ Rick D. Puckett
 
   
David V. Singer
  Rick D. Puckett
President and Chief
  Executive Vice President,
Executive Officer
  Chief Financial Officer,
November 2, 2007
  Treasurer and Secretary
 
  November 2, 2007