Snyder's-lance (LNCE) 10-Q 2008 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarter ended June 28, 2008

Commission File Number 0-398

LANCE, INC.

(Exact name of registrant as specified in its charter)

North Carolina (State or other jurisdiction of incorporation or organization)	56-0292920 (I.R.S. Employer Identification No.)
14120 Ballantyne Corporate Place Suite 350 Charlotte, North Carolina (Address of principal executive offices)	28277 (Zip Code)

704-554-1421
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso Noþ

The number of shares outstanding of the registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock as of July 18, 2008, was 31,474,662 shares.

LANCE, INC. AND SUBSIDIARIES

INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income (Unaudited) —Quarters and Six Months Ended June 28, 2008 and June 30, 2007		3
Condensed Consolidated Balance Sheets — June 28, 2008 (Unaudited) and December 29, 2007		4
Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited) — Six Months Ended June 28, 2008 and June 30, 2007		5
Condensed Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended June 28, 2008 and June 30, 2007		6
Notes to the Condensed Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3. Quantitative and Qualitative Disclosures about Market Risk		14
Item 4. Controls and Procedures		14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		15
Item 1A. Risk Factors		15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		15
Item 4. Submission of Matters to a Vote of Security Holders		15
Item 6. Exhibits		16
SIGNATURE		17
Exhibit 10.2
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 10.6
Exhibit 31.1
Exhibit 31.2
Exhibit 32

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)
For the Quarters and Six Months Ended June 28, 2008 and June 30, 2007
(in thousands, except share and per share data)

	Quarter Ended					Six Months Ended
	June 28,		June 30,			June 28,		June 30,
	2008		2007			2008		2007
Net sales and other operating revenue	$	213,614	$	197,036		$	411,582	$	379,463
Cost of sales and operating expenses:
Cost of sales		133,691		109,435			257,152		212,412
Selling, general and administrative		74,568		71,467			147,425		141,082
Other expense, net		161		973			157		884
Total costs and expenses		208,420		181,875			404,734		354,378
Income from continuing operations before interest and income taxes		5,194		15,161			6,848		25,085
Interest expense, net		860		615			1,465		1,219
Income from continuing operations before income taxes		4,334		14,546			5,383		23,866
Income tax expense		1,626		5,277			2,030		8,725
Net income from continuing operations		2,708		9,269			3,353		15,141
(Loss)/income from discontinued operations		—		(346	)		—		190
Income tax (benefit)/expense		—		(129	)		—		69
Net (loss)/income from discontinued operations		—		(217	)		—		121
Net income	$	2,708	$	9,052		$	3,353	$	15,262
Basic earnings/(loss) per share:
From continuing operations	$	0.09	$	0.30		$	0.11	$	0.49
From discontinued operations		—	$	(0.01	)		—	$	—
Basic earnings per share	$	0.09	$	0.29		$	0.11	$	0.49
Weighted average shares outstanding — basic		31,181,000		30,927,000			31,142,000		30,866,000
Diluted earnings/(loss) per share:
From continuing operations	$	0.09	$	0.30		$	0.11	$	0.49
From discontinued operations		—	$	(0.01	)		—	$	—
Diluted earnings per share	$	0.09	$	0.29		$	0.11	$	0.49
Weighted average shares outstanding — diluted		31,807,000		31,414,000			31,701,000		31,308,000

See Notes to the Condensed Consolidated Financial Statements (Unaudited).

3

LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets
As of June 28, 2008 (Unaudited) and December 29, 2007
(in thousands, except share data)

	June 28,		December 29,
	2008		2007
ASSETS
Current assets
Cash and cash equivalents	$	1,086	$	8,647
Accounts receivable, net		77,127		64,081
Inventories		45,048		38,659
Deferred income taxes		10,184		9,335
Prepaid expenses and other current assets		14,415		12,367
Total current assets		147,860		133,089
Other assets
Fixed assets, net		211,879		205,075
Goodwill and other intangible assets, net		87,549		69,127
Other noncurrent assets		6,058		5,712
Total assets	$	453,346	$	413,003
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	29,030	$	21,169
Other payables and accrued liabilities		53,379		53,468
Short-term debt		13,958		—
Total current liabilities		96,367		74,637
Other liabilities
Long-term debt		74,000		50,000
Deferred income taxes		26,296		26,874
Other noncurrent liabilities		14,223		14,395
Total liabilities		210,886		165,906
Commitments and contingencies
Stockholders’ equity
Common stock, 31,474,662 and 31,214,743 shares outstanding, respectively		26,228		26,011
Preferred stock, no shares outstanding		—		—
Additional paid-in capital		45,933		41,430
Retained earnings		156,665		163,356
Accumulated other comprehensive income		13,634		16,300
Total stockholders’ equity		242,460		247,097
Total liabilities and stockholders’ equity	$	453,346	$	413,003

See Notes to the Condensed Consolidated Financial Statements (Unaudited).

4

LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited)
For the Quarters Ended June 28, 2008 and June 30, 2007
(in thousands, except share data)

					Additional					Accumulated Other
					Paid-in		Retained			Comprehensive
	Shares		Common Stock		Capital		Earnings			Income			Total
Balance, December 30, 2006		30,855,891	$	25,714	$	32,129	$	159,329		$	5,228		$	222,400
Comprehensive income:
Net income		—		—		—		15,262			—			15,262
Foreign currency translation adjustment		—		—		—		—			5,678			5,678
Net unrealized losses on derivatives, net of $401 tax effect		—		—		—		—			710			710
Actuarial gains recognized in net income, net of $45 tax effect		—		—		—		—			(105	)		(105	)
Total comprehensive income														21,545
Cash dividends paid to stockholders		—		—		—		(9,900	)		—			(9,900	)
Stock options exercised, including $517 excess tax benefit		162,025		133		2,636		—			—			2,769
Cumulative adjustment from adoption of FIN 48		—		—		—		61			—			61
Equity-based incentive expense previously recognized under a liability plan		54,900		46		1,220		—			—			1,266
Amortization of nonqualified stock options		—		—		303		—			—			303
Issuances and amortization of restricted stock and units, net of forfeitures		28,100		23		1,440		—			—			1,463
Balance, June 30, 2007		31,100,916	$	25,916	$	37,728	$	164,752		$	11,511		$	239,907
Balance, December 29, 2007		31,214,743	$	26,011	$	41,430	$	163,356		$	16,300		$	247,097
Comprehensive income:
Net income		—		—		—		3,353			—			3,353
Foreign currency translation adjustment		—		—		—		—			(2,246	)		(2,246	)
Net unrealized losses on derivatives, net of $198 tax effect		—		—		—		—			(366	)		(366	)
Actuarial gains recognized in net income, net of $32 tax effect		—		—		—		—			(54	)		(54	)
Total comprehensive income														687
Cash dividends paid to stockholders		—		—		—		(10,044	)		—			(10,044	)
Stock options exercised, including $267 excess tax benefit		98,638		82		1,559		—			—			1,641
Equity-based incentive expense previously recognized under a liability plan		39,250		33		876		—			—			909
Amortization of nonqualified stock options		—		—		542		—			—			542
Issuances and amortization of restricted stock and units, net of forfeitures		122,031		102		1,526		—			—			1,628
Balance, June 28, 2008		31,474,662	$	26,228	$	45,933	$	156,665		$	13,634		$	242,460

See Notes to the Condensed Consolidated Financial Statements (Unaudited).

5

LANCE, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 28, 2008 and June 30, 2007
(in thousands)

	Six Months Ended
	June 28, 2008			June 30, 2007
Operating activities
Net income	$	3,353		$	15,262
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization		16,105			14,461
Stock-based compensation expense		2,170			1,767
Loss on sale of fixed assets		195			518
Changes in operating assets and liabilities, excluding business acquisition		(11,503	)		(3,057	)
Net cash from operating activities		10,320			28,951
Investing activities
Purchases of fixed assets		(21,603	)		(22,608	)
Proceeds from sale of fixed assets		321			3,319
Business acquisition, net of cash acquired		(23,931	)		—
Purchase of investment		—			(2,090	)
Net cash used in investing activities		(45,213	)		(21,379	)
Financing activities
Dividends paid		(10,044	)		(9,900	)
Issuance of common stock		1,641			2,769
Proceeds from debt		38,014			—
Repayments of acquired debt from business acquisition		(2,239	)		—
Net cash from/(used in) financing activities		27,372			(7,131	)
Effect of exchange rate changes on cash		(40	)		87
(Decrease)/increase in cash and cash equivalents		(7,561	)		528
Cash and cash equivalents at beginning of period		8,647			5,504
Cash and cash equivalents at end of period	$	1,086		$	6,032
Supplemental information:
Cash paid for income taxes	$	1,371		$	5,389
Cash paid for interest	$	1,500		$	1,442

See Notes to the Condensed Consolidated Financial Statements (Unaudited).

6

LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

1.	The accompanying unaudited condensed consolidated financial statements of Lance, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These condensed financial statements should be read in conjunction with the audited financial statements and notes included in our Form 10-K for the year ended December 29, 2007 filed with the Securities and Exchange Commission (the “SEC”) on February 22, 2008. In our opinion, these condensed consolidated financial statements reflect all adjustments (consisting of only normal, recurring accruals) necessary to present fairly our condensed consolidated financial position as of June 28, 2008 and December 29, 2007 and the condensed consolidated statements of income for the quarters and six months ended June 28, 2008 and June 30, 2007 and the condensed consolidated statements of stockholders’ equity and comprehensive income and cash flows for the six months ended June 28, 2008 and June 30, 2007. Prior year amounts shown in the accompanying condensed consolidated financial statements have been reclassified for consistent presentation.
2.	The consolidated results of operations for the quarter and six months ended June 28, 2008 are not necessarily indicative of the results to be expected for the year ending December 27, 2008.
3.	Preparing financial statements requires management to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosure of contingent assets and liabilities. Examples include customer returns and promotions, provisions for bad debts, inventory valuations, useful lives of fixed assets, hedge transactions, supplemental retirement benefits, intangible asset valuations, incentive compensation, income taxes, insurance, post-retirement benefits, contingencies and legal proceedings. Actual results may differ from these estimates under different assumptions or conditions.
4.	On March 14, 2008, we acquired 100% of the outstanding common stock of Brent & Sam’s, Inc. Brent & Sam’s is a producer of branded and private brand premium gourmet cookies with operations in North Little Rock, Arkansas. This acquisition enhances our portfolio of branded products and extends our product offering into the premium private brand category. We paid $24.1 million to acquire Brent & Sam’s, mostly funded from borrowings under our existing Credit Agreement. Since the acquisition date, we have repaid all of the $2.2 million assumed debt. Approximately $19.9 million of the acquisition price was assigned to goodwill and other intangible assets.
5.	We own a non-controlling equity interest in Late July Snacks, LLC, an organic snack food company. We also manufacture products for Late July. During the first six months of 2008, non-branded sales to Late July were approximately $2.0 million. As of June 28, 2008, accounts receivable due from Late July totaled $0.7 million.
6.	The following tables provide a reconciliation of the common shares used for basic earnings per share and diluted earnings per share:

	Quarter Ended				Six Months Ended
	June 28,		June 30,		June 28,		June 30,
(in thousands)	2008		2007		2008		2007
Weighted average number of common shares used for basic earnings per share		31,181		30,927		31,142		30,866
Effect of potential dilutive shares		626		487		559		442
Weighted average number of common shares and potential dilutive shares used for diluted earnings per share		31,807		31,414		31,701		31,308
Anti-dilutive shares excluded from the above reconciliation		95		—		867		19

7

LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

7.	During the first quarter of 2008, we granted approximately 175,000 vested 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 during the first quarter of 2008. During the first quarter of 2007, we granted 114,000 vested nonqualified stock options, 27,450 restricted shares and 27,450 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 $1.3 million during the first quarter of 2007.
8.	Sales to our largest customer, Wal-Mart Stores, Inc., were 20% of revenue for both quarters and six months ended June 28, 2008 and June 30, 2007. Accounts receivable at June 28, 2008 and December 29, 2007 included receivables from Wal-Mart Stores, Inc. totaling $20.6 million and $14.7 million, respectively.
9.	In accordance with FIN 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109,” we have recorded gross unrecognized tax benefits as of June 28, 2008 totaling $1.5 million and related interest and penalties of $0.5 million in other noncurrent liabilities of the condensed consolidated balance sheet. Of this amount, $1.7 million would affect the effective tax rate if subsequently recognized. Various taxing authorities’ statutes of limitations related to the computation of our unrecognized tax benefits will expire within twelve months of our prior year-end resulting in a potential $0.5 million reduction of the unrecognized tax benefit amount. We classify interest and penalties associated with income tax positions within income tax expense. The interest and penalty component of the unrecognized tax benefits as of June 28, 2008 was $0.5 million.
	We have open years for income tax audit purposes in our major taxing jurisdictions according to statutes as follows:

Jurisdiction	Open years
US federal	2004 and forward
Canada federal	2003 and forward
Ontario provincial	2001 and forward
Massachusetts	2001 and forward
North Carolina	2004 and forward
Iowa	2004 and forward

10. At June 28, 2008 and December 29, 2007, we had $2.3 million and $0.5 million, respectively, of assets held for sale included in other current assets on the condensed consolidated balance sheets. The assets at June 28, 2008 primarily consist of land and buildings to be sold related to the consolidation of sugar wafer facilities in Ontario, Canada, and certain properties in Columbus, Georgia.

8

LANCE, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements (Unaudited)

11.

The principal raw materials used in the manufacture of our products are flour, vegetable oil, sugar, potatoes, peanuts, other nuts, cheese and seasonings. The principal supplies used are flexible film, cartons, trays, boxes, and bags. These raw materials and supplies are generally available in adequate quantities in the open market either from sources in the United States or from other countries.

We utilize the dollar value last-in, first-out (“LIFO”) method of determining the cost of approximately one third of our inventories. Because inventory valuations under the LIFO method are based on annual determinations, the interim LIFO valuations require management to estimate year-end costs and levels of inventories. The variation between estimated year-end costs and levels of LIFO inventories compared to the actual year-end amounts may materially affect the results of operations for the full year. During the second quarter of 2008, we recorded a favorable valuation adjustment of $0.8 million ($0.4 million after tax) related to LIFO layers generated in prior periods. Inventories consist of:

	June 28,			December 29,
(in thousands)	2008			2007
Finished goods	$	25,307		$	21,910
Raw materials		8,981			7,701
Supplies, etc.		15,854			14,297
Total inventories at FIFO cost		50,142			43,908
Less adjustments to reduce FIFO cost to LIFO cost		(5,094	)		(5,249	)
Total inventories	$	45,048		$	38,659

12. Our Board of Directors adopted a Preferred Shares Rights Agreement on July 14, 1998. The rights granted under this agreement were designed to protect all of our stockholders and ensure they receive fair and equal treatment in the event of an attempted takeover or certain takeover tactics. None of these rights were redeemed and all expired on July 14, 2008 in accordance with the terms of the Rights Agreement.

9

LANCE, INC. AND SUBSIDIARIES

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

Forward-Looking Statements and Risk Factors

We, from time to time, make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, beliefs, intentions, or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, those set forth under Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 29, 2007.

Caution should be taken not to place undue reliance on our forward-looking statements, which reflect our management’s expectations only as of the time such statements are made. We undertake no obligation to update publicly or revise any forward-looking statement, whether due to new information, future events or otherwise.

Results of Operations

Management’s discussion and analysis of our financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, management’s determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances. We routinely evaluate our estimates, including those related to customer returns and promotions, provisions for bad debts, inventory valuations, useful lives of fixed assets, hedge transactions, supplemental retirement benefits, intangible asset valuations, incentive compensation, income taxes, insurance, post-retirement benefits, contingencies and legal proceedings. Actual results may differ from these estimates under different assumptions or conditions.

Quarter Ended June 28, 2008 Compared to Quarter Ended June 30, 2007

									Favorable/
	Quarter Ended								(Unfavorable)
(dollars in thousands)	June 28, 2008				June 30, 2007				Variance
Revenue	$	213,614	100.0	%	$	197,036	100.0	%	$	16,578		8.4	%
Cost of sales		133,691	62.6	%		109,435	55.5	%		(24,256	)	(22.2	%)
Gross margin		79,923	37.4	%		87,601	44.5	%		(7,678	)	(8.8	%)
Selling, general and administrative		74,568	34.9	%		71,467	36.3	%		(3,101	)	(4.3	%)
Other expense/(income), net		161	0.1	%		973	0.5	%		812		83.5	%
Earnings before interest and taxes		5,194	2.4	%		15,161	7.7	%		(9,967	)	(65.7	%
Interest expense, net		860	0.4	%		615	0.3	%		(245	)	(39.8	%)
Income tax expense		1,626	0.8	%		5,277	2.7	%		3,651		69.2	%
Income from continuing operations	$	2,708	1.3	%	$	9,269	4.7	%	$	(6,561	)	(70.8	%)

For the second quarter of 2008, revenue increased $16.6 million or 8%, but income from continuing operations decreased $6.6 million compared to the second quarter of 2007. The results of operations were significantly impacted by the unprecedented increases in ingredient and energy costs, which have not yet been fully offset by price increases. During the first quarter of 2008, we acquired Brent & Sam’s, a producer of branded and private brand premium gourmet cookies located in North Little Rock, Arkansas. The addition of Brent & Sam’s increased revenue by 2% compared to the second quarter of 2007, but did not have a significant impact on our income from operations. This acquisition is expected to generate approximately $10 million in revenue and positive net earnings during the remainder of 2008.

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LANCE, INC. AND SUBSIDIARIES

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

Branded product revenue increased $8.1 million or 6% compared to the second quarter of last year. Approximately 3% of this percentage growth was due to price increases, 2% was due to higher unit volume and favorable product mix, and 1% was due to the addition of Brent & Sam’s. From a product line perspective, Lance® home pack sandwich crackers and Cape Cod^® potato chips product revenue experienced strong growth, which was partially offset by declines in certain salty snacks and cakes. Branded product revenue represented 63% and 64% of total revenue for the second quarter of 2008 and 2007, respectively.

From a trade channel perspective and consistent with our overall strategy, sales to grocery stores/mass merchandisers, distributors, and club stores generated the majority of the growth in branded product revenues. These increases in revenue were partially offset by anticipated declines in less profitable trade channels.

Non-branded product revenue, which includes private brands and contract manufacturing, increased $8.5 million or 12% compared to the second quarter of 2007. The growth in revenue was the result of increased pricing of 12%, increased revenue from the addition of Brent & Sam’s of 4%, and higher volume from new and existing customers and new product offerings of approximately 2%. Unfavorable product mix and volume declines from certain contract manufacturing customers reduced non-branded revenue by 6%. Non-branded product revenue represented 37% and 36% of total revenue for the second quarter of 2008 and 2007, respectively.

Gross margin decreased $7.7 million or 7% as a percentage of revenue compared to the second quarter of 2007. The impact of higher ingredient costs, and unfavorable foreign exchange and natural gas rates reduced gross margin approximately 9% as a percentage of revenue, and unfavorable product mix and costs associated with the consolidation of our Canadian plant operations accounted for an additional 4% decline in gross margin as a percentage of revenue. This decline was partially offset by a 6% increase in gross margin as a percent of revenue due to price increases and improved manufacturing efficiencies compared to the second quarter of 2007. Price increases will continue to be implemented through the third and fourth quarters of 2008 to offset significantly higher ingredient costs.

Selling, general and administrative costs increased $3.1 million, but decreased 1% as a percentage of revenue compared to the second quarter of 2007. These increased costs were driven by a number of factors: strategic growth and infrastructure initiatives generated $2.0 million in higher employee and information technology costs; transportation-related fuel costs increased $1.4 million; and selling costs, such as displays and commissions, increased $2.1 million compared to the second quarter of 2007. These cost increases incurred in 2008 were partially offset by reductions in advertising costs and lower professional fees of $2.4 million as compared to the second quarter of 2007.

Compared to the second quarter of 2007, the effective tax rate increased from 36.3% to 37.5% due to a combination of lower earnings and the impact of accounting for uncertain tax positions. We expect the full year effective tax rate to be between 35% and 36%.

Six Months Ended June 28, 2008 Compared to Six Months Ended June 30, 2007

									Favorable/
	Six Months Ended								(Unfavorable)
(dollars in thousands)	June 28, 2008				June 30, 2007				Variance
Revenue	$	411,582	100.0	%	$	379,463	100.0	%	$	32,119		8.5	%
Cost of sales		257,152	62.5	%		212,412	56.0	%		(44,740	)	(21.1	%)
Gross margin		154,430	37.5	%		167,051	44.0	%		(12,621	)	(7.6	%)
Selling, general and administrative		147,425	35.8	%		141,082	37.2	%		(6,343	)	(4.5	%)
Other expense/(income), net		157	—			884	0.2	%		727		(82.2	%)
Earnings before interest and taxes		6,848	1.7	%		25,085	6.6	%		(18,237	)	(72.7	%)
Interest expense, net		1,465	0.4	%		1,219	0.3	%		(246	)	(20.2	%)
Income tax expense		2,030	0.5	%		8,725	2.3	%		6,695		76.7	%
Income from continuing operations	$	3,353	0.8	%		15,141	4.0	%	$	(11,788	)	(77.9	%)

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LANCE, INC. AND SUBSIDIARIES

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

For the six months ended June 28, 2008, revenue increased $32.1 million or 9%, but income from continuing operations decreased $11.8 million compared to the first six months in 2007. The results of operations were significantly impacted by the unprecedented increase in ingredient and energy costs, which have not yet been fully offset by price increases. Since March 14, 2008, Brent & Sam’s has been included in our results of operations and represents 1% of the increased revenue compared to 2007. Brent & Sam’s did not have a significant impact on our income from operations for the first six months of 2008.

Branded product revenue increased $14.2 million or 6% compared to the first six months of 2007. Approximately 3% of this percentage growth was due to price increases, 3% was due to favorable product mix and 1% was due to the addition of Brent & Sam’s. This increase was offset slightly by an approximate 1% decline in branded unit volume. From a product line perspective, Lance^® home pack sandwich crackers and Cape Cod^® potato chips product revenue experienced strong growth, which was partially offset by declines in certain salty snacks and cakes. Branded product revenue represented 62% and 64% of total revenue for the first six months of 2008 and 2007, respectively.

From a trade channel perspective and consistent with our overall strategy, sales to grocery stores/mass merchandisers, distributors, and club stores generated the majority of the growth in branded product revenues. These increases in revenue were partially offset by anticipated declines in less profitable trade channels.

Non-branded product revenue, which includes private brands and contract manufacturing, increased $17.9 million or 13% compared to the first six months of 2007. The growth in revenue was the result of increased pricing of 9%, higher volume from private brand sales from new and existing customers and new product offerings of approximately 5%, and increased revenue from the addition of Brent & Sam’s of approximately 2%. Volume declines from certain contract manufacturing customers and unfavorable product mix reduced non-branded revenue by 3%. Non-branded product revenue represented 38% and 36% of total revenue for the first six months of 2008 and 2007, respectively.

Gross margin decreased $12.6 million or 7% as a percentage of revenue compared to the first six months of 2007. The impact of higher ingredient costs, unfavorable foreign exchange and increased natural gas rates reduced gross margin approximately 8% as a percentage of revenue, and unfavorable product mix and costs associated with the consolidation of our Canadian plant operations accounted for an additional 4% decline in gross margin as a percentage of revenue. This decline was partially offset by a 5% increase in gross margin as a percent of revenue, due to price increases and improved manufacturing efficiencies compared to the first six months of 2007. Price increases will continue to be implemented through the third and fourth quarter of 2008 to offset significantly higher ingredient costs.

Selling, general and administrative costs increased $6.3 million, but decreased 1% as a percentage of revenue compared to the first six months of 2007. These increased costs were driven by a number of factors: strategic growth and infrastructure initiatives generated $4.0 million in higher employee and information technology costs; transportation-related fuel costs increased $2.5 million; and selling costs, such as displays, market research, and commissions, increased $3.8 million compared to the first six months of 2007. These cost increases were partially offset by reductions in advertising costs, shipping efficiencies, and lower professional fees of $4.0 million as compared to the first six months of 2007.

Compared to the first six months of 2007, the effective tax rate increased from 36.6% to 37.7% due to a combination of lower earnings and the impact of accounting for uncertain tax positions.

Liquidity and Capital Resources

Liquidity

The principal sources of liquidity for operations during the first six months of 2008 were provided by proceeds from debt, operating activities and cash on hand. Cash flow from operating activities, cash on hand and existing borrowing facilities are believed to be sufficient for the foreseeable future to enable us to meet obligations, fund capital expenditures and pay cash dividends to our stockholders.

Operating Cash Flows

Net cash from operating activities was $10.3 million and $29.0 million for the first six months of 2008 and 2007, respectively. The decrease was due to lower net income, predominately driven by higher ingredient costs, and higher levels of working capital. Working capital, excluding cash and short-term debt, increased $14.6 million predominately from increased accounts receivable due to higher revenue and increased inventory due to higher ingredient costs.

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LANCE, INC. AND SUBSIDIARIES

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

Investing Cash Flows

Net cash used in investing activities was $45.2 million for the first six months of 2008. On March 14, 2008, we acquired Brent and Sam’s, Inc. for approximately $23.9 million, net of cash acquired of $0.2 million. Capital expenditures for fixed assets, principally manufacturing equipment, delivery vans for field sales representatives, and information system implementation costs, totaled $21.6 million during the first six months of 2008, partially funded by proceeds from the sale of assets of $0.3 million. Capital expenditures are expected to continue at a level sufficient to support our strategic and operating needs. Capital expenditures for fiscal 2008 are projected to be approximately $40 million and funded by net cash flow from operating activities, cash on hand and borrowing facilities.

Net cash used in investing activities during the first six months of 2007 represented capital expenditures of $22.6 million and a purchase of a noncontrolling equity interest in an organic snack food company for $2.1 million Proceeds from the sale of fixed assets were $3.3 million. For the full year ended December 29, 2007, capital expenditures for purchases of property and equipment were $39.5 million.

Financing Cash Flows

During the first six months of 2008, net cash from financing activities was impacted by $24.0 million of additional borrowings under our existing Credit Agreement for the acquisition of Brent & Sam’s. Since the acquisition date, we have repaid all of the $2.2 million acquired debt. In the second quarter of 2008, we made additional short-term borrowings of $14.0 million to purchase fixed assets.

During the first six months of 2008 and 2007, we paid dividends of $0.32 per share totaling $10.0 million and $9.9 million, respectively. In addition, we received cash and related tax benefits of $1.6 million and $2.8 million during the first six months of 2008 and 2007, respectively, due to stock option exercises. On July 24, 2008, the Board of Directors declared a quarterly cash dividend of $0.16 per share, payable on August 20, 2008 to stockholders of record on August 11, 2008.

Debt

Additional borrowings available under all existing credit facilities totaled $56.7 million as of June 28, 2008. We have complied with all financial covenants contained in the credit facilities. We also maintain standby letters of credit in connection with our self-insurance reserves for casualty claims. The total amount of these letters of credit was $20.2 million as of June 28, 2008.

Contractual Obligations

Purchase commitments for inventory increased from $58.9 million as of December 29, 2007, to approximately $119.3 million as of June 28, 2008 due to the increased cost of certain raw materials and the duration of purchase contracts.

Market Risks

The principal market risks that may adversely impact results of operations and financial position are changes in raw material prices, energy costs, interest and foreign exchange rates and credit risks. We selectively use derivative financial instruments to manage these risks. There are no market risk sensitive instruments held for trading purposes.

At times, we may enter into commodity futures and option contracts to manage fluctuations in prices of anticipated purchases of ingredients. Our policy is to use these commodity derivative financial instruments only to the extent necessary to manage these exposures. We do not use these financial instruments for trading purposes. As of June 28, 2008, there were no outstanding commodity futures or option contracts. For the first six months of 2008, increases in ingredients costs reduced our gross margin by $30.8 million as compared to the first six months of 2007.

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 in order to manage the risk associated with variable interest rates. The variable-to-fixed interest rate swap is accounted for as a cash flow hedge. The interest rate on the swap is 5.4%, including applicable margin. The underlying notional amount of the swap agreement is $35.0 million. The fair value of the interest rate swap liability as determined by a third-party financial institution was $1.3 million on June 28, 2008. While this swap fixed a portion of the interest rate at a predictable level, pre-tax interest expense would have been $0.3 million lower without this swap during the first six months of 2008.

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LANCE, INC. AND SUBSIDIARIES

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

We are exposed to credit risks related to our accounts receivable. We perform ongoing credit evaluations of our customers to minimize the potential exposure. For the first six months of 2008, net bad debt expense was $0.3 million. Net bad debt income was $0.1 million for the first six months of 2007. Allowances for doubtful accounts were $0.7 million and $0.5 million at June 28, 2008 and December 29, 2007, respectively.

Through the operations of our Canadian subsidiary, there is an exposure to foreign exchange rate fluctuations, primarily between U.S. dollars and Canadian dollars. A majority of the revenue of our Canadian operations is denominated in U.S. dollars and a substantial portion of the operations’ costs, such as raw materials and direct labor, are denominated in Canadian dollars. We have entered into a series of forward contracts to mitigate a portion of this foreign exchange rate exposure. These contracts have maturities through December 2008. As of June 28, 2008, the fair value of the liability related to the forward contracts as determined by a third party financial institution was less than $0.1 million. During the first six months of 2008, foreign exchange rate fluctuations negatively impacted the results of operations by $1.6 million compared to the first six months of 2007.

Due to foreign currency fluctuations during the first six months of 2008 and 2007, we recorded losses of $2.2 million and gains of $5.7 million, respectively, in other comprehensive income because of the translation of the subsidiary’s financial statements into U.S. dollars.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The principal market risks to which we are exposed that may adversely impact results of operations and financial position include changes in raw material prices, energy costs, interest and foreign exchange rates and credit risks. Quantitative and qualitative disclosures about these market risks are included under “Market Risks” in Item 2 above, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities and Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for the purpose of providing reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

There have been no changes in our internal control over financial reporting during the quarter ended June 28, 2008 that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.

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LANCE, INC. AND SUBSIDIARIES

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Lance, Inc. was one of several companies sued in August 2005 in the Superior Court for the State of California for the County of Los Angeles by the Attorney General of the State of California for alleged violations of California Proposition 65. California Proposition 65 is a state law that, in part, requires companies to warn California residents if a product contains chemicals listed within the statute. All of the parties, including Lance, Inc., have reached agreements in principle with the Attorney General of California on terms of settlement. Our agreement is subject to approval by the court and is not expected to have a material adverse effect upon our consolidated financial statements taken as a whole.

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.

Item 1A. Risk Factors

There have been no material changes to the factors disclosed in Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 29, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Our Credit Agreement dated October 20, 2006, restricts our payment of cash dividends and repurchases of common stock if, after payment of any dividends or any repurchases of common stock, our consolidated stockholders’ equity would be less than $125.0 million. At June 28, 2008, our consolidated stockholders’ equity was $242.5 million.

Item 4. Submission of Matters to a Vote of Security Holders

The following proposals were submitted and approved by stockholders at the Annual Meeting of Stockholders held on April 24, 2008:

1. Election of nominees to the Board of Directors to serve until the Annual Meeting of Stockholders in 2011:

	Votes For		Votes Withheld
William R. Holland		28,936,029		457,605
James W. Johnston		29,110,950		282,683
W. J. Prezzano		28,944,208		449,425

2. Adoption of the Lance, Inc. 2008 Director Stock Plan (22,528,710 for, 3,692,101 against, 117,482 abstaining, 3,055,341 broker non-votes).

3. Ratification of the selection of KPMG LLP as independent public accountants for fiscal 2008 (29,211,881 for, 149,270 against, 32,483 abstaining).

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LANCE, INC. AND SUBSIDIARIES

Item 6. Exhibits

Exhibit Index

No.	Description
3.1	Restated Articles of Incorporation of Lance, Inc. as amended through April 17, 1998, incorporated herein by reference to Exhibit 3 to the Registrant’s Quarterly Report on Form 10-Q for the twelve weeks ended June 13, 1998 (File No. 0-398).
3.2	Articles of Amendment of Lance, Inc. dated July, 14 1998 designating rights, preferences and privileges of the Registrant’s Series A Junior Participating Preferred Stock, incorporated herein by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 26, 1998 (File No. 0-398).
3.3	Bylaws of Lance, Inc., as amended through 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).
10.1*	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).
10.2*	Executive Employment Agreement Amendment dated April 24, 2008 between the Registrant and David V. Singer, filed herewith.
10.3*	Amended and Restated Compensation and Benefits Assurance Agreement dated April 24, 2008 between the Registrant and David V. Singer, filed herewith.
10.4*	Restricted Stock Unit Award Agreement Amendment Number Two dated April 24, 2008 between the Registrant and David V. Singer, filed herewith.
10.5*	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, Frank I. Lewis and Earl D. Leake, filed herewith.
10.6*	Amended and Restated Executive Severance Agreement dated April 24, 2008 between the Registrant and Earl D. Leake, 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.

Items 3 and 5 are not applicable and have been omitted.

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LANCE, INC. AND SUBSIDIARIES

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned thereunto duly authorized.

LANCE, INC.
By:	/s/ Rick D. Puckett
	Rick D. Puckett
	Executive Vice President, Chief Financial Officer, Treasurer and Secretary

Dated: July 25, 2008

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