Item 1. Business
General
Lance, Inc. was incorporated as a North Carolina corporation in 1926. We operate in one segment, snack food products. Our corporate offices are located in Charlotte, North Carolina. We have U.S. manufacturing operations in Charlotte, North Carolina; Burlington, Iowa; Columbus, Georgia; Hyannis, Massachusetts; Corsicana, Texas; Perry, Florida; and Ashland, Ohio. Our Canadian manufacturing operations are located in Cambridge and Guelph, Ontario.
In October 2009, we acquired the Stella D’oro® brand as well as certain equipment and inventory from Stella D’oro Biscuit Co., Inc. These products are manufactured in our Ashland, Ohio facility.
During 2009, we closed our Little Rock, Arkansas premium cookie manufacturing operation and relocated the manufacturing equipment and production to Charlotte, North Carolina.
Products
We manufacture, market and distribute a variety of snack food products. We manufacture products including sandwich crackers and sandwich cookies, potato chips, cookies, crackers, other salty snacks, sugar wafers, nuts, restaurant style crackers and candy. In addition, we purchase certain cakes, meat snacks, candy, restaurant style crackers and salty snacks for resale in order to broaden our product offerings. Products are packaged in various single-serve, multi-pack and family-size configurations. We manufacture approximately 97% of all of the products we sell and the remainder is purchased for resale.
We sell both branded and private brand products, as well as contracted products for other branded food manufacturers. Our branded products are principally sold under the Lance®, Cape Cod®, Tom’s®, Archway® and Stella D’oro® brands. Private brand (private label) products are sold to retailers and distributors using store brands or our own control brands. During 2009, 2008 and 2007, branded products represented approximately 58%, 60% and 63% of total revenue, respectively, and private brand products represented approximately 32%, 30% and 27% of total revenue in 2009, 2008 and 2007, respectively. Contract manufacturing represented 10% of revenue in 2009, 2008 and 2007.
Intellectual Property
Trademarks that are important to our business are protected by registration or other means in the United States and most other markets where the related products are sold. We own various registered trademarks for use with our branded products including LANCE, CAPE COD POTATO CHIPS, TOM’S, ARCHWAY, STELLA D’ORO, TOASTCHEE, TOASTY, NEKOT, NIPCHEE, CHOC-O-LUNCH, VAN-O-LUNCH, GOLD-N-CHEES, CAPTAIN’S WAFERS, THUNDER, SALERNO, OUTPOST and a variety of other marks and designs. We license trademarks, including DON PABLO’s, BUGLES, BASS PRO SHOP and TEXAS PETE, for limited use on certain products that are classified as branded product sales. We also own registered trademarks including VISTA, BRENT & SAM’S, DELICIOUS, and JODAN that are used in connection with our private brand products.
Distribution
Distribution through our direct-store-delivery (DSD) route sales system accounted for approximately 40% of 2009 revenues. At December 26, 2009, the DSD system consisted of approximately 1,100 sales routes in 24 states, mostly located within the Southeastern and Mid-Atlantic United States. One sales representative serves each sales route. We use our own fleet of tractors and trailers to make deliveries of products throughout our DSD system. Each route maintains stockroom space for inventory through either individual stockrooms or distribution facilities. The sales representatives load route trucks from these stockrooms for delivery to customers.
In 2009, approximately 60% of our total revenues were generated through distribution of direct shipments or customer pick-ups through third-party carriers and our own transportation fleet to customer locations throughout most of the United States and other parts of North America. We utilize our own personnel, independent distributors and brokers to solicit direct sales.
Customers
The customer base for our branded products include grocery/mass merchandisers, distributors, convenience stores, club stores, discount stores, food service establishments and various other customers including drug stores, schools, military and government facilities and “up and down the street” outlets such as recreational facilities, offices and other independent retailers. Private brand customers include grocery/mass merchandisers and discount stores. We also manufacture products for branded manufacturers.
Substantially all of our revenues are to customers in the United States. Revenue from our largest customer, Wal-Mart Stores, Inc., was approximately 22% of our total revenue in 2009. The loss of this customer or a substantial portion of business with this customer could have a material adverse effect on our business and results of operations.
Raw Materials
The principal raw materials used to manufacture our products are flour, vegetable oil, sugar, potatoes, peanuts, other nuts, cheese, cocoa and seasonings. The principal packaging supplies used are flexible film, cartons, trays, boxes and bags. These raw materials and supplies are normally available in adequate quantities in the open market and may be contracted by us up to a year or more in advance, depending on market conditions.
Competition and Industry
Our products are sold in highly competitive markets. Generally, we compete with manufacturers, many of whom have greater total revenues and resources than we do. The principal methods of competition are price, service, product quality and product offerings. The methods of competition and our competitive position vary according to the geographic location, the particular products and the activities of our competitors.
Environmental Matters
Our operations in the United States and Canada are subject to various federal, state (or provincial) and local laws and regulations with respect to environmental matters. However, the Company was not a party to any material proceedings arising under these laws or regulations for the periods covered by this Form 10-K. We believe the Company is in compliance with all material environmental regulations affecting our facilities and operations and that continued compliance will not have a material impact on our capital expenditures, earnings or competitive position.
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Employees
At both the beginning of February 2010 and 2009, we had approximately 4,800 active employees in the United States and Canada. None of our employees are covered by a collective bargaining agreement.
Other Matters
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, are available on our website free of charge. The website address is www.lanceinc.com. All required reports are made available on the website as soon as reasonably practicable after they are filed with the Securities and Exchange Commission.
Item 1A.
Item 1A. Risk Factors
In addition to the other information in this Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition or results of operations may be adversely affected by any of these risks. Additional risks and uncertainties, including risks that we do not presently know of or currently deem insignificant, may also impair our business, financial condition or results of operations.
Our performance may be impacted by general economic conditions and an economic downturn.
Recessionary pressures from an overall decline in U.S. economic activity could adversely impact our business and results of operations. Economic uncertainty may reduce consumer spending in our sales channels and create a shift in consumer preference toward private label products. While our product portfolio contains both branded and private label offerings and mitigates certain exposure, shifts in consumer spending could result in increased pressure from competitors or customers to reduce the prices of some of our products and/or limit our ability to increase or maintain prices, which could lower our overall revenues and profitability.
Instability in the financial markets may impact our ability or increase the cost to enter into new credit agreements in the future. Additionally, it may weaken the ability of our customers, suppliers, distributors, banks, insurance companies and other business partners to perform in the normal course of business, which could expose us to losses or disrupt the supply of inputs we rely upon to conduct our business. If one or more of our key business partners fail to perform as expected or contracted for any reason, our business could be negatively impacted.
Volatility in the price or availability of the inputs we depend on, including raw materials, packaging, energy and labor, may adversely impact our profitability.
Our profitability could be adversely impacted by changes in the cost or availability of raw materials and packaging. While we often obtain substantial commitments for future delivery of certain raw materials and may engage in limited hedging to reduce the price risk of these raw materials, continuing long-term increases in the costs of raw materials and packaging, including cost increases due to the tightening of supply, could adversely affect our profitability.
Our transportation and logistics system is dependent upon gasoline and diesel fuel, and our manufacturing operations depend on natural gas. While we may enter into forward purchase contracts to reduce the price risk associated with some of these costs, continuing long-term changes in the cost or availability of natural gas and energy could adversely impact our financial performance.
Our continued growth requires us to hire, retain and develop a highly skilled workforce and talented management team. Any unplanned turnover or our failure to develop an adequate succession plan for current positions could erode our competitiveness. In addition, our operating results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs.
We operate in a highly competitive food industry.
Price competition and industry consolidation could adversely impact our results of operations and financial condition. The sales of most of our products are subject to significant competition primarily through discounting and other price cutting techniques by competitors, many of whom are significantly larger and have greater resources than we do. In addition, there is a continuing consolidation by the major companies in the food industry, which could increase competition. Significant competition increases the possibility that we could lose one or more major customers, lose existing product offerings at customer locations, lose market share and/or shelf space, increase expenditures or reduce selling prices, which could have an adverse impact on our business or results of operations.
Sales price increases initiated by us may negatively impact total revenue. Future price increases, such as those to offset increased ingredient costs, may reduce our overall sales volume, which could reduce total revenues and operating profit. Additionally, if market prices for certain ingredients decline significantly below our contracted prices, customer pressure to reduce prices could lower total revenues and operating profit.
Changes in our top customer relationships could impact our revenues and profitability.
We are exposed to risks resulting from several large customers that account for a significant portion of our revenue. Our top ten customers accounted for approximately 40% of our revenue during 2009 with our largest customer representing 22% of our 2009 revenue. The loss of one or more of our large customers could adversely affect our results of operations. These customers typically make purchase decisions based on a combination of price, product quality, consumer demand and customer service performance and generally do not enter into long-term contracts. In addition, these significant customers may re-evaluate or refine their business practices related to inventories, product displays, logistics or other aspects of the customer-supplier relationship. Our results of operations could be adversely affected if revenue from one or more of these customers is significantly reduced or if the cost of complying with customers’ demands is significant. If receivables from one or more of these customers become uncollectible, our results of operations may be adversely impacted.
Efforts to execute and accomplish our strategic initiatives could adversely affect our financial performance.
We utilize several operating strategies to increase revenue and improve operating performance. If we are unsuccessful due to our execution, unplanned events, change management or unfavorable market conditions, our financial performance could be adversely affected. If we pursue strategic acquisitions, divestitures, or joint ventures, we may incur significant costs and may not be able to consummate the transactions. We may also be unsuccessful at integrating acquired businesses.
Future acquisitions could also result in potentially dilutive issuances of equity securities or the incurrence of debt, which could adversely affect result of operations and financial condition. In the event we enter into strategic transactions or relationships, our financial results may differ from expectations. We may not be able to achieve expected returns and other benefits as a result of integration or divestiture challenges not adequately considered at the time of the transaction.
Concerns with the safety and quality of certain food products or ingredients could cause consumers to avoid our products.
We could be adversely affected if consumers in our principal markets lose confidence in the safety and quality of certain products or ingredients. Negative publicity about these concerns, whether or not valid, may discourage consumers from buying our products or cause disruptions in production or distribution of our products.
If our products become adulterated, misbranded or mislabeled, we might need to recall those items and may experience product liability claims if consumers are injured or become sick.
Future product recalls or safety concerns could adversely impact our results of operations and market share. We may be required to recall certain of our products should they be mislabeled, contaminated or damaged. We also may become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products causes injury or illness. A product recall or an adverse result in any such litigation could have a material adverse effect on our operating and financial results.
Disruption of our supply chain or information technology systems could have an adverse impact on our business, results of operations, and financial condition.
Our ability to make, move, and sell products is critical to our success. Damage or disruption to our manufacturing or distribution capabilities or the supply and delivery of key inputs, such as raw materials, packaging, labor and energy, could impair our ability to conduct our business. Examples include, but are not limited to, weather, natural disasters, fires, terrorism, pandemics, and strikes. We specifically have DSD routes and manufacturing facilities located in areas prone to tornadoes, hurricanes and floods. Any business disruption due to natural disasters or catastrophic events in these areas could adversely impact our financial performance if not adequately mitigated.
Also, we increasingly rely on information technology systems to conduct our business. These systems may experience damage, failures, interruptions, errors, inefficiencies, attacks, or suffer from fires or natural disasters, any of which could have a material adverse effect on our business if not adequately mitigated by our security measures and disaster recovery plans.
We may be unable to anticipate changes in consumer preferences and trends, which may result in lower demand for our products.
Inability to anticipate changes in consumer preferences may result in decreased demand for products, which could have an adverse impact on our future growth and operating results. Our success depends in part on our ability to respond to current market trends and to anticipate the tastes and dietary habits of consumers. Changes in consumer preferences, and our failure to anticipate, identify or react to these changes could result in reduced demand for our products, which could in turn cause our operating results to suffer.
New regulations or legislation could adversely affect our business.
Food production and marketing are highly regulated by a variety of governmental agencies. New or increased government regulation of the food industry, including areas related to production processes, product quality, packaging, labeling, marketing, storage and distribution, and labor unions could adversely impact our results of operations by increasing production costs or restricting our methods of operation and distribution. These regulations may address food industry or society factors, such as obesity, nutritional concerns and diet trends. Additionally, we have increased advertising for our products and could be the target of claims relating to alleged false or deceptive advertising practices that may restrict our right to advertise our products.
We are exposed to interest and foreign currency exchange rate volatility, which could negatively impact our operating results and financial condition.
We are exposed to interest rate volatility since the interest rate associated with our existing credit facilities is variable. While we mitigate a portion of this volatility by entering into interest rate swap agreements, those agreements could lock our interest rates above the market rates.
We are also exposed to foreign exchange rate volatility primarily through the operations of our Canadian subsidiary. We mitigate a portion of the volatility impact on our results of operations by entering into foreign currency derivative contracts. Because our consolidated financial statements are presented in U.S. dollars, we must translate the Canadian subsidiary’s financial statements at the then-applicable exchange rates. Consequently, changes in the value of the U.S. dollar may impact our consolidated financial statements, even if the value has not changed in the original currency.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
Our corporate offices are located in Charlotte, North Carolina. We have manufacturing operations in Charlotte, North Carolina; Burlington, Iowa; Columbus, Georgia; Hyannis, Massachusetts; Corsicana, Texas; Perry, Florida; Ashland, Ohio; Cambridge, Ontario; and Guelph, Ontario. Most of our manufacturing facilities produce both branded and non-branded products. During 2009, we closed our Little Rock, Arkansas premium cookie manufacturing operation and relocated the manufacturing equipment and production to Charlotte, North Carolina. Our Little Rock location is currently held for sale.
We lease office space for administrative support and sales offices in 13 states. We also own or lease approximately 1,400 stockroom locations and 10 distribution facilities.
The plants and properties that we own and operate are maintained in good condition and are believed to be suitable and adequate for present needs. We believe that we have sufficient production capacity or the ability to increase capacity to meet anticipated demand in 2010.
Item 3.
Item 3. Legal Proceedings
We are currently subject to various routine legal proceedings and claims incidental to our business. In our opinion, such routine litigation and claims should not have a material adverse effect upon our consolidated financial statements taken as a whole.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item X. Executive Officers of the Registrant
Information as to each of our executive officers is as follows:
Name
Age
Information About Officer
David V. Singer
President and Chief Executive Officer of Lance, Inc. since 2005; Executive Vice President and Chief Financial Officer of Coca-Cola Bottling Co. Consolidated, a beverage manufacturer and distributor, from 2001 to 2005.
Rick D. Puckett
Executive Vice President, Chief Financial Officer and Secretary of Lance, Inc. since January 2006 and Treasurer of Lance, Inc. since April 2006; Executive Vice President, Chief Financial Officer and Treasurer of United Natural Foods, Inc., a wholesale distributor of natural and organic products from 2005 to January 2006; and Senior Vice President, Chief Financial Officer and Treasurer of United Natural Foods, Inc. from 2003 to 2005.
Glenn A. Patcha
Senior Vice President - Sales and Marketing of Lance, Inc. since January 2007; Senior Vice President of Marketing ConAgra Grocery Products Division, a packaged foods company, 2003 to June 2006.
Blake W. Thompson
Senior Vice President - Supply Chain of Lance, Inc. since February 2007; Vice President - Supply Chain of Lance, Inc. from 2005 to 2006; Senior Vice President, Supply Chain of Tasty Baking, a snack food manufacturer and distributor, from 2004 to 2005.
Kevin A. Henry
Senior Vice President and Chief Human Resources Officer of Lance, Inc. from January 2010; Chief Human Resources Officer of Coca Cola Bottling Co. Consolidated, a beverage manufacturer and distributor, from September 2007 to 2009; and Senior Vice President of Human Resources at Coca Cola Bottling Co. from February 2001 to 2009.
Margaret E. Wicklund
Vice President, Corporate Controller, Principal Accounting Officer and Assistant Secretary of Lance, Inc. since 2007; Corporate Controller, Principal Accounting Officer and Assistant Secretary of Lance, Inc. from 1999 to 2006.
All of the executive officers were appointed to their current positions at the Annual Meeting of the Board of Directors on April 23, 2009, except Kevin A. Henry who was appointed on January 13, 2010.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our $0.83-1/3 par value Common Stock is traded on the NASDAQ Global Select Market under the symbol LNCE. We had 3,017 stockholders of record as of February 18, 2010.
The following table sets forth the high and low sales prices and dividends paid during the interim periods in fiscal years 2009 and 2008:
On February 9, 2010, the Board of Directors of Lance, Inc. declared a quarterly cash dividend of $0.16 per share payable on March 1, 2010 to stockholders of record on February 22, 2010. Our Board of Directors will consider the amount of future cash dividends on a quarterly basis.
Our Credit Agreement dated October 20, 2006 restricts payment of cash dividends and repurchases of our common stock if, after payment of any such dividends or any such repurchases of our common stock, our consolidated stockholders’ equity would be less than $125.0 million. At December 26, 2009, our consolidated stockholders’ equity was $274.7 million.
In December 2008, the Board of Directors approved the repurchase of up to 100,000 shares of common stock for the purpose of acquiring shares of common stock from employees to cover withholding taxes payable by employees upon the vesting of shares of restricted stock. During the first quarter of 2009, we repurchased 6,741 shares of common stock. We did not repurchase any shares of common stock during 2008 and 2007. At December 26, 2009, we had the authority to repurchase 93,259 shares of common stock.
Item 6.
Item 6. Selected Financial Data
The following table sets forth selected historical financial data for the five-year period ended December 26, 2009. The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited financial statements. The prior year amounts have been reclassified for consistent presentation, including the reclassification of the vending operations to discontinued operations for 2005, 2006 and 2007.
Footnotes:
(1)
revenue included approximately $27 million from both Archway (acquired in December 2008) and Stella D’oro (acquired in October 2009).
(2)
revenue included approximately $15 million from Brent & Sam’s (acquired in March 2008). Also, a significant amount of price increases were initiated in response to unprecedented ingredient costs increases, such as flour and vegetable oil.
(3)
revenue included incremental revenues from Tom’s (acquired in October 2005).
(4)
represented a 53-week year, which accounted for $8.1 million in incremental revenue. 2005 revenue was also impacted by two months of revenue from the Tom’s acquisition.
(5)
pre-tax income was significantly impacted by unprecedented ingredient costs increases, such as flour and vegetable oil, not fully offset by our selling price increases during the year.
(6)
Compared to previous years, pre-tax income in 2006 was impacted by $1.3 million of expenses related to stock options as required by a change in accounting standard. Incremental severance and integration costs during 2006 related to the Tom’s acquisition were $2.8 million.
(7)
pre-tax income was negatively impacted by $3.4 million of Tom’s integration costs and $2.5 million of severance charges for the prior CEO.
(8)
During 2006, we committed to a plan to discontinue our vending operations.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Information About Forward-Looking Statements
From time to time, we 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, the factors set forth under Part I, Item 1A - Risk Factors.
Caution should be taken not to place undue reliance on our forward-looking statements, which reflect the expectations of management only as of the time such statements are made. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
The following discussion provides an assessment of our financial condition, results of operations, liquidity and capital resources and should be read in conjunction with the accompanying consolidated financial statements.
Management’s discussion and analysis of our financial condition and results of operations are based upon consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, management’s determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances. We routinely evaluate our estimates, including those related to 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, self-insurance, contingencies and legal proceedings. Actual results may differ from these estimates under different assumptions or conditions.
Executive Summary
This has been a year of growth for our Company, as well as a year of successfully overcoming challenges while we continued to transform our business. In 2009, we nearly doubled our earnings per share (“EPS”) from $0.56 in 2008 to $1.11 in 2009 and increased our revenue by $65.8 million or 7.7%.
We began 2009 dealing with the impact of a peanut butter recall. Although our sandwich crackers were not impacted by the recall, the potential health concerns caused many consumers to discontinue purchases of our sandwich crackers. The loss in revenue and increased consumer communication initiatives related to the peanut butter recall negatively impacted our net income in the first quarter of 2009 by an estimated $1.5 million.
During most of 2008, our financial results were significantly impacted by higher commodity prices and fuel costs that were not offset by selling price increases. By the beginning of the fourth quarter of 2008, pricing initiatives were put in place to offset a significant portion of the commodity price increases. Commodity costs continued to increase over the first half of 2009 and then declined in the second half of 2009 compared to 2008. In addition, energy-related costs declined compared to 2008. These costs were still at levels significantly higher than historical rates; however, our selling price increases mitigated the impact of the higher commodity prices and helped restore our gross margin percentages.
From an operational perspective, we continued to focus on our long-term key priorities in order to develop a foundation for profitable growth. During the year, we continued to focus on:
1.
Enhancing organizational development and effectiveness in order to align our organization to achieve our goals, including:
a.
Attracting highly talented employees to support growth and efficiency initiatives,
b.
Aligning the organization to support a centralized functional management structure, and
c.
Implementing organizational goals and a common vision throughout the organization.
2.
Enhancing operational efficiencies in our direct-store-delivery (“DSD”) operations, supply chain process and information technology systems, including:
a.
Improving profitability within our DSD system by increasing weekly route sales averages while improving pay and reducing turnover,
b.
Improving our capability to leverage manufacturing across facilities in order to produce products at locations closer to our customers, standardizing processes and continually improving our quality initiatives,
c.
Developing a distribution logistic strategy for our DSD and direct shipments and increasing cubes per mile to reduce distribution costs, and
d.
Implementing a common ERP information technology system across all locations to standardize processes and procedures and more efficiently provide consistent data for decision-making.
3.
Achieving focused growth in core channels and product lines while simplifying our business and creating new platforms for growth, including:
a.
Supporting growth in core products and channels through advertising and improved sales execution,
b.
Leveraging our distributor relationships to provide increased geographic and product revenue growth and utilizing small format distributors to transfer distribution as a result of our DSD transformation initiatives,
c.
Increasing profitable sales growth in our club and discount channels through pricing initiatives, product offerings and packaging configuration changes,
d.
Investing in product innovation to drive profitable sales growth and support consumer preferences, and
e.
Widening our product offering in our private brands portfolio by offering value, mainstream and premium products and providing exceptional customer service.
During 2009, we continued to focus on our priorities as we transform Lance into a leader within our snack food categories, while delivering on our key goals of accelerated sales growth, widening our profit margins, improving return on capital and driving growth in our earnings per share.
During 2009, our accomplishments included:
·
We completed the integration of Archway, which we acquired in late 2008. As a result of the acquisition, we were able to significantly increase revenue, leverage and expand production capacity for both Archway and our private brand products, and increase our employee base in Ashland, Ohio.
·
In October 2009, we acquired the Stella D’oro brand and certain machinery and equipment, which we moved to our Ashland, Ohio facility, and began producing Stella D'oro product shortly after the acquisition.
·
During 2009, we launched our first national television campaign and increased our advertising in order to support our core brands.
·
We continued to focus our attention on product innovation initiatives and introduced several new products both in our branded and private brand portfolio.
·
We completed our ERP information technology system implementation in all of our U.S. facilities, which provided consistency and standardization at all of our U.S. locations.
·
We experienced significant improvements in supply chain efficiencies, which included lower shipping costs as we centralized warehousing and more efficiently utilized our transportation fleet.
·
We completed the majority of our DSD transformation initiative, which resulted in improvements in weekly average sales per route, reduced route sales turnover and reduced route costs as a percentage of revenue compared to 2008.
·
We moved the production of Brent and Sam’s products from Little Rock, Arkansas to our Charlotte, North Carolina facility to improve manufacturing and distribution efficiencies.
·
We had significant revenue growth in our club and discount channels through providing additional product offerings and packaging configurations.
·
Despite the issues resulting from the peanut butter recall that occurred during the first quarter of 2009, we experienced both consistent revenue growth as well as increased market share of sandwich crackers sold through grocery stores compared to 2008.
During 2009, we also experienced increased costs or declines in revenue as a result of these initiatives and other economic factors, as follows:
·
We incurred approximately $0.8 million of pre-tax incremental start-up costs as a result of the Archway acquisition during the first quarter of 2009.
·
As a result of the Stella D’oro acquisition, we incurred approximately $1.1 million in expenses due to legal and professional fees as well as start-up costs and other costs associated with the de-installation of the equipment moved to Ashland Ohio.
·
Advertising costs to support our core brands increased $6.6 million compared to 2008.
·
Employee-related costs, such as compensation, incentives and insurance-related expenses increased approximately 18% compared to 2008, due to acquisitions and additional employees to support revenue growth and other company initiatives.
·
We experienced double-digit revenue declines in our convenience store, up-and-down the street and food service channels, as a result of lower consumer spending and our DSD transformation initiatives.
·
As a result of the closure of the Brent and Sam’s facility and the subsequent relocation of the manufacturing equipment to Charlotte, NC, we experienced operating costs of $0.5 million.
·
During 2009, we experienced significant competition in our Cape Cod potato chips products and achieved only modest revenue growth.
Results of Operations
Compared to 2008
Revenue
Revenue from continuing operations for the year ended December 26, 2009 increased $65.8 million or approximately 8% compared to the year ended December 27, 2008, and was affected by the following factors:
As a percentage of total revenue, revenue by product category was as follows:
Branded revenue increased $20.7 million or 4.0% compared to 2008. Sales of branded products to grocery stores, distributors, discount stores and club stores generated significant growth compared to 2008 due to acquisitions, increased selling prices and new product offerings. Branded revenue from mass merchandisers increased only modestly compared to 2008 due to changes in store formats, which reduced the number of opportunities for promotional displays. This growth was significantly offset by double-digit declines in up-and-down the street, convenience store and food service revenue as a result of lower consumer spending in these establishments and the implementation of our DSD transformation strategy aimed at improving route efficiency and profitability by shifting focus to servicing larger, more profitable customers.
Our DSD system represented approximately 68% of branded revenue in 2009 and 72% in 2008. The remainder consisted of branded revenue from distributors and direct shipments to customers. The increase in our distributor revenue was significantly impacted by the addition of the Archway and Stella D’oro product offerings as well as an intended shift of certain revenue from our DSD system to independent distributors as part of our DSD transformation strategy.
Private brand revenue increased $37.8 million or 15% compared to 2008, primarily related to growth from new products and increased selling prices. Growth in this category was also driven by increased demand from consumers for store brands, which is in part believed to be the result of the economic downturn.
Revenue from contract manufacturing increased $7.3 million or 9% compared to 2008 as a result of increased volume, increased selling prices and a short-term manufacturing contract for a new customer.
Gross Margin
Gross margin increased $49.3 million or 2.7% as a percentage of revenue, compared to 2008. The increase in gross margin was mostly due to lower ingredient, natural gas and packaging costs, as well as the favorable impact of higher selling prices aimed at offsetting the escalation of ingredient costs that were experienced throughout 2008 and into 2009. The increase in gross margin was somewhat offset by a higher percentage of both private brand revenue, which has a lower gross margin percentage than our branded products, and a higher percentage of distributor branded revenue, which has a lower gross margin than branded products sold through our DSD channel. In addition, we had incremental start-up costs related to the acquisitions of Archway and Stella D’oro and the relocation of the production of Brent & Sam’s products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $18.9 million as compared to 2008, but decreased 0.4% as a percentage of revenue. Advertising costs increased $6.6 million, which included a substantial investment in advertising to support our first national television advertising campaign. We also incurred incremental marketing costs of approximately $1.3 million to reestablish the Archway® brand in the marketplace and mitigate the negative impact of the peanut butter recall. In 2010, we plan to continue to invest in advertising. Compensation-related expenses increased $6.7 million due to acquisitions and additional employees to support Company initiatives. Information technology expenditures also increased due to our ERP information technology system implementation. Somewhat offsetting these increased expenses were favorable fuel rates, lower shipping expenses and lower route costs due to the DSD transformation initiatives compared to 2008.
Other Expense/(Income), Net
During 2009, other expense of $1.7 million consisted primarily of foreign currency transaction losses due to the unfavorable impact of exchange rates in 2009, as well as losses on sale of fixed assets. Conversely, other income during 2008 was primarily the result of $0.9 million of foreign currency transaction gains.
Interest Expense, Net
Net interest expense increased $0.4 million primarily due to higher average debt than 2008 resulting from acquisitions made late in 2008 and 2009, offset slightly by lower weighted average interest rates.
Income Tax Expense
Our effective income tax rate was 34.3% in 2009 as compared to 34.6% in 2008. The decrease in the income tax rate was primarily due to increased utilization of federal and state credits as a result of higher net income.
Compared to 2007
Revenue
Revenue from continuing operations for the year ended December 27, 2008 increased $89.7 million or approximately 12% compared to the year ended December 29, 2007, and was affected by the following factors:
As a percentage of total revenue, revenue by product category was as follows:
Branded revenue increased $33.2 million or 7% compared to 2007, due to price increases and volume growth. Branded revenue was favorably impacted by double-digit growth in sales to grocery/mass merchandisers. This growth was significantly offset by double-digit declines in up-and-down the street revenue and DSD food service revenue as a result of implementing our DSD transformation strategy.
Our DSD system represented approximately 72% of branded revenue in 2008 and 74% in 2007. The remainder consisted of branded revenue from distributors and direct shipments to customers.
Private brand revenue increased $52.4 million or 26% as a result of increased selling prices, as well as the addition of Brent & Sam’s product offerings. Sales volume increased only modestly due to the loss of private brand sandwich cracker revenue from our largest customer driven by their decision to discontinue the product.
Contract manufacturing revenue increased $4.2 million or 6% as a result of increased selling prices which was somewhat offset by volume declines in sales to certain contract manufacturing customers.
Gross Margin
Gross margin increased $2.7 million but declined 4.1% as a percentage of revenue as a result of: significantly increased ingredient costs (principally flour and vegetable oil), higher energy rates (principally natural gas), higher compensation and vacation expense, increased packaging costs, manufacturing inefficiencies due to the consolidation of our Canadian facilities, start-up costs related to the acquisition of the Archway facility and the impact of increased volume sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $14.4 million as compared to 2007. Increased expenses included higher salaries, wages, employee commissions, vacation and incentives of $9.9 million, increased cost to deliver products due to higher gasoline and diesel rates of $3.0 million, and increased depreciation and amortization of $2.0 million due to new sales route trucks, larger and more efficient over-the-road trailers and the implementation of our ERP system. Also, there were increases in information technology software and hardware maintenance costs, higher third-party brokerage costs due to increased revenue and increased costs associated with market research regarding new and existing products. Offsetting these increases in expenses were reductions in advertising expenditures and lower casualty claims costs.
Other Expense/(Income), Net
During 2008, other income consisted primarily of $0.9 million of foreign currency transaction gains due to the favorable impact of exchange rates during the fourth quarter. Conversely, other expense during 2007 was the result of $1.3 million of foreign currency transaction losses from unfavorable exchange rates and write-offs of $1.1 million of previously capitalized information technology that was replaced by the new ERP information technology system.
Interest Expense, Net
Net interest expense increased $0.8 million primarily due to higher average debt than 2007 resulting from acquisitions made during 2008, offset slightly by lower weighted average interest rates.
Income Tax Expense
Our effective income tax rate was 34.6% in 2008 as compared to 34.4% in 2007. The increase in the income tax rate was due primarily to unfavorable changes in permanent book-tax differences partially offset by reductions in long-term tax contingencies.
Liquidity and Capital Resources
Liquidity
Liquidity represents our ability to generate sufficient cash flows from operating activities to meet our obligations as well as our ability to obtain appropriate financing. Therefore, liquidity cannot be considered separately from capital resources that consist primarily of current and potentially available funds for use in achieving our objectives. Currently, our liquidity needs arise primarily from working capital requirements, capital expenditures and dividends. Sufficient liquidity is expected to be available to enable us to meet these demands.
We have a universal shelf registration statement that, subject to our ability to consummate a transaction on acceptable terms, provides the flexibility to sell up to $250 million of debt or equity securities.
Operating Cash Flows
Net cash from operating activities was $69.3 million in 2009, $54.9 million in 2008 and $52.4 million in 2007. Cash used from net changes in operating assets and liabilities increased from $9.0 million in 2008 to $12.9 million in 2009, primarily due to higher accounts receivable, as a result of increased sales, and higher inventory, as a result of acquisitions and new product introductions, offset somewhat by higher accounts payable and accrued selling costs.
Cash used from net changes in operating assets and liabilities increased from $6.1 million in 2007 to $9.0 million in 2008, primarily due to higher accounts receivable, as a result of increased sales, and higher inventory, as a result of acquisitions and new product introductions, offset somewhat by higher accounts payable and accrued compensation.
Investing Cash Flows
Cash used in investing activities in 2009 included capital expenditures of $40.7 million which was partially offset by proceeds from the sale of fixed assets of $0.8 million. Capital expenditures for fixed assets in 2009 included manufacturing equipment, computer hardware and software, office furniture and fixtures, route truck shelving and permanent sales displays. Capital expenditures for 2010 are projected to be between $40 million and $45 million, funded primarily by net cash flow from operating activities, cash on hand, and available credit from credit facilities. On October 13, 2009, we acquired the Stella D’oro® brand as well as certain inventory and equipment from Stella D’oro Biscuit Co., Inc. for $23.9 million, including the cost of equipment installation.
Cash used in investing activities in 2008 represented capital expenditures of $39.1 million, partially offset by proceeds from the sale of fixed assets of $3.0 million. On March 14, 2008, we acquired Brent & Sam’s, Inc. for approximately $23.9 million, net of cash acquired of $0.2 million. Additionally, on December 8, 2008, we acquired substantially all of the assets of Archway Cookies, LLC for approximately $31.0 million. During 2008, we also invested an additional $0.2 million in our non-controlling equity interest in Late July, an organic snack food company. Cash used in investing activities in 2007 represented capital expenditures of $39.5 million and the purchase of a non-controlling equity interest in Late July for $2.1 million. Proceeds from the sale of fixed assets were $7.3 million in 2007.
Financing Cash Flows
During 2009, 2008 and 2007, we paid dividends of $0.64 per share each year totaling $20.4 million, $20.1 million and $19.9 million, respectively. As a result of the exercise of stock options by employees, we received cash and tax benefits of $4.1 million in 2009, net of stock repurchases of $0.1 million, $2.5 million in 2008, and $4.7 million in 2007. During 2009 and 2008, proceeds from debt, net of repayments, were $15.0 million and $46.2 million, respectively. These proceeds from debt were primarily used to fund acquisitions.
In December 2008, the Board of Directors approved the repurchase of up to 100,000 shares of common stock for the purpose of acquiring shares of common stock from employees to cover withholding taxes payable by employees upon the vesting of shares of restricted stock. During the first quarter of 2009, we repurchased 6,741 shares of common stock. We did not repurchase any shares of common stock during 2008 and 2007.
Debt
In October 2006, we entered into an unsecured Credit Agreement, which allows us to make revolving credit borrowings of up to US$100.0 million and CDN$15.0 million through October 2011. As of December 26, 2009 and December 27, 2008, we had $63.0 million and $48.0 million outstanding under the revolving credit agreement, respectively. Also under the Credit Agreement, we entered into a $50.0 million term loan due in October 2011. As of December 26, 2009 and December 27, 2008, we had $50.0 million outstanding under the term loan. Debt increased $15.0 million during 2009, primarily to fund the purchase of certain assets of Stella D’oro Biscuit Co., Inc.
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 $15.7 million as of December 26, 2009. These letters of credit reduce the total available borrowings under the Credit Agreement. Unused and available borrowings were $35.6 million under our existing U.S. and Canadian credit facilities at December 26, 2009. Under certain circumstances and subject to certain conditions, we have the option to increase available credit under the Credit Agreement by up to $50.0 million during the life of the facility.
The Credit Agreement requires us to comply with certain defined covenants, such as a maximum debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 3.0 and a minimum interest coverage ratio of 2.5. At December 26, 2009, our debt to EBITDA ratio was 1.2, and our interest coverage ratio was 16.5. In addition, our revolving credit agreement restricts payment of cash dividends and repurchases of our common stock if, after payment of dividends or repurchases of our common stock, our consolidated stockholders’ equity would be less than $125.0 million. At December 26, 2009, our consolidated stockholders’ equity was $274.7 million. We were in compliance with these covenants at December 26, 2009. Total interest expense under the Credit Agreement for 2009, 2008 and 2007 was $3.4 million, $3.2 million, and $2.9 million, respectively. During 2009 and 2008, we capitalized $0.2 million and $0.3 million of interest expense, respectively into fixed assets as part of our ERP information technology system implementation.
Contractual Obligations
We lease certain facilities and equipment classified as operating leases. We also have entered into agreements with suppliers for the purchase of certain ingredients, packaging materials and energy used in the production process. These agreements are entered into in the normal course of business and consist of agreements to purchase a certain quantity over a certain period of time. These purchase commitments range in length from a few weeks to twelve months. Additionally, we provide supplemental retirement benefits to certain retired and active officers.
Contractual obligations as of December 26, 2009 were:
* Variable interest will be paid in future periods based on the outstanding balance at that time. The amounts due include the estimated interest payable on debt instruments through October 2011.
Because we are uncertain as to if or when settlements may occur, this table does not reflect our liability for gross unrecognized tax benefits of $0.9 million and related interest and penalties of $0.3 million related to uncertain tax positions. Details regarding this liability are presented in Note 9 to the consolidated financial statements included in Item 8.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations or cash flows.
Critical Accounting Estimates
Preparing the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We believe the following estimates and assumptions to be critical accounting estimates. These assumptions and estimates may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and may have a material impact on the financial condition or operating performance. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
Our policy on revenue recognition varies based on the types of products sold and the distribution method. We recognize operating revenue when title and risk of loss passes to our customers. Allowances for sales returns, stale products, promotions and discounts are also recorded as reductions of revenue in the consolidated financial statements.
Revenue for products sold through our DSD system is recognized when the product is delivered to the retailer. Our sales representative creates the invoice at time of delivery using a handheld computer. The invoice is transmitted electronically each day and sales revenue is recognized.
Revenue for products shipped directly to the customer from our warehouse is recognized based on the shipping terms listed on the shipping documentation. Products shipped with terms FOB-shipping point are recognized as revenue at the time the shipment leaves our warehouses. Products shipped with terms FOB-destination are recognized as revenue based on the anticipated receipt date by the customer.
We allow certain customers to return products under agreed upon circumstances. We record a returns allowance for damaged products and other products not sold by the expiration date on the product label. This allowance is estimated based on a percentage of sales returns using historical and current market information.
We record certain reductions to revenue for promotional allowances. There are several different types of promotional allowances such as off-invoice allowances, rebates and shelf space allowances. An off-invoice allowance is a reduction of the sales price that is directly deducted from the invoice amount. We record the amount of the deduction as a reduction to revenue when the transaction occurs. At times, certain rebates may be offered to customers based on the quantity of product purchased over a period of time. Based on the nature of these allowances, the exact amount of the rebate is not known at the time the product is sold to the customer. An estimate of the expected rebate amount is recorded as a reduction to revenue and an accrued liability at the time the sale is recorded. The accrued liability is monitored throughout the period covered by the promotion. The accrual is based on historical information and the progress of the customer against the target amount. Shelf space allowances are capitalized and amortized over the lesser of the life of the agreement or three years and recorded as a reduction to revenue. Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.
We also record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue. The accrued liability is monitored throughout the period covered by the coupon or promotion.
Total allowances for sales returns, rebates, coupons, scan-backs and other promotional activities included in other payables and accrued liabilities on the consolidated balance sheets increased from $5.2 million at the end of 2008 to $9.2 million at the end of 2009 due to a more aggressive marketing effort to drive sales growth.
Allowance for Doubtful Accounts
The determination of the allowance for doubtful accounts is based on management’s estimate of uncollectible accounts receivable. We record a general reserve based on analysis of historical data and the aging of accounts receivable. In addition, management records specific reserves for receivable balances that are considered at higher risk due to known facts regarding the customer. Allowances for doubtful accounts increased from $0.9 million at the end of 2008 to $1.0 million at the end of 2009 due to higher accounts receivable.
Self-Insurance Reserves
We maintain reserves for the self-funded portions of employee medical insurance benefits. The employer’s portion of employee medical claims is limited by stop-loss insurance coverage each year to $0.3 million per person. At December 26, 2009 and December 27, 2008, the accruals for our portion of medical insurance benefits were $2.9 million and $2.5 million, respectively.
For casualty insurance obligations, we maintain self-insurance reserves for workers’ compensation and auto liability for individual losses up to the $0.5 million insurance deductible. In addition, general and product liability claims are self-funded for individual losses up to the $0.1 million insurance deductible. Claims in excess of the deductible are fully insured up to $100 million per individual claim. We evaluate input from a third-party actuary in the estimation of the casualty insurance obligation on an annual basis. In determining the ultimate loss and reserve requirements, we use various actuarial assumptions including compensation trends, healthcare cost trends and discount rates. We also use historical information for claims frequency and severity in order to establish loss development factors. The estimate of discounted loss reserves ranged from $11.6 million to $14.4 million in 2009. In 2008, the estimate of discounted loss reserves ranged from $11.7 million to $14.9 million. Consistent with prior periods, the 75th percentile of this range represents our best estimate of the ultimate outstanding casualty liability. We lowered the discount rate from 4.5% in 2008 to 3.5% in 2009 based on projected investment returns over the estimated future payout period, which increased the estimated claims liability by approximately $0.2 million.
Impairment Analysis of Goodwill and Other Indefinite-Lived Intangible Assets
The annual impairment analysis of goodwill and other indefinite-lived intangible assets requires us to project future financial performance, including revenue and profit growth, fixed asset and working capital investments, income tax rates and cost of capital. These projections rely upon historical performance, anticipated market conditions and forward-looking business plans. The analysis of goodwill and other indefinite-lived intangible assets as of December 26, 2009 assumes combined average annual revenue growth of approximately 4.2% during the valuation period.
We also use a combination of internal and external data to develop the weighted average cost of capital. Significant investments in fixed assets and working capital to support this growth are estimated and factored into the analysis. If the forecasted revenue growth is not achieved, the required investments in fixed assets and working capital could be reduced. Even with the excess fair value over carrying value, significant changes in assumptions or changes in conditions could result in a goodwill impairment charge in the future.
Depreciation and Impairment of Fixed Assets
Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used in computing depreciation are based on estimates of the period over which the assets will provide economic benefits. Estimated lives are based on historical experience, maintenance practices, technological changes and future business plans. Depreciation expense was $34.6 million, $32.0 million and $29.3 million during 2009, 2008 and 2007, respectively. Changes in these estimated lives and increases in capital expenditures could significantly affect depreciation expense in the future.
Fixed assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Recoverability of fixed assets is evaluated by comparing the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If this comparison indicates that an asset’s carrying amount is not recoverable, an impairment loss is recognized, and the adjusted carrying amount is depreciated over the asset’s remaining useful life.
Equity-Based Incentive Compensation Expense
Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term, expected stock price volatility, risk-free interest rate and expected dividends. Judgment is required in estimating the amount of share-based awards that are expected to be forfeited before vesting. In addition, our long-term equity incentive plans require assumptions and projections of future operating results and financial metrics. Actual results may differ from these assumptions and projections, which could have a material impact on our financial results.
Provision for Income Taxes
We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage. Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. Significant judgment is required in evaluating tax positions that affect the annual tax rate. Unrecognized tax benefits for uncertain tax positions are established when, despite the fact that the tax return positions are supportable, we believe these positions may be challenged and the results are uncertain. We adjust these liabilities in light of changing facts and circumstances, such as the progress of a tax audit.
New Accounting Standards
See Note 1 to the consolidated financial statements included in Item 8. for a summary of new accounting standards.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to certain commodity, interest rate and foreign currency exchange rate risks as part of our ongoing business operations and may use derivative financial instruments, where appropriate, to manage some of these risks. We do not use derivatives for trading purposes. There are no market risk sensitive instruments held for trading purposes.
In order to reduce the price volatility of certain ingredient, packaging and energy costs, we have entered into various forward purchase agreements with certain suppliers based on market prices, forward price projections, and expected usage levels in order to determine appropriate selling prices for our products. As of December 26, 2009 and December 27, 2008, we had no outstanding commodity futures contracts or other derivative contracts related to ingredients and energy.
Our variable-rate 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. See Note 8 to the consolidated financial statements in Item 8.
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Income
LANCE, INC. AND SUBSIDIARIES
For the Fiscal Years Ended December 26, 2009, December 27, 2008, and December 29,
(in thousands, except share and per share data)
Consolidated Balance Sheets
LANCE, INC. AND SUBSIDIARIES
December 26, 2009 and December 27, 2008
(in thousands, except share data)
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
LANCE, INC. AND SUBSIDIARIES
For the Fiscal Years Ended December 26, 2009, December 27, 2008, and December 29,
(in thousands, except share data)
Consolidated Statements of Cash Flows
LANCE, INC. AND SUBSIDIARIES
For the Fiscal Years Ended December 26, 2009, December 27, 2008, and December 29,
(in thousands)
Notes to Consolidated Financial Statements
LANCE, INC. AND SUBSIDIARIES
December 26, 2009 and December 27, 2008
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
We operate in one segment, snack food products, which we manufacture, market and distribute. We manufacture products including sandwich crackers and cookies, potato chips, cookies, crackers, other salty snacks, sugar wafers, nuts, restaurant style crackers and candy. In addition, we purchase certain cakes, meat snacks, candy, restaurant style crackers and salty snacks for resale in order to broaden our product offerings. Products are packaged in various single-serve, multi-pack and family-size configurations.
We sell both branded and private brand products, as well as contracted products for other branded food manufacturers. Our branded products are principally sold under the Lance®, Cape Cod®, Tom’s®, Archway® and Stella D’oro® brands. Private brand products are sold to retailers and distributors using store brands or Lance control brands.
Our corporate offices are located in Charlotte, North Carolina. We have manufacturing operations in Charlotte, North Carolina; Burlington, Iowa; Columbus, Georgia; Hyannis, Massachusetts; Corsicana, Texas; Perry, Florida; Ashland, Ohio; Cambridge, Ontario and Guelph, Ontario.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Lance, Inc. and subsidiaries. All intercompany transactions and balances have been eliminated.
Reclassifications
Certain prior year amounts shown in the consolidated financial statements have been reclassified for consistent presentation. These reclassifications had no impact on net income, financial position or cash flows.
Revenue Recognition
Revenue for products sold through our direct-store-delivery (DSD) system is recognized when the product is delivered to the retailer. Our sales representative creates the invoice at time of delivery using a handheld computer. The invoice is transmitted electronically each day and sales revenue is recognized.
Revenue for products shipped directly to the customer from our warehouse is recognized based on the shipping terms listed on the shipping documentation. Products shipped with terms FOB-shipping point are recognized as revenue at the time the shipment leaves our warehouses. Products shipped with terms FOB-destination are recognized as revenue based on the anticipated receipt date by the customer.
We allow certain customers to return products under agreed upon circumstances. We record a returns allowance for damaged products and other products not sold by the expiration date on the product label. This allowance is estimated based on a percentage of sales returns using historical and current market information.
We record certain reductions to revenue for promotional allowances. There are several different types of promotional allowances such as off-invoice allowances, rebates and shelf space allowances. An off-invoice allowance is a reduction of the sales price that is directly deducted from the invoice amount. We record the amount of the deduction as a reduction to revenue when the transaction occurs. Rebates are offered to customers based on the quantity of product purchased over a period of time. Based on the nature of these allowances, the exact amount of the rebate is not known at the time the product is sold to the customer. An estimate of the expected rebate amount is recorded as a reduction to revenue and an accrued liability at the time the sale is recorded. The accrued liability is monitored throughout the time period covered by the promotion. The accrual is based on historical information and the progress of the customer against the target amount. Shelf space allowances are capitalized and amortized over the lesser of the life of the agreement or three years and recorded as a reduction to revenue. Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.
We also record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue. The accrued liability is monitored throughout the time period covered by the coupon or promotion.
Fiscal Year
Our fiscal year ends on the last Saturday of December. While most of our fiscal years are 52 weeks, some may be 53 weeks. The fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007, were 52 weeks.
Use of Estimates
Preparing the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include customer returns and promotions, allowances for doubtful accounts, inventories, useful lives of fixed assets, hedge transactions, supplemental retirement benefits, intangible assets, incentive compensation, income taxes, insurance, postretirement benefits, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.
Allowance for Doubtful Accounts
Amounts for bad debt expense are recorded in selling, general and administrative expenses on the Consolidated Statements of Income. The determination of the allowance for doubtful accounts is based on management’s estimate of uncollectible accounts receivable. We record a general reserve based on analysis of historical data and aging of accounts receivable. In addition, management records specific reserves for receivable balances that are considered at higher risk due to known facts regarding the customer. The assumptions for this determination are reviewed quarterly to ensure that business conditions or other circumstances are consistent with the assumptions.
Fair Value
We have classified assets and liabilities required to be measured at fair value into the fair value hierarchy as set forth below:
Level
- quoted prices in active markets for identical assets and liabilities.
Level
- observable inputs other than quoted prices for identical assets and liabilities
Level
- unobservable inputs in which there is little or no market data available, which requires us to develop our own assumptions.
We measure our derivative instruments at fair value using Level 2 inputs.
The carrying amount of cash and cash equivalents, receivables and accounts payable approximates fair value due to their short-term nature. The carrying amount of debt approximates fair value since its variable interest rate is based on current market rates and interest payments are made monthly.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Inventories
The principal raw materials used in the manufacturing of our snack food products are flour, vegetable oil, sugar, potatoes, peanuts, other nuts, cheese, cocoa and seasonings. The principal supplies used are flexible film, cartons, trays, boxes and bags. Inventories are valued at the lower of cost or market. Cost was determined using the last-in, first-out method (LIFO) for approximately 36% and 44% of inventories as of December 26, 2009, and December 27, 2008, respectively. The first-in, first-out method (FIFO) is used for all other inventories.
We may enter into various forward purchase agreements and derivative financial instruments to reduce the impact of volatility in raw material ingredient prices. As of December 26, 2009, and December 27, 2008, we had no outstanding commodity futures contracts or other derivative contracts related to raw materials.
Fixed Assets
Depreciation of fixed assets is computed using the straight-line method over the estimated useful lives of long-term depreciable assets. Estimated lives are based on historical experience, maintenance practices, technological changes and future business plans. The following table summarizes the majority of our estimated useful lives of long-term depreciable assets:
Useful Life
Buildings and building improvements
10-45 years
Land improvements
10-15 years
Machinery, equipment and computer systems
3-20 years
Furniture and fixtures
3-12 years
Trucks, trailers and automobiles
3-10 years
Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets held for sale are reported at the lower of the carrying amount or fair value less cost to sell.
Goodwill and Other Intangible Assets
We are required to evaluate and determine our reporting units for purposes of performing the annual impairment analysis of goodwill. The annual impairment analysis of goodwill and other indefinite-lived intangible assets also requires us to project future financial performance, including revenue and profit growth, fixed asset and working capital investments, income tax rates and cost of capital. These projections rely upon historical performance, anticipated market conditions and forward-looking business plans.
Amortizable intangible assets are amortized using the straight-line method over their useful lives, which is the estimated period over which economic benefits are expected to be provided.
Income Taxes
Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. Significant judgment is required in evaluating tax positions that affect the annual tax rate. Unrecognized tax benefits for uncertain tax positions are established when, despite the fact that the tax return positions are supportable, we believe these positions may be challenged and the results are uncertain. We adjust these liabilities in light of changing facts and circumstances, such as the progress of a tax audit.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Deferred U.S. income taxes are not provided on undistributed earnings of our foreign subsidiary since we have no plans to repatriate the earnings. We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage.
Employee and Non-Employee Stock-Based Compensation Arrangements
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 during the years ended December 26, 2009, December 27, 2008 and December 29, 2007:
The expected dividend yield is based on the projected annual dividend payment per share divided by the stock price at the date of grant. The risk free interest rate is based on rates of U.S. Treasury issues with a remaining life equal to the expected life of the option.
The expected life of the option is calculated using the simplified method by using the vesting term of the option and the option expiration date. The expected volatility is based on the historical volatility of our common stock over the expected life.
Compensation expense is recognized over the vesting period based on the closing stock price on the grant date of the restricted stock and the restricted stock units. As compensation expense is recognized, additional paid-in capital is increased in stockholders’ equity. Restricted stock and restricted stock units receive or accrue the same dividend as common shares outstanding.
We plan to repurchase shares of common stock from employees to cover withholding taxes payable upon the vesting of shares of restricted stock. We estimate that approximate 60,000 shares of common stock will be purchased from employees for this purpose in 2010.
Self-Insurance Reserves
We maintain reserves for the self-funded portions of employee medical insurance benefits. The employer’s portion of employee medical claims is limited by stop-loss insurance coverage each year to $0.3 million per person. At December 26, 2009 and December 27, 2008, the accruals for our portion of medical insurance benefits were $2.9 million and $2.5 million, respectively.
For casualty insurance obligations, we maintain self-insurance reserves for workers’ compensation and auto liability for individual losses up to the $0.5 million insurance deductible. In addition, general and product liability claims are self-funded for individual losses up to the $0.1 million insurance deductible. Claims in excess of the deductible are fully insured up to $100 million per individual claim. We evaluate input from a third-party actuary in the estimation of the casualty insurance obligation on an annual basis. In determining the ultimate loss and reserve requirements, we use various actuarial assumptions including compensation trends, healthcare cost trends and discount rates. We also use historical information for claims frequency and severity in order to establish loss development factors. The estimate of discounted loss reserves ranged from $11.6 million to $14.4 million in 2009. In 2008, the estimate of discounted loss reserves ranged from $11.7 million to $14.9 million. Consistent with prior periods, the 75th percentile of this range represents our best estimate of the ultimate outstanding casualty liability. We lowered the discount rate from 4.5% in 2008 to 3.5% in 2009 based on projected investment returns over the estimated future payout period, which increased the estimated claims liability by approximately $0.2 million.
Derivative Financial Instruments
We are exposed to certain market, commodity and interest rate risks as part of our ongoing business operations and may use derivative financial instruments, where appropriate, to manage these risks. We do not use derivatives for trading purposes.
Earnings Per Share
Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period.
Diluted earnings per share are calculated by including all dilutive common shares such as stock options and restricted stock. Dilutive potential shares were 819,000 in 2009, 601,000 in 2008, and 412,000 in 2007. Anti-dilutive shares are excluded from the dilutive earnings calculation. There were 25,000 anti-dilutive shares in 2009, 233,000 in 2008, and 15,000 in 2007. No adjustment to reported net income is required when computing diluted earnings per share.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs included in selling, general and administrative expenses on the Consolidated Statements of Income were $7.5 million, $0.9 million and $3.8 million during 2009, 2008 and 2007, respectively.
Shipping and Handling Costs
We do not bill customers separately for shipping and handling of product. These costs are included as part of selling, general and administrative expenses on the Consolidated Statements of Income. For the years ended December 26, 2009, December 27, 2008 and December 29, 2007, shipping and handling costs were $68.8 million, $67.0 million and $62.5 million, respectively.
Foreign Currency Translation
All assets and liabilities of our Canadian subsidiary are translated into U.S. dollars using current exchange rates and income statement items are translated using the average exchange rates during the period. The translation adjustment is included as a component of stockholders’ equity. Gains and losses on foreign currency transactions are included in earnings.
Vacation Policy Change
During 2008, we modified our vacation policy to be more competitive and ensure consistency at all facilities. This policy change generally allows employees to earn more vacation with fewer years of service. Since our policy allows employees with more than 1 year of service to vest in all of their vacation as of the beginning of the year, we recorded a pre-tax charge of $1.2 million when this modification was made during the fourth quarter of 2008.
New Accounting Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) announced the FASB Accounting Standards Codification (the “Codification”), the online research system representing the single source of authoritative non-governmental U.S. GAAP, was available to use. All previous levels of the U.S. GAAP hierarchy are superseded and all other accounting literature not included in the Codification is non-authoritative. This Codification was effective for Lance beginning in the third quarter of 2009. The adoption did not affect our financial statements; however, it did impact how the authoritative references are disclosed by referencing the applicable Codification section.
In May 2009, the FASB issued authoritative guidance included in ASC Subtopic 855 “Subsequent Events,” which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. Specifically, this guidance provides (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This guidance is effective for interim or annual financial periods ending after June 15, 2009, and is to be applied prospectively. We adopted this guidance in the second quarter of 2009. The adoption of this guidance did not have a material effect on our consolidated financial position, results of operations or cash flows. Subsequent events have been evaluated for recognition and disclosure through the date these financial statements were filed with the SEC.
In December 2007, the FASB issued authoritative guidance included in ASC Subtopic 805 “Business Combinations,” which requires us to record fair value estimates of contingent consideration and certain other potential liabilities during the original purchase price allocation, expense acquisition costs as incurred and does not permit certain restructuring activities to be recorded as a component of purchase accounting.
In April 2009, the FASB issued additional guidance that requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value, only if fair value can be reasonably estimated and eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008. We adopted this guidance at the beginning of 2009 for all prospective business acquisitions. The effect of expensing acquisition costs as incurred in 2009 was to reduce net income by $0.3 million.
In March 2008, the FASB issued authoritative guidance included in ASC Subtopic 815 “Derivatives and Hedging,” which requires enhanced disclosures to enable investors to better understand how and why derivatives are used and their effects on an entity’s financial position, financial performance and cash flows. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted this guidance at the beginning of 2009. The adoption of this guidance did not have any effect on our consolidated financial position, results of operations or cash flows. See Note 8 for required disclosures related to this guidance.
In December 2007, the FASB issued authoritative guidance included in ASC Subtopic 810 “Consolidation,” which requires noncontrolling interests in subsidiaries to be included in the equity section of the balance sheet. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. We adopted this guidance at the beginning of 2009. This Statement did not have any impact on our financial condition, results of operations or cash flows because all of our consolidated subsidiaries are wholly-owned.
NOTE 2. DISCONTINUED OPERATIONS
During 2006, we analyzed the different areas of our business and determined that our vending operations were becoming increasingly less competitive in the marketplace. Near the end of 2006, we committed to a plan to discontinue our vending operations and sell all remaining vending machines and related assets. A plan was designed to identify potential buyers and dispose of substantially all of the vending assets by the end of the third quarter of 2007.
Revenue and pre-tax income related to the discontinued vending operations is as follows:
NOTE 3. ACQUISITIONS & INVESTMENTS
On October 13, 2009, we completed the purchase of the Stella D’oro® brand and certain manufacturing equipment and inventory from Stella D’oro Biscuit Co., Inc. Stella D’oro® is a leading brand in the specialty cookie market. Stella D’oro® products include shelf stable cookies, breakfast treats, breadsticks and biscotti that are sold in grocery stores and mass merchants throughout the United States, with a high concentration in the Northeast and Southeast regions of the country. The Stella D’oro® brand enhances our portfolio of niche snack food offerings to our customers. We manufacture the majority of the products in our Ashland, Ohio facility. We paid approximately $23.9 million to acquire and install the Stella D’oro assets, which was predominantly funded from borrowings from our existing Credit Agreement.
Although we are continuing to evaluate the purchase price allocation, the initial purchase price allocation resulted in goodwill of approximately $5.7 million and identified other intangible assets of $11.8 million. Of the $11.8 million of other identified intangible assets, $9.8 million was assigned to trademarks that are not subject to amortization and $2.0 million was assigned to customer relationships with a useful life of 15 years. The post-acquisition results of operations related to these assets are included in the 2009 Consolidated Statement of Income.
On December 8, 2008, we acquired substantially all of the assets of Archway Cookies, LLC. Archway is a premium soft cookie brand and complements our existing product portfolio. The acquired bakery in Ashland, Ohio, also provides increased capacity to support volume growth in the production of our existing private brands portfolio of products. We paid approximately $31.0 million, including direct acquisition costs, to acquire the Archway assets, which were predominately funded from borrowings under our existing Credit Agreement. The post-acquisition results of operations related to these assets are included in the 2008 and 2009 Consolidated Statements of Income.
On March 14, 2008, we acquired 100% of the outstanding common stock of Brent & Sam’s, Inc. Brent & Sam’s is a producer of private brand premium gourmet cookies with operations in Little Rock, Arkansas. In 2009, we moved the Brent & Sam’s operations to Charlotte, North Carolina. This acquisition enhances our product portfolio and extends our product offering into the premium private brand category. We paid approximately $23.9 million to acquire Brent & Sam’s, net of cash acquired of $0.2 million, mostly funded from borrowings under our existing Credit Agreement. Since the acquisition date, we have repaid all of the $2.2 million assumed debt. The post-acquisition results of operations of Brent & Sam’s are included in the 2008 and 2009 Consolidated Statements of Income.
We purchased a non-controlling equity interest in an organic snack food company, Late July Snacks LLC, for $2.1 million in 2007. During 2008, we invested an additional $0.2 million into Late July. This investment has been reflected in other assets on the Consolidated Balance Sheets. During 2009, 2008 and 2007, the equity method losses were less than $0.1 million, $0.2 million and $0.1 million, respectively, and have been recorded in other expense on the Consolidated Statements of Income. We also manufacture products for Late July. As of December 26, 2009, and December 27, 2008, accounts receivable due from Late July totaled $0.5 million and $0.4 million, respectively.
NOTE 4. INVENTORIES
Inventories at December 26, 2009 and December 27, 2008 consisted of the following:
The increase in inventory during 2009 was primarily due to new product offerings and business acquisitions.
NOTE 5. FIXED ASSETS
Fixed assets at December 26, 2009 and December 27, 2008 consisted of the following:
The increase in fixed assets during 2009 was primarily due to purchases of fixed assets for existing facilities and $4.9 million from business acquisitions.
Depreciation expense related to fixed assets was $34.6 million during 2009, $32.0 million during 2008, and $29.3 million during 2007.
During 2009 and 2008, we capitalized $0.2 million and $0.3 million, respectively, of interest expense into fixed assets as part of our ERP system implementation.
At December 26, 2009, assets held for sale consisted of land and buildings related to certain properties in Little Rock, Arkansas and Columbus, Georgia. During 2009, we closed our Brent & Sam’s Little Rock, Arkansas facility and relocated our manufacturing equipment and production to Charlotte, North Carolina.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the fiscal year ended December 26, 2009, are as follows:
The purchase price adjustments in 2009 related to the acquisition of Archway Cookies, LLC in December 2008.
As of December 26, 2009 and December 27, 2008, acquired intangible assets consisted of the following:
During 2009, we added approximately $11.8 million of intangible assets from business acquisitions.
Intangibles subject to amortization are being amortized over a weighted average useful life of 13.7 years. The intangible assets related to customer relationships are being amortized over a weighted average useful life of 14.6 years and will be amortized through October 2024. The intangible asset related to the non-compete agreement is being amortized over 2 years. Amortization expense related to intangibles was $0.6 million and $0.3 million for the years ended December 26, 2009 and December 27, 2008, respectively. For the year ended December 29, 2007, intangible amortization expense was less than $0.1 million. We estimate that annual amortization expense for intangible assets over the next five years is as follows: $0.7 million in 2010, and $0.5 million in each of the years 2011 through 2014.
The trademarks are deemed to have an indefinite useful life because they are expected to generate cash flows indefinitely. Therefore, effective for years after 2001, these trademarks have not been amortized.
NOTE 7. LONG-TERM DEBT
In October 2006, we entered into an unsecured revolving Credit Agreement, which allows us to make revolving credit borrowings of up to US$100.0 million and CDN$15.0 million through October 2011.
At December 26, 2009 and December 27, 2008, we had the following debt outstanding:
During 2009, the proceeds from the increase in debt were primarily used to fund acquisitions.
The applicable margin is determined by certain financial ratios. The Credit Agreement also requires us to pay a facility fee on the entire US$100.0 million and CDN$15.0 million revolvers ranging from 0.07% to 0.13% based on certain financial ratios. Including the effect of interest rate swap agreements, the weighted average interest rate for 2009 and 2008 was 3.1% and 3.6%, respectively. See Note 8, Derivatives, for further information on our interest rate swap agreements.
The carrying value of all long-term debt approximates fair value since its variable interest rate is based on current market rates and interest payments are made monthly. At December 26, 2009 and December 27, 2008, we had available $35.6 million and $46.5 million, respectively, of unused credit facilities. Under certain circumstances and subject to certain conditions, we have the option to increase available credit under the Credit Agreement by up to $50.0 million during the life of the facility.
The Credit Agreement requires us to comply with certain defined covenants, such as a maximum debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 3.0 and a minimum interest coverage ratio of 2.5. At December 26, 2009, our debt to EBITDA ratio was 1.2, and our interest coverage ratio was 16.5. In addition, our revolving credit agreement restricts payment of cash dividends and repurchases of our common stock if, after payment of any such dividends or any such repurchases of our common stock, our consolidated stockholders’ equity would be less than $125.0 million. At December 26, 2009, our consolidated stockholders’ equity was $274.7 million. We were in compliance with these covenants at December 26, 2009. Total interest expense under the Credit Agreement for 2009, 2008 and 2007 was $3.4 million, $3.2 million and $2.9 million, respectively. During 2009 and 2008, we capitalized $0.2 million and $0.3 million, respectively, of interest expense into fixed assets as part of our ERP system implementation.
NOTE 8. DERIVATIVE INSTRUMENTS
We are exposed to certain risks relating to our ongoing business operations. We use derivative instruments to manage interest rate and foreign exchange rate risks.
Interest Rate Swaps
Our variable-rate 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 on $35 million of debt in order to fix the interest rate at 4.99%, plus applicable margin. The applicable margin on December 26, 2009, was 0.40%. The fair value of the interest rate swap liability was $2.5 million and $3.3 million at December 26, 2009 and December 27, 2008, respectively.
In July 2008, we entered into an interest rate swap agreement on an additional $15 million of debt in order to fix the interest rate at 3.87%, plus applicable margin. The applicable margin on December 26, 2009, was 0.40%. The fair value of the interest rate swap liability was $0.8 million and $1.0 million at December 26, 2009 and December 27, 2008, respectively.
In February 2009, we entered into an interest rate swap agreement on an additional $15 million of debt in order to fix the interest rate at 1.68%, plus applicable margin. The applicable margin on December 26, 2009, was 0.32%. The fair value of the interest rate swap liability was $0.2 million at December 26, 2009.
While these swaps fixed a portion of the interest rate at a predictable level, pre-tax interest expense would have been $2.3 million lower without these swaps during 2009. These swaps are accounted for as cash flow hedges.
Foreign Currency Forwards
Through the operations of our Canadian subsidiary, there is an exposure to foreign exchange rate fluctuations between U.S. dollars and Canadian dollars. The majority of revenue from 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 currency contracts to mitigate a portion of this foreign exchange rate exposure. These contracts have maturities through June 2010. The fair value of the forward contracts is determined by a third-party financial institution.
All of our derivative instruments are accounted for as cash flow hedges. The effective portion of the change in fair value is included in accumulated other comprehensive income/(loss), net of related tax effects, with the corresponding asset or liability recorded in the Consolidated Balance Sheets.
The pre-tax income/(expense) effect of derivative instruments on the Consolidated Statements of Income is as follows:
The fair value of the derivative instrument asset/(liability) in the Consolidated Balance Sheets using Level 2 inputs is as follows:
The change in unrealized pre-tax gains/(losses) included in other comprehensive income due to fluctuations in interest rates and foreign exchange rates were as follows:
The counterparty risk associated with our derivative instruments in an asset position is considered to be low, because we limit our exposure to strong, creditworthy counterparties.
NOTE 9. INCOME TAXES
Income tax expense consists of the following:
A reconciliation of the federal income tax rate to our effective income tax rate for the years ended December 26, 2009, December 27, 2008, and December 29, 2007 follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 26, 2009 and December 27, 2008, are presented below:
In 2009 and 2008, the valuation allowance on deferred tax assets related to a state net operating loss carryforward, which management did not believe would be fully utilized due to the limited nature of our activities in that state.
Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates, and tax planning opportunities available in the various jurisdictions in which we operate. Significant judgment is required in evaluating tax positions that affect the annual tax rate.
Pre-tax income in our Canadian operation amounted to $1.9 million in 2009, and pre-tax losses amounted to $2.1 million and $2.0 million in 2008 and 2007, respectively.
We adjust unrecognized tax liabilities in light of changing facts and circumstances, such as the progress of a tax audit. As of December 26, 2009, we have recorded gross unrecognized tax benefits totaling $0.9 million and related interest and penalties of $0.3 million in other long-term liabilities on the Consolidated Balance Sheets. Of this total amount, $0.9 million would affect the effective tax rate if subsequently recognized. We expect that certain income tax audits will be settled and various tax authorities’ statutes of limitations will expire during the next twelve months resulting in a potential $0.8 million reduction of the unrecognized tax benefit amount. We classify interest and penalties associated with income tax positions within income tax expense. During both 2009 and 2008, $0.1 million of interest and penalties related to unrecognized tax benefits was recorded in income tax expense.
We have open years for income tax audit purposes in our major taxing jurisdictions according to statutes as follows:
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows:
NOTE 10. POSTRETIREMENT BENEFITS PLANS
We have a defined contribution retirement plan (known as the Lance, Inc. Profit-Sharing “PSR” and 401(k) Retirement Saving Plan) that covers substantially all of our employees. The PSR portion of the plan provides contributions equal to 3.25% of qualified wages if an employee has less than ten years of service, and 3.5% of qualified wages if over ten years of service. The 401(k) portion of the plan provides a 50% match of the first 5% of employee contributions not to exceed 2.5% of the employee’s qualified wages. Total expenses for these employee retirement plans were $8.7 million, $8.0 million and $7.6 million, in 2009, 2008 and 2007, respectively.
Additionally, we provide supplemental retirement benefits to certain retired and active key officers. The discounted liability recorded in other noncurrent liabilities on the Consolidated Balance Sheets was $1.1 million and $1.0 million at December 26, 2009 and December 27, 2008, respectively.
In 2001, we began the phase out of our unfunded postretirement healthcare plan. This plan currently provides postretirement medical benefits for certain retirees who were age 55 or older on June 30, 2001 and their spouses for medical coverage between the ages of 60 and 65. Retirees pay contributions toward medical coverage based on the medical plan and coverage they select. The postretirement healthcare plan will be phased-out completely in 2011. As of December 26, 2009, there were seven participants in the postretirement healthcare plan. The total liability recorded at December 26, 2009 was not significant.
NOTE 11. EQUITY-BASED INCENTIVE COMPENSATION
Total equity-based incentive expense recorded in the Consolidated Statements of Income was $7.5 million, $6.0 million, and $3.3 million for the years ended December 26, 2009, December 27, 2008, and December 29, 2007, respectively.
Key Employee Incentive Plans
As of December 26, 2009, there were approximately 0.1 million of restricted shares and 0.6 million of other securities available for future issuance under the 2007 Key Employee Incentive Plan (the “Plan”). This Plan provided for a maximum of 1.8 million new securities to be issued to key employees as defined in the Plan. The Plan authorizes the grant of incentive stock options, non-qualified stock options, stock appreciation rights (SARs), restricted stock and performance shares, and expires in April 2013. The plan also authorizes other awards denominated in monetary units or shares of common stock payable in cash or shares of common stock. At December 26, 2009, there were no SARs outstanding. In April 2008, the 2003 Key Employee Stock Plan (the 2003 Plan) expired and there were no further securities awarded from this plan.
Long-term Incentive Plans
Long-term performance-based incentive plans are accounted for as liability share-based payment plans. Once certain performance-based measures are attained, the related liabilities are converted into equity instruments. As of December 26, 2009, and December 27, 2008, liabilities for long-term incentive plans were $0.9 million and $1.5 million, respectively.
Employee Stock Options
As of December 26, 2009, there was $1.5 million of total unrecognized compensation expense related to outstanding stock options. This cost is expected to be recognized consistent with vesting on a straight-line basis over a weighted average period of two years. Cash received from option exercises during 2009, 2008 and 2007 was $3.6 million, $2.1 million and $3.7 million, respectively. The benefit realized for the tax deductions from option exercises was $0.6 million, $0.4 million and $1.0 million, respectively, during 2009, 2008 and 2007. The total intrinsic value of stock options exercised during 2009, 2008 and 2007 was $2.1 million, $1.0 million and $2.7 million, respectively.
Stock options become exercisable in periods ranging up to five years after the grant date. The option price, which equals the fair market value of our common stock at the date of grant, ranges from $7.65 to $25.27 per share for the outstanding options as of December 26, 2009. The weighted average exercise price of exercisable options was $16.85 as of December 26, 2009.
Employee Restricted Stock and Restricted Stock Unit Awards
As of December 26, 2009, there was $4.4 million of total unrecognized compensation expense related to outstanding restricted stock awards. This cost is expected to be recognized consistent with vesting on a straight-line basis over a weighted average period of 1.4 years.
During 2005, we awarded 300,000 restricted stock units, half of which would be settled in common stock shares under the 2003 Key Employee Stock Plan and half of which would be settled in cash. During 2006, the Compensation Committee of the Board of Directors approved an amendment that re-designated the 150,000 units that were to be settled in cash to units settled in stock under the 1997 Incentive Equity Plan for our Chief Executive Officer. These restricted units are classified as equity. Compensation costs associated with the restricted stock units that are settled in common stock shares are amortized over the vesting period through May 2010.
During 2006, the Compensation Committee of the Board of Directors approved the 2006 Five-Year Performance Equity Plan for Officers and Senior Managers, which included performance equity units to be paid in common stock to key employees in 2011. All shares to be issued under the Five-Year Performance Equity Plan were awarded under the 2003 Plan. The number of awards ultimately issued under this plan is contingent upon our relative stock price compared to the Russell 2000 Index and can range from zero to 100% of the awards granted. The fair value of the award was calculated using the Monte Carlo valuation method. This method estimates the probability of the potential payouts using the historical volatility of our common stock compared to the Russell 2000 Index. Included in our assumptions was a risk-free interest rate of 4.53%, expected volatility of 35.08%, and an expected dividend rate of 2.8%. Based on these assumptions, a discount rate of 33.4% was applied to the market value on the grant date. Compensation costs associated with the restricted stock units are amortized over the vesting period through the end of 2010.
The deferred portion of these restricted shares is included in the Consolidated Balance Sheets as additional paid-in capital. The weighted average grant date fair value for awards granted during 2008 and 2007 was $16.70 and $17.78, respectively.
During 2009, we granted 73,356 restricted shares related to a long-term incentive plan for key employees that were previously accounted for as a liability. This resulted in an increase in equity and a decrease in accrued liabilities of $1.6 million. During 2008, we granted approximately 175,000 nonqualified stock options, 19,500 restricted shares and 19,750 shares of common stock related to a long-term incentive plan for key employees that were previously accounted for as a liability. This resulted in an increase in equity and a decrease in accrued liabilities of $0.9 million.
Non-Employee Director Stock Option Plan
In 1995, we adopted a Nonqualified Stock Option Plan for Non-Employee Director (Director Plan). The Director Plan requires among other things that the options are not exercisable unless the optionee remains available to serve as a director until the first anniversary of the date of grant, except that the initial option shall be exercisable after six months. The options under this plan vest on the first anniversary of the date of grant. Options granted under the Director Plan expire ten years from the date of grant. After December 28, 2002, there were no awards made under this plan. The option price, which equals the fair market value of our common stock at the date of grant, ranges from $10.50 to $15.88 per share. There were 44,000 options outstanding at December 26, 2009. At December 26, 2009, the weighted average remaining contractual term was 1.3 years, and the aggregate intrinsic value was $0.6 million.
Non-Employee Director Restricted Stock Awards
In 2008, we adopted the Lance, Inc. 2008 Director Stock Plan (“2008 Director Plan”). With the adoption of the 2008 Director Plan, no further awards will be made under the 2003 Director Plan that expired in April 2008.
The 2008 Director Plan is intended to attract and retain persons of exceptional ability to serve as Directors and to further align the interests of Directors and stockholders in enhancing the value of our common stock and to encourage such Directors to remain with and to devote their best efforts to the company. The Board of Directors reserved 200,000 shares of common stock for issuance under the 2008 Director Plan. This number is subject to adjustment in the event of stock dividends and splits, recapitalizations and similar transactions. The 2008 Director Plan is administered by the Board of Directors and expires in April 2013. As of December 26, 2009, there were 160,000 shares available for future issuance under the 2008 Director Plan.
In 2009, we awarded 24,000 shares of common stock to our directors, subject to certain vesting restrictions. During 2008 and 2007, we awarded 16,000 and 9,000 shares of common stock to our directors with a grant date fair value of $20.36 and $23.23, respectively. At December 26, 2009, there were 24,000 unvested restricted shares outstanding under the 2008 Director Plan with a remaining contractual term of four months and a grant date fair value of $20.97. In addition, there were 25,000 unvested restricted shares outstanding under the 2003 Director Plan with a weighted average grant date fair value of $18.57. Compensation costs associated with these restricted shares are amortized over the vesting or service period, at which time the earned portion is charged against current earnings. The deferred portion of these restricted shares is included in the Consolidated Balance Sheets as additional paid-in capital.
Employee Stock Purchase Plan
We have an employee stock purchase plan under which shares of common stock are purchased on the open market with employee and company contributions. The plan provides for us to contribute an amount equal to 10% of the employees’ contributions, and up to 25% for certain employees who are not executive officers. We contributed less than $0.1 million to the employee stock purchase plan during each of 2009, 2008 and 2007.
NOTE 12. OTHER COMMITMENTS AND CONTINGENCIES
We have entered into contractual agreements providing severance benefits to certain key employees in the event of a change in control. Commitments not previously accrued for under these agreements totaled $28.4 million at December 26, 2009.
We have entered into contractual agreements providing severance benefits to certain key employees in the event of termination without cause. Commitments under these agreements not previously accrued for were $9.6 million as of December 26, 2009. The maximum aggregate unrecognized commitment for both the change in control and severance agreements as of December 26, 2009 was $31.1 million.
We lease certain facilities and equipment under contracts classified as operating leases. Total rental expense was $7.0 million in 2009, $5.3 million in 2008 and $6.2 million in 2007. In the third quarter of 2009, we entered into a 10-year operating lease agreement for a corporate office located in Charlotte, North Carolina, which allowed for the consolidation of two leased administrative office locations.
Future minimum lease commitments for operating leases at December 26, 2009 were as follows:
We also maintain standby letters of credit in connection with our self-insurance reserves for casualty claims. These letters of credit amounted to $15.7 million as of December 26, 2009.
We entered into agreements with suppliers for certain ingredients, packaging materials and energy used in the production process. These agreements are entered into in the normal course of business and consist of agreements to purchase a certain quantity over a certain period of time. As of December 26, 2009, outstanding purchase commitments totaled $88.2 million. These commitments range in length from a few weeks to twelve months.
In addition, we are subject to routine litigation and claims incidental to our business. In our opinion, such routine litigation and claims should not have a material adverse effect upon our consolidated financial statements taken as a whole.
NOTE 13. OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income/(loss) presented in the Consolidated Balance Sheets consists of:
Income taxes on the foreign currency translation adjustment in other comprehensive income are not recognized because the earnings are intended to be indefinitely reinvested in those operations.
NOTE 14. GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Geographic Information
Substantially all of our sales are to U.S customers. Revenues are attributable to the United States and Canada based on the country in which the product is produced. Revenues by country are as follows:
Long-lived assets, comprised of fixed assets, goodwill, other intangible assets and other noncurrent assets, located in the United States and Canada as of December 26, 2009 and December 27, 2008, are as follows:
Significant Customers
Sales to our largest customer, Wal-Mart Stores, Inc., were approximately 22% of revenues in 2009, and 20% in both 2008 and 2007. Accounts receivable at December 26, 2009, and December 27, 2008, included receivables from Wal-Mart Stores, Inc. totaling $22.6 million and $18.0 million, respectively.
NOTE 15. INTERIM FINANCIAL INFORMATION (UNAUDITED)
A summary of interim financial information follows (in thousands, except per share data):
SCHEDULE II - VALUATION & QUALIFYING ACCOUNTS
For Fiscal Years ended December 26, 2009, December 27, 2008, and December 29,
(in thousands)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lance, Inc.:
We have audited the accompanying consolidated balance sheets of Lance, Inc. and subsidiaries (the Company) as of December 26, 2009 and December 27, 2008, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 26, 2009. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement schedule “Valuation and Qualifying Accounts.” Additionally, we have audited the Company’s internal control over financial reporting as of December 26, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 26, 2009 and December 27, 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 26, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Additionally, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 26, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in the Summary of Significant Accounting Policies, the Company has changed its method of accounting for business combinations and noncontrolling interests effective December 28, 2008, due to the adoption of Accounting Standards Codification Subtopics 805 and 810-10.
/s/ KPMG LLP
Charlotte, North Carolina
February 22, 2010
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed 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. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements or instances of fraud. As such, a control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of internal control over financial reporting as of December 26, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment and those criteria, management believes that we maintained effective internal control over financial reporting as of December 26, 2009.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Disclosure 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 management, including the 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-15b of the Securities and Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, the 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 the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Our management assessed the effectiveness of our internal control over financial reporting as of December 26, 2009. See page 53 for “Management’s Report on Internal Control over Financial Reporting.” Our independent registered public accounting firm has issued an attestation report on our internal control over financial reporting. The report of the independent registered public accounting firm appears on page 51.
There have been no changes in our internal control over financial reporting during the quarter ended December 26, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
Not applicable.
PART III
Items through 14 are incorporated by reference to the sections captioned Principal Stockholders and Holdings of Management, Election of Directors, The Board of Directors and its Committees, Compensation Committee Interlocks and Insider Participation, Compensation Committee Report, Equity Compensation Plans, Director Compensation, Section 16(a) Beneficial Ownership Reporting Compliance, Executive Officer Compensation and Ratification of Selection of Independent Public Accountants in our Proxy Statement for the Annual Meeting of Stockholders to be held on May 4, 2010 and Item X in Part I of this Annual Report captioned Executive Officers of the Registrant.
Code of Ethics
We have adopted a Code of Conduct and Ethics that covers our officers and employees. In addition, we have adopted a Code of Ethics for Directors and Senior Financial Officers which covers the members of the Board of Directors and Senior Financial Officers, including the Chief Executive Officer, Chief Financial Officer, Corporate Controller and Principal Accounting Officer. These Codes are posted on our website at www.lanceinc.com.
We will disclose any substantive amendments to, or waivers from, our Code of Ethics for Directors and Senior Financial Officers on our website or in a report on Form 8-K.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
The following financial statements are filed as part of this report:
Page
Consolidated Statements of Income for the Fiscal Years Ended December 26, 2009, December 27, 2008, and December 29,
Consolidated Balance Sheets as of December 26, 2009 and December 27, 2008
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Fiscal Years Ended December 26, 2009, December 27, 2008, and December 29, 2007
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 26, 2009, December 27, 2008, and December 29, 2007
Notes to Consolidated Financial Statements
(a) 2. Financial Schedules.
Schedules have been omitted because of the absence of conditions under which they are required or because information required is included in financial statements or the notes thereto.
(a) 3. Exhibit Index.
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 Bylaws of Lance, Inc., as amended through November 1, 2007, incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on November 7, 2007 (File No. 0-398).
4.1 See 3.1 and 3.2 above.
10.1 Lance, Inc. 1995 Nonqualified Stock Option Plan for Non-Employee Directors, as amended, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 25, 2005 (File No. 0-398).
10.2 Lance, Inc. 1997 Incentive Equity Plan, as amended, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007 (File No. 0-398).
10.3 Lance, Inc. 2003 Key Employee Stock Plan, as amended, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007 (File No. 0-398).
10.4 Lance, Inc. 2003 Director Stock Plan, incorporated herein by reference to Exhibit 4 to the Registrant’s Registration Statement on Form S-8 filed on May 2, 2003 (File No. 333-104961).
10.5 Lance, Inc. 2007 Key Employee Incentive Plan, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 2, 2007 (File No. 0-398).
10.6 Lance, Inc. 2008 Director Stock Plan, incorporated herein by reference to Exhibit 4.8 to the Registrant’s Registration Statement on Form S-8 filed on May 15, 2008 (File No. 333-150931).
10.7* Lance, Inc. Compensation Deferral and Benefit Restoration Plan, as amended, incorporated herein by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (File No. 0-398).
10.8* Lance, Inc. 2006 Five-Year Performance Equity Plan for Officers and Senior Managers, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 22, 2006 (File No. 0-398).
10.9* Lance, Inc. 2007 Three-Year Performance Incentive Plan for Officers, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the thirteen weeks ended March 31, 2007 (File No. 0-398).
10.10* Lance, Inc. 2007 Stock Option Plan for Officers and Key Managers, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 14, 2007 (File No. 0-398).
10.11* Lance, Inc. 2008 Annual Performance Incentive Plan for Officers, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the thirteen weeks ended March 29, 2008 (File No. 0-398).
10.12* Lance, Inc. 2008 Three-Year Performance Incentive Plan for Officers and Key Managers, as amended, incorporated herein by reference to Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 2008 (File No. 0-398).
10.13* Lance, Inc. 2009 Annual Performance Incentive Plan for Officers, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2009 (File No. 0-398).
10.14* Lance, Inc. 2009 Three-Year Performance Incentive Plan for Officers and Key Managers, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2009 (File No. 0-398).
10.15* Lance, Inc. 2005 Employee Stock Purchase Plan, as amended and restated, incorporated herein by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 30, 2006 (File No. 0-398).
10.16* Executive Employment Agreement dated May 11, 2005 between the Registrant and David V. Singer, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 16, 2005 (File No. 0-398).
10.17* Executive Employment Agreement Amendment dated April 24, 2008 between the Registrant and David V. Singer, incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the thirteen weeks ended June 28, 2008 (File No. 0-398).
10.18* Amended and Restated Compensation and Benefits Assurance Agreement dated April 24, 2008 between the Registrant and David V. Singer, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the thirteen weeks ended June 28, 2008 (File No. 0-398).
10.19* Restricted Stock Unit Award Agreement dated May 11, 2005 between the Registrant and David V. Singer, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on May 16, 2005 (File No. 0-398).
10.20* Restricted Stock Unit Award Agreement Amendment dated April 27, 2006 between the Registrant and David V. Singer, incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on May 3, 2006 (File No. 0-398).
10.21* Restricted Stock Unit Award Agreement Amendment Number Two dated April 24, 2008 between the Registrant and David V. Singer, incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the thirteen weeks ended June 28, 2008 (File No. 0-398).
10.22* Form of Amended and Restated Compensation and Benefits Assurance Agreement between the Registrant and each of Rick D. Puckett, Glenn A. Patcha, Blake W. Thompson, and Earl D. Leake, incorporated herein by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the thirteen weeks ended June 28, 2008 (File No. 0-398).
10.23* Amended and Restated Executive Severance Agreement dated April 24, 2008 between the Registrant and Earl D. Leake, incorporated herein by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the thirteen weeks ended June 28, 2008 (File No. 0-398).
10.24* Form of Executive Severance Agreement between the Registrant and each of Glenn A. Patcha, Rick D. Puckett, Blake W. Thompson and Margaret E. Wicklund, incorporated herein by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 27, 1997 (File No. 0-398).
10.25 Credit Agreement, dated as of October 20, 2006, among the Registrant, Tamming Foods, Ltd., Bank of America, National Association, Wachovia Capital Markets, LLC and the other lenders named therein, incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 26, 2006 (File No. 0-398).
12 Computation of Ratio of Earnings to Fixed Charges, filed herewith.
21 List of the Subsidiaries of the Registrant, filed herewith.
23 Consent of KPMG LLP, filed herewith.
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.
________________________
* Management contract.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
LANCE, INC.
Dated: February 22, 2010
By:
/s/ David V. Singer
David V. Singer
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ David V. Singer
President and Chief Executive Officer (Principal Executive
February 22, 2010
David V. Singer
Officer)
/s/ Rick D. Puckett
Executive Vice President, Chief Financial Officer,
February 22, 2010
Rick D. Puckett
Treasurer and Secretary (Principal Financial Officer)
/s/ Margaret E. Wicklund
Vice President, Corporate Controller and Assistant
February 22, 2010
Margaret E. Wicklund
Secretary (Principal Accounting Officer)
/s/ W.J. Prezzano
Chairman of the Board of Directors
February 22, 2010
W. J. Prezzano
/s/ Jeffrey A. Atkins
Director
February 22, 2010
Jeffrey A. Atkins
/s/ J.P. Bolduc
Director
February 22, 2010
J.P. Bolduc
/s/ William R. Holland
Director
February 22, 2010
William R. Holland
/s/ James W. Johnston
Director
February 22, 2010
James W. Johnston
/s/ Dan C. Swander
Director
February 22, 2010
Dan C. Swander
/s/ Isaiah Tidwell
Director
February 22, 2010
Isaiah Tidwell
/s/ S. Lance Van Every
Director
February 22, 2010
S. Lance Van Every