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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter (Twelve Weeks) Ended September 5, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-398
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LANCE, INC.
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(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-0292920
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
8600 South Boulevard (P.O. Box 32368), Charlotte, North Carolina 28232
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(Address of principal executive offices) (Zip Code)
704-554-1421
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes
of common Stock, as of the latest practicable date.
Common Stock, $.83-1/3 par value -
29,987,135 shares outstanding as of October 2, 1998
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LANCE, INC. AND SUBSIDIARIES
INDEX
Page
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PART I. FINANCIAL INFORMATION:
Financial Statements:
Condensed Consolidated Balance Sheets - September 5, 1998
(Unaudited) and December 27, 1997 .......................................... 3
Condensed Consolidated Statements of Income (Unaudited) - Twelve and
Thirty-six Weeks Ended September 5, 1998 and September 6, 1997.............. 4
Condensed Consolidated Statements of Changes in Stockholders'
Equity (Unaudited) - Thirty-Six Weeks Ended September 5, 1998 and
September 6, 1997 .......................................................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
Thirty-Six Weeks Ended September 5, 1998 and September 6, 1997.............. 6
Notes to Condensed Consolidated Financial Statements ............................ 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 9
PART II. OTHER INFORMATION:
Exhibits and Reports on Form 8-K .................................................... 12
SIGNATURES................................................................................. 12
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LANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 5, 1998 (UNAUDITED) AND DECEMBER 27, 1997
(In thousands, except share and per share data)
September 5, December 27,
1998 1997
------------ ------------
ASSETS:
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 24,984 $ 34,040
Marketable securities 16,080 25,430
Accounts receivable (less allowance for doubtful accounts) 39,888 34,057
Inventories (Notes 3 and 4) 20,254 17,882
Deferred income tax benefit 7,178 6,913
Prepaid expenses and other 2,661 1,275
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Total current assets 111,045 119,597
PROPERTY, NET 143,869 130,264
OTHER ASSETS 2,319 2,879
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TOTAL ASSETS $ 257,233 $ 252,740
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 10,392 $ 5,821
Accrued liabilities 29,758 31,457
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Total current liabilities 40,150 37,278
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OTHER LIABILITIES AND DEFERRED CREDITS:
Deferred income taxes 11,248 10,005
Accrued postretirement health care costs 12,344 11,180
Accrual for insurance claims 3,613 4,449
Supplemental retirement benefits 3,113 3,306
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Total other liabilities and deferred credits 30,318 28,940
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STOCKHOLDERS' EQUITY
Common stock, $.83 1/3 par value (authorized: 75,000,000 shares;
issued 29,984,135 shares in 1998; 29,923,287 in 1997) 24,987 24,936
Preferred stock, $1.00 par value (authorized: 5,000,000 shares;
none issued) -- --
Additional paid in capital 1,888 999
Unamortized portion of restricted stock awards (569) (488)
Retained earnings 160,452 160,682
Net unrealized gain on marketable securities 7 393
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Total stockholders' equity 186,765 186,522
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 257,233 $ 252,740
========= =========
See notes to condensed consolidated financial statements (unaudited).
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LANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE TWELVE AND THIRTY-SIX WEEKS ENDED SEPTEMBER 5, 1998 AND
SEPTEMBER 6, 1997
(In thousands, except share and per share data)
Twelve Weeks Ended Thirty-Six Weeks Ended
----------------------------- -----------------------------
September 5, September 6, September 5, September 6,
1998 1997 1998 1997
----------- ----------- ----------- -----------
NET SALES AND OTHER
OPERATING REVENUE $ 112,098 $ 110,341 $ 340,588 $ 341,251
----------- ----------- ----------- -----------
COST OF SALES AND
OPERATING EXPENSES:
Cost of sales (Note 3) 50,408 51,288 153,969 161,259
Selling and delivery 46,319 43,112 138,456 131,226
General and administrative 4,018 4,366 12,948 13,601
Provision for profit-sharing
retirement plan 1,336 1,247 4,289 3,815
----------- ----------- ----------- -----------
Total 102,081 100,013 309,662 309,901
----------- ----------- ----------- -----------
PROFIT FROM OPERATIONS 10,017 10,328 30,926 31,350
OTHER INCOME, NET 956 780 3,172 2,618
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 10,973 11,108 34,098 33,968
INCOME TAXES 4,105 4,202 12,757 12,979
----------- ----------- ----------- -----------
NET INCOME $ 6,868 $ 6,906 $ 21,341 $ 20,989
=========== =========== =========== ===========
SHARE AND PER SHARE
AMOUNTS (Note 5)
Net Income:
Basic $ 0.23 $ 0.23 $ 0.71 $ 0.70
=========== =========== =========== ===========
Diluted $ 0.23 $ 0.23 $ 0.71 $ 0.70
=========== =========== =========== ===========
Cash dividends $ 0.24 $ 0.24 $ 0.72 $ 0.72
=========== =========== =========== ===========
Weighted average shares of
common stock outstanding:
Basic 29,935,000 29,898,000 29,917,000 29,886,000
=========== =========== =========== ===========
Diluted 30,043,000 30,017,000 30,073,000 30,005,000
=========== =========== =========== ===========
See notes to condensed consolidated financial statements (unaudited).
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LANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 5, 1998 AND SEPTEMBER 6, 1997
(In thousands, except share and per share data)
Net
Unamortized Unrealized
Additional Portion of Gain on
Common Paid-in Restricted Retained Marketable
Shares Stock Capital Stock Awards Earnings Securities Total
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BALANCE, DECEMBER 26, 1996 29,888,265 $ 24,907 $ -- $ -- $ 159,700 $ 255 $ 184,862
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COMPREHENSIVE INCOME:
Net Income -- -- -- -- 20,989 -- 20,989
Net change in unrealized gain on -- -- -- -- -- 4 4
marketable securities
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Total comprehensive income -- -- -- -- 20,989 4 20,993
CASH DIVIDENDS PAID -- -- -- -- (21,521) -- (21,521)
ISSUANCE OF RESTRICTED STOCK 30,200 25 530 (555) -- -- --
RECOGNITION OF RESTRICTED
STOCK AWARDS -- -- 69 53 -- -- 122
STOCK OPTIONS EXERCISED 5,145 5 -- -- 71 -- 76
PURCHASE OF COMMON STOCK (25,000) (21) -- -- (417) -- (438)
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BALANCE, SEPTEMBER 6, 1997 29,898,610 $ 24,916 $ 599 $(502) $ 158,822 $ 259 $ 184,094
=========================================================================================
BALANCE, DECEMBER 27, 1997 29,923,287 $ 24,936 $ 999 $(488) $ 160,682 $ 393 $ 186,522
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COMPREHENSIVE INCOME:
Net Income -- -- -- -- 21,341 -- 21,341
Net change in unrealized gain on
marketable securities -- -- -- -- -- (386) (386)
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Total comprehensive income -- -- -- -- 21,341 (386) 20,955
CASH DIVIDENDS PAID -- -- -- -- (21,571) -- (21,571)
ISSUANCE OF RESTRICTED STOCK 24,450 20 491 (511) -- -- --
RECOGNITION OF RESTRICTED
STOCK AWARDS (7,049) (5) (272) 430 -- -- 153
STOCK OPTIONS EXERCISED 55,826 46 955 -- -- -- 1,001
PURCHASE OF COMMON STOCK (12,379) (10) (285) -- -- -- (295)
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BALANCE, SEPTEMBER 5, 1998 29,984,135 $ 24,987 $ 1,888 $(569) $ 160,452 $ 7 $ 186,765
=========================================================================================
See notes to condensed consolidated financial statements (unaudited).
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LANCE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THIRTY-SIX WEEKS ENDED SEPTEMBER 5, 1998 AND SEPTEMBER 6, 1997
(In thousands)
Thirty-Six Weeks Ended
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September 5, September 6,
1998 1997
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OPERATING ACTIVITIES:
Net income $ 21,341 $ 20,989
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation 14,858 13,690
Gain on sale and impairment of property, net (812) (799)
Deferred income taxes 978 2,560
Other, net 956 598
Changes in operating assets and liabilities (7,211) 2,839
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Net cash flow from operating activities 30,110 39,877
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INVESTING ACTIVITIES:
Purchases of property (29,037) (24,606)
Proceeds from sale of property 1,386 10,268
Purchases of marketable securities (941) (12,753)
Sales of marketable securities 4,993 2,872
Maturities of marketable securities 5,201 8,125
Other, net 97 84
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Net cash used in investing activities (18,301) (16,010)
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FINANCING ACTIVITIES:
Dividends paid (21,571) (21,521)
Issuance (purchase) of common stock, net 706 (356)
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Net cash used in financing activities (20,865) (21,877)
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(DECREASE)/INCREASE IN CASH (9,056) 1,990
CASH, BEGINNING OF PERIOD 34,040 29,764
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CASH, END OF PERIOD $ 24,984 $ 31,754
======== ========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes $ 7,829 $ 3,955
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See notes to condensed consolidated financial statements (unaudited).
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LANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting
of only normal, recurring accruals) necessary to present fairly the
consolidated financial position of the Company and its subsidiaries as
of September 5, 1998 and December 27, 1997, the consolidated results of
operations for the thirty-six weeks ended September 5, 1998 and
September 6, 1997 and the consolidated cash flows for the thirty-six
weeks ended September 5, 1998 and September 6, 1997. All 1997 amounts
have been reclassified to conform with the 1998 presentation.
2. The consolidated results of operations for the twelve and thirty-six
weeks weeks ended September 5, 1998 and September 6, 1997 are not
necessarily indicative of the results to be expected for a full year.
3. The Company's primary raw materials include peanuts, peanut butter,
flour and other grain products. The Company enters into various forward
purchase agreements and derivative financial instruments to reduce the
impact of volatility in raw material prices. The Company has only
limited involvement with derivative financial instruments and does not
use them for trading purposes. Amounts payable or receivable under the
agreements, which qualify as hedges, are recognized as deferred gains
or losses and included in other assets or other liabilities. These
deferred amounts are charged or credited to cost of sales as the
related raw materials costs are charged to operations.
4. The Company utilizes the dollar value last-in, first-out (LIFO) method
of determining the cost of substantially all of its inventories.
Because inventory calculations under the LIFO method are based on
annual determinations, the determination of interim LIFO valuations
requires that estimates be made of year-end costs and levels of
inventories. The possibility of variation between estimated year-end
costs and levels of LIFO inventories and the actual year-end amounts
may materially affect the results of operations as finally determined
for the full year.
Inventories at September 5, 1998 and December 27, 1997 consisted of (in
thousands):
September 5, 1998 December 27, 1997
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Finished goods $ 15,998 $ 15,047
Raw materials 4,402 4,133
Supplies, etc 4,691 3,986
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Total inventories at FIFO cost 25,091 23,166
Less: Adjustment to reduce FIFO costs to LIFO (4,837) (5,284)
-------- --------
Total inventories at LIFO cost $ 20,254 $ 17,882
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LANCE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. The following table provides a reconciliation of the denominator used
in computing basic earnings per share to the denominator used in
computing diluted earnings per share at September 5, 1998 and September
6, 1997 (there were no reconciling items for the numerator amounts of
basic and diluted earnings per share):
September 5, September 6,
1998 1997
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Weighted average number of common shares used in
computing basic earnings per share 29,935,000 29,898,000
Effect of dilutive stock options 108,000 119,000
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Weighted average number of common shares and
dilutive potential common stock used in computing
diluted earnings per share
30,043,000 30,017,000
========== ==========
Stock options excluded from the above reconciliation
because they are anti-dilutive 437,000 88,000
========== ==========
6. On December 28, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires an entity to disclose its 'comprehensive
income' which is defined as changes in equity that arise from non-owner
sources. The Company's comprehensive income consists of net income plus
other comprehensive income, which consists only of changes in
stockholders' equity due to unrealized gains or losses from its
investment in marketable securities. The Company's comprehensive income
is included in the accompanying condensed consolidated statements of
changes in stockholders' equity.
During the thirty-six weeks ended September 5, 1998, other
comprehensive income consisted of a $386,000 loss, net of taxes.
Holding gains arising during the period were $14,000, net of taxes,
while the reclassification adjustment for gains included in net income
totaled $400,000, net of taxes.
7. On July 14, 1998, the Board of Directors adopted a stockholder rights
plan intended to provide an appropriate and reasonable means of
safeguarding the interests of all Company stockholders in the event of
an attempted takeover of the Company or certain takeover tactics.
Pursuant to the Preferred Shares Rights Agreement dated July 14, 1998,
each common stockholder at the close of business on August 3, 1998 will
automatically receive a dividend distribution of one Right for each
share of Common Stock held. In addition, one Right will be delivered
with each share of Common Stock issued after August 3, 1998. The Rights
will expire on July 14, 2008 unless redeemed earlier.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition
The Company's financial position remains strong. Through cash generated from
operations, existing cash and marketable securities and unused debt capacity,
the Company has sufficient financial resources to meet its ongoing operating
needs, cash dividend payments, capital expenditures and stock repurchases.
Cash, cash equivalents and marketable securities at September 5, 1998 decreased
$18.4 million from December 27, 1997. The Company has maintained its regular
quarterly dividend of $0.24 per share amounting to $21.6 million for the
thirty-six weeks ended September 5, 1998. In addition, capital expenditures were
$29.0 million for that period and are expected to reach $50.0 million for 1998.
Dividends and capital expenditures were funded through $30.1 million of cash
flow from operating activities and through reductions of cash and marketable
securities.
Accounts receivable increased $5.8 million from December 27, 1997 reflecting
seasonality of sales and differences in the timing of billings and collections.
Inventories increased $2.4 million to support back-to-school sales efforts and
higher production schedules for traditionally higher sales levels in the early
part of the fourth quarter. Prepaid expenses and other current assets increased
$1.4 million due to the timing of insurance payments and certain marketing
expenses.
Property increased by a net of $13.6 million since December 27, 1997. Purchases
of property amounted to $29.0 million while depreciation totaled $14.9 million.
Purchases of property included expenditures for vending machines, automated
packaging equipment, information technology projects, handheld computers for
field sales representatives and point-of-sale displays.
Current liabilities increased to $40.2 million at September 5, 1998 compared to
$37.3 million at December 27, 1997 reflecting changes in the timing of
disbursements and from an increased level of property purchases. Accrued
liabilities decreased $1.7 million primarily related to compensation and
benefits, including payments of profit sharing contributions, incentive
compensation and casualty insurance claims.
Other liabilities and deferred credits increased $1.4 million due to provisions
for postretirement healthcare costs and an increased deferred tax liability
primarily from accelerated tax depreciation on increased property purchases.
Quarter (12 Weeks) Ended September 5, 1998 Compared to Quarter (12 Weeks) Ended
September 6, 1997
Net sales and other operating revenue increased $1.8 million, or 1.6%, over the
same period last year to $112.1 million. Revenues from grocery, vending and
private label improved. Partially offsetting these increases were lower sales of
single-serve, branded products.
Cost of sales decreased $0.9 million, improving gross margin to 55.0% as
compared to 53.5% in the same period last year. The improved gross margin
resulted from improved manufacturing efficiencies and from lower raw material
costs, principally flour.
Selling and delivery expenses increased $3.2 million, to 41.3% of revenues as
compared to 39.1% in the same period last year, due to additional support to
sales and marketing initiatives. Personnel and training costs were higher due to
efforts to improve service levels across all distribution channels. Aggressive
trade allowance programs were in place for back-to-school promotions in grocery
and mass
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merchants. General and administrative costs were $0.3 million lower than last
year due to lower costs for benefits. Other income was $0.2 million higher than
the same period last year due to dispositions of equipment and marketable
securities.
The Company's effective tax rate of 37.4% was lower than the 37.8% for last year
due to changes in the composition of sales and earnings.
Net income of $6.9 million or $0.23 per share on a diluted basis equaled net
income and net income per share for the same period last year.
Thirty-Six Weeks Ended September 5, 1998 Compared to Thirty-Six Weeks Ended
September 6, 1997
Net sales and other operating revenue decreased $0.7 million over the same
period last year to $340.6 million. Increases in sales through grocery, vending
and private label were offset by lower sales of single-serve, branded products.
Cost of sales decreased $7.3 million, improving gross margin to 54.8% as
compared to 52.7% in the same period last year. The majority of the improved
gross margin resulted from improved manufacturing efficiencies with the
remaining coming from lower raw material costs, principally flour.
Selling and delivery expenses increased $7.2 million, to 40.7% of revenues as
compared to 38.4% in the same period last year, due to additional support to
sales and marketing initiatives. Personnel and training costs were higher due to
efforts to improve service levels across all distribution channels. Consumer
promotion activities in the first half of the year and trade allowance programs
throughout the period were also increased. General and administrative costs were
$0.7 million lower than last year due to lower costs for benefits and
professional fees. Other income was $0.6 million higher than the same period
last year due to dispositions of equipment and marketable securities.
The Company's effective tax rate of 37.4% was lower than the 38.2% for last year
due to changes in the composition of sales and earnings.
Net income of $21.3 million, or $0.71 per share on a diluted basis, increased
$0.4 million, 1.7%, from the same period last year, which was $0.70 per share on
a diluted basis.
Year 2000 Issues
The Company has organized its activities to address Year 2000 issues in four
phases: (1) initial assessment and project organization; (2) remediation and
testing; (3) assessment of third-party readiness and impacts and (4) contingency
planning. The timing of each of these phases overlaps each other. The Company
has completed the first phase, which included an assessment of hardware and
software applications; implementation of a vendor management program; awareness
training throughout the Company; establishment of compliance testing principles
and standards; and development of the project master plan.
The second phase, remediation and testing, is well underway and is expected to
be completed for all critical internal hardware and software applications
(commonly referred to as "IT systems") by the end of 1998. Other applications
not internal to the Company (commonly referred to as "non-IT systems") include
applications such as energy supply, telecommunications, facility operation and
security, automated production controllers and financial services such as
banking and benefit plan administration. In addition, the Company has non-IT
systems included in its vending machine operations and direct-
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store-delivery distribution system. Remediation and testing for non-IT systems
has begun and is expected to be completed for all critical applications by the
end of the first quarter of 1999.
The third phase, assessment of third party readiness and impacts, has also begun
and is expected to be completed by mid-1999. The Company has received a majority
of responses to initial inquiries of material third party relationships. The
Company plans to validate readiness responses for its key relationships as it
assesses its contingency planning requirements. The Company's key relationships
include suppliers of flour, peanuts, peanut butter, energy and production and
distribution equipment. The fourth phase, contingency planning, has just begun
and is expected to be completed early in the fourth quarter of 1999.
Year 2000 compliance costs are expected to range from $0.7 million to $1.0
million of external costs, of which approximately $0.4 million have been
incurred. In addition, the Company is using internal resources for a
cross-functional steering committee and three project co-managers. The estimated
compliance costs do not include costs for system replacements. Essentially all
of the Company's systems have been replaced during the last three years or will
be replaced by the end of 1998 as part of the integrated information systems
project initiated in 1995.
At this stage of the Company's Year 2000 readiness activities, the Company's
assessment is that the failure of non-IT systems and lack of readiness by third
parties would not have a material adverse effect on revenues since a majority of
sales are to a large number and wide variety of customers. While such failures
would likely cause increased operating expenses, the Company does not expect a
material effect on the results of operations, liquidity or financial condition.
The Company will continue to assess possible increased operating expenses as the
Company's Year 2000 readiness activities continue.
Safe Harbor Statement
This discussion contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. Actual results could
differ materially from those forward-looking statements. Factors that may cause
actual results to differ materially include, price competition, industry
consolidation, raw material costs, effectiveness of sales and marketing
activities and effectiveness of Year 2000 readiness activities, as described in
Exhibit 99 to this Form 10-Q.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4 Preferred Shares Rights Agreement dated July 14, 1998
by and between the Registrant and Wachovia Bank,
N.A., together with the Form of Rights Certificate
attached as Exhibit B. thereto. Incorporated by
reference to Exhibit 4.1 to the Registrant's Form 8-A
filed on July 15, 1998.
27 Financial Data Schedule (Filed in electronic format
only. Pursuant to Rule 402 of Regulation S-T, this
schedule shall not be deemed filed for purposes of
Section 11 of the Securities Act of 1933 or Section
18 of the Securities Exchange Act of 1934).
99 Cautionary Statement under Safe Harbor Provisions of
the Private Securities Litigation Reform Act of 1995.
(b) Reports on Form 8-K
On July 15, 1998, the Registrant filed Form 8-K to report the
declaration of a dividend of one Right for each outstanding
share of Common Stock. The description and terms of the Rights
are set forth in the Preferred Shares Rights Agreement dated
July 14, 1998 between the Registrant and the Rights Agent.
No other reports on Form 8-K were filed during the 12 weeks
ended September 5, 1998.
Items 1 through 5 are inapplicable and have been omitted.
SIGNATURES
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/ B. Clyde Preslar
------------------------------
B. Clyde Preslar
Vice President and Principal
Financial Officer
Dated: October 6, 1998
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