NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Operations

We operate in one business segment: the manufacturing, distribution, marketing and sale of snack food products. These products include pretzels, sandwich crackers, kettle chips, pretzel crackers, cookies, potato chips, tortilla chips, other salty snacks, sugar wafers, nuts and restaurant style crackers. In addition, we purchase certain cakes, meat snacks and other partner brand products for resale in order to broaden our product offerings for the Independent Business Owners ("IBO") through an IBO-based Direct-Store-Delivery ("DSD") distribution network ("DSD network"). Products are packaged in various single-serve, multi-pack and family-size configurations.

Our branded products are principally sold under the Snyder’s of Hanover^®, Lance^®, Cape Cod^®, Snack Factory^® Pretzel Crisps^®, Krunchers!^®, Tom’s^®, Archway^®, Jays^®, Stella D’oro^®, EatSmart^™,O-Ke-Doke^®and Quitos^™ brands. Partner brands consist of other third-party brands that we sell through our DSD network. We sell private brand products directly to retailers and third-party distributors using certain store brands or our own control brands, such as Brent & Sam’s^®, Vista^® and Delicious^®. In addition, we contract with other branded food manufacturers to produce their products and periodically sell certain semi-finished goods to other manufacturers.

We distribute snack food products throughout the United States using a DSD network of approximately 3,000 routes, primarily operated by IBOs. During 2011, we began the process of converting the vast majority of our company-owned routes to a DSD network ("IBO conversion") in order to better position our distribution network to serve retailers. We completed this project in 2012 and most of our DSD network is now serviced by IBOs. We also ship products directly to third-party distributors in areas where our DSD network does not operate. Through our direct sales organization ("Direct"), we distribute products directly to retailers or to third-party distributors using our own transportation fleet or other freight carriers.

Through our DSD network, we sell our branded and partner brand products to IBOs that distribute to grocery/mass merchandisers, club stores, discount stores, convenience stores, food service establishments and various other retailers including drug stores, schools, military and government facilities and “up and down the street” outlets such as recreational facilities, offices and other independent retailers. In addition, we sell our branded products direct to retailers and third-party distributors. Private brand customers include grocery/mass merchandisers and discount stores. We also contract with other branded food manufacturers to produce their products or provide semi-finished goods.

Our corporate headquarters is located in Charlotte, North Carolina. We have an additional administrative office in Hanover, Pennsylvania. Our manufacturing operations are located in Charlotte, North Carolina; Hanover, Pennsylvania; Goodyear, Arizona; Burlington, Iowa; Columbus, Georgia; Jeffersonville, Indiana; Hyannis, Massachusetts; Perry, Florida; Ashland, Ohio; and Guelph, Ontario. Additionally, our newly constructed research and development center is located in Hanover, Pennsylvania.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Snyder’s-Lance, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.

Noncontrolling Interests

We own 51% of Patriot Snacks Real Estate, LLC (“Patriot”) and consolidate its balance sheet and operating results into our consolidated financial statements. The remaining 49% is owned by an employee. Noncontrolling interests are classified in equity, with the consolidated net income adjusted to include the net income attributed to the noncontrolling interest.

During 2013, we acquired the remaining 20% of Michaud Distributors (“Michaud”) and now own all of the outstanding equity. We exchanged 342,212 newly issued unregistered shares of our common stock, approximately $10.2 million in equity consideration, for the remaining 20% equity in Michaud. Prior to this acquisition, which was completed in the fourth quarter of 2013, we had an 80% ownership interest in Michaud.

During 2011, we acquired the remaining ownership interest in Melisi Snacks, Inc. for $3.5 million, increasing our total ownership to 100%. Prior to this acquisition, which was completed in the second and third quarters of 2011, we had an 80% ownership interest in Melisi Snacks, Inc.

Revenue Recognition

Our policy on revenue recognition varies based on the types of products sold and the distribution method. We recognize 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 to IBOs in our DSD network is recognized when the IBO purchases the inventory from our warehouses. Revenue for products sold to retailers through routes operated by our associates is recognized when the product is delivered to the customer.

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 retailers based on the quantity of product purchased over a period of time. Based on the nature of these allowances, the exact amount of the rebate is not known at the time the product is sold to the customer. An estimate of the expected rebate amount is recorded as a reduction to revenue at the time of the sale and a corresponding accrued liability is recorded. The accrued liability is monitored throughout the time period covered by the promotion, and is based on historical information and the progress of the customer against the target amount. We also record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue. The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion.

Shelf space allowances are capitalized and amortized over the lesser of the life of the agreement or up to a maximum of three years and recorded as a reduction to revenue. Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.

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 sales and promotional allowances, customer returns, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, goodwill and intangible asset valuations and impairments, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.

Allowance for Doubtful Accounts

The determination of the allowance for doubtful accounts is based on management’s estimate of uncollectible accounts receivable. We record a general reserve based on analysis of historical data and aging of accounts receivable. In addition, management records specific reserves for receivable balances that are considered at higher risk due to known facts regarding the customer. The assumptions for this determination are reviewed quarterly to ensure that business conditions or other circumstances are consistent with the assumptions.

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 1		Quoted prices in active markets for identical assets and liabilities.
Level 2		Observable inputs other than quoted prices for identical assets and liabilities.
Level 3		Unobservable inputs in which there is little or no market data available, which requires us to develop our own assumptions.

See Note 10 for more information on fair value.

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, peanuts, potatoes, chocolate, other nuts, cheese and seasonings. The principal supplies used are flexible film, cartons, trays, boxes and bags. Inventories are valued at the lower of cost or market using the first-in first-out (FIFO) method.

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 or asset group 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 or asset groups are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets or asset groups exceeds the fair value of the assets or asset groups. Assets held for sale are reported at the lower of the carrying amount or fair value less cost to sell.

Route Intangible Gains/Losses

We purchase and sell route businesses as a part of maintenance of our DSD network. Gains and losses on sales of routes are recorded based on the difference between the sales price of the route and carrying value plus associated goodwill. Goodwill associated with the sale of a route is determined based on the relative value of the route in comparison to the value of the entire company.

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 our weighted average 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 estimated useful lives, which is the 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, business credits available in the various jurisdictions in which we operate and permanent tax differences. Significant judgment is required in evaluating tax positions that affect the annual tax rate. 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. 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 2013, 2012 and 2011.



	2013			2012			2011
Assumptions used in Black-Scholes pricing model:
Expected dividend yield	2.50		%	2.86		%	3.68		%
Risk-free interest rate	1.12		%	1.13		%	2.69		%
Weighted average expected life	6.0 years			6.0 years			6.7 years
Expected volatility	32.59		%	30.59		%	30.34		%
Weighted average fair value per share of options granted	$	6.22		$	4.83		$	3.83

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 as we feel this is a reasonable estimate of future volatility. Compensation expense for stock options is recognized using straight-line attribution over the vesting period, which is usually three years.

Compensation expense for restricted stock is recognized over the vesting period based on the closing stock price on the grant date of the restricted stock. Restricted stock awards receive or accrue the same dividend as common shares outstanding.

Self-Insurance Reserves

We maintain reserves for the self-funded portions of employee medical insurance benefits. Our portion of employee medical claims is generally limited to $0.3 million per participant annually by stop-loss insurance coverage. Due to the significance of certain historical claims, our 2013 stop-loss insurance coverage limit was increased to $5.0 million in aggregate for a specific portion of our self-funded claims. The entire $5.0 million associated with these claims was recorded in pre-tax expenses during 2013. This specific stop-loss of $5.0 million for 2013 has decreased to $3.3 million for 2014. The accrual for incurred but not reported medical insurance claims was $4.4 million in both 2013 and 2012.

We maintain self-insurance reserves for workers’ compensation and auto liability for individual losses up to the deductibles which are currently $350,000 per individual loss and $250,000 for auto physical damage per accident. In addition, certain general and product liability claims are self-funded for individual losses up to the $100,000 insurance deductible. Claims in excess of the deductible are fully insured up to $100 million per individual claim. We evaluate input from a third-party actuary in the estimation of the casualty insurance obligation on an annual basis. In determining the ultimate loss and reserve requirements, we use various actuarial assumptions including compensation trends, healthcare cost trends and discount rates. In 2013, we used a discount rate of 2.0%, an increase from 1.5% used in 2012, based on projected investment returns over the estimated future payout period.

We also use historical information for claims frequency and severity in order to establish loss development factors. For 2013 and 2012, we had accrued liabilities related to the retained risks of $10.1 million and $12.3 million, respectively, included in the accruals for casualty insurance claims in our Consolidated Balance Sheets.

In December 2010, we assumed a liability for workers’ compensation relating to claims that had originated prior to 1992 and been insured by a third-party insurance company. Due to the uncertainty of that insurer’s ability to continue paying claims, we entered into an agreement where we assumed the full liability of insurance claims under the pre-existing workers’ compensation policies. The net liability for these claims was $1.7 million and $2.2 million for 2013 and 2012, respectively, and was included in the accruals for casualty insurance claims in our Consolidated Balance Sheets.

Derivative Financial Instruments

We are exposed to certain foreign currency exchange 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 share is computed by dividing net income attributable to Snyder’s-Lance, Inc. by the weighted average number of shares outstanding during each period.

Diluted earnings per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. Dilutive potential shares were 775,000 in 2013, 832,000 in 2012, and 1,078,000 in 2011. Anti-dilutive shares are excluded from the dilutive earnings calculation. There were no anti-dilutive shares in 2013 and 2012. In 2011, there were 20,000 anti-dilutive shares. 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 $30.4 million, $24.2 million and $20.1 million during 2013, 2012 and 2011, 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 28, 2013, December 29, 2012 and December 31, 2011, shipping and handling costs were $118.3 million, $109.2 million and $106.8 million, respectively.

Loss Contingencies

Various legal actions, claims, and other contingencies arise in the normal course of our business. Specific reserves are provided for loss contingencies to the extent we conclude that a loss is both probable and reasonably estimable. We use a case-by-case evaluation of the underlying data and update our evaluation as further information becomes known. Legal costs are expensed as incurred.

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 presented as a component of accumulated other comprehensive income. Gains and losses on foreign currency transactions are included in other income/expense, net in the Consolidated Statements of Income.

Vacation Plan Change

During 2011, as part of the integration, we transitioned to a standard vacation plan for the merged company. Due to this change, we recorded a $9.9 million reduction in the vacation accrual, of which $4.9 million was recorded as a reduction in cost of sales and $5.0 million was recorded as a reduction in selling, general and administrative expense.