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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K
_____________________
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________to _____________.
Commission File Number 001-35844
___________________________________
Pinnacle Foods Inc.
(Exact name of registrant as specified in its charter)
___________________________________
Delaware
 
35-2215019
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
399 Jefferson Road
Parsippany, New Jersey
 
07054
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (973) 541-6620
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of the exchange on which registered
Common Stock, par value $0.01 per share
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.
___________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).
Yes ý No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No ý

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   ý No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes   ý     No  

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
ý
Accelerated filer
o
 
 
 
 
Non-accelerated filer (Do not check if a smaller reporting company)
o
Smaller Reporting Company
o
 
 
 
 
 
 
Emerging growth company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes   ¨     No   ý
As of June 23, 2017 (the last business day of the registrant's most recently completed second fiscal quarter), the aggregate market value of common stock held by non-affiliates of the registrant was approximately $7.29 billion. For purposes of this calculation, the Registrant has assumed that its directors and executive officers are affiliates.
There were 119,032,551 shares of common stock, $0.01 par value, outstanding at February 27, 2018 .

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the annual meeting of shareholders scheduled to be held on May 30, 2018 are incorporated by reference into Part III of this Form 10-K.


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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, financing needs, plans or intentions relating to acquisitions and restructuring, business trends and other information that is not historical information. When used in this Form 10-K, the words “estimates,” “expects,” “contemplates,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management's examination of historical facts and operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-K. Such risks, uncertainties and other important factors include, among other things:

▪
competition;
▪
our ability to predict, identify, interpret and respond to changes in consumer preferences;
▪
the loss of any of our major customers;
▪
our reliance on a single source provider for the manufacturing, co-packing and distribution of many of our products;
▪
fluctuations in price and supply of food ingredients, packaging materials and freight;
▪
volatility in commodity prices and our failure to mitigate the risks related to commodity price fluctuation and foreign exchange risk through the use of derivative instruments;
▪
future borrowing and restrictive covenants under our credit facility and the indentures governing our senior notes;
▪
costs and timeliness related to integrating acquisitions and strategically exiting certain markets, brands or products, including any restructuring initiatives, or our failure to realize anticipated cost savings, revenue enhancements or other synergies therefrom;
▪
litigation or claims regarding our intellectual property rights or termination of our material licenses;
▪
our ability to drive revenue growth in our key product categories or to add products that are in faster growing and more profitable categories;
▪
potential product liability and product recall claims;
▪
seasonality;
▪
stock price volatility;
▪
changes in our collective bargaining agreements or shifts in union policy;
▪
changes in the cost of compliance with laws and regulations, including environmental, worker health and workplace safety laws and regulations;
▪
our failure to comply with U.S. Food & Drug Administration (the "FDA"), U.S. Department of Agriculture (the "USDA") or Federal Trade Commission (the "FTC") regulations and the impact of governmental budget cuts;
▪
disruptions in our information technology systems;
▪
future impairments of our goodwill and intangible assets;
▪
difficulty in the hiring or the retention of key management personnel; and
▪
changes in tax statutes, tax rates, or case laws which impact tax positions we have taken.

There may be other factors that may cause our actual results to differ materially from the forward-looking statements, including factors disclosed under the sections entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-K. You should evaluate all forward-looking statements made in this Form 10-K in the context of these risks and uncertainties.

We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this Form 10-K apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.


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EXPLANATORY NOTE
Unless the context requires otherwise, in this Form 10-K, “Pinnacle,” the “Company,” “we,” “us” and “our” refers to Pinnacle Foods Inc.”, and the entities that are its consolidated subsidiaries.
PART I
ITEM 1.      BUSINESS

Company Overview

We are a leading manufacturer, marketer and distributor of high-quality, branded food products in North America, with annual net sales of approximately $3.1 billion in fiscal 2017. Our brand portfolio enjoys strong household penetration in the United States ("U.S."), where our products can be found in over 85% of U.S. households. Our products are sold through supermarkets, grocery wholesalers and distributors, mass merchandisers, super centers, convenience stores, dollar stores, natural and organic food stores, drug stores, e-commerce websites and warehouse clubs in the United States and Canada, as well as in military channels and foodservice locations. Given our diverse portfolio of brands with attractive market positions, our business generates significant and stable cash flows that have enabled us to pay regular quarterly dividends to our shareholders, reduce our debt and drive value creation through both reinvestment in our existing brands and periodic strategic acquisitions.

Pinnacle Foods Inc. was incorporated under the name "Crunch Holding Corp." in Delaware on July 28, 2003. Pinnacle Foods Inc. is a holding company whose sole asset is 100% ownership of Peak Finance Holdings LLC (“PFH”). PFH is a holding company whose sole asset is 100% ownership of Pinnacle Foods Finance LLC.

The Company’s business is organized into the following four reportable segments: The Frozen segment, The Grocery segment, The Boulder segment and The Specialty segment

Frozen Segment

Birds Eye is the largest brand in the $3.3 billion frozen vegetables category, with a 31.9% market share. Government programs, such as the USDA’s My Plate program, and nutrition and health professionals continue to identify increased vegetable consumption as a key to better health. We believe that enhancing the taste of vegetables and making them exceptionally convenient are keys to driving more vegetable consumption. Birds Eye has taken a leadership role in increasing vegetable consumption, including encouraging children to eat more vegetables. We are supporters of the USDA’s My Plate program and have engaged in breakthrough marketing efforts with major multi-media family entertainment partners to encourage children to eat more vegetables. We also compete in the frozen complete bagged meals category with our Birds Eye Voila! brand which has a 41.6% market share. Birds Eye Voila! frozen bagged meals provide consumers with a high quality complete meal, including protein, starch, and vegetables, that can be prepared in a skillet in just minutes.

Our Frozen segment also includes Hungry-Man frozen entrées, Van de Kamp’s and Mrs. Paul's frozen prepared seafood, Lender's frozen and refrigerated bagels and Celeste frozen pizza. The Frozen segment also includes all of the Company’s business in Canada.

Grocery Segment

Included in the Grocery segment is our Duncan Hines portfolio, which includes cake mixes, ready-to-serve frostings, brownie mixes, and cookie mixes.  In addition to our traditional cake mix offerings, our cake mix portfolio also includes premium offerings under the Duncan Hines Decadent and Duncan Hines Perfect Size brands.  Duncan Hines is the #2 brand with a 28.9% market share in the $1.1 billion cake/brownie mix and frostings category.  We compete in the shelf-stable salad dressings category with our Wish-Bone and Western brands, including our Wish-Bone E.V.O.O. , Wish-Bone Ristorante Italiano and Wish-Bone Avocado Oil lines.   We hold the #4 position in the $2.0 billion salad dressings category, with a combined share of 11.0%, and Wish-Bone holds the #1 position in the branded Italian segment of the category.   Our Grocery segment also includes Armour , Nalley and Brooks canned meat, Mrs. Butterworth’s and Log Cabin table syrups, Smart Balance premium margarine/spread, Comstock and Wilderness pie and pastry fruit fillings and Open Pit barbecue sauce.

The Grocery segment also includes a diversified portfolio of shelf-stable and refrigerated products including a complete line of shelf-stable pickle products, primarily under the nationally-distributed Vlasic brand, and the regional brands under the Milwaukee’s and Wiejske Wyroby brands.  Our Vlasic brand, represented by its trademark Vlasic stork, has the highest consumer awareness and quality ratings in the pickle category.  Vlasic is the #1 brand in the $790 million shelf-stable pickle category and Pinnacle pickle brands collectively hold a 34.3% market share. 

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Boulder Segment

We offer a portfolio of gluten-free products under the Udi’s and Glutino brands. Udi’s is the #1 brand in the $436.8 million gluten-free frozen bakery and pizza category with a 30.2% market share.  The Boulder segment also includes the rapidly-growing gardein plant-based protein brand, natural frozen meals under our EVOL brand and all of the products under the Earth Balance brand, a plant-based premium refrigerated and shelf-stable portfolio.

Specialty Segment

The Specialty segment is comprised of our direct store delivery snacks portfolio, including Tim’s Cascade , Hawaiian kettle style chips, Snyder of Berlin and Husman’s , each of which has strong regional presence.   We also manufacture and distribute certain products, mainly in the gluten-free, frozen meat substitutes, canned meat, and pie and pastry fruit filling categories, through foodservice channels.  The Specialty segment also includes our private label business, which manufactures and distributes products in the canned meat and shelf-stable pickles categories.

Financial information about our business segments is discussed in greater detail in Note 15 to the Consolidated Financial Statements, Segments.



Frozen Segment
Major Pinnacle Brands
Industry Category
Market Share
52 Weeks Ended
December 31, 2017 (1)
Category Rank (1)
Birds Eye
Frozen vegetables
 
31.9%
#1
Birds Eye Voila!
Frozen complete bagged meals
 
41.6%
#1
Lender's 
Frozen and refrigerated bagels
61.8%
#1
Van de Kamp's
Mrs. Paul's
Frozen prepared seafood
24.9%
#2
Celeste 
Frozen pizza for one
4.9%
#4
Hungry-Man
Full-calorie single-serve frozen dinners and entrées
 
9.1%
#3



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Grocery Segment
Major Pinnacle Brands
Industry Category
Market Share
52 Weeks Ended
December 31, 2017 (1)
Category Rank (1)
Vlasic  
Shelf-stable pickles  
34.3%
#1
Mrs. Butterworth's
Log Cabin
Country Kitchen
Table syrup
20.4%
#2
Comstock
Wilderness
 
Pie / pastry fruit fillings  
37.2%
#1
Duncan Hines 
Cake / brownie mixes and frostings 
28.9%
#2
Smart Balance
Premium margarine/spreads
19.5%
#2
Armour
Brooks
Nalley
 
Canned meat
 
21.4%
#2
Wish-Bone (2)
Western
Shelf-stable salad dressings
11.0%
#4

Boulder Segment
Major Pinnacle Brands
Industry Category
Market Share
52 Weeks Ended
December 31, 2017 (1)
Category Rank (1)
Udi's  
Gluten-free frozen bakery and pizza
30.2%
#1
gardein
Frozen meat/poultry substitutes
16.9%
#2
Glutino
Gluten-free snacks
6.7%
NM
EVOL
Frozen healthy dinners/entrées

Frozen handhelds
3.0%

0.6%
NM

NM
Earth Balance
Premium margarine/spreads
9.0%
#3


(1) Based on Information Resources Inc. ("IRI") custom Pinnacle databases; rank among branded manufacturers, excluding Private Label.
(2) Pinnacle is the number 4 competitor in the category and Wish-Bone is the number one brand in the Italian segment.

Throughout this Form 10-K, we use data provided by IRI. Unless we indicate otherwise, retail sales, market share, category and other industry data used throughout this Form 10-K for all categories and segments are for U.S. brands and for the 53-week period ended December 31, 2017 . This data includes retail sales for food (grocery stores with at least $2.0 million in annual sales), drug (all chain and independent drug retailers, excluding prescription sales), mass merchandisers (Target, Kmart and Shopko), Walmart (Supercenters, Division 1 and Neighborhood Market), club stores (Costco, BJ’s and Sam’s Club), dollar stores (Dollar General, Family Dollar and Fred’s) and military (Defense Commissary Agency commissaries in the continental U.S.). Retail sales are dollar sales estimated by IRI and represent the value of units sold through cash registers for the relevant period. Market share is the Company’s percentage of the overall category and is calculated using dollar retail sales of U.S. brands.

We view shelf-stable pickles, table syrup, frozen and refrigerated bagels and pie/pastry fruit fillings as distinct categories. We view the cake/brownie mixes and frostings category as consisting of cake and cupcake mixes, brownie mixes and frostings. We view the frozen vegetables category as consisting of frozen plain vegetables, frozen prepared vegetables and select frozen side dishes, including vegetables. We view the frozen complete bagged meals category as consisting of frozen full-calorie multi-serve dinners, excluding non-bag items. We view the frozen prepared seafood category as consisting of frozen breaded and battered fish, excluding shellfish. We view the frozen meat/poultry substitutes category as consisting of frozen meat substitutes, frozen poultry substitutes, and frozen dinners/entrées where the ‘meat’ component is a plant-based substitute. We view the full-calorie single-serve frozen dinners and entrées category as consisting of full-calorie single-serve frozen dinners and entrées and select

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frozen handheld entrees. We view the frozen pizza-for-one category as consisting of total frozen pizza of 12 ounces per unit or less (for single serve packages, or individual units within multi-serve packages), excluding French bread crust and diet-positioned varieties. We view the canned meat category as consisting of shelf-stable prepared chili, shelf-stable lunch meats, shelf-stable Vienna Sausage and shelf-stable potted meats. We view the shelf-stable salad dressings category as consisting of shelf-stable pourable dressings and salad dressing mixes. We view the frozen healthy dinners and entrees category as consisting of frozen single-serve frozen dinners and entrees with healthy (natural, organic, non-GMO, gluten-free or diet) positioning. We view the frozen handhelds category as consisting of both breakfast and non-breakfast frozen handheld offerings, including burritos. We view the gluten-free frozen bakery and pizza category as consisting of all gluten-free dedicated brands as well as any of the following that contains a gluten free claim: frozen bread, frozen bagels, frozen rolls, frozen dough/biscuits/muffins, frozen single-serve tortillas/taco kits, frozen pizza and frozen pizza crust/dough. We view the gluten-free snacks category as consisting of all gluten-free dedicated brands as well an any of the following that contains a gluten free claim: cookies, crackers, cupcakes/brownies, carob/yogurt covered snacks, chocolate covered salty snacks, trail mixes, cheese snacks, pretzels, popcorn, tortilla/tostado chips, breakfast/cereal/snack bars, granola bars or other salted snacks with a gluten free claim. We view the premium margarine/spreads category as consisting of any premium margarine or spread.
Although we believe that this information is reliable, we cannot guarantee its accuracy and completeness, nor have we independently verified it. Although we are not aware of any misstatements regarding the industry data that we present in this Form 10-K, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Disclosure regarding forward-looking statements” and “Item 1A: Risk Factors.”

Competitive Strengths
We believe the following competitive strengths differentiate us from our competitors and contribute to our ongoing success:
Actively Managed Portfolio of Iconic Food Brands with Leading Market Positions
We actively manage our diverse portfolio of food brands that participate in attractive product categories. Our well-recognized brand portfolio enjoys strong household penetration in the U.S., where our products can be found in over 85% of U.S. households.

We have prioritized our investment spending and brand-building activities behind brands that have higher growth and margins, greater potential for value-added innovation and enhanced responsiveness to consumer marketing. We manage some of our other brands for stability in sales, market share and cash flow, with a focus on ongoing quality upgrades, competitive pricing and strong merchandising and trade programs. Our brand prioritization strategy is focused on ensuring that the strong, stable cash flows from certain brands are deployed for reinvestment in marketing and on-trend innovation for our higher-margin brands, as well as for debt reduction and other corporate priorities.
Strong Innovation and Marketing Capabilities
Over the past few years, we have continually enhanced our organizational capabilities in the areas of new product innovation and consumer marketing. Our Research and Development (“R&D”) facility in our Parsippany, New Jersey headquarters co-locates our sales, marketing and operations teams with our entire company-wide R&D team, and better enables us to leverage the innovation experience of our senior management. We also have sales, marketing, R&D and operations teams in Boulder, Colorado to further enhance our organizational capabilities in the health and wellness arena. Our manufacturing facility in Denver, Colorado also enables the Company to produce its gluten-free products and improve process capability and product quality.
Additionally, we have increased investment in consumer insights and employee innovation training. Recent examples of successfully launched innovations include new varieties of our Duncan Hines Perfect Size and our Birds Eye Veggie-Made pasta dishes . We intend to continue to invest in innovation that enables us to further differentiate our brands in the marketplace. Our research and development expenditures totaled $16.1 million , $18.1 million , and $13.0 million for fiscal years 2017 , 2016 and 2015 , respectively. Our level of research and development expenditures reflects our focus on product development in comparison to basic research.
We have partnered with best-in-class branded consumer advertising, digital and media agencies to develop high impact marketing programs implemented across television, print, social and digital media. We intend to continue to increase marketing investments over time, as the volume trends and promotional environment in the broader food industry normalize.

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Operational Excellence
Our operational excellence program is a holistic, Company-wide productivity initiative designed to generate annual productivity savings across our supply chain greater than 4.0% of our annual Cost of products sold for the foreseeable future. We have previously achieved productivity savings across our supply chain in the range of 3.5% to 4% over the last five years. In fiscal 2017, our operational excellence initiative drove productivity savings of 4.1%. These productivity savings, combined with selective retail price increases have been instrumental in mitigating input cost inflation in periods of significant inflationary pressure. We also pursue other initiatives to drive incremental improvement in our gross margin, including improving our product mix through new product innovation and low-margin SKU rationalization, increasing the effectiveness of our trade promotional spending and realizing synergies from acquisitions. Furthermore, our gross margin benefits from our diversified input cost basket in which no single commodity accounted for more than 5% of our total Cost of products sold in fiscal 2017 .
Strong Cash Flow Conversion
Our business generates strong cash flows which benefits from modest capital expenditure and working capital requirements and approximately $408.3 million in net operating loss carryovers (“NOLs”) ($171.1 million after IRC Section 382 limitation, subject to an annual limitation of $17.1 million), which combined have resulted in strong and stable cash flows. Our cash flow benefits from the quality of our brand portfolio and our lean, nimble structure and efficient internal processes have enabled us to consistently hold our overhead costs (i.e., selling, general and administrative expenses, excluding one-time items affecting comparability) to below 9% of net sales on an annual basis in 2017 . Our NOLs and other tax attributes will generate annual cash tax savings in 2017 and thereafter. Additionally, our cash taxes on an ongoing basis will be significantly reduced as a result of the lower federal statutory corporate income tax rate resulting from the 2017 Tax Cuts and Jobs Act (the “Act”).

We believe our strong cash flows will enable us to continue to maximize shareholder value through reducing our indebtedness, paying a regular quarterly dividend, strategically deploying our capital to fund innovation and organic growth opportunities and financing value-enhancing acquisitions.
Proven M&A Expertise with Significant Opportunity
We have substantial experience in sourcing, executing and integrating value-enhancing acquisitions. We maintain a highly-disciplined approach to M&A, focusing on opportunities that add new iconic brands to our portfolio and/or allow for strong synergy realization. The Company’s Boulder Brands acquisition expanded the Company’s presence in growing and complementary health and wellness categories and in the natural and organic retail channels.
Our strong existing platforms in the Frozen, Grocery, and Boulder segments facilitate a large addressable market and provide us with a broad set of potential acquisition targets. We believe our scale, management depth, integration expertise and access to capital will allow us to consider both small and large acquisitions in the future and to seamlessly integrate them to drive maximum value creation.
Experienced, Hands-On Management Team and Board of Directors
Our management team has a demonstrated history of delivering strong operating results, has extensive food industry experience and includes several executives who have managed significantly larger businesses and have led numerous acquisition integrations. Our management team is complimented by an experienced Board of Directors, which includes several individuals with a proven track record of successfully managing and acquiring consumer businesses.

Customers

We have several large customers that account for a significant portion of our sales. Wal-Mart is our largest customer and represented approximately 28%, 28%, and 27% of net sales in each of fiscal years 2017 , 2016 , and 2015 , respectively. Cumulatively, including Wal-Mart, our top ten customers accounted for approximately 59%, 63%, and 60% of net sales in each of fiscal years 2017, 2016, and 2015.


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Marketing
Our marketing programs consist of consumer advertising, consumer promotions, trade promotions, direct marketing and public relations. Our advertising is aimed at increasing consumer preference and usage of our brands. Consumer promotions include free trial offers, targeted coupons and on-package offers to generate trial usage and increase purchase frequency. Our trade promotions focus on obtaining retail feature and display support, achieving optimum retail product prices and securing retail shelf space. Over the long term, we continue to focus on shifting our marketing efforts toward building long-term brand equity through increased consumer marketing.

Intellectual Property

Our intellectual property and other proprietary assets include copyrights, registered and common law trademarks and trademark applications, patents and patent applications, domain names, trade secrets, other proprietary rights and licenses of intellectual property rights of various kinds. We consider these assets and rights, both in the U.S. and in Canada, among our most valuable assets. We rely on a combination of copyright, trademark, patent, trade secret and unfair competition laws as well as contractual provisions to protect these assets. The duration and scope of the protection afforded to our intellectual property and other assets depends on the type of property in question and the laws and regulations of the relevant jurisdiction. In the case of licenses, they also depend on contractual provisions.

We manufacture and market certain of our frozen food products under the Swanson, Aunt Jemima and Voila! brands pursuant to royalty-free, exclusive and perpetual trademark licenses. The licenses give us the right to use certain Swanson, Aunt Jemima and Voila! trademarks both inside and outside of the U.S. in connection with the manufacture, distribution, marketing, advertising, and promotion and sale of these products. The licenses contain standard provisions, including those dealing with quality control and termination as well as assignment and consent. If we were to breach any material term of the licenses and not timely cure such breach, Campbell Soup Company, The Quaker Oats Company or Voila! Bakeries, Inc. could terminate the licenses. Additionally, as a result of the Exit (As defined in Note 10 to the Consolidated Financial Statements, Restructuring Charges) in the second quarter of 2017, the Company recorded a tradename impairment charge of $27.4 million on the Aunt Jemima tradename, which resulted in a carrying value of $0 .
We also have a license agreement granting us an exclusive, royalty bearing, perpetual license to use certain Armour trademarks in the U.S.. Under the license agreement, Smithfield Foods, Inc., as successor to ConAgra, Inc., the licensor, grants us a license for the use of various Armour trademarks in conjunction with shelf-stable products within the U.S. We are required to make annual royalty payments to the licensor based upon our annual net sales of the approved shelf-stable products. If we were to materially breach the license agreement, Smithfield Foods, Inc. could terminate the license. We own and maintain Armour registrations in many other countries.

Sales and Distribution
We sell and distribute a majority of our products in the U.S. and Canada through a combined network of internal sales and broker teams. We employ other brokers for the foodservice and club channels. Through our combined network and other brokers, our products reach all traditional classes of trade, including supermarkets, grocery wholesalers and distributors, mass merchandisers, super centers, convenience stores, drug stores, warehouse clubs, foodservice and other alternative channels.

Due to the different demands of distribution for frozen, shelf-stable and refrigerated products, we maintain separate distribution systems for these products. In addition to these distribution systems, our snack products are primarily distributed through a direct store delivery network in the Midwest, Mid-Atlantic, and Pacific Northwest, a portion of which we own and operate and a portion of which utilizes third-party providers. We believe that our sales and distribution network is scalable and has the capacity to support substantial increases in volume.

Ingredients and Packaging
We believe that the ingredients and packaging used to produce our products are readily available through multiple sources. Ingredients and packaging typically account for approximately two thirds of our annual Cost of products sold.  We use a broad array of ingredients including vegetables and fruits, proteins, grains and oils, sugars, seafood and other agricultural products. Certain vegetables and fruits are purchased under dedicated acreage supply contracts from a number of growers prior to each growing season, while the balance is sourced directly from third parties. Our packaging consists primarily of steel, aluminum, glass jars, plastic bottles, corrugated fiberboard, and various poly-films.


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Manufacturing and Warehouse
Owned and Operated Manufacturing and Warehouse Facilities. We own and operate thirteen manufacturing and warehouse facilities and also lease eight manufacturing and distribution center facilities for our products. On December 15, 2017, the Company acquired a frozen warehouse and vegetable packaging facility from Ryder Integrated Logistics, Inc. located in Beaver Dam, Wisconsin for $37.5 million with cash on hand. This acquisition provided the Company with incremental capacity beginning in early 2018 to support the continued, strong growth of its  Birds Eye  franchise, including providing manufacturing flexibility for innovation, as well as expanded lower cost internal warehouse capacity.

See "Item 2, Properties" for a listing of our manufacturing and warehouse facilities.

Co-Packing Arrangements . In addition to our own manufacturing facilities, we source a portion of our products under “co-packing” agreements, a common industry practice in which manufacturing is outsourced to other companies. Recently, these arrangements have been used to source our innovation initiatives. As in-house incremental capacity comes fully on stream, volume is expected to be repatriated for future productivity gains. We regularly evaluate all co-packing arrangements to ensure the most cost-effective manufacturing of our products and to utilize company-owned manufacturing facilities most effectively.

See “Item 1A. Risk Factors. For the manufacturing, co-packing and distribution of many of our products, we primarily rely on single source providers where a significant disruption in a facility or loss of arrangements could affect our business, financial condition, and results of operations.”

Seasonality
Our sales and cash flows are affected by seasonal cyclicality. In general, our sales are highest in the fourth quarter. In addition, since many of our raw materials are agricultural crops, production of these products is predominantly seasonal. As a result our inventory levels tend to be higher in the third quarter, requiring more working capital at that time. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Seasonality.”

Competition
We face competition in each of our respective product lines. Although we operate in a highly competitive industry, we believe that the strength of our brands has resulted in strong respective competitive positions. We compete with producers of similar products on the basis of, among other things, product quality, brand recognition and loyalty, price, customer service, effective consumer marketing and promotional activities, and the ability to identify and satisfy emerging consumer preferences.

Employees

We employed approximately 4,900 people as of December 31, 2017 , with approximately 58% of our hourly employees unionized. Due to the seasonality of our agricultural businesses, our employment fluctuates throughout the year, and thus our average number of employees was approximately 5,450 throughout fiscal 2017 . Our unionized employees are covered under collective bargaining agreements expiring between April 2018 and October 2022. In general, we consider our relationship with employees to be good. See “Item 1A. Risk Factors. Our financial well-being could be jeopardized by unforeseen changes in our employees’ collective bargaining agreements or shifts in union policy .”

Financial Information About Geographical Areas
For information about our geographic segments, see Note 15 to the Consolidated Financial Statements, Segments in this Form 10-K.
See “Item 1A. Our operations are subject to regulation by the U.S. Food and Drug Administration (“FDA”), U.S. Department of Agriculture (“USDA”), Federal Trade Commission (“FTC”) and other governmental entities and such regulations are subject to change from time to time which could impact how we manage our production and sale of products. Government regulations could increase our costs of production and our business could be adversely affected. ”

Governmental, Legal and Regulatory Matters

Food Safety and Labeling
We are subject to extensive regulation, including, among other things, the Food, Drug and Cosmetic Act, as amended by the Food Safety Modernization Act ("FSMA"), the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, and

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the rules and regulations promulgated thereunder by the FDA. FSMA was enacted in order to aid the effective prevention of food safety issues in the food supply. This comprehensive and evolving regulatory program will impact how food is grown, packed, processed, shipped and imported into the United States and will govern compliance with Good Manufacturing Practices regulations (“cGMPs”). FDA has finalized seven major rules to implement FSMA, recognizing that ensuring the safety of the food supply is a shared responsibility among many different points in the global supply chain. The FSMA rules are designed to make clear specific actions that must be taken at each of these points to prevent contamination. Some aspects of these laws use a strict liability standard for imposing sanctions on corporate behavior. If we fail to comply with applicable laws and regulations, we may be subject to civil remedies, including fines, injunctions, recalls, or seizures, and criminal sanctions, any of which could impact our results of operations.
In addition, the Nutrition Labeling and Education Act of 1990 prescribes the format and content of certain information required to appear on the labels of food products. We are also subject to regulation by certain other governmental agencies, including the USDA.

Our operations and products are also subject to state and local regulation, including the registration and licensing of plants, enforcement by state health agencies of various state standards, and the registration and inspection of facilities. Compliance with federal, state and local regulation is costly and time-consuming. Enforcement actions for violations of federal, state, and local regulations may include seizure and condemnation of products, cease and desist orders, injunctions or monetary penalties. We believe that our practices are sufficient to maintain compliance with applicable government regulations.

Federal Trade Commission

We are subject to certain regulations by the FTC. Advertising of our products is subject to such regulation pursuant to the Federal Trade Commission Act and the regulations promulgated thereunder.

Employee Safety Regulations

We are subject to certain health and safety regulations, including regulations issued pursuant to the Occupational Safety and Health Act. These regulations require us to comply with certain manufacturing, health, and safety standards to protect our employees from accidents.

Environmental Regulation

We are subject to a number of federal, state, and local laws and other requirements relating to the protection of the environment and the safety and health of personnel and the public. These requirements relate to a broad range of our activities, including: the discharge of pollutants into the air and water; the identification, generation, storage, handling, transportation, disposal, recordkeeping, labeling, and reporting of, and emergency response in connection with, hazardous materials (including asbestos) associated with our operations; noise emissions from our facilities; and safety and health standards, practices, and procedures that apply to the workplace and the operation of our facilities.

In order to comply with these requirements, we may need to spend substantial amounts of money and other resources from time to time to (i) construct or acquire new equipment, (ii) acquire or amend permits to authorize facility operations, (iii) modify, upgrade, or replace existing and proposed equipment and (iv) clean up or decommission our facilities or other locations to which our wastes have been sent. For example, some of our baking facilities are required to obtain air emissions permits and to install bag filters. Many of our facilities discharge wastewater into municipal treatment works, and may be required to pre-treat the wastewater and/or to pay surcharges. Some of our facilities use and store in tanks large quantities of materials, such as sodium chloride and ammonia, that could cause environmental damage if accidentally released. We use some hazardous materials in our operations, and we generate and dispose of hazardous wastes as a conditionally exempt small quantity generator. Our capital and operating budgets include costs and expenses associated with complying with these laws. If we do not comply with environmental requirements that apply to our operations, regulatory agencies could seek to impose civil, administrative, and/or criminal liabilities, as well as seek to curtail our operations. Under some circumstances, private parties could also seek to impose civil fines or penalties for violations of environmental laws or recover monetary damages, including those relating to property damage or personal injury.
Many of our plants were in operation before current environmental laws and regulations were enacted. Our predecessors have in the past had to remediate soil and/or groundwater contamination at a number of locations, including petroleum contamination caused by leaking underground storage tanks which they removed, and we may be required to do so again in the future. We have sold a number of plants where we have ceased operations, and it is possible that future renovations or redevelopment at these facilities might reveal additional contamination that may need to be addressed. Although remediation costs in the past have not been material, future remediation costs may be. The presence of hazardous materials at our facilities or at other locations to which

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we have sent hazardous wastes for treatment or disposal, may expose us to potential liabilities associated with the cleanup of contaminated soil and groundwater under federal or state “Superfund” statutes. Under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (“CERCLA”), owners and operators of facilities from which there has been a release or threatened release of hazardous materials, together with those who have transported or arranged for the transportation or disposal of those materials, are liable for (i) the costs of responding to and remediating that release and (ii) the restoration of natural resources damaged by any such release. Under CERCLA and similar state statutes, liability for the entire cost of cleaning up the contaminated site can, subject to certain exceptions, be imposed upon any such party regardless of the lawfulness of the activities that led to the contamination.
See “Item 1A. Risk Factors. We and our third-party co-packers and suppliers are subject to laws and regulations relating to protection of the environment, worker health, and workplace safety. Costs to comply with these laws and regulations, or claims with respect to environmental, health and safety matters, could have a significant negative impact on our business.”

Insurance

We maintain general liability and product liability, property, worker’s compensation, business interruption, director and officer and other insurance in amounts and on terms that we believe are customary for companies similarly situated. In addition, we maintain excess insurance where we believe it is reasonably cost effective.

Additional Information

Additional information pertaining to our businesses, including operating segments, is set forth under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations and Related Information” under Item 7 of this Form 10-K and in Note 15 to the Consolidated Financial Statements, Segments, which is included under Item 8 of this Form 10-K.

Our reports on Form 10-K, along with all other reports and amendments, are filed with or furnished to the U.S. Securities and Exchange Commission (the "SEC"). You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C., 20549. Please call 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Our filings are also available free of charge to the public from commercial document retrieval services and at the web site maintained by the SEC at http://www.sec.gov . We also make available through our internet website at http://www.pinnaclefoods.com under the heading “Investor Center” and under the sub-heading "Public Filings" our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports after we electronically file any such materials with the SEC. In addition, copies of our (i) Corporate Governance Guidelines, (ii) charters for the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee and (iii) Code of Business Conduct and Ethics are available through our internet website at http://www.pinnaclefoods.com under the heading “Investor Center” and under the sub-heading “Governance Documents”. References to our website are intended to be inactive textual references only and the information posted on, accessed through or otherwise connected to it shall not be deemed to be incorporated by reference into this annual report on Form 10-K and shall not be deemed "filed" under the Exchange Act.

Executive Officers of the Registrant

Pursuant to General Instruction G of Form 10-K, the following is included in Part I of this Annual Report and sets forth certain information as of March 1, 2018 concerning our executive officers:
Mr. Michael Barkley
Mr. Barkley, age 51, was named Executive Vice President and President, Boulder in May 2017. In this role, Mr. Barkley leads Pinnacle’s Boulder segment of brands. From December 2015 to December 2017, Mr. Barkley served as Executive Vice President, Meals and Sides and Chief Marketing Officer and oversaw the Meals and Sides category team and channels marketing.Additionally, Mr. Barkley's responsibilities as Chief Marketing Officer included strengthening and harmonizing the Company’s marketing across the business teams, overseeing agency relationships and developing marketing talent. From December 2013 to December 2015, Mr. Barkley served as the Company’s Senior Vice President and General Manager Meals and Sides. Prior to joining Pinnacle, Mr. Barkley served as Vice President and General Manager of Healthy Beverages, Vice President Simple Meals and Vice President Ready to Serve Soup at Campbell Soup Company from 2008 to 2013. Prior to joining Campbell, Mr. Barkley led consumer health brands in various Vice President and General Manager roles at Johnson & Johnson and Bristol-Meyers Squibb. Mr. Barkley holds a Bachelor of Science degree from the University of Virginia and an M.B.A. from the University of North Carolina.

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Mr. Mark Clouse

Mr. Clouse, age 49, was appointed Chief Executive Officer effective May 23, 2016. From January 2016 to May 2016, Mr. Clouse served as Executive Vice President and Chief Commercial Officer at Mondelez International, Inc. He previously served as Executive Vice President and Chief Growth Officer from July 2014 until December 2015 and Executive Vice President and President, North America from October 2012 to March 2015. He was President of the Snacks and Confectionery business in North America from June 2011 to October 2012, Senior Vice President of the Biscuits Global Category Team from October 2010 to June 2011, Managing Director of Kraft Foods Brazil from January 2008 to September 2010 and President of Kraft Foods Greater China from January 2006 to January 2008. Prior to that, Mr. Clouse held various positions of increasing responsibility around the world. During Mr. Clouse’s 20-year tenure at Kraft Foods Inc. and the subsequent spin-off of Mondelez, Mr. Clouse held a broad range of leadership positions involving iconic brands such as Oreo, Nabisco, Cadbury and Trident, oversaw the company’s commercial execution for all of its five geographic regions, as well as the global sales function, was responsible for the company’s growth strategy and oversaw key areas such as corporate strategy, global marketing, global sales, and research, development and quality. Mr. Clouse is a graduate of the U.S. Military Academy at West Point, with a degree in economics.
Ms. Mary Beth DeNooyer
Ms. DeNooyer, age 47, was named Executive Vice President and Chief Human Resources Officer in May 2013. As Chief Human Resources Officer, Ms. DeNooyer leads all human resources responsibilities throughout the Company including organizational development, recruitment and talent management, training, compensation and benefits, employee relations, diversity and communications. From April 2011 through June 2012, Ms. DeNooyer served as Senior Vice President and Chief Human Resources Officer, in addition to her role as head of Compensation and Benefits, for the division of Sara Lee which was later spun-off as Hillshire Brands. From March 2010 to April 2011, Ms. DeNooyer served as Senior Vice President, Compensation and Benefits at Sara Lee. Ms. DeNooyer held Human Resources leadership positions at The Pepsi Bottling Group from 1998 to 2010 and General Mills from 1994 to 1998. Ms. DeNooyer holds a Bachelor’s Degree in Business Administration from Drexel University and a Master’s Degree in Industrial and Labor Relations from Cornell University.
Mr. Michael Kelley Maggs
Mr. Maggs, age 66, was named Executive Vice President and General Counsel in March 2013. Previously, Mr. Maggs served as Senior Vice President, General Counsel and Secretary since Pinnacle’s inception in 2001. Mr. Maggs oversees all legal and corporate secretary activities at Pinnacle. He was associated with affiliates of CDM Investor Group LLC from 1993 until 2007. Prior to his involvement with Pinnacle, Mr. Maggs held the same position with International Home Foods Inc. from November 1996 to December 2000. From 1993 to 1996, Mr. Maggs was employed with Stella Foods, Inc. as Vice President and General Counsel. Prior to that time, he was engaged in the private practice of law in Virginia and New York. Mr. Maggs is a graduate of Niagara University and received his Juris Doctor from George Mason University Law School.
Mr. Daniel Poland
Mr. Poland, age 54, was named Executive Vice President and Chief Supply Chain Officer in January 2018. In this role, Mr. Poland has overall corporate responsibility for the end-to-end supply chain, including procurement, manufacturing, customer service, warehousing and distribution. Mr. Poland also oversees the Company’s food quality and safety programs. From March 2017 until January 2018, Mr. Poland served as the Chief Supply Chain Officer for North American Operations at DanoneWave following the 2017 acquisition of WhiteWave by Danone. Prior to that, Mr. Poland served as Senior Vice President of Supply Chain for WhiteWave with responsibility for all aspects of WhiteWave’s end-to-end supply chain from May 2014 until March 2017. From September 2013 to May 2014, Mr. Poland served as Vice President, Integrated Supply North America of McCain Foods, Inc. where he was responsible for the company’s end-to-end North America supply chain. From March 1999 to September 2013, Mr. Poland held a number of roles at the H.J. Heinz Company. Mr. Poland’s roles at the H.J. Heinz Company included North American Chief Supply Chain Officer, Vice President of Heinz North American Manufacturing and Tomato Seed Business, Vice President of Dry Manufacturing, Director of Food Service Operations and Factory Manager. Mr. Poland began his career with Gerber and Nestle and held roles with increasing responsibility, including R&D, engineering and operations management. Mr. Poland holds a Bachelor of Science degree in Engineering from Michigan State University and an MBA in business/finance from the University of Iowa.

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Mr. Mark Schiller
Mr. Schiller, age 56, was named Executive Vice President and Chief Commercial Officer in May 2017 and became the interim leader of the Sales organization in January 2018. In this role, Mr. Schiller leads Pinnacle’s Grocery and Frozen segments and key commercial functions utilized across the entire organization, including marketing strategy, innovation, product development, package design, commercialization, productivity, consumer insights and shopper marketing. On an interim basis, Mr. Schiller also leads Pinnacle’s Sales function. From January 2015 to May 2017, Mr. Schiller served as Executive Vice President and President North America Retail. In that role, Mr. Schiller oversaw the management of all of the Company’s retail brands and private label, excluding brands within the Boulder segment and snack business. From May 2013 to December 2014, Mr. Schiller served as Executive Vice President and President Birds Eye Frozen Division. From June 2010 to May 2013, Mr. Schiller served as Executive Vice President and President Duncan Hines Grocery Division. From March 2002 to April 2010, Mr. Schiller worked at PepsiCo as Senior Vice President of Frito Lay New Ventures, President of Quaker Foods and Snacks North America, and Senior Vice President and General Manager of Frito Lay Convenience Foods Division. From 1998 to 2002, Mr. Schiller was Chief Operating Officer and Co-President of Tutor Time Learning Systems, Inc. From 1996 to 1998, Mr. Schiller served as President of Valley Recreation Products, Inc. Mr. Schiller began his career at the Quaker Oats Company in 1985 where he progressed through a number of marketing, sales and supply chain roles. Mr. Schiller holds a Bachelor of Arts degree from Tulane University and an MBA from Columbia University Graduate School of Business.
Mr. Craig Steeneck

Mr. Steeneck, age 60, was named Executive Vice President and Chief Financial Officer in July 2007. Mr. Steeneck oversees our financial operations, treasury, tax, investor relations, corporate development and information technology. From June 2005 to July 2007, Mr. Steeneck served as Executive Vice President, Supply Chain Finance and IT, where he helped redesign the supply chain to generate savings and improved financial performance. From April 2003 to June 2005, Mr. Steeneck served as Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Cendant Timeshare Resort Group (now Wyndham Worldwide), playing key roles in wide-scale organization of internal processes and staff management. From March 2001 to April 2003, Mr. Steeneck served as Executive Vice President and Chief Financial Officer of Resorts Condominiums International (now Wyndham Worldwide) From October 1999 to February 2001, he was the Chief Financial Officer of International Home Foods Inc. Mr. Steeneck is a member of the Board of Directors of Freshpet, Inc. since November 2014, and serves as Chairman of its Audit Committee. Mr. Steeneck is a member of the Board of Directors of Hostess Brands Inc. since November 2016, and he serves as Chairman of its Audit Committee. Mr. Steeneck is an honors graduate of the University of Rhode Island.

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ITEM 1A.      RISK FACTORS
Risks Related to Our Business
We face significant competition in our industry, which could cause us to lose market share, lower prices, or increase advertising and promotional expenditures. Our success also depends on our ability to predict, identify and interpret changes in consumer preferences and develop and offer new products rapidly enough to meet those changes.
The food products business is highly competitive. Numerous brands and products compete for shelf space and sales, with competition based primarily on product quality, brand recognition and loyalty, price, trade promotion, consumer promotion, customer service, and the ability to identify and satisfy emerging consumer preferences. We compete with a significant number of companies of varying sizes, including divisions, subdivisions, or subsidiaries of larger companies. Many of these competitors have multiple product lines, substantially greater financial and other resources available to them, and may be substantially less leveraged than Pinnacle. Our inability to respond to competitor actions within relevant categories may impact our ability to meet our growth objectives. In addition, private label is a significant competitor, particularly in the frozen vegetables, shelf-stable pickles, table syrup, frozen and refrigerated bagels, and pie/pastry fruit fillings categories. We may not be able to compete successfully with these companies and private label. Competitive pressures or other factors could cause us to lose market share, which may require us to lower prices, increase marketing and advertising expenditures, or increase the use of discounting or promotional campaigns, each of which would materially and adversely affect our margins and could result in a decrease in our operating results and profitability.
Our success depends on our ability to predict, identify, and interpret the tastes and dietary habits of consumers and to offer products that appeal to those preferences. There are inherent marketplace risks associated with new product or packaging introductions, including uncertainties about trade and consumer acceptance. If we do not succeed in offering products that consumers want to buy, our sales and market share will decrease, resulting in reduced profitability. If we are unable to accurately predict which shifts in consumer preferences will be long-lasting, or are unable to introduce new and improved products to satisfy those preferences, our sales will decline. In addition, given the variety of backgrounds and identities of consumers in our consumer base, we must offer a sufficient array of products to satisfy the broad spectrum of consumer preferences. As such, we must be successful in developing innovative products across a multitude of product categories. Finally, if we fail to rapidly develop products in faster-growing and more profitable categories, we could experience reduced demand for our products, or fail to expand margins.
We are also subject to the effect that the overall economic conditions have upon consumer sentiment and retail sales.

If we lose one or more of our major customers, or if any of our major customers experience significant business interruption or enact initiatives to improve their cost structure, our results of operations could be adversely affected.

We have several large customers that account for a significant portion of our sales. We do not have long-term supply contracts with any of our major customers. Our large customers may choose to purchase products from us based on a combination of factors such as price, consumer demand, customer service performance, their desired inventory levels, and other factors. Changes in any of our major customers’ strategies, including a reduction in the number of brands they carry, initiatives to improve their cost structure, or a shift of shelf space to private label products, may adversely affect sales. Additionally, changing customer demands could negatively impact our sales and gross margin or lead to the loss of a major customer if such demands or requirements are not met.

The loss of one or more major customers, a material reduction in sales to these customers as a result of competition from other food manufacturers, or the occurrence of a significant business interruption of our customers’ operations would result in a decrease in our revenues, operating results, and earnings and could adversely affect the market price of our common stock.

In addition, as the retail grocery trade continues to consolidate and our retail customers grow larger and become more sophisticated, our retail customers may demand lower pricing and increased promotional programs. If we fail to use our sales and marketing expertise to maintain our category leadership positions to respond to these trends, or if we lower our prices or increase promotional support of our products and are unable to increase the volume of our products sold, our profitability and financial condition may be adversely affected.

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For the manufacturing, co-packing and distribution of many of our products, we primarily rely on single source providers where a significant disruption in a facility or loss of arrangements could affect our business, financial condition, and results of operations.
With the exception of our Birds Eye frozen vegetable products which are produced in three facilities (Waseca, Minnesota, Beaver Dam, Wisconsin, and Darien, Wisconsin), none of our products are produced in significant amounts at multiple manufacturing facilities or co-packers. Significant unscheduled downtime at any of our facilities or those of our co-packers due to equipment breakdowns, power failures, natural disasters, or any other cause could materially adversely affect our ability to provide products to our customers, which would have a material adverse effect on our business, financial condition and results of operations.
We rely upon co-packers for some of our production needs, including certain Birds Eye products, a significant portion of products acquired through the Boulder Brands acquisition and our Duncan Hines frosting products, among others. We believe that there are a limited number of competent, high-quality co-packers in the industry, and if we were required to obtain additional or alternative co-packing agreements or arrangements in the future, we may not be able to do so on satisfactory terms or in a timely manner.
We sell a majority of our products in the U.S. and Canada through a combination of a direct and broker network. Our business could suffer disruption if either of our major U.S. or Canada brokers were to default in the performance of their obligations to perform brokerage services or fail to effectively represent us to the retail grocery trade.
We are vulnerable to fluctuations in the price and supply of food ingredients, packaging materials, and freight.
The prices of the food ingredients, packaging materials and freight are subject to fluctuations in price attributable to, among other things, changes in supply and demand of crops or other commodities, fuel prices and government-sponsored agricultural and livestock programs. The sales prices to our customers are a delivered price. Therefore, changes in our input costs could impact our gross margins. Our ability to pass along higher costs through price increases to our customers is dependent upon competitive conditions and pricing methodologies employed in the various markets in which we compete. To the extent competitors do not also increase their prices, customers and consumers may choose to purchase competing products or may shift purchases to lower-priced private label or other value offerings which may adversely affect our results of operations.

We use significant quantities of food ingredients and other agricultural products as well as plastic, paper corrugated fiberboard, aluminum, glass jars and steel packaging materials provided by third-party suppliers. We buy from a variety of producers and manufacturers, and alternate sources of supply are generally available. However, the supply and price are subject to market conditions and are influenced by other factors beyond our control, such as general economic conditions, unanticipated demand, problems in production or distribution, natural disasters, weather conditions during the growing and harvesting seasons, insects, plant diseases, and fungi.

Adverse weather conditions may occur more frequently as a result of climate change and other factors. There is concern that greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Long-term climate changes may negatively impact the price or availability of key raw materials. Adverse weather conditions and natural disasters can reduce crop size and crop quality, which in turn could reduce our supplies of raw materials, lower recoveries of usable raw materials, increase the prices of our raw materials, increase our cost of transporting and storing raw materials, or disrupt our production schedules.
We do not have long-term contracts with many of our suppliers, and, as a result, they could increase prices or fail to deliver. The occurrence of any of the foregoing could increase our costs and disrupt our operations.
If our assessments and assumptions about commodity prices, as well as ingredient and other prices and currency exchange rates, prove to be incorrect in connection with our hedging or forward-buy efforts or planning cycles, our costs may be greater than anticipated and our financial results could be adversely affected. Volatility in commodity prices will impact our results of operations.
From time to time, we enter into commodity forward contracts to fix the price of diesel fuel, natural gas, soybean oil and other commodity purchases at a future delivery date. However, such strategies do not fully address commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies. Additionally, changes in the value of our commodities derivatives are recorded in the Cost of products sold line in our Consolidated Statements of Operations. Accordingly, volatility in commodities could result in volatility in our results of operations. As of December 31, 2017 , the potential change in fair value of commodity derivative instruments, assuming a 10% adverse movement in the underlying commodity prices, would have resulted in an unrealized net loss of $2.1 million.

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In addition, certain parts of our foreign operations in Canada expose us to fluctuations in foreign exchange rates. Net sales in Canada accounted for 4.9% of Consolidated Net Sales for fiscal 2017. We also seek to reduce our exposure to such foreign exchange risks primarily through the use of foreign exchange-related derivative financial instruments. We enter into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of our functional currency. As of December 31, 2017 , a 10% decline in the U.S. dollar relative to the Canadian dollar would have decreased the fair value of our foreign exchange forward contracts by $3.2 million .
We may cease any of our current programs or use other hedging or derivative programs in the future. The extent of our hedges at any given time depends on our assessment of the markets for these commodities, diesel fuel and natural gas, including our assumptions about future prices and currency exchange rates. For example, if we believe market prices for the commodities we use are unusually high, we may choose to hedge less, or even none, of our upcoming requirements. If we fail to hedge and prices or currency exchange rates subsequently increase, or if we institute a hedge and prices or currency exchange rates subsequently decrease, our costs may be greater than anticipated or greater than our competitors’ costs and our financial results could be adversely affected. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Quantitative and Qualitative Disclosures About Market Risk” for a discussion of our current hedging and derivatives programs.

We may not be able to successfully identify, evaluate and integrate businesses we may acquire in the future and we may not be able to realize anticipated cost savings, revenue enhancements, or other synergies from such acquisitions.

We may not be able to identify and complete acquisitions in the future, and our failure to do so could limit our ability to grow our business beyond our existing brands. If we do acquire businesses in the future, the process of integrating such businesses involves risks. Some of these risks include, but are not limited to, demands on management related to the potential significant increase in the size of our business, the diversion of management’s attention from the management of daily operations and difficulties in the assimilation of different corporate cultures and business practices. Failure to successfully integrate acquired businesses may result in reduced levels of revenue, earnings or operating efficiency than might have been achieved if we had not acquired such businesses.

Litigation or claims regarding our trademarks and any other proprietary rights or termination of our material licenses may have a significant, negative impact on our business.
We attempt to protect our intellectual property rights through a combination of trademark, patent, copyright and trade secret laws. We consider our trademarks to be of significant importance to our business and devote resources to the establishment and protection of our trademarks and other intellectual property rights. However, our trademark or other intellectual property applications are not always approved. Third parties may also oppose our intellectual property applications, or otherwise challenge our use of our trademark or other intellectual property. The actions we have taken or will take in the future may not be adequate to prevent violation of our trademark or other proprietary rights by others or prevent others from seeking to block sales of our products as an alleged violation of their trademark or other proprietary rights. We may need to initiate future claims or litigation or defend claims or litigation against us to enforce our trademark or other proprietary rights or to defend ourselves against claimed infringement of the trademark or other proprietary rights of others. Any future claims or litigation of this type, even without merit, could result in a material adverse effect on our business, financial condition or results of operations. Any such future claims or litigation may: (a) be expensive and time consuming to defend; (b) cause us to cease making, licensing or using products that incorporate the challenged intellectual property; (c) require us to rebrand our products or redesign our packaging, if feasible; (d) divert management’s attention and resources; or (e) require us to enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property, which, if required, may not be available to us on acceptable terms or at all. Any inability to use our trademarks or other proprietary rights could harm our business and sales through reduced demand for our products and reduced revenues.
Additionally, we manufacture certain brands under license agreements from various third parties. The loss of these licenses could have a material adverse effect on our business.

We may be unable to drive revenue growth in our key product categories or add products that are in faster growing and more profitable categories.
The food and beverage industry’s overall growth is linked to population growth. Our future results will depend on our ability to drive revenue growth in our key product categories. Because our operations are concentrated in North America, where growth in the food and beverage industry has been moderate, our success also depends in part on our ability to enhance our portfolio by adding innovative new products in faster growing and more profitable categories. Our failure to drive revenue growth in our key product categories or develop innovative products for new and existing categories could materially and adversely affect our profitability, financial condition and results of operations.


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We may be subject to product recalls or product liability claims should the consumption of any of our products cause injury, illness or death.
We sell food products for human consumption, which involves risks such as product contamination or spoilage, misbranding, product tampering, and other adulteration of food products. Consumption of a misbranded, adulterated, contaminated, or spoiled product may result in personal illness or injury.
We could be subject to claims or lawsuits relating to an actual or alleged illness or injury, and we could incur liabilities that are not insured or exceed our insurance coverage. Even if product liability claims against us are not successful or fully pursued, these claims could be costly and time consuming and may require our management to spend time defending the claims rather than operating our business.
A product that has been actually or allegedly misbranded or becomes adulterated could result in product withdrawals or recalls, destruction of product inventory, negative publicity, temporary plant closings, and substantial costs of compliance or remediation. Recalls might also be required due to usage of raw materials provided by third-party suppliers. A significant product recall could cause our products to be unavailable for a period of time and reduce our sales. Any of these events, including a significant product liability judgment against us, could result in a loss of demand for our food products, which could have a material adverse effect on our financial condition, results of operations or cash flows.

Due to the seasonality of the business, our revenue and operating results may vary from quarter to quarter.

Our sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including frozen vegetables and frozen complete bagged meals, tend to be marginally higher during the winter months. Seafood sales peak during Lent, in advance of the Easter holiday. Sales of pickles, relishes, barbecue sauces, potato chips and salad dressings tend to be higher in the spring and summer months, and demand for Duncan Hines, Smart Balance and Earth Balance products, Birds Eye vegetables and our pie and pastry fruit fillings tend to be higher around the Easter, Thanksgiving, and Christmas holidays. Since many of the raw materials we process under the Birds Eye and Vlasic brands are agricultural crops, production of these products is predominantly seasonal, occurring during and immediately following the purchase of such crops. We also increase our Duncan Hines inventories in advance of the peak fall selling season. As a result, our inventory levels tend to be higher during August, September, and October, and thus we require more working capital during these months. We are typically a seasonal net user of cash in the third quarter of the calendar year.

For these reasons, sequential quarterly comparisons are not a good indication of our performance or how we may perform in the future. If we are unable to obtain access to working capital or if seasonal fluctuations are greater than anticipated, there could be a material adverse effect on our financial condition, results of operations or cash flows.

We face risks associated with certain pension obligations.

We hold investments in equity and debt securities in our qualified defined benefit pension plan. Deterioration in the value of plan assets, resulting from a general financial downturn or otherwise, could cause an increase in the underfunded status of our defined benefit pension plan, thereby increasing our obligation to make contributions to the plan. The underfunding in our pension plan totaled $51.5 million as of December 31, 2017 . Changes in interest rates in the future could have a significant effect on our funded status.

Our obligation to make contributions to the pension plan could reduce the cash available for working capital and other corporate uses and may have a material adverse impact on our operations, financial condition and liquidity.

Our financial well-being could be jeopardized by unforeseen changes in our employees’ collective bargaining agreements or shifts in union policy.

We employed approximately 4,900 people as of December 31, 2017 , with approximately 58% of our hourly employees unionized. Failure to extend or renew our collective bargaining agreements or a prolonged work stoppage or strike at any facility with union employees could have a material adverse effect on our business, financial condition, or results of operations. In addition, we may not be able to reach new agreements upon the expiration of our existing collective bargaining agreements and if we do reach new agreements, such agreements may not be on terms that we consider favorable. Furthermore, labor organizing activities could result in additional employees becoming unionized.

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We and our third-party co-packers and suppliers are subject to laws and regulations relating to protection of the environment, worker health, and workplace safety. Costs to comply with these laws and regulations, or claims with respect to environmental, health and safety matters, could have a significant negative impact on our business.
Our operations are subject to various federal, state and local laws and regulations relating to the protection of the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of solid and hazardous materials and wastes, employee exposure to hazards in the workplace and the cleanup of contaminated sites. We are required to obtain and comply with environmental permits for many of our operations, and sometimes we are required to install pollution control equipment or to implement operational changes to limit air emissions or wastewater discharges and/or decrease the likelihood of accidental releases of hazardous materials. We could incur substantial costs, including cleanup costs, civil or criminal fines or penalties, and third-party claims for property damage or personal injury as a result of any violations of environmental laws and regulations, noncompliance with environmental permit conditions or contamination for which we may be responsible that is identified or that may occur in the future. Such costs may be material.
Under federal and state environmental laws, we may be liable for the costs of investigation, removal or remediation of certain hazardous or toxic substances, as well as related costs of investigation and damage to natural resources, at various properties, including our current and former properties and the former properties of our predecessors, as well as offsite waste handling or disposal sites that we or our predecessors have used. Liability may be imposed upon us without regard to whether we knew of or caused the presence of such hazardous or toxic substances. Any such locations, or locations that we may acquire in the future, may result in liability to us under such laws or expose us to third party actions such as tort suits based on alleged conduct or environmental conditions. In addition, we may be liable if hazardous or toxic substances migrate from properties for which we may be responsible to other properties.
In addition to regulations applicable to our operations, failure by any of our co-packers or other suppliers to comply with regulations, or allegations of compliance failure, may disrupt their operations and could result in potential liability. Even if we were able to obtain insurance coverage or compensation for any losses or damages resulting from the non-compliance of a co-packer or supplier with applicable regulations, our brands and reputation may be adversely affected by negative perceptions of our brands stemming from such compliance failures.

We cannot predict what environmental or health and safety legislation or regulations will be enacted in the future or how existing or future laws or regulations will be enforced, administered or interpreted. We also cannot predict the amount of future expenditures that may be required in order to comply with such environmental or health and safety laws or regulations or to respond to environmental claims.

Unsuccessful implementation of business strategies may adversely affect our results of operations.

If we are not able to complete projects designed to improve our processes, systems and business planning, our operating profits may be adversely impacted. In addition, if the initiatives we have implemented to identify productivity opportunities in order to drive margin improvement, or any future cost-saving initiatives, do not generate the expected cost savings and synergies, our results of operations may be adversely affected.

Our operations are subject to regulation by the U.S. Food and Drug Administration, U.S. Department of Agriculture, Federal Trade Commission and other governmental entities and such regulations are subject to change from time to time which could impact how we manage our production and sale of products. Government regulations could increase our costs of production and our business could be adversely affected.

Our operations are subject to extensive regulation by the FDA, the USDA and other national, state, and local authorities. There may be changes in the legal and regulatory environment, and governmental entities or agencies in jurisdictions where we operate may impose new manufacturing, transportation, processing, packaging, storage, import, export, distribution, labeling or other restrictions, any of which could increase our costs and affect our profitability. For example, we are subject to the Food, Drug and Cosmetic Act and regulations promulgated thereunder by the FDA. This comprehensive regulatory program governs, among other things, the manufacturing, composition and ingredients, packaging, and safety of food. Under this program, the FDA regulates manufacturing practices for foods through, among other things, its current “good manufacturing practices” regulations, or cGMPs, and specifies the recipes for certain foods. Additionally, the FDA declared that the use of partially hydrogenated oils in food is no longer “generally recognized as safe” (often referred to as GRAS), effectively banned the use of partially hydrogenated oils in food, and established a transition period for companies to comply with the new regulations. The FDA also released major food safety regulations governing the production and handling of food, and we have incurred and may continue to incur costs to comply with these regulations.


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In addition, various regulatory authorities have paid increasing attention to the effect on humans due to the consumption of acrylamide - a naturally-occurring chemical compound that is formed in the process of cooking many foods, including potato chips, and have imposed additional regulatory requirements. In the State of California, we are required to warn about the presence of acrylamide and other potential carcinogens in our products. If consumer concerns about acrylamide increase or this or other substances are regulated further or not allowed in food products, demand for affected products could decline or we may be unable to sell some of our products and our revenues and business could be harmed. Efforts to reformulate products may be expensive or unsuccessful or may fail to meet consumer expectations, in which event our revenues or business would be harmed.

Our processing facilities and products are subject to periodic inspection by federal, state, and local authorities. In addition, we must comply with similar laws in Canada. The FTC and other authorities regulate how we market and advertise our products, and we could be the target of claims relating to alleged false or deceptive advertising under federal, state, and foreign laws and regulations. Changes in these laws or regulations or the introduction of new laws or regulations could increase the costs of doing business for us or our customers or suppliers or restrict our actions, causing our results of operations to be adversely affected

We seek to comply with applicable regulations through a combination of employing internal personnel to ensure quality-assurance compliance (for example, assuring that food packages contain only ingredients as specified on the package labeling) and contracting with third-party laboratories that conduct analysis of products for the nutritional-labeling requirements. New or amended statutes and regulations, increased production at our existing facilities and our expansion into new operations and jurisdictions may require us to obtain new licenses and permits, could require us to change our methods of operations, and could require us to implement remediation plans, any of which could be costly. Compliance with federal, state and local regulations is costly and time-consuming. Failure to comply with applicable laws and regulations or maintain permits and licenses relating to our operations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as potential criminal sanctions, which could result in increased operating costs resulting in a material adverse effect on our operating results and business.

Our business operations could be disrupted if our information technology systems fail to perform adequately.
The efficient operation of our business depends on our information technology systems, some of which are managed by third-party service providers. We rely on our information technology systems to effectively manage our business data, digital marketing activities, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and customers, causing our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, cyber-attacks and viruses. Any such damage or interruption could have a material adverse effect on our business.
Computer viruses, hackers and employee or vendor misconduct, and other external hazards, could expose our data systems to security breaches, cyber-attacks or other disruptions. In addition, we routinely transmit and receive personal, confidential and proprietary information by e-mail and other electronic means. While we attempt to develop secure transmission capabilities with third-party vendors and others with whom we do business, we may be unable to put in place secure capabilities with all of such vendors and third parties and, in addition, these third parties may not have appropriate controls in place to protect the confidentiality of the information.
Like other North American companies, our computer systems are regularly subject to and will continue to be the target of computer viruses, malware or other malicious codes, unauthorized access, cyber-attacks or other computer-related penetrations. While we have experienced threats to our data and systems, to date, we are not aware that we have experienced a material breach of cyber-security. However, over time, and particularly recently, the sophistication of these threats continues to increase. Our administrative and technical controls as well as other preventative actions we take to reduce the risk of cyber incidents and protect our information may be insufficient to detect or prevent unauthorized access, other physical and electronic break-ins, cyber-attacks or other security breaches to our computer systems or those of third parties with whom we do business. In addition, new technology that could result in greater operational efficiency may further expose our computer systems to the risk of cyber-attacks.
The increased risks identified above could expose us to data loss, disruption of service, monetary and reputational damages and significant increases in compliance costs and costs to improve the security and resiliency of our computer systems. The compromise of personal, confidential or proprietary information could also subject us to legal liability or regulatory action under evolving cyber-security, data protection and privacy laws and regulations enacted by the U.S. federal and state governments or other jurisdictions or by various regulatory organizations or exchanges. As a result, our ability to conduct our business and our results of operations might be materially and adversely affected.


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Failure to optimize our supply chain or disruption of our supply chain could have an adverse effect on our business, financial condition and results of operations.

In coordination with our suppliers, our ability to make, move and sell products is critical to our success. Our inability to maintain sufficient internal production capacity or our inability to enter into co-packing agreements on terms that are beneficial to the Company could have an adverse effect on our business. Failure to adequately handle increasing production costs and complexity, turnover of manufacturing personnel, or production capability and efficiency issues could materially impact our ability to cost effectively produce our products and meet customer demand.

Additionally, damage or disruption to our collective manufacturing or distribution capabilities resulting from weather, any potential effects of climate change, natural disaster, disease, crop spoilage, fire or explosion, terrorism, pandemics, strikes, repairs or enhancements at our facilities, or other reasons, could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely affect our business, financial condition and results of operations, and may require additional resources to restore our supply chain.

We have a significant amount of goodwill and intangible assets on our Consolidated Balance Sheets that are subject to impairment based upon future adverse changes in our business and the overall economic environment.

At December 31, 2017 , the carrying value of goodwill and tradenames was $2,178.0 million and $2,463.4 million , respectively. We evaluate the carrying amount of goodwill and indefinite-lived intangible assets for impairment on an annual basis, in the third quarter, or more frequently if an event occurs or circumstances change that would reduce the fair value below its carrying amount. The value of goodwill and intangible assets will be derived from our business operating plans and is susceptible to an adverse change in demand, input costs, general changes in the business, or changes in the overall economic environment and could require an impairment charge in the future.

If we are unable to retain our key management personnel, our future performance may be impaired and our financial condition could suffer as a result.
Our success depends to a significant degree upon the continued contributions of senior management, certain of whom would be difficult to replace. Departure by certain of our executive officers could have a material adverse effect on our business, financial condition, or results of operations. The lack of robust succession plans for key positions across the Company, due to our lean selling, general and administrative structure, increases the likelihood that the Company would be negatively impacted if one or more key senior executives were to depart unexpectedly. We do not maintain key-man life insurance on any of our executive officers. The services of such personnel may not continue to be available to us.

We may not be able to utilize all of our net operating loss carryovers.

I f there is an unfavorable adjustment from a United States Internal Revenue Service (“IRS”) examination (whether as a result of a change in law, IRS policy or otherwise) that reduces any of our NOLs, cash taxes may increase and impact our ability to pay dividends or make interest payments on our indebtedness. As of December 31, 2017 , we had gross NOLs for U.S. federal income tax purposes of approximately $408.3 million. In general, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), a corporation that undergoes an “ownership change” is subject to annual limitations on its ability to utilize its pre-change NOLs to offset future taxable income. Our existing NOLs are subject to annual limitations under Section 382 of the Code. For further detail on our NOLs, see Note 16 to our Consolidated Financial Statements, (Benefit)/Provision for Income Taxes.

Maintaining, extending and expanding our reputation and brand image is essential to our business success.

Our success depends on our ability to maintain brand image for our existing products, extend our brands into new geographies and to new distribution platforms, including online, and expand our brand image with new product offerings.

We seek to maintain, extend and expand our brand image through marketing investments, including advertising and consumer promotions, and product innovation. Continuing global focus on health and wellness, including weight management, and increasing attention from the media, shareholders, consumers, activists and other stakeholders on the role of food marketing could adversely affect our brand image. It could also lead to stricter regulations and increased focus on food and snacking marketing practices. Increased legal or regulatory restrictions on our advertising, consumer promotions and marketing, or our response to those restrictions, could limit our efforts to maintain, extend and expand our brands. Moreover, adverse publicity about regulatory or legal action against us, product quality and safety, or environmental and human rights risks in our supply chain could damage our reputation and brand image, undermine our customers’ confidence and reduce demand for our products, even if the regulatory or legal action is unfounded or these matters are immaterial to our operations.

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In addition, our success in maintaining, extending and expanding our brand image depends on our ability to adapt to a rapidly changing marketing and media environment, including our increasing reliance on social media and online dissemination of marketing and advertising campaigns. We are subject to a variety of legal and regulatory restrictions on how and to whom we market our products. These restrictions may limit our ability to maintain, extend and expand our brand image, particularly as social media and the communications environment continue to evolve. Negative posts or comments about us on social networking web sites (whether factual or not) or security breaches related to use of our social media and failure to respond effectively to these posts, comments or activities could seriously damage our reputation and brand image across the various regions in which we operate. In addition, we might fail to invest sufficiently in maintaining, extending and expanding our brand image. As a result, we might be required to recognize impairment charges on our intangible assets or goodwill. If we do not successfully maintain, extend and expand our reputation and brand image, then our brands, product sales, financial condition and results of operations could be materially and adversely affected.

Risks Related to Our Indebtedness
Our leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to rising interest rate risk and prevent us from meeting our obligations under our indebtedness.
This leverage could have important consequences, including:

•
requiring a portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities or to pay dividends;
•
exposing us to the risk of rising interest rates to the extent of borrowings under our senior secured credit facility that are not hedged;
•
making it more difficult for us to make payments on our indebtedness;
•
increasing our vulnerability to general economic and industry conditions;
•
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
•
subjecting us to restrictive covenants that may limit our flexibility in operating our business;
•
limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
•
placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.
In the future, we may be able to incur significant additional amounts of debt, which could increase the risks associated with our leverage.

Our debt agreements contain restrictions that will limit our flexibility in operating our business.
Our senior secured credit facilities and the indentures governing our existing notes contain various covenants that limit our restricted subsidiaries’ ability to, among other things:
•
incur additional indebtedness and make guarantees;
•
create liens on assets;
•
engage in mergers or consolidations;
•
sell assets;
•
pay dividends and distributions or repurchase our capital stock;
•
make investments, loans and advances, including acquisitions; and
•
engage in certain transactions with affiliates.

The senior secured credit facilities require us to maintain a net first lien leverage ratio not to exceed 5.75 to 1.00. Our ability to comply with this ratio can be affected by events beyond our control, and we cannot assure you that we will continue to comply with this ratio. Our senior secured credit facilities also contain certain customary affirmative covenants and events of default.

A breach of any of these covenants or failure to maintain or satisfy this financial ratio could result in a default under our senior secured credit facilities. Upon the occurrence of an event of default under our senior secured credit facilities, the lenders could elect to declare all amounts outstanding under our senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit. Any such acceleration would also result in an event of default under the indentures governing our notes. If we were unable to repay those amounts, the lenders under our senior secured credit facilities could proceed

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against the collateral granted to them to secure that indebtedness. If the lenders under our senior secured credit facilities accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our senior secured credit facilities as well as our unsecured indebtedness, including the notes.
Risks Related to Our Common Stock and the Securities Market
Our stock price may be subject to significant volatility, and you may not be able to resell shares of our common stock at or above the price you paid or at all, and you could lose all or part of your investment as a result.

The market price of our common stock could fluctuate significantly for many reasons, including reasons not specifically related to our performance, such as industry or market trends, reports by industry analysts and other third parties, investor perceptions, actions by credit rating agencies, negative announcements by our customers or competitors regarding their own performance or actions taken by our competitors, as well as general economic and industry conditions. Our common stock price is also affected by announcements we make about our business, market data that is available to subscribers, analyst reports related to our Company, changes in financial estimates by analysts, whether or not we meet the financial estimates of analysts who follow our Company, rating agency announcements about our business, variations in our quarterly results of operations and those of our competitors, general economic and stock market conditions, future sales of our common stock, perceptions of the investment opportunity associated with our common stock relative to other investment alternatives, the public’s reaction to our public announcements and filings with the SEC, actual or anticipated growth rates relative to our competitors, and speculation by the investment community regarding our business, among other factors.

As a result of these factors, investors in our common stock may not be able to resell their shares at or above the price at which they purchase our common stock. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, in the past, some companies that have had volatile market prices for their securities have been subject to class action or derivative lawsuits. The filing of a lawsuit against us, regardless of the outcome, could have a negative effect on our business, financial condition and results of operations, as it could result in substantial legal costs and a diversion of management’s attention and resources.

There can be no guarantee that the Company will continue to make dividend payments.
Although the Company has paid quarterly cash dividends to its stockholders since 2013, any determinations by the Board of Directors to continue paying cash dividends on the Common Stock, whether at levels consistent with recent practice or at all, will be based primarily upon the Company’s financial condition, results of operations, business requirements, and the Board of Directors' continuing determination that the declaration of dividends are in the best interests of Company stockholders and are in compliance with all laws and agreements applicable to the dividend programs. In the event the Company does not declare a quarterly dividend, its stock price could be adversely affected.


ITEM 1B.      UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.      PROPERTIES

We own and operate the following thirteen manufacturing and warehouse facilities:
 
Facility location  
Principal products  
Principal segment (1)
Facility size  
Darien, Wisconsin
Frozen vegetables and complete bagged meals
Frozen
748,000 square feet
Ft. Madison, Iowa
Canned meat
Grocery
475,000 square feet
Imlay City, Michigan
Pickles, peppers, relish
Grocery
467,500 square feet
Fayetteville, Arkansas
Frozen dinners and entrées
Frozen
360,000 square feet
Waseca, Minnesota
Frozen vegetables
Frozen
348,000 square feet
Beaver Dam, Wisconsin
Frozen vegetables
Frozen
343,000 square feet
Centralia, Illinois
Cake and Brownie Mixes / Frosting
Grocery
342,000 square feet
Fennville, Michigan
Fruit toppings and fillings
Grocery
328,000 square feet
Jackson, Tennessee
Frozen breakfast, frozen pizza, frozen prepared seafood
Frozen
324,300 square feet
St. Elmo, Illinois
Syrup, salad dressing, barbecue sauce
Grocery
292,000 square feet
Mattoon, Illinois
Frozen and refrigerated bagels
Frozen
244,000 square feet
Berlin, Pennsylvania
Snack foods - Snyder of Berlin
Specialty
180,000 square feet
Hagerstown, Maryland
Plant based proteins
Boulder
142,000 square feet

(1)We manufacture private label and foodservice products which are included in the Specialty segment, in many of our plants.

All of our properties are mortgaged to secure our obligations under our Senior Secured Credit Facility. Our Senior Secured Credit Facility is described in more detail in Note 11 to the Consolidated Financial Statements, Debt and Interest Expense.

We also lease manufacturing plants, warehouses and distribution centers in Algona, Washington (Snack foods - Tim's Cascade ); Richmond, British Columbia (g ardein ); Laval, Quebec; Denver, Colorado; and Aurora, Colorado. In addition, we lease warehouses in Darien, Wisconsin; Waseca, Minnesota and Effingham, Illinois.

We have entered into co-packing (third-party manufacturing) agreements with several manufacturers for certain of our finished products. We believe that our manufacturing facilities, together with our co-packing agreements, provide us with sufficient capacity to accommodate our planned internal growth.

We also lease office space under operating leases (expiring) in Parsippany, New Jersey (April 2023); Cherry Hill, New Jersey (October 2021); Mississauga, Ontario (June 2026); Richmond, British Columbia (July 2022), and Boulder, Colorado (September 2025).


ITEM 3.      LEGAL PROCEEDINGS

From time to time, we and our operations are parties to, or targets of, lawsuits, claims, investigations, and proceedings, which are being handled and defended in the ordinary course of business. Although the outcome of such items cannot be determined with certainty, our general counsel and management are of the opinion that the final outcome of these matters individually or in the aggregate will not have a material effect on our financial condition, results of operations or cash flows.

ITEM 4.      MINE SAFETY DISCLOSURES
        
Not Applicable.

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PART II

ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES    

The Company's common stock is listed and traded on the New York Stock Exchange (NYSE) under the symbol "PF". The number of holders of record, including individual owners, of the Company's common stock was 20 as of February 27, 2018 . This is not the actual number of beneficial owners of the Company's common stock, as shares are held in "street name" by brokers and others on behalf of individual owners. The closing price of the common stock on the NYSE on February 27, 2018 was $55.23. The following graph compares the cumulative total return on our common stock with the cumulative total return of the Standard & Poor’s ("S&P") 500 Index and the S&P 500 Packaged Foods and Meats Index, which represents our peer group. This graph covers the period from March 28, 2013 (the first day our common stock began trading on the NYSE) through December 31, 2017 (the last trading day of our fiscal year). The graph shows total shareholder return assuming $100 was invested on March 28, 2013 and dividends were reinvested.

CHART-F277C59019EE55B4B7B.JPG
Date
 
Pinnacle Foods, Inc
 
S&P 500 Index
 
S&P 500 Packaged Foods & Meats Index
March 28, 2013
*
$
100.00

 
$
100.00

 
$
100.00

December 27, 2013
 
125.30

 
119.23

 
107.95

December 26, 2014
 
168.38

 
138.01

 
124.04

December 25, 2015
 
207.30

 
139.07

 
143.60

December 23, 2016
 
263.85

 
156.14

 
156.08

December 31, 2017
 
300.89

 
188.18

 
157.23


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* Using the closing market price at the end of the first trading day of $22.21 in accordance with SEC guidance. The initial public offering ("IPO") price was $20.00 per share. The Company's IPO is described further in Note 1 to the Consolidated Financial Statements.

Information regarding our common stock high and low sales prices as reported on NYSE and dividends declared during the last two fiscal years are included in Note 17 to the Consolidated Financial Statements, Quarterly Results (Unaudited).

This performance graph and other information furnished under this Item of this Annual Report on Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.

Issuer Purchase of Equity Securities

The Company does not have a share repurchase program currently in place but may seek authorization from our Board of Directors to implement one in the future.

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ITEM 6.      SELECTED FINANCIAL DATA

The following table sets forth selected historical consolidated financial and other operating data for the fiscal years ended December 31, 2017 , December 25, 2016 , December 27, 2015 , December 28, 2014 , and December 29, 2013 .

The selected financial data as of December 31, 2017 and December 25, 2016 and for the fiscal years ended December 31, 2017 , December 25, 2016 and December 27, 2015 have been derived from the audited consolidated financial statements included elsewhere in this Form 10-K. The selected financial data as of December 27, 2015 , December 28, 2014 and December 29, 2013 and for the fiscal years ended December 28, 2014 and December 29, 2013 have been derived from financial statements not included in this Form 10-K.

The selected financial data presented below should be read in conjunction with our Consolidated Financial Statements and the notes to those statements and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-K.

($ in millions, other than per share and share data)
Fiscal Year ended
 
Fiscal Year ended
 
Fiscal Year ended
 
Fiscal Year ended
 
Fiscal Year ended
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
December 28, 2014
 
December 29, 2013
 
53 weeks
 
52 weeks
 
52 weeks
 
52 weeks
 
52 weeks
Statement of operations data:
 
 
 
 
 
 
 
 
 
Net sales
$
3,144.0

 
$
3,127.9

 
$
2,655.8

 
$
2,591.2

 
$
2,463.8

Gross profit
868.1

 
916.1

 
740.5

 
681.2

 
654.2

Earnings before interest and taxes
448.7

 
479.6

 
424.7

 
512.3

 
293.0

Earnings before income taxes
279.2

 
340.5

 
336.4

 
416.2

 
160.8

(Benefit) Provision for income taxes (1)
(253.0
)
 
129.4

 
123.9

 
167.8

 
71.5

Net earnings
$
532.2

 
$
211.1

 
$
212.5

 
$
248.4

 
$
89.3

 
 
 
 
 
 
 
 
 
 
Net earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
4.50

 
$
1.81

 
$
1.83

 
$
2.15

 
$
0.84

Diluted
$
4.45

 
$
1.79

 
$
1.81

 
$
2.13

 
$
0.82

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
118,140,957

 
116,871,948

 
116,031,648

 
115,697,621

 
106,841,198

Diluted
119,552,072

 
118,160,705

 
117,322,526

 
116,885,222

 
108,618,740

Dividends declared per share
$
1.22

 
$
1.08

 
$
0.98

 
$
0.89

 
$
0.57

 
 
 
 
 
 
 
 
 
 
Cash flow:
 
 
 
 
 
 
 
 
 
Net cash provided by (used in):
 
 
 
 
 
 
 
 
 
Operating activities
$
416.0

 
$
487.5

 
$
372.9

 
$
550.7

 
$
262.2

Investing activities
(129.8
)
 
(1,086.4
)
 
(105.8
)
 
(270.0
)
 
(652.4
)
Financing activities
(390.3
)
 
771.3

 
(124.2
)
 
(358.0
)
 
414.4

 
 
 
 
 
 
 
 
 
 
Balance sheet data (at end of period):
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
249.8

 
$
353.1

 
$
180.5

 
$
38.5

 
$
116.7

Working capital (2)
507.7

 
553.3

 
469.1

 
346.6

 
488.0

Total assets
6,578.3

 
6,739.6

 
5,324.2

 
5,181.9

 
5,057.9

Total debt (3)
2,962.3

 
3,166.7

 
2,274.1

 
2,281.3

 
2,479.9

Total liabilities
4,198.0

 
4,790.7

 
3,518.6

 
3,468.0

 
3,459.9

Shareholders' equity
2,379.1

 
1,948.0

 
1,805.5

 
1,714.0

 
1,598.0

 
 
 
 
 
 
 
 
 
 

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($ in millions, other than per share and share data)
Fiscal Year ended
 
Fiscal Year ended
 
Fiscal Year ended
 
Fiscal Year ended
 
Fiscal Year ended
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
December 28, 2014
 
December 28, 2013
 
53 weeks
 
52 weeks
 
52 weeks
 
52 weeks
 
52 weeks
Other financial data:
 
 
 
 
 
 
 
 
 
Adjusted gross profit (4)
$
913.2

 
$
921.1

 
$
749.8

 
$
711.3

 
$
664.4

Adjusted EBITDA (5)
675.2

 
644.4

 
531.6

 
504.0

 
452.4

Capital expenditures
94.2

 
101.1

 
108.5

 
103.0

 
84.1


(1)
Benefit from income taxes in fiscal 2017 includes the decrease in our net deferred income tax liability as a result of the Tax Cuts and Jobs Act of 2017. For more information, see Note 16 to the Consolidated Financial Statements, (Benefit)/Provision for Income Taxes.
(2)
Working capital excludes short term borrowings, revolving debt facility and current portion of long term debt.
(3)
Total debt includes long term debt, short term borrowings, revolving debt facility and current portion of long term debt.
(4)
Adjusted gross profit is defined and explained in more detail in the section titled "Adjusted Gross Profit" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations."
(5)
Adjusted EBITDA is defined and explained in more detail in the section titled "Covenant Compliance" in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations."
    




29
Table of Contents

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except where noted)

You should read the following discussion of our results of operations and financial condition with the “Selected Financial Data” and the audited Consolidated Financial Statements appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in “Item 1A - Risk Factors” of this Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. See "Disclosure Regarding Forward Looking Statements" in this Form 10-K.

Overview

The Company is a leading manufacturer, marketer and distributor of high quality, branded food products in North America. The business is comprised of four segments: Frozen, Grocery, Boulder and Specialty.

The Frozen segment is comprised of the retail businesses of the Company’s frozen brands, including vegetables ( Birds Eye ), complete bagged meals ( Birds Eye Voila! and Birds Eye Signature Skillets ), full-calorie single-serve frozen dinners and entrées ( Hungry-Man ), prepared seafood ( Van de Kamp's and Mrs. Paul's ), frozen and refrigerated bagels ( Lender's ) and pizza for one ( Celeste ). The Frozen segment also includes all of the Company’s business in Canada, including those of the Garden Protein International and Boulder Brands acquisitions.

The Grocery segment is comprised of the retail businesses of the Company’s grocery brands, including cake/brownie mixes and frostings ( Duncan Hines ), shelf-stable pickles ( Vlasic ), shelf-stable salad dressings ( Wish-Bone , Western and Bernstein’s ), table syrups ( Log Cabin and Mrs. Butterworth's ), premium margarine/spreads ( Smart Balance), canned meat ( Armour, Nalley and Brooks ), pie and pastry fillings ( Duncan Hines, Comstock and Wilderness ) and barbecue sauces ( Open Pit ).

The Boulder segment is comprised of the retail businesses of the Company’s health and wellness lifestyle brands, including gluten-free products ( Udi's and Glutino) , natural frozen meal offerings ( EVOL) , plant-based refrigerated and shelf-stable spreads ( Earth Balance ) and plant-based protein frozen products ( gardein ).

The Specialty segment includes the Company’s snack products ( Tim's Cascade and Snyder of Berlin ) and all of its U.S. foodservice and private label businesses, including those of the Garden Protein International and Boulder Brands acquisitions.

Segment performance is evaluated by the Company’s Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets, including goodwill, which are identified with the operations in each segment or geographic region. Corporate assets consist of prepaid and deferred tax assets. Unallocated corporate expenses consist of corporate overhead such as executive management and finance and legal functions.

Business Drivers and Measures
In operating our business and monitoring its performance, we pay attention to trends in the food manufacturing industry and a number of performance measures and operational factors. The industry experiences volatility in overall commodity prices from time to time, which has historically been managed by increasing retail prices.  However, over the past several years, significant macroeconomic weakness and ongoing pressures on the consumer have resulted in shifting consumer buying patterns for grocery products.  As a result, industry volumes have come under pressure, hampering the ability of the industry to pass along higher input costs.

Industry Trends

Growth in our industry is driven primarily by population growth, changes in product selling prices, changes in consumption between out-of-home and in-home eating and lifestyle trends. Lifestyle categories driven by health and wellness choices are the fastest growing trend in the industry, with plant based/vegetarian and gluten-free products being two of the largest accelerators. In the current environment, consumers are looking for both value and healthier alternatives, which have caused an increase in the percentage of products sold on promotion and a shift from traditional retail grocery to natural and organic, mass merchandisers, club stores and dollar store channels. We believe we are well positioned in grocery and non-traditional channels, maintaining strong customer relationships across key retailers in each segment. In addition, the Boulder Brands and Garden Protein acquisitions have significantly increased our presence and footprint in the natural and organic lifestyle segments.


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Table of Contents

In order to maintain and grow our business, we must successfully react to, and offer products that respond to, evolving consumer trends, such as changing lifestyle trends, the focus on convenience and the growth of smaller households. Incremental growth in the industry is principally driven by product and packaging innovation.
Revenue Factors
Our net sales are driven principally by the following factors:
 
•
Gross sales, which change as a function of changes in volume and list price; and
•
the costs that we deduct from gross sales to arrive at net sales, which consist of:
•
Cash discounts, returns and other allowances .
•
Trade marketing expenses, which include the cost of temporary price reductions (“on sale” prices), promotional displays and advertising space in store circulars.
•
New product distribution (slotting) expenses, which are the costs of having certain retailers stock a new product, including amounts retailers charge for updating their warehousing systems, allocating shelf space and in-store systems set-up, among other things.
•
Consumer coupon redemption expenses, which are costs from the redemption of coupons we circulate as part of our marketing efforts.
Cost Factors
 
•
Costs recorded in Cost of products sold in the Consolidated Statement of Operations include:
•
Raw materials, such as vegetables and fruits, proteins, grains and oils, sugars, seafood and other agricultural products, among others, are available from numerous independent suppliers but are subject to price fluctuations due to a number of factors, including changes in crop size, federal and state agricultural programs, export demand, weather conditions and insects, among others.
•
Packaging costs. Our broad array of products entail significant costs for packaging and is subject to fluctuations in the price of plastics, paper and corrugated fiberboard, aluminum, glass jars, and steel.
•
Conversion costs, which include all costs necessary to convert raw materials into finished product. Key components of this cost include direct labor, and plant overhead such as salaries, benefits, utilities and depreciation.
•
Freight and distribution costs. We use a combination of common carriers and inter-modal rail to transport our products from our manufacturing facilities to distribution centers and to deliver products to our customers from both those centers and directly from our manufacturing plants. Our freight and distribution costs are influenced by fuel costs as well as capacity within the industry.

•
Costs recorded in Marketing and selling expenses in the Consolidated Statement of Operations include:
•
Advertising and other marketing expenses. These expenses represent advertising and other consumer and trade-oriented marketing programs.
•
Brokerage commissions and other overhead expenses.

•
Costs recorded in Administrative and Research and development expenses in the Consolidated Statement of Operations include:
•
Administrative expenses. These expenses consist of personnel and facility charges and also include third party professional and other services. Our lean, nimble structure and efficient internal processes have enabled us to consistently hold our overhead costs (i.e., selling, general and administrative expenses, excluding one-time items affecting comparability) to approximately 9% of net sales on an annual basis.
•
Research and Development ("R&D") expenses. These expenses consist of personnel and facility charges and include expenditures on new products and the improvement and maintenance of existing products and processes.
Working Capital
Our working capital is primarily driven by accounts receivable and inventories, which fluctuate throughout the year due to seasonality in both sales and production. See “Seasonality” below. We continually focus on reducing our working capital requirements while simultaneously maintaining our customer service levels and fulfilling our production requirements. We have historically relied on internally generated cash flows and temporary borrowings under our revolving credit facility to satisfy our working capital requirements.


31
Table of Contents

Seasonality
Our sales and cash flows are affected by seasonal cyclicality. Sales of frozen foods, including frozen vegetables and frozen complete bagged meals, tend to be marginally higher during the winter months. Seafood sales peak during Lent, in advance of the Easter holiday. Sales of pickles, relishes, barbecue sauces, potato chips and salad dressings tend to be higher in the spring and summer months, and demand for  Duncan Hines  products,  Birds Eye  vegetables and our pie and pastry fruit fillings tend to be higher around the Easter, Thanksgiving, and Christmas holidays. Since many of the raw materials we process under the  Birds Eye ,  Vlasic , Duncan Hines, Comstock and Wilderness  brands are agricultural crops, production of these products is predominantly seasonal, occurring during and immediately following the purchase of such crops. We also increase our  Duncan Hines  inventories in advance of the peak fall selling season. As a result, our inventory levels tend to be higher during August, September, and October, and thus we require more working capital during these months.

Inflation

To the extent possible, we strive to offset the effects of inflation with cost reduction and productivity programs. However, we spend approximately $2.3 billion annually on cost of products sold, therefore each 1% change in our weighted average cost of inputs would increase our cost of products sold by approximately $23 million. If we experience significant inflation, price increases may be necessary in order to preserve our margins and returns. However, over the past several years, significant macroeconomic weakness and ongoing pressures on the consumer have resulted in shifting consumer buying patterns for grocery products.  As a result, industry volumes have come under pressure, hampering our ability to pass along higher input costs with limited exceptions in select categories. Severe increases in inflation could have an adverse impact on our business, financial condition and results of operations.



32
Table of Contents

Items Affecting Year Over Year Results

During fiscal 2017, our earnings before interest and taxes were impacted by certain items. These items included:

•
In May 2017, the Company issued a voluntary recall for certain Aunt Jemima retail and foodservice frozen breakfast products. The cost impact of the Recall (as defined in Note 14 to the Consolidated Financial Statements, Commitments and Contingencies) for fiscal 2017 is a charge to gross margin of $13.0 million , of which $10.8 million is recorded as a reduction of Net Sales related to customer returns with the remaining $2.2 million relating to freight and disposal costs, charged directly to Cost of products sold. As of December 31, 2017 , the reserve related to the Recall remaining on the Company's Consolidated Balance Sheets is $0.9 million in Accrued liabilities.
•
In fiscal 2017, the Company recorded $63.2 million of charges related to the Exit (as defined in Note 10 to the Consolidated Financial Statements, Restructuring Charges) which consisted of non-cash intangible asset impairment charges of $31.2 million , non-cash accelerated depreciation charges of $22.6 million , non-cash charges to adjust inventory to net realizable value of $4.6 million , $3.3 million of contract termination and other fees in addition to employee termination costs of $1.5 million . As of December 31, 2017 , the reserve related to the Exit remaining on the Company's Consolidated Balance Sheets is $1.1 million in Accrued liabilities.
•
In addition, in fiscal 2017, the Company recorded approximately $15 million of other charges, primarily consisting of additional strategic investments to strengthen capabilities and systems at our Jackson, Tennessee manufacturing facility.
•
In fiscal 2017, the Company recorded approximately $10 million of costs related to enhancing processes and procedures across our manufacturing network, including improving assets and strengthening capabilities and systems (excluding the Jackson, Tennessee manufacturing facility).
•
As more fully described in Note 9 to the Consolidated Financial Statements, Goodwill, Tradenames and Other Assets, upon completion of our annual impairment review, we recorded tradename impairments of $24.8 million on Celeste , $6.5 million on Snyder of Berlin , $4.2 million on Nalley , $3.1 million on Bernstein and $0.5 million on Swanson . Celeste and Swanson are reported in the Frozen segment, Nalley and Bernstein are reported in the Grocery segment, and Snyder of Berlin is reported in the Specialty segment. These charges were the result of the Company's reassessment of the long-term sales projections for the brands during our annual planning cycle which occurs during the third quarter each year as well as a 50 basis point year on year increase in the weighted average cost of capital assumed in the calculation.
•
Performance-based compensation expense was $26.0 million lower in fiscal 2017 compared to fiscal 2016, in which the expense was in excess of target.

During fiscal 2017, our net earnings were also impacted by certain items. These items included::

•
Our 2017 refinancing resulted in the recognition of $28.5 million of non-cash charges to interest expense for deferred financing costs and original issue discount as well as a $20.7 million cash charge to interest expense resulting from the de-designation and settlement of interest rate swaps. See Note 11 to the Consolidated Financial Statements, Debt and Interest Expense, for further details.
•
The Tax Cuts and Jobs Act of 2017 resulted in a $334.7 million benefit to income tax expense driven by the decrease in our net deferred income tax liability. For more information, see Note 16 to the Consolidated Financial Statements, (Benefit)/Provision for Income Taxes.

During fiscal 2016, our earnings before interest and taxes were impacted by certain items. These items included:

•
As more fully described in Note 9 to the Consolidated Financial Statements, Goodwill, Tradenames and Other Assets, we recorded $11.2 million of tradename impairment charges related to the Celeste ($7.3 million), Aunt Jemima ($3.0 million) and Snyder of Berlin ($0.9 million) tradenames. These charges were the result of the Company's reassessment of the long-term sales projections for the brands during our annual planning cycle which occurs during the third quarter each year.
•
As more fully described in Note 7 to the Consolidated Financial Statements, Other Expense (Income), net, in October 2016, we voluntarily ceased production at Boulder Brands private label gluten-free bakery operation based in the United Kingdom. In conjunction with the wind down, we incurred charges of $4.3 million in the fourth quarter of 2016 which were recorded in Other expense (income), net. For the fiscal year ended December 25, 2016, net sales were $8.7 million and the business incurred a loss before interest, taxes, depreciation and amortization related to normal business operations of $3.9 million.
•
We recorded $32.9 million of restructuring charges and integration costs related to the Boulder Brands and Garden Protein acquisitions, of which $30.2 million was recorded in Administrative expenses, $1.5 million in Costs of products sold, $1.0 million in Marketing and selling expenses and $0.2 million in Research and development expenses.

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Table of Contents

•
We recorded $10.4 million of purchase accounting adjustments which represents expense related to the write-up to fair value of inventories acquired as a result of the Boulder Brands acquisition, which was recorded in Cost of products sold.
•
As more fully described in Note 3 to the Consolidated Financial Statements, Acquisitions, we recorded acquisition costs of $6.8 million related to the Boulder Brands acquisition, which were recorded in Other expense (income), net.

During fiscal 2015, our earnings before interest and taxes were impacted by certain items. These items included:

•
We recorded $8.6 million of manufacturing integration costs related to the Wish-Bone and Garden Protein acquisitions which were recorded in Cost of products sold.
•
The Boulder Brands acquisition was completed on January 15, 2016. Acquisition costs, primarily legal, accounting and other professional fees of $1.7 million were incurred in the fourth quarter of 2015.
•
As more fully described in Note 7 to the Consolidated Financial Statements, Other Expense (Income), net, we recorded $4.7 million of foreign exchange losses, which represents foreign exchange losses from intra-entity loans resulting from the Garden Protein acquisition.


34
Table of Contents

Results of Operations:
Consolidated Statements of Operations
The following tables set forth our statement of operations data expressed in dollars and as a percentage of net sales. There were 53 weeks in fiscal 2017. There were 52 weeks in fiscal 2016 and 2015.
 
 
Fiscal year
 
December 31,
2017
 
December 25,
2016
 
December 27,
2015
 
53 weeks
 
52 weeks
 
52 weeks
Net sales
$
3,144.0

 
100.0
%
 
$
3,127.9

 
100.0
%
 
$
2,655.8

 
100.0
%
Cost of products sold
2,275.9

 
72.4
%
 
2,211.9

 
70.7
%
 
1,915.3

 
72.1
%
Gross profit
868.1

 
27.6
%
 
916.1

 
29.3
%
 
740.5

 
27.9
%
 
 
 
 
 
 
 
 
 
 
 
 
Marketing and selling expenses
193.1

 
6.1
%
 
218.3

 
7.0
%
 
176.7

 
6.7
%
Administrative expenses
130.9

 
4.2
%
 
163.1

 
5.2
%
 
107.0

 
4.0
%
Research and development expenses
16.1

 
0.5
%
 
18.1

 
0.6
%
 
13.0

 
0.5
%
Tradename impairment charges
66.5

 
2.1
%
 
11.2

 
0.4
%
 
—

 
—
%
Other expense (income), net
12.9

 
0.4
%
 
25.8

 
0.8
%
 
19.1

 
0.7
%
 
419.5

 
13.3
%
 
436.4

 
14.0
%
 
315.8

 
11.9
%
Earnings before interest and taxes
$
448.7

 
14.3
%
 
$
479.6

 
15.3
%
 
$
424.7

 
16.0
%

 
 
Fiscal year
 
December 31,
2017

December 25,
2016
 
December 27,
2015
 
53 weeks
 
52 weeks
 
52 weeks
Net sales
 
 
 
 
 
Frozen
$
1,299.1

 
$
1,304.8

 
$
1,236.0

Grocery
1,115.4

 
1,089.3

 
1,024.3

Boulder
403.4

 
364.7

 
41.5

Specialty
326.0

 
369.2

 
354.1

Total
$
3,144.0

 
$
3,127.9

 
$
2,655.9

 
 
 
 
 
 
Earnings before interest and taxes
 
 
 
 
 
Frozen
$
154.8

 
$
240.9

 
$
218.5

Grocery
249.0

 
229.2

 
203.1

Boulder
59.9

 
9.1

 
(5.5
)
Specialty
10.8

 
32.3

 
34.4

Unallocated corporate expense
(25.8
)
 
(31.8
)
 
(25.9
)
Total
$
448.7

 
$
479.6

 
$
424.6

 
 
 
 
 
 
 





35


Fiscal year ended December 31, 2017 compared to the fiscal year ended December 25, 2016
Net sales
Net sales were $3.14 billion for the fiscal year ended December 31, 2017 , an increase of 0.5% compared to net sales of $3.13 billion in the prior year, reflecting underlying net sales growth of 0.5% driven by a 0.3% increase from volume/mix and higher net price realization of 0.2%, despite a reduction of retail inventories in the fourth quarter of 2017 at several key customers. Also impacting the performance was the combined benefit of 2.7% from the 53rd week and the three extra weeks from the Boulder Brands acquisition compared to prior year, entirely offset by a 2.0% decrease from the impact of the Recall and the subsequent Exit (as defined in footnotes 14 and 10 to the Consolidated Financial Statements), a 0.4% reduction from the SKU rationalization program, and a 0.3% decline from the wind-down of the Boulder Brands United Kingdom operations. The SKU rationalization program, which was implemented in the second half of 2016, consisted of the discontinuation of certain lower margin Boulder products as part of the overall acquisition integration. In an industry generally marked by low growth and heavier promotional spending, we continue to outpace the performance of our composite categories, with market share growth of 0.5 percentage points in fiscal 2017 .
Frozen Segment:
Net sales in the fiscal year ended December 31, 2017 were $1.30 billion , a decrease of $5.6 million , or 0.4% , from the prior year reflecting underlying net sales that were essentially even with year ago driven by a decrease of 0.3% from volume/mix, largely offset by favorable foreign currency translation of 0.1%. Also impacting the performance was the unfavorable 2.3% impact from the Recall and subsequent Exit, partially offset by a combined 2.1% benefit from the 53rd week and three extra weeks from those brands added in the Boulder Brands acquisition. Strong growth in the period from our Birds Eye franchise was supported by the launch of several new innovation platforms, including Birds Eye Veggie Made Pasta , Birds Eye Veggie Made Mashed , Birds Eye Superfoods Blends , and Birds Eye Organic . Offsetting the strong growth in Birds Eye were lower net sales of our Seafood and Canadian businesses and the reduction of retail inventory levels in the fourth quarter of 2017 at several key customers.
Grocery Segment:
Net sales in the fiscal year ended December 31, 2017 were $1.12 billion , an increase of $26.2 million , or 2.4% , from the prior year reflecting underlying net sales that were essentially even with year ago driven by a 0.7% benefit from volume/mix offset by lower net price realization of 0.8%. The combined benefit of the 53rd week and three extra weeks from those brands added in the Boulder Brands acquisition added net sales growth of 2.5%. Growth in the period was driven by higher sales of Duncan Hines baking products, which included the launch of eighteen varieties of our innovative Perfect Size for 1 , and Armour canned meat driven in part by a hurricane-related surge in demand. Partially offsetting these increases were lower sales of Comstock & Wilderness pie fillings, Wish-Bone dressings and Smart Balance spreads.
Boulder Segment:
Net sales in the fiscal year ended December 31, 2017 were $403.4 million , an increase of $38.7 million , or 10.6% , from the prior year reflecting a 7.3% increase from volume/mix and higher net price realization of 3.1%, as well as a 6.2% combined benefit from the Boulder Brands acquisition and the 53rd week. Partially offsetting these gains was a 3.6% impact from the SKU rationalization program and a 2.4% decline resulting from the wind-down of the Boulder Brands United Kingdom operations. During the period we realized double digit growth from our gardein , Evol and Earth Balance products partially offset by lower sales for Udi's , in part due to the SKU rationalization program.
Specialty Segment:
Net sales in the fiscal year ended December 31, 2017 were $326.0 million , an decrease of $43.2 million , or 11.7% , from the prior year, reflecting a 8.5% decrease from the impact of the Recall and the subsequent Exit and lower volume/mix of 5.0%, primarily driven by the decision to exit the gardein private label business earlier in the year and lower foodservice sales. Partially offsetting these losses were a 0.1% benefit from net price realization and 1.7% combined benefit from the 53rd week and three extra weeks from those products added in the Boulder Brands acquisition.
Gross profit
Gross profit for the year ended December 31, 2017 was $868.1 million , or 27.6% of net sales, compared to $916.1 million , or 29.3% of net sales, in the prior year. Excluding items affecting comparability, Adjusted gross profit declined 0.9% to $913.2 million and Adjusted gross profit percentage decreased approximately 40 basis points to 29.0% . See "Adjusted gross profit reconciliation" under "Non-GAAP Financial Measures" discussed below for further details.

36

The following table outlines the factors resulting in the year on year change in gross profit and gross margin percentage in fiscal 2017 .
 
$ (in millions)
 
% net sales
Productivity
$
88.0

 
2.8
 %
Effects of adjustments related to the application of purchase accounting (a)
10.4

 
0.3

Higher net price realization, net of slotting
8.9

 
0.2

Inflation
(64.0
)
 
(2.0
)
Unfavorable product mix
(27.1
)
 
(0.6
)
Higher mark-to-market losses on financial instruments
(12.7
)
 
(0.4
)
Higher acquisition integration charges
(5.8
)
 
(0.2
)
Higher depreciation expense
(6.0
)
 
(0.2
)
Other (b)
4.8

 
0.1

 
(3.5
)
 
—

 
 
 
 
Aunt Jemima retail and foodservice frozen breakfast products exit (c)
(52.2
)
 
(1.1
)
Aunt Jemima retail and foodservice frozen breakfast products recall
(13.0
)
 
(0.3
)
Strategic manufacturing investments (d)
(10.1
)
 
(0.3
)
 
(75.3
)
 
(1.7
)
 
 
 
 
Subtotal
$
(78.8
)
 
(1.7
)%
 
 
 
 
Higher sales volume
30.9

 
 
 
$
(47.9
)
 



(a) Represents expense recorded in 2016 related to the write-up to fair market value of inventories acquired as a result of the Boulder Brands acquisition.
(b) Primarily lower performance-based compensation expense.
(c) Consists of $32.0 million of charges related to the Exit (see Note 10 to the Consolidated Financial Statements, Restructuring Charges) as well as $20.2 million of other charges, primarily consisting of additional costs incurred at the Jackson, Tennessee manufacturing facility as well as the impact to gross margin from lower sales resulting from the impact of the Exit.
(d) Consists primarily of costs related to enhancing processes and procedures across our manufacturing network, including improving assets and strengthening capabilities and systems.

Marketing and selling expenses
Marketing and selling expenses were $193.1 million , or 6.1% of net sales, for the fiscal year ended December 31, 2017 , compared to $218.3 million , or 7.0% of net sales, for fiscal 2016 . The decrease was primarily driven by lower performance-based compensation expense, recoveries of previously incurred marketing costs, lower consumer marketing and selling expenses and synergies realized as part of the Boulder Brands acquisition integration.
Administrative expenses
Administrative expenses were $130.9 million , or 4.2% of net sales, for the fiscal year ended December 31, 2017 , compared to $163.1 million , or 5.2% of net sales, for the prior year. The decrease was primarily driven by synergies realized as part of the Boulder Brands acquisition integration as well as lower performance-based compensation expense partially offset by higher equity based compensation expense driven by the change in the Company's Chief Executive Officer ("CEO") in the prior year period and the impact of the 53rd week.

Research and development expenses
Research and development expenses were $16.1 million , or 0.5% of net sales, for the fiscal year ended December 31, 2017 , compared to $18.1 million , or 0.6% of net sales, for the comparable prior-year period. This decrease primarily reflected the impacts of lower performance-based compensation expense and the timing of certain innovation trials.


37

Tradename impairment charges
In fiscal 2017, the Company recorded tradename impairments of $27.4 million on Aunt Jemima , $24.8 million on Celeste , $6.5 million on Snyder of Berlin , $4.2 million on Nalley , $3.1 million on Bernstein and $0.5 million on Swanson . In fiscal 2016, the Company recorded tradename impairments of $7.3 million on Celeste , $3.0 million on Aunt Jemima and $0.9 million on Snyder of Berlin . See Note 9 to the Consolidated Financial Statements, Goodwill, Tradenames and Other Assets for further details.

Other Income and Expense:
 
Fiscal year ended
 
December 31, 2017
 
December 25, 2016
Other expense (income), net consists of:
 
 
 
Amortization of intangibles/other assets
$
15.8

 
$
17.0

Boulder Brands acquisition costs (Note 3)
—

 
6.8

Foreign exchange gains
(1.5
)
 
(0.5
)
Wind down of Boulder Brands United Kingdom operations
(0.8
)
 
4.3

Royalty income and other
(0.7
)
 
(1.7
)
Total other expense (income), net
$
12.9

 
$
25.8


Foreign exchange gains. Represents foreign exchange gains from intra-entity loans resulting from the Garden Protein acquisition that are anticipated to be settled in the foreseeable future.

Wind down of Boulder Brands United Kingdom operations. In October 2016, the Company voluntarily ceased production at Boulder Brands private-label gluten-free bakery operation which is based in the United Kingdom. As such, the Company adopted a plan in the fourth quarter of 2016 to wind down operations and dispose of all associated assets such as land, buildings, machinery and equipment and inventory. In connection with the plan of disposal, the Company determined that the carrying values of some of the underlying assets exceeded their fair values. Consequently, the above 2016 charges are primarily comprised of impairment losses, which represent the estimated excess of the carrying values of the assets over their fair values. The 2016 charges also include employee termination benefits and professional fees resulting from the closing and disposition. The final sale and disposal of the assets is substantially complete as of December 31, 2017, with final settlement of certain immaterial liabilities expected in early 2018.

Earnings before interest and taxes
Earnings before interest and taxes for the fiscal year ended December 31, 2017 were $448.7 million , a decrease of $31.0 million , or 6.5% as compared to the prior year, primarily driven by lower gross profit and the unfavorable impact of items affecting comparability. These items were partially offset by the benefit of the 53rd week as well as lower marketing and selling and administrative expenses. Items affecting comparability totaled $120.6 million and $59.0 million in fiscal 2017 and 2016, respectively. For fiscal 2017, these items primarily resulted from certain costs associated with the Exit and the tradename impairment charges. For fiscal 2016, these items primarily resulted from expenses related to the Boulder Brands acquisition. Excluding items affecting comparability, Adjusted earnings before interest and taxes increased $30.7 million or 5.7% to $569.3 million . See "Non-GAAP Financial Measures" discussed below for further details and reconciliations.

Frozen Segment:
Earnings before interest and taxes for the fiscal year ended December 31, 2017 decreased $86.1 million , or 35.7% , to $154.8 million as compared with the year-ago period, reflecting the unfavorable impact of items affecting comparability, consisting primarily of costs associated with the Exit and tradename impairment charges, as well as higher unrealized mark-to-market losses on financial instruments. Also negatively impacting the period was the Recall as well as input cost inflation. Partially offsetting these items was the benefit of the 53rd week, strong productivity as well as lower consumer marketing and performance-based compensation expenses. Excluding items affecting comparability, Earnings before interest and taxes decreased $14.9 million , or 6.0% , to $231.5 million .



38


Grocery Segment:
Earnings before interest and taxes increased $19.8 million , or 8.6% , to $249.0 million as compared to the previous year reflecting the benefit of the net sales growth, strong productivity and the impact of the 53rd week in addition to lower consumer marketing and performance-based compensation expenses. Partially offsetting these items were the impact of items affecting comparability, namely higher tradename impairment charges and higher unrealized mark-to-market losses on financial instruments as well as input cost inflation. Excluding items affecting comparability, Earnings before interest and taxes increased $22.5 million , or 9.5% , to $258.6 million .

Boulder Segment:

Earnings before interest and taxes increased $50.8 million , or 558.2% , to $59.9 million as compared to the previous year reflecting the favorable impact of items affecting comparability, largely related to the Boulder Brands acquisition integration, as well as net sales growth, synergies realized and productivity. Also positively impacting the comparison was the benefit of the 53rd week and lower performance-based compensation expense. Partially offsetting these factors was input cost inflation. Excluding items affecting comparability, Earnings before interest and taxes increased $25.6 million , or 55.1% , to $72.2 million .

Specialty Segment:
Earnings before interest and taxes were $10.8 million in 2017, a decline of $21.5 million or 66.5% as compared to the previous year reflecting the decline in net sales, which included the impact of the Recall and the negative impact of items affecting comparability, primarily costs associated with the Exit as well as tradename impairment charges. Partially offsetting these factors were the benefit of the 53rd week in addition to lower performance-based compensation expense. Excluding items affecting comparability, Earnings before interest and taxes decreased $1.8 million , or 5.3% , to $32.8 million .

Unallocated corporate income (expenses):
Unallocated corporate expense for fiscal 2017 was $25.8 million , as compared to $31.8 million in the prior year period primarily reflecting the impact of $6.8 million of Boulder Brands acquisition costs in 2016 as well as lower performance-based compensation expense in the current year. These benefits were partially offset by higher equity based compensation expense driven by the change in CEO in the prior year period.

Interest Expense, net
Net interest expense increased 21.8% , or $30.3 million , to $169.4 million in the fiscal year ended December 31, 2017 as compared to $139.1 million in the fiscal year ended December 25, 2016 . Included in net interest expense in fiscal 2017 is $49.5 million of charges related to the Refinancing (See Note 11 to the Consolidated Financial Statements, Debt and Interest Expense). These charges consisted of a $28.5 million non-cash charge from deferred financing costs and original issue discount and a $20.7 million cash charge resulting from the de-designation and early settlement of interest rate swaps. Excluding these charges, net interest expense in fiscal 2017 decreased 13.4%, driven by the impact of the first quarter 2017 Refinancing which lowered outstanding debt balances and interest rates on our term loans (as discussed in Note 11 to the Consolidated Financial Statements). Also impacting the period was lower interest rate swap losses described below.

We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. Any gains or losses realized on the interest rate swap agreements, excluding the Accumulated other comprehensive (loss) earnings ("AOCL") portion, are recorded as an adjustment to interest expense. Included in net interest expense is $1.3 million of gains in fiscal 2017 as compared to $8.5 million of losses in fiscal 2016.

Provision (benefit) for income taxes

The effective tax rate was (90.6)% for the fiscal year ended December 31, 2017 compared to 38.0% for the fiscal year ended December 25, 2016. On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other provisions, the Act reduced the federal statutory corporate income tax rate from 35% to 21%. This rate reduction generated a provisional one-time benefit of 119.9% on our year ended December 31, 2017 provision for income taxes as a result of the revaluation of our deferred tax assets and liabilities at the lower rate. Other provisions of the Act did not have a material effect on our year ended December 31, 2017 income tax provision. The effective rate for the fiscal year ended December 31, 2017 also includes benefits

39

of approximately 1.5% related to the domestic production activities deduction and 4.5% from share based payments transactions being recorded as an item of continuing operations in accordance with ASU 2016-09, “Improvements to Employee Share-Based Payments Accounting” effective for our 2017 fiscal year (see Note 2 to the Consolidated Financial Statements, Summary of Significant Accounting Policies).

The effective rate for the fiscal year ended December 25, 2016 includes benefits of approximately 1.9% related to the domestic production activities deduction. In connection with our acquisition of Boulder Brands, Inc., our effective income tax rate was adversely impacted for the tax effect associated with incurring certain non-deductible acquisition costs and compensation payments of 0.6%, a charge for an increase in our non-current state deferred income tax liability balance of approximately 1.0%, and a charge to record a valuation allowance on our foreign tax credit carryforward of approximately 0.2%.

The Company is a loss corporation as defined by Internal Revenue Code (the "Code") Section 382. Section 382 places an annual limitation on our ability to utilize our net operating loss carryovers (NOLs) and other attributes to reduce future taxable income. As of December 31, 2017, we have federal NOL carryovers of $408.3 million, subject to an annual limitation of $17.1 million. As a result, $237.2 million of the carryovers exceed the estimated available Section 382 limitation. The Company has reduced its deferred tax assets for this limitation.

The Company's federal NOLs have expiration periods beginning in 2020 through 2027. The Company also has state NOLs that are limited and vary in amount by jurisdiction. Gross state NOLs are approximately $261.0 million with expiration periods beginning in 2018 through 2037. State tax credits are $2.8 million in total and will expire on or before 2022.

We have significant tax-deductible intangible asset amortization and federal and state NOLs, which resulted in federal and state cash tax savings through 2016. We expect continued amortization and utilization of our NOLs will generate additional cash tax savings in 2017 and thereafter.


Fiscal year ended December 25, 2016 compared to fiscal year ended December 27, 2015

Net sales

Net sales were $3.13 billion for the fiscal year ended December 25, 2016, an increase of 17.8% compared to net sales of $2.66 billion in the prior year, primarily reflecting a 17.7% benefit from the Boulder Brands acquisition as well as higher net price realization of 0.2%, partially offset by unfavorable foreign currency translation of 0.1%. In an industry generally marked by low growth and heavier promotional spending, we continue to outpace the performance of our composite categories, with market share growth of 0.7 percentage points in fiscal 2016 for the legacy Pinnacle business.

Frozen Segment:

Net sales in the fiscal year ended December 25, 2016 were $1.30 billion, an increase of $68.8 million, or 5.6%, from the prior year reflecting a 2.1% benefit from the Boulder Brands acquisition (Boulder Brands products sold in Canada), a 2.9% increase from volume/mix and higher net price realization of 0.8%, partially offset by unfavorable foreign currency translation of 0.2%. The period was positively impacted by sales increases from our  Birds Eye  franchise and our  Hungry-Man  frozen entrées. The  Birds Eye  growth was driven by distribution expansion and new varieties of  Birds Eye Steamfresh Flavor Full, Protein Blends, Disney -themed side dishes for kids and  Birds Eye Voila!  Family Size offerings and premium-tier varieties. Also positively impacting net sales for the period was the second half 2016 launch of our  Birds Eye Signature Skillets  premium meals.  Hungry-Man  growth was driven by retail distribution expansion and the launch of 12 new varieties, 10 of which were behind the  Hungry-Man Selects  line. These increases were partially offset by lower sales from our seafood products,  Aunt Jemima  breakfast products and  Lender's  bagels.

Grocery Segment:

Net sales in the fiscal year ended December 25, 2016 were $1.09 billion, an increase of $65.0 million, or 6.3%, from the prior year reflecting a 9.7% benefit from the Boulder Brands acquisition ( Smart Balance  is managed in the Grocery segment) partially offset by a 3.3% decrease from volume/mix and lower net price realization of 0.1%. Positively impacting the period were the addition of the  Smart Balance  brand as well as increased sales of our  Armour  canned meats. Partially offsetting these increases were lower sales of our  Duncan Hines  baking products due to category weakness, and lower sales of  Wish-Bone  salad dressings, which improved in the second half of the year following the launch of our two new product lines, Wish-Bone E.V.O.O. and Wish-Bone Ristorante Italiano dressings. Vlasic pickles and Mrs. Buttersworth's syrup also posted modest year-over-year declines.

40


Boulder Segment:

Net sales in the fiscal year ended December 25, 2016 were $364.7 million, an increase of $323.2 million, primarily resulting from the impact of the Boulder Brands acquisition, in addition to double digit growth from our gardein products.

Specialty Segment:

Net sales in the fiscal year ended December 25, 2016 were $369.2 million, an increase of $15.1 million, or 4.3%, from the prior year, reflecting a 9.1% benefit from the Boulder Brands acquisition, partially offset by a 4.2% decrease from volume/mix and lower net price realization of 0.6%. The addition of the Boulder Brands private label and foodservice businesses into the segment, along with growth of gardein private label and foodservice, was partially offset by lower sales of private label canned meat.

Gross profit

Gross profit for the year ended December 25, 2016 was $916.1 million, or 29.3% of net sales, compared to $740.5 million, or 27.9% of net sales, in the prior year. Excluding items affecting comparability, Adjusted gross profit advanced 22.8% to $921.1 million and Adjusted gross profit percentage increased approximately 120 basis points to 29.4%. See "Adjusted gross profit reconciliation" under "Non-GAAP Financial Measures" discussed below for further details.

The following table outlines the factors resulting in the year on year change in gross profit and gross margin percentage in fiscal 2016.
 
$
 
% net sales
Productivity
$
70.0

 
2.2
 %
Favorable product mix
26.6

 
0.5

Higher mark-to-market gains on financial instruments
10.5

 
0.3

Higher net price realization, net of slotting
7.5

 
0.2

Inflation
(36.0
)
 
(1.2
)
Effects of adjustments related to the application of purchase accounting (a)
(10.4
)
 
(0.3
)
Higher depreciation expense (b)
(3.4
)
 
(0.1
)
Other (c)
(9.5
)
 
(0.2
)
Subtotal
55.3

 
1.4
 %
Higher sales volume
120.3

 
 
 
$
175.6

 
 

(a) Represents expense related to the write-up to fair market value of inventories acquired as a result of the Boulder Brands
acquisition.
(b) The increase primarily relates to insourcing of the manufacturing of Wish-Bone into our St. Elmo, Illinois location.
(c) Consists primarily of investments in new Birds-Eye stand-up packaging, higher product obsolescence, and the unfavorable
impact of foreign currency.

Marketing and selling expenses

Marketing and selling expenses were $218.3 million, or 7.0% of net sales, for the fiscal year ended December 25, 2016, compared to $176.7 million, or 6.7% of net sales, for fiscal 2015. The increase was driven by the addition of the Boulder Brands acquisition.

Administrative expenses

Administrative expenses were $163.1 million, or 5.2% of net sales, for the fiscal year ended December 25, 2016, compared to $107.0 million, or 4.0% of net sales, for the prior year. The increase primarily reflected the impact of the Boulder Brands acquisition, which included $19.1 million of restructuring costs in 2016, as well as higher management incentive compensation in 2016.

41


Research and development expenses

Research and development expenses were $18.1 million, or 0.6% of net sales, for the fiscal year ended December 25, 2016, compared to $13.0 million, or 0.5% of net sales, for the comparable prior-year period. This increase primarily reflected the impacts of the Boulder Brands acquisition and innovation related expenses on the base Pinnacle business.

Other Income and Expense:
 
Fiscal year ended
 
December 25, 2016
 
December 27, 2015
Other expense (income), net consists of:
 
 
 
Amortization of intangibles/other assets
$
17.0

 
$
13.6

Boulder Brands acquisition costs (Note 3)
6.8

 
1.7

Foreign exchange (gains) losses
(0.5
)
 
4.7

Charges resulting from the wind down of Boulder Brands United Kingdom operations
4.3

 
—

Royalty income and other
(1.7
)
 
(0.9
)
Total other expense (income), net
$
25.8

 
$
19.1


Foreign exchange losses. Represents foreign exchange (gains) losses from intra-entity loans resulting from the
Garden Protein acquisition that are anticipated to be settled in the foreseeable future.

Charges resulting from the wind down of Boulder Brands United Kingdom operations . In October 2016, the Company voluntarily ceased production at Boulder Brands private label gluten-free bakery operation which is based in the United Kingdom. As such, the Company adopted a plan in the fourth quarter to wind down operations and dispose of all associated assets such as land, buildings, machinery and equipment and inventory. In connection with the plan of disposal, the Company determined that the carrying values of some of the underlying assets exceeded their fair values. Consequently, the above charges are primarily comprised of impairment losses, which represents the excess of the carrying values of the assets over their fair values. The charges also include employee termination benefits and professional fees resulting from the closing and disposition.

Tradename impairment charges

In the third quarter of 2016, the Company recorded tradename impairments of $7.3 million on  Celeste , $3.0 million on  Aunt Jemima  and $0.9 million on  Snyder of Berlin . See Note 9 to the Consolidated Financial Statements, Goodwill, Tradenames and Other Assets for further details.

Earnings before interest and taxes

Earnings before interest and taxes for the fiscal year ended December 25, 2016 were $479.6 million, an increase of $54.9 million, or 12.9% as compared to the prior year, primarily resulting from increased gross profit, as discussed above, partially offset by higher selling, general and administrative expenses primarily associated with the Boulder Brands acquisition and the unfavorable impact of items affecting comparability. Excluding items affecting comparability, Adjusted earnings before interest and taxes increased $95.5 million or 21.6% to $538.6 million.


Frozen Segment:

Earnings before interest and taxes for the fiscal year ended December 25, 2016 increased $22.4 million, or 10.2%, to $240.9 million as compared to the prior year reflecting the benefits of the net sales growth, strong productivity and higher mark-to-market unrealized gains on financial instruments, partially offset by input cost inflation, investment behind the conversion to new  Birds Eye Steamfresh  stand-up packaging and Tradename impairment charges. Excluding items affecting comparability, Earnings before interest and taxes increased $26.9 million, or 12.3%, to $246.4 million.

42


Grocery Segment:

Earnings before interest and taxes increased $26.0 million, or 12.8%, to $229.2 million as compared to the previous year reflecting the benefit of the net sales growth, strong productivity and favorable mix from the inclusion of the  Smart Balance  brand, partially offset by input cost inflation. Excluding items affecting comparability, Earnings before interest and taxes increased $25.4 million, or 12.1%, to $236.1 million.

Boulder Segment:

Earnings before interest and taxes were $9.1 million in 2016 as compared to a loss before interest and taxes of $5.5 million in 2015 primarily reflecting the benefit of the Boulder Brands acquisition. Excluding items affecting comparability, but including the benefit of the acquisition, Earnings before interest and taxes totaled $46.5 million in 2016, versus $2.7 million in 2015.

Specialty Segment:

Earnings before interest and taxes were $32.3 million in 2016, a decline of $2.1 million or 6.1% as compared to the previous year reflecting higher net sales, largely due to gains from the Boulder Brands acquisition, which was more than offset by acquisition integration and Tradename impairment charges. Excluding items affecting comparability, Earnings before interest and taxes of $34.6 million was essentially flat as compared to the year ago period.

Unallocated corporate income (expenses):

Unallocated corporate expense for fiscal 2016 was $31.8 million, as compared to $25.9 million in the comparable prior year period. The increase primarily reflected the impact of the Boulder Brands acquisition costs partially offset by lower equity based compensation expense driven by the CEO transition.

Interest Expense, net

Net interest expense increased 57.5%, or $50.8 million, from $88.3 million in the fiscal year ended December 27, 2015 to $139.1 million in the fiscal year ended December 25, 2016. The increase was largely driven by additional debt issued to finance the Boulder Brands acquisition and, to a lesser extent, the impact of higher interest expense for floating rate debt. Also impacting the comparison were $0.6 of charges associated with the re-pricing of Term Loan I during the third quarter of 2016 and higher interest rate swap losses described below.

We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed rate debt. Any gains or losses realized on the interest rate swap agreements, excluding the AOCL portion, are recorded as an adjustment to interest expense. Included in net interest expense was $8.5 million and $3.7 million for the fiscal 2016 and fiscal 2015, respectively, recorded from losses on interest rate swap agreements.

As discussed in more detail in Note 11 to the Consolidated Financial Statements, Debt and Interest Expense, on February 3, 2017, the Company amended it credit agreement which significantly changed our debt profile and expected future interest expense.

Provision (benefit) for income taxes

The effective tax rate was 38.0% for the fiscal year ended December 25, 2016 compared to 36.8% for the fiscal year ended December 27, 2015. The effective rate for the fiscal year ended December 25, 2016 includes benefits of approximately 1.9% related to the domestic production activities deduction. In connection with our acquisition of Boulder Brands, Inc., our effective income tax rate was adversely impacted for the tax effect associated with incurring certain non-deductible acquisition costs and compensation payments of 0.6%, a charge for an increase in our non-current state deferred income tax liability balance of approximately 1.0%, and a charge to record a valuation allowance on our foreign tax credit carryforward of approximately 0.2%.

The effective rate for the fiscal year ended December 27, 2015, includes benefits of approximately 0.3% related to the domestic production activities deduction and 0.6% related to foreign earnings, including recognition of foreign tax credit. The foreign tax credit benefit is attributable to a fiscal year 2015 dividend repatriation from the Company’s Canadian subsidiary to its U.S parent. The 2015 rate also includes a charge for 0.3% for non-deductible transaction expenditures related to acquisition activity (Note 3 to the Consolidated Financial Statements, Acquisitions) and our public offerings (Note 1 to the Consolidated Financial Statements, Summary of Business Activities).

43


Under the Code Section 382, the Company is a loss corporation. Section 382 of the Code places limitations on our ability to use our NOL's to offset taxable income. As described in Note 16 to the Consolidated Financial Statements, (Benefit)/Provision for Income Taxes, an ownership change in the third quarter of 2014 placed an annual limitation of approximately $94.0 million on approximately $230.8 million of our federal NOL carryovers which previously were not subject to an annual limitation. During 2015 the Company fully utilized the federal NOLs which became subject to the 2014 limitation. Our remaining NOLs remain subject to an annual limitation of approximately $17.1 million. See Note 16 to the Consolidated Financial Statements (Benefit)/Provision for Income taxes.

On January 15, 2016, we acquired Boulder Brands, Inc. which is a loss corporation. As of the acquisition date, Boulder had approximately $54.5 million of federal NOL carryover subject to the Section 382 provisions. The annual limitation is approximately $26.5 million subject to increase for recognized built in gains. We have fully utilized the $54.5 million of federal NOLs in 2016.

We have significant tax-deductible intangible asset amortization and federal and state NOLs, which resulted in minimal federal and state cash taxes through 2016. We expect continued amortization and utilization of our NOLs will generate additional annual cash tax savings in 2017 and thereafter.



44

Liquidity and Capital Resources

Historical
Our cash flows are seasonal. Typically we are a net user of cash in the third quarter of the calendar year (i.e., the quarter ending in September) and a net generator of cash over the balance of the year.
Our principal liquidity requirements have been, and we expect will be, for working capital and general corporate purposes, including capital expenditures, debt service, and our quarterly dividend program. Currently, the quarterly payment is $0.325 per share or approximately $39.0 million. We do not have a share repurchase program currently in place but may seek authorization from our Board of Directors to implement one in the future. Capital expenditures are expected to be approximately $155.0 to $165.0 million in 2018. We have historically satisfied our liquidity requirements with internally generated cash flows and availability under our revolving credit facility. We expect that our ability to generate cash from our operations and ability to borrow from our credit facilities should be sufficient to support working capital needs, planned growth and capital expenditures for the next 12 months and for the foreseeable future. We keep an insignificant amount of cash in foreign accounts, primarily related to the operations of our Canadian business. Additionally, our cash taxes on an ongoing basis will be significantly reduced as a result of the lower federal statutory corporate income tax rate resulting from the Act.
Statements of cash flows for the fiscal year ended December 31, 2017 compared to the fiscal year ended December 25, 2016
Net cash provided by operating activities was $416.0 million for the fiscal year ended December 31, 2017 and was the result of net earnings, excluding non-cash charges and credits of $490.6 million and higher working capital of $74.6 million . The increase in working capital was primarily the result of a $43.1 million increase in inventories driven by inventory builds due to new products and growth in the Birds-Eye franchise, partially offset by the Exit (as defined in Note 10 to the Consolidated Financial Statements, Restructuring Charges), a $41.3 million decrease in accrued liabilities driven primarily by lower performance-based compensation, restructuring and interest accruals, a $20.7 million payment for the early settlement of interest rate hedges as a result of the Refinancing (as defined in Note 11 to the Consolidated Financial Statements, Debt and Interest Expense) and a $11.9 million decrease in accrued trade marketing expense driven the timing of payments. These were partially offset by $26.8 million increase in accounts payable driven by our inventory purchases and the timing of vendor payments and an $8.6 million decrease in accounts receivable, primarily driven by timing of sales.

Net cash provided by operating activities was $487.5 million for the fiscal year ended December 25, 2016 and was the result of net earnings, excluding non-cash charges and credits of $376.8 million and a decrease in working capital of $110.7 million. The decrease in working capital was primarily the result of a $61.0 million increase in accounts payable driven by our inventory purchases and the timing of vendor payments, a $36.4 million increase in accrued liabilities driven primarily by higher income tax, interest and restructuring accruals, a $23.5 million decrease in inventories resulting from the sale of higher cost acquired inventories in addition to higher agricultural crop yields in 2015, a $14.4 million decrease in other current assets driven primarily by prepaid income taxes and a $4.8 million increase in accrued trade marketing expense driven by the Boulder Brands acquisition partially offset by the timing of payments. This was partially offset by a $29.4 million increase in accounts receivable primarily resulting from an increase in days sales outstanding.

Net cash used in investing activities for the fiscal year ended December 31, 2017 totaled $129.8 million and included $37.5 million for the Beaver Dam acquisition, $94.2 million for capital expenditures as well as $1.9 million in proceeds from the sale of plant assets.

Net cash used in investing activities for the fiscal year ended December 25, 2016 totaled $1,086.4 million and included $985.4
million for the Boulder Brands acquisition as well as $101.1 million for capital expenditures.
Net cash used by financing activities for the fiscal year ended December 31, 2017 was $390.3 million and consisted of $2,491.5 million of term loan repayments, $140.7 million of dividends paid, $12.9 million of debt acquisition costs and $11.9 million of net capital leases and notes payable activity which were partially offset by $2,262.0 million of net proceeds from our new Tranche B Term Loans and $4.9 million of net cash inflows related to our equity based compensation plans. Our term loans are discussed in Note 11 to the Consolidated Financial Statements.

Net cash provided by financing activities for the fiscal year ended December 25, 2016 was $771.3 million and consisted of $547.3 million of net proceeds from our Tranche I Term Loans and $350.0 million from our 5.875% Senior Notes offering (both related to the funding of the Boulder Brands acquisition), $36.9 million of net cash inflows related to our equity based compensation plans which were partially offset by $122.9 million of dividends paid, $22.6 million of debt acquisition costs, $13.7 million of term loan repayments and $3.8 million of net capital leases and notes payable activity.


45

The net of all activities resulted in a decrease in cash of $103.2 million for the fiscal year ended December 31, 2017 , compared to an increase in cash of $172.5 million for the fiscal year ended December 25, 2016 .
Statements of cash flows for the fiscal year ended December 25, 2016 compared to the fiscal year ended December 27, 2015
Net cash provided by operating activities was $487.5 million for the fiscal year ended December 25, 2016 and was the result of net earnings, excluding non-cash charges and credits of $376.8 million and a decrease in working capital of $110.7 million. The decrease in working capital was primarily the result of a $61.0 million increase in accounts payable driven by our inventory purchases and the timing of vendor payments, a $36.4 million increase in accrued liabilities driven primarily by higher income tax, interest and restructuring accruals, a $23.5 million decrease in inventories resulting from the sale of higher cost acquired inventories in addition to higher agricultural crop yields in 2015, a $14.4 million decrease in other current assets driven primarily by prepaid income taxes and a $4.8 million increase in accrued trade marketing expense driven by the Boulder Brands acquisition partially offset by the timing of payments. This was partially offset by a $29.4 million increase in accounts receivable primarily resulting from an increase in days sales outstanding.
Net cash provided by operating activities was $372.9 million for the fiscal year ended December 27, 2015 and was the result of net earnings, excluding non-cash charges and credits of $441.8 million and an increase in working capital of $68.9 million. The increase in working capital was primarily the result of a $49.2 million increase in inventories resulting from favorable agricultural crop yields and innovation related inventory build, a $30.9 million increase in accounts receivable resulting from the timing of sales within the month of December 2015 compared to the previous year, a $8.1 million decrease in accrued liabilities driven primarily by lower accrued income taxes, and a $6.4 million increase in other current assets driven primarily by prepaid income taxes. This was partially offset by a $15.1 million increase in accounts payable driven by our inventory purchases and the timing of vendor payments and a $10.5 million increase in accrued trade marketing expense driven by higher sales for December 2015 compared to the previous year.
Net cash used in investing activities for the fiscal year ended December 25, 2016 totaled $1,086.4 million and included $985.4 million for the Boulder Brands acquisition as well as $101.1 million for capital expenditures.
Net cash used in investing activities for the fiscal year ended December 27, 2015 totaled $105.8 million and included $108.5 million for capital expenditures as well as $1.1 million of cash inflows from a Garden Protein acquisition post closing working capital adjustment. Capital expenditures included approximately $25.5 million of costs related to our acquisition integration projects. Investing activities also included $1.6 million of proceeds from the sale of assets.
Net cash provided by financing activities for the fiscal year ended December 25, 2016 was $771.3 million and consisted of $547.3 million of net proceeds from our Tranche I Term Loans and $350.0 million from our 5.875% Senior Notes offering (both related to the funding of the Boulder Brands acquisition), $36.9 million of net cash inflows related to our equity based compensation plans which were partially offset by $122.9 million of dividends paid, $22.6 million of debt acquisition costs, $13.7 million of term loan repayments and $3.8 million of net capital leases and notes payable activity.
Net cash used in financing activities for the fiscal year ended December 27, 2015 was $124.2 million and consisted of $111.8 million of dividends paid, $8.9 million of term loan repayments, $3.8 million of net capital leases and notes payable activity and $0.3 million of cash inflows related to our equity based compensation plans.
The net of all activities resulted in an increase in cash of $172.5 million for the fiscal year ended December 25, 2016, compared to an increase in cash of $142.1 million for the fiscal year ended December 27, 2015.


Debt
For more information on our debt, see Note 11 of the Consolidated Financial Statements "Debt and Interest Expense".

Covenant Compliance

The following is a discussion of the financial covenants contained in our debt agreements. See section below for detailed calculation.


46

Third Amended and Restated Credit Agreement

As discussed in more detail in Note 11 to the Consolidated Financial Statements, Debt and Interest Expense, on February 3, 2017, the Company entered into an amendment to its Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”) in order to (1) refinance all of the Company’s outstanding term loans with a new seven-year term loan in an aggregate principal amount of $2,262.0 million (the “New Term Loans”), (2) replace the Company’s existing $150.0 million revolving credit facility with a new five-year $225.0 million revolving credit facility (the “New Revolving Credit Facility and, collectively with the New Term Loans, the “New Credit Facilities”) and (3) amend and restate the Amended Credit Agreement in its entirety to make certain other amendments and modifications (as so amended and restated, the “Third Amended and Restated Credit Agreement”).

Our Third Amended and Restated Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:
•
incur additional indebtedness and make guarantees;
•
create liens on assets;
•
engage in mergers or consolidations;
•
sell assets;
•
pay dividends and distributions or repurchase our capital stock;
•
make investments, loans and advances, including acquisitions; and
•
engage in certain transactions with affiliates.

The Third Amended and Restated Credit Agreement also contains certain customary affirmative covenants and events of default.

5.875% Senior Notes and 4.875% Senior Notes

In April 2013, we issued the 4.875% Senior Notes. In January 2016, we issued the 5.875% Senior Notes. We refer to the 4.875% Notes and the 5.875% Notes as the "Senior Notes". The Senior Notes are general senior unsecured obligations, effectively subordinated to all of our existing and future secured indebtedness to the extent of the value of the assets securing that indebtedness, and guaranteed on a full, unconditional, joint and several basis by the Company and Pinnacle Foods Finance's wholly-owned domestic subsidiaries that guarantee our other indebtedness.
The indentures governing the Senior Notes limits our (and our restricted subsidiaries’) ability to, subject to certain exceptions:
•
incur additional debt or issue certain preferred shares;
•
pay dividends on or make other distributions in respect of our capital stock or make other restricted payments;
•
make certain investments;
•
sell certain assets;
•
create liens on certain assets to secure debt;
•
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
•
enter into certain transactions with our affiliates; and
•
designate our subsidiaries as unrestricted subsidiaries.
Subject to certain exceptions, the indentures governing the Senior Notes permits us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness.

Non-GAAP Financial Measures

Pinnacle uses the following non-GAAP financial measures as defined by the Securities and Exchange Commission in its financial communications. These non-GAAP financial measures should be considered as supplements to the generally accepted accounting principles in the United States ("GAAP") reported measures, should not be considered replacements for, or superior to, the GAAP measures and may not be comparable to similarly named measures used by other companies.

•
Adjusted gross profit
•
Adjusted gross profit as a % of sales
•
Adjusted EBITDA
•
Adjusted Earnings before Interest and Taxes (Adjusted EBIT)
•
Covenant Compliance EBITDA


47

Adjusted gross profit
Pinnacle defines Adjusted gross profit as gross profit before accelerated depreciation related to restructuring activities, certain non-cash items, acquisition, merger and other restructuring charges and other adjustments. The Company believes that the presentation of Adjusted gross profit is useful to investors in the evaluation of the operating performance of companies in similar industries. The Company believes this measure is useful to investors because it increases transparency and assists investors in understanding the underlying performance of the Company and in the analysis of ongoing operating trends. In addition, Adjusted gross profit is one of the components used to evaluate the performance of Company's management. Such targets include, but are not limited to, measurement of sales efficiency, productivity measures and recognition of acquisition synergies.

Adjusted EBITDA
Pinnacle defines Adjusted EBITDA as earnings before interest expense, taxes, depreciation and amortization ("EBITDA"), further adjusted to exclude certain non-cash items, non-recurring items and certain other adjustment items permitted in calculating Covenant Compliance EBITDA under the Amended Credit Agreement, the Third Amended and Restated Credit Agreement and the indentures governing the Senior Notes. Adjusted EBITDA does not include adjustments for equity-based compensation and certain other adjustments related to acquisitions, both of which are permitted in calculating Covenant Compliance EBITDA.

Management uses Adjusted EBITDA as a key metric in the evaluation of underlying Company performance, in making financial, operating and planning decisions and, in part, in the determination of cash bonuses for its executive officers and employees. The
Company believes this measure is useful to investors because it increases transparency and assists investors in understanding the
underlying performance of the Company and in the analysis of ongoing operating trends. Additionally, Pinnacle believes the presentation of Adjusted EBITDA provides investors with useful information, as it is an important component in determining our
ability to service debt and meet any payment obligations. In addition, Pinnacle believes that Adjusted EBITDA is frequently used
by analysts, investors and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA
measure when reporting their results. The Company has historically reported Adjusted EBITDA to analysts and investors and believes that its continued inclusion provides consistency in financial reporting and enables analysts and investors to perform meaningful comparisons of past, present and future operating results.

Adjusted EBITDA should not be considered as an alternative to operating or net earnings (loss), determined in accordance with
GAAP, as an indicator of the Company's operating performance, as an alternative to cash flows from operating activities, determined in accordance with GAAP, as an indicator of cash flows, or as a measure of liquidity.

Adjusted Earnings before Interest and Taxes (Adjusted EBIT)
Adjusted earnings before interest and taxes is provided because Pinnacle believes it is useful information in understanding our EBIT results by improving the comparability of year-to-year results. Additionally, Adjusted EBIT provides transparent and useful
information to management, investors, analysts and other parties in evaluating and assessing the Company and its segments, primary operating results from period to period after removing the impact of unusual, non-operational or restructuring-related activities that affect comparability. Adjusted EBIT is one of the measures management uses for planning and budgeting, monitoring and evaluating financial and operating results and in the analysis of ongoing operating trends.

Covenant Compliance EBITDA
Covenant Compliance EBITDA is defined as earnings before interest expense, taxes, depreciation and amortization, further adjusted to exclude non-cash items including equity based compensation, extraordinary, unusual or non-recurring items and other adjustment items permitted in calculating Covenant Compliance EBITDA under the Amended Credit Agreement, the Third Amended and Restated Credit Agreement and the indentures governing the Senior Notes. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Covenant Compliance EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financial covenants.

EBITDA, Adjusted EBITDA and Covenant Compliance EBITDA do not represent net earnings or (loss) or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definitions of Covenant Compliance EBITDA under the Amended Credit Agreement, the Third Amended and Restated Credit Agreement and the indentures allow Pinnacle to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net earnings or loss. However, these are expenses that may recur, vary greatly and are difficult to predict. While EBITDA, Adjusted EBITDA and Covenant Compliance EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

Pursuant to the terms of both the Amended Credit Agreement and the Third Amended and Restated Credit Agreement, Pinnacle Foods Finance is required to maintain a ratio of Net First Lien Secured Debt to Covenant Compliance EBITDA of no greater

48

than 5.75 to 1.00. Net First Lien Secured Debt is defined as Pinnacle Foods Finance's aggregate consolidated secured indebtedness secured on a first lien basis, less the aggregate amount of all unrestricted cash and cash equivalents.

In addition, under the Amended Credit Agreement, the Third Amended and Restated Credit Agreement and the indentures governing the Senior Notes, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to the Senior Secured Leverage Ratio (which is currently the same as the ratio of Net First Lien Secured Debt to Covenant Compliance EBITDA described above), in the case of the Amended Credit Agreement, and the Third Amended and Restated Credit Agreement, or to the ratio of Covenant Compliance EBITDA to fixed charges for the most recently concluded four consecutive fiscal quarters, in the case of the Senior Notes. We believe that these covenants are material terms of these agreements and that information about the covenants is material to an investor's understanding our financial performance. As of December 31, 2017 , we were in compliance with all covenants and other obligations under the Amended Credit Agreement and the indentures governing the Senior Notes.

Our ability to meet the covenants specified above in future periods will depend on events beyond our control, and we cannot assure you that we will meet those ratios. A breach of any of these covenants in the future could result in a default under, or an inability to undertake certain activities in compliance with, the Third Amended and Restated Credit Agreement and the indentures governing the Senior Notes, at which time the lenders could elect to declare all amounts outstanding under the Third Amended and Restated Credit Agreement to be immediately due and payable. Any such acceleration would also result in a default under the indentures governing the Senior Notes.
The following table provides a reconciliation from our net earnings to EBITDA, Adjusted EBITDA and Covenant Compliance EBITDA for the fiscal year ended December 31, 2017 and December 25, 2016 . The terms and related calculations are defined in the Amended Credit Agreement and the indentures governing the Senior Notes.
(thousands of dollars)
Fiscal year
 
December 31, 2017
 
December 25, 2016
 
53 weeks
 
52 weeks
Net earnings
$
532,221

 
$
211,117

Interest expense, net
169,434

 
139,098

Income tax (benefit) expense
(252,999
)
 
129,430

Depreciation and amortization expense
132,887

 
105,772

EBITDA
$
581,543

 
$
585,417

Non-cash items (a)
69,576

 
12,850

Acquisition, merger and other restructuring charges (b)
24,038

 
46,100

Adjusted EBITDA
$
675,157

 
$
644,367

Garden Protein and Boulder Brands acquisition adjustments (1)
4,000

 
23,120

Non-cash equity based compensation charges (2)
18,728

 
14,016

Covenant Compliance EBITDA
$
697,885

 
$
681,503


(1) For fiscal 2017 and 2016, represents net cost savings projected to be realized from acquisition synergies from the Boulder and Garden Protein acquisitions, calculated consistent with the definition of Covenant Compliance EBITDA. For fiscal 2016, also represents proforma additional EBITDA from Boulder for the period prior to the acquisition.

(2)
Represents non-cash compensation charges related to the granting of equity awards that occur in the normal course of business.
  

49

(a)
Non-cash items are comprised of the following:
(thousands of dollars)
Fiscal year
 
December 31, 2017
 
December 25, 2016
 
53 weeks
 
52 weeks
Unrealized (gains)/losses resulting from hedging activities (1)
$
223

 
$
(12,511
)
Tradename impairment charges (2)
66,530

 
11,200

Effects of adjustments related to the application of purchase accounting (3)
—

 
10,382

Intra entity foreign exchange gains (4)
(1,484
)
 
(486
)
Wind down of Boulder Brands UK operations (5)
(771
)
 
4,265

Aunt Jemima  and other frozen breakfast products exit (6)
5,078

 
—

Total non-cash items
$
69,576

 
$
12,850

(1)
Represents non-cash gains and losses resulting from mark-to-market adjustments of obligations under derivative contracts.
(2)
For fiscal 2017, represents tradename impairment on Aunt Jemima ($27.4 million), Celeste ($24.8 million), Snyder of Berlin ($6.5 million), Nalley ($4.2 million), Bernstein ($3.1 million) and Swanson ($0.5 million). For fiscal 2016, represents tradename impairment on Celeste ($7.3 million), Aunt Jemima ($3.0 million) and Snyder of Berlin ($0.9 million).
(3)
For fiscal 2016, represents expense related to the write-up to fair market value of inventories acquired as a result of the Boulder Brands acquisition.
(4)
Represents foreign exchange gains resulting from intra-entity loans that are anticipated to be settled in the foreseeable future.
(5)
Represents adjustments related to the voluntary wind down of the Boulder Brands private label gluten-free bakery operation which was based in the United Kingdom.
(6)
Primarily represents charges to adjust inventory to net realizable value resulting from the exit of the business.


(b)
Acquisition, merger and other restructuring charges are comprised of the following:
(thousands of dollars)
Fiscal year
 
December 31, 2017
 
December 25, 2016
 
53 weeks
 
52 weeks
Expenses in connection with an acquisition or other non-recurring costs (1)
$
—

 
$
6,781

Restructuring charges, integration costs and other business optimization expenses (2)
16,107

 
39,079

Employee severance (3)
3,607

 
240

Aunt Jemima  and other frozen breakfast products exit (4)
4,324

 
—

Total other adjustments
$
24,038

 
$
46,100

(1)
For fiscal 2016, represents Boulder Brands acquisition costs.
(2)
Primarily represents integration costs of the Boulder Brands and Garden Protein acquisitions.
(3)
Represents severance costs paid, or to be paid, to terminated employees.
(4)
Primarily represents employee termination costs and contract termination fees resulting from the exit of the business.


Our covenant requirements and actual ratios for the year ended December 31, 2017 are as follows:
 
   
Covenant
Requirement
Actual Ratio
Amended Credit Agreement
 
 
Net First Lien Leverage Ratio (1)
5.75 to 1.00
2.91
Total Leverage Ratio (2)
Not applicable
3.92
Senior Notes (3)
 
 
Minimum Covenant Compliance EBITDA to fixed charges ratio required to incur additional debt pursuant to ratio provisions (4)
2.00 to 1.00
6.06

50

(1)
Pursuant to the terms of the Amended Credit Agreement, Pinnacle Foods Finance was required to maintain a ratio of Net First Lien Secured Debt to Covenant Compliance EBITDA of no greater than 5.75 to 1.00. Net First Lien Secured Debt is defined as Pinnacle Foods Finance's aggregate consolidated secured indebtedness secured on a first lien priority basis, less the aggregate amount of all unrestricted cash and cash equivalents.
(2)
The Total Leverage Ratio is not a financial covenant and is calculated by dividing consolidated total debt less the aggregate amount of all unrestricted cash and cash equivalents by Covenant Compliance EBITDA.
(3)
Our ability to incur additional debt and make certain restricted payments under the indentures governing the Senior Notes, subject to specified exceptions, is tied to an Covenant Compliance EBITDA to fixed charges ratio of at least 2.00 to 1.00.
(4)
Fixed charges is defined in the indentures governing the Senior Notes as (i) consolidated interest expense (excluding specified items) plus consolidated capitalized interest less consolidated interest income, plus (ii) cash dividends and distributions paid on preferred stock or disqualified stock.

Pinnacle Foods Inc.
Reconciliation of Non-GAAP measures (Unaudited)
Adjusted gross profit and Adjusted gross profit as a % of sales
(thousands)

(thousands of dollars)
Fiscal year
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
53 weeks
 
52 weeks
 
52 weeks
Gross profit
$
868,148

 
$
916,074

 
$
740,506

Accelerated depreciation expense (a)
22,554

 
—

 
1,131

Non-cash items (b)
5,301

 
(2,129
)
 
(1,029
)
Acquisition, merger or other restructuring charges (c)
17,171

 
7,121

 
9,217

Adjusted gross profit
$
913,174

 
$
921,066

 
$
749,825

 
 
 
 
 
 
Adjusted gross profit as a % of Net sales
29.0
%
 
29.4
%
 
28.2
%
 
 
 
 
 
 

(a)
For fiscal 2017, represents accelerated depreciation related to the Aunt Jemima and other frozen breakfast products exit. For fiscal 2015, represents accelerated depreciation related to in-sourcing of Wish-Bone production.

(b)
Non-cash items are comprised of the following:

(thousands of dollars)
Fiscal year
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
53 weeks
 
52 weeks
 
52 weeks
Unrealized (gains)/losses resulting from hedging activities (1)
$
223

 
$
(12,511
)
 
$
(1,983
)
Effects of adjustments related to the application of purchase accounting (2)
—

 
10,382

 
—

Non-cash compensation charges (3)
—

 
—

 
954

Aunt Jemima and other frozen breakfast products (4)
$
5,078

 
$
—

 
$
—

Non-cash items
$
5,301


$
(2,129
)
 
$
(1,029
)
 
 
 
 
 
 

(1)
Represents non-cash gains and losses resulting from mark-to-market adjustments of obligations under derivative contracts.
(2)
For fiscal 2016, represents expense related to the write-up to fair market value of inventories acquired as a result of the Boulder Brands acquisition.
(3)
For fiscal 2015, represents non-cash employee incentives and retention charges resulting from the termination on of the Hillshire merger agreement.
(4)
Primarily represents charges to adjust inventory to net realizable value resulting from the exit of the business.

51



(c)
Acquisition, merger and other restructuring charges are comprised of the following:
(thousands of dollars)
Fiscal year
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
53 weeks
 
52 weeks
 
52 weeks
Expenses in connection with an acquisition or other non-recurring merger costs (1)
$
—

 
$
—

 
$
130

Restructuring charges, integration costs and other business optimization expenses (2)
11,192

 
7,121

 
8,625

Employee severance and recruiting (3)
1,655

 
—

 
462

Aunt Jemima and other frozen breakfast products exit (4)
$
4,324

 
$
—

 
$
—

Total acquisition, merger and other restructuring charges
$
17,171

 
$
7,121

 
$
9,217

 
 
 
 
 
 

(1)
Represents expenses incurred related to the terminated agreement with Hillshire.
(2)
For fiscal 2017 and 2016, primarily represents integration costs of the Garden Protein and Boulder Brands acquisition. For fiscal 2015, primarily represents integration costs of the Garden Protein and Wish-Bone acquisitions.
(3)
Represents severance costs for terminated employees not related to business acquisitions.
(4)
Primarily represents employee termination costs and contract termination fees resulting from the exit of the business.


52

Pinnacle Foods Inc. and Subsidiaries
Reconciliation of Non-GAAP measures
Adjusted EBIT (1)
(thousands)
 
 
Fiscal Year
 
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
 
53 weeks
 
52 weeks
 
52 weeks
Net earnings (as reported)
 
$
532,221

 
$
211,117

 
$
212,508

  Interest expense, net
 
169,434

 
139,098

 
88,315

  (Benefit)/Provision for income taxes
 
(252,999
)
 
129,430

 
123,879

Earnings before interest and taxes (as reported)
 
448,656

 
479,645

 
424,702

Accelerated depreciation (2)
 
22,554

 
—

 
1,131

Accelerated amortization expense - Aunt Jemima
and other frozen breakfast products exit
 
3,783

 
—

 


Accelerated amortization expense - gardein  Private
Label business exit
 
656

 
—

 


Non-cash items
 
 
 
 
 
 
Unrealized (gains)/losses resulting from hedging (3)
 
223

 
(12,511
)
 
(1,983
)
Purchase accounting adjustments (4)
 
—

 
10,382

 
—

Tradename impairment charges (5)
 
66,530

 
11,200

 
—

Non-cash compensation charges (6)
 
—

 
—

 
1,567

Intra entity foreign exchange (gains)/losses (7)
 
(1,484
)
 
(486
)
 
4,731

Wind down of Boulder Brands UK operations (8)
 
(771
)
 
4,265

 
—

Aunt Jemima and other frozen breakfast products
exit (9)
 
5,078

 
—

 
—

Acquisition, merger and other restructuring charges
 
 
 
 
 
 
Acquisition or other non recurring expenses (10)
 
—

 
6,781

 
2,735

Restructuring and integration costs (11)
 
16,107

 
39,079

 
9,504

Employee severance (12)
 
3,607

 
240

 
687

Aunt Jemima and other frozen breakfast products exit (13)
 
4,324

 
—

 
—

Other
 
—

 
—

 
—

Adjusted EBIT
 
$
569,263

 
$
538,595

 
$
443,074


(1)
Excludes Boulder, Wish-Bone and Gardein anticipated synergies which are included in calculating Covenant compliance.
(2)
For fiscal 2017, represents accelerated depreciation related to the Exit. For fiscal 2015, reflects accelerated depreciation related to in-sourcing of Wish-Bone production.
(3)
Represents non-cash (gains)/losses resulting from mark-to-market obligations under derivative contracts.
(4)
Represents expense related to the write-up to fair value of inventories acquired as a result of the Boulder Brands acquisition.
(5)
For fiscal 2017, represents tradename impairment on Aunt Jemima ($27.4 million), Celeste ($24.8 million), Snyder of Berlin ($6.5 million), Nalley ($4.2 million), Bernstein ($3.1 million) and Swanson ($0.5 million). For fiscal 2016, represents tradename impairment on Celeste ($7.3 million), Aunt Jemima ($3.0 million) and Snyder of Berlin ($0.9 million).
(6)
Represents non-cash employee incentives and retention charges resulting from the termination of the Hillshire merger agreement.
(7)
Represents foreign exchange (gains)/losses resulting from intra-entity loans that are anticipated to be settled in the foreseeable future.

53

(8)
Represents adjustments related to the voluntary wind down of the Boulder Brands private label gluten-free bakery operation which was based in the United Kingdom.
(9)
Primarily represents charges to adjust inventory to net realizable value resulting from the exit of the business.
(10)
For fiscal 2016, represents Boulder Brands acquisition costs. For fiscal 2015, represents Boulder Brands acquisition costs and expenses related to the secondary offerings of common stock.
(11)
For fiscal 2017 and 2016, primarily represents restructuring charges and integration costs of the Boulder Brands and Garden Protein acquisitions. For fiscal 2015, primarily represents integration costs of the Garden Protein and Wish-Bone acquisitions.
(12)
Represents severance costs for terminated employees not related to business acquisitions.
(13)
Primarily represents employee termination costs and contract termination fees resulting from the exit of the business.


54

Pinnacle Foods Inc.
Reconciliation from Reported to Adjusted Segment Amounts
For the fiscal year ended December 31, 2017 , December 25, 2016 , and December 27, 2015
(thousands)
 
 
Fiscal Year
 
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
 
53 weeks
 
52 weeks
 
52 weeks
 
 
 
 
 
 
 
Earnings before interest & taxes - Reported
 
 
 
 
 
 
Frozen
 
$
154,797

 
$
240,919

 
$
218,536

Grocery
 
248,967

 
229,155

 
203,146

Boulder
 
59,874

 
9,096

 
(5,498
)
Specialty
 
10,799

 
32,263

 
34,369

Unallocated corporate expenses
 
(25,781
)
 
(31,788
)
 
(25,851
)
Total
 
$
448,656

 
$
479,645

 
$
424,702

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjustments (Non-GAAP - See separate table)
 
 
 
 
 
 
Frozen
 
$
76,717

 
$
5,454

 
$
894

Grocery
 
9,588

 
6,907

 
7,467

Boulder
 
12,304

 
37,439

 
8,181

Specialty
 
21,998

 
2,369

 
117

Unallocated corporate expenses
 
—

 
6,781

 
1,713

Total
 
$
120,607


$
58,950

 
$
18,372

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings before interest & taxes - Adjusted (Non-GAAP - See separate discussion and tables)
 
 
 
 
 
 
Frozen
 
$
231,514

 
$
246,373

 
$
219,430

Grocery
 
258,555

 
236,062

 
210,613

Boulder
 
72,178

 
46,535

 
2,683

Specialty
 
32,797

 
34,632

 
34,486

Unallocated corporate expenses
 
(25,781
)
 
(25,007
)
 
(24,138
)
Total
 
$
569,263


$
538,595

 
$
443,074



55

Pinnacle Foods Inc.
Reconciliation from Reported to Adjusted Segment Amounts
Supplemental Schedule of Adjustments Detail (unaudited)
For the fiscal year ended December 31, 2017 , December 25, 2016 , and December 27, 2015
(millions)

 
 
Adjustments to Earnings Before Interest and Taxes
 
 
Fiscal Year
 
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
 
53 weeks
 
52 weeks
 
52 weeks
Frozen
 
 
 
 
 
 
Aunt Jemima and other frozen breakfast products exit (1)
 
$
48.8

 
$
—

 
$
—

Restructuring and acquisition integration charges
 
1.4

 
0.5

 
—

Employee severance
 
1.1

 
0.1

 
0.4

Unrealized mark-to-market (gain)/loss
 
0.1

 
(5.8
)
 
(0.6
)
Hillshire merger termination-related employee compensation expense
 
—

 
—

 
0.8

Write-up to fair market value of inventories acquired
 
—

 
0.3

 
—

Tradename impairment charges
 
25.3

 
10.3

 
—

Other
 
—

 
0.1

 
0.3

Total Frozen
 
$
76.7

 
$
5.5

 
$
0.9

 
 
 
 
 
 
 
Grocery
 
 
 
 
 
 
Restructuring and acquisition integration charges
 
$
1.0

 
$
8.6

 
$
7.3

Employee severance
 
1.3

 
0.1

 
0.3

Unrealized mark-to-market (gain)/loss
 
—

 
(5.5
)
 
(1.3
)
Hillshire merger termination-related employee compensation expense
 
—

 
—

 
0.8

Expenses related to the write-up to fair value of inventories acquired
 
—

 
3.5

 
—

Tradename impairment charges
 
7.3

 
—

 
 
Other
 
—

 
0.2

 
0.4

Total Grocery
 
$
9.6

 
$
6.9

 
$
7.5

 
 
 
 
 
 
 
Boulder
 
 
 
 
 
 
Restructuring and acquisition integration charges
 
$
12.0

 
$
27.4

 
$
8.2

Wind down of Boulder Brands UK operations
 
(0.8
)
 
4.3

 
—

Employee severance
 
1.1

 
—

 
 
Unrealized mark-to-market (gain)/loss
 
—

 
(0.3
)
 
—

Write-up to fair value of inventories acquired
 
—

 
6.0

 
—

Total Boulder
 
$
12.3

 
$
37.4

 
$
8.2

 
 
 
 
 
 
 
Specialty
 
 
 
 
 
 
Aunt Jemima and other frozen breakfast products exit
 
$
14.3

 
$
—

 
$
—

Restructuring and acquisition integration charges
 
0.3

 
1.4

 
 
Employee severance
 
0.1

 
—

 
—

Accelerated amortization due to the exit of the Gardein Private Label business
 
0.7

 
—

 
 
Unrealized mark-to-market (gain)/loss
 
0.1

 
(0.8
)
 
(0.1
)
Hillshire merger termination-related employee compensation expense
 
—

 
—

 
0.1

Write-up to fair value of inventories acquired
 
—

 
0.6

 
—

Tradename impairment charges
 
6.5

 
0.9

 
—

Other
 
—

 
0.3

 
0.1

Total Specialty
 
$
22.0

 
$
2.4

 
$
0.1

 
 
 
 
 
 
 
Unallocated Corporate Expenses
 
 
 
 
 
 
Boulder Brands acquisition related charges
 
$
—

 
$
6.8

 
$
1.7

Total Unallocated Corporate Expenses
 
$
—


$
6.8

 
$
1.7

(1) Includes a tradename impairment charge of $27.4 million on the Aunt Jemima tradename.

56

Contractual Commitments

The table below provides information on our contractual commitments as of December 31, 2017 :
 
Total  
 
 
Less Than
1 Year
 
 
1-3 Years  
 
 
3-5 Years  
 
 
More than
5 Years
 
 
(in thousands)
Total debt at face value (1)
$
2,940,362

 
$
17,947

 
$
45,240

 
$
395,240

 
$
2,481,935

Projected interest payments on long term debt (2)
743,052

 
119,390

 
255,060

 
235,439

 
133,163

Operating lease obligations
60,156

 
13,382

 
21,360

 
16,224

 
9,190

Capital lease obligations
96,241

 
14,514

 
28,348

 
24,633

 
28,746

Purchase obligations (3)
1,082,411

 
650,663

 
115,613

 
91,385

 
224,750

Pension (4)
54,041

 
6,969

 
9,644

 
11,058

 
26,370

Total (5)
$
4,976,263

 
$
822,865

 
$
475,265

 
$
773,979

 
$
2,904,154

 
 
 
 
 
 
 
 
 
 
 
(1)
Total debt at face value includes scheduled principal repayments and excludes interest payments.
(2)
The total projected interest payments on long-term debt are based upon borrowings and interest rates as of December 31, 2017 , including the effect of interest rate swaps in place. The interest rate on variable rate debt is subject to changes beyond our control and may result in actual interest expense and payments differing from the amounts above.
(3)
The amounts indicated in this line primarily reflect future contractual payments, including certain take-or-pay arrangements entered into as part of the normal course of business. The amounts do not include obligations related to other contractual purchase obligations that are not take-or-pay arrangements. Such contractual purchase obligations are primarily purchase orders at fair value that are part of normal operations and are reflected in historical operating cash flow trends. Purchase obligations also include trade and consumer promotion and advertising commitments. We do not believe such purchase obligations will adversely affect our liquidity position.
(4)
The funding of the defined benefit pension plan is based upon our planned 2018 cash contribution. The future years' contributions are based upon our expectations taking into consideration the funded status of the plan at December 31, 2017 . Currently, under the Employee Retirement Income Security Act of 1974 ("ERISA") and Internal Revenue Service ("IRS") guidelines, our plan is 94% funded.
(5)
The total excludes the liability for uncertain tax positions. We are not able to reasonably estimate the timing of the long-term payments or the amount by which the liability will increase or decrease over time. Therefore, the long-term portion of the liability is excluded from the preceding table.

Off-Balance Sheet Arrangements

As of December 31, 2017 , we did not have any off-balance sheet obligations.

Accounting Policies and Pronouncements

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with GAAP requires the use of judgment, estimates and assumptions. We make such subjective determinations after careful consideration of our historical performance, management's experience, current economic trends and events and information from outside sources. Inherent in this process is the possibility that actual results could differ from these estimates and assumptions for any particular period.

Our significant accounting policies are detailed in Note 2 to our Consolidated Financial Statements, Summary of Significant Accounting Policies, for the fiscal year ended December 31, 2017 . The following areas are the most important and require the most difficult, subjective judgments.

Trade and Consumer Promotion Programs  

The Company offers various sales incentive programs to customers and consumers, such as price discounts, in-store display incentives, cooperative advertising programs, new product introduction fees, and coupons. The mix between the various sales incentive programs, which are classified as reductions in revenue, and advertising or other marketing activities, which are classified as marketing and selling expenses, fluctuates between periods based on the Company's overall marketing plans, and such fluctuations have an impact on revenues. The measurement and recognition of the costs for trade and consumer promotion programs

57

involves the use of judgment related to performance and redemption estimates. Estimates are made based on historical experience and other factors and are adjusted quarterly based upon our most recent experience and new information. Typically, programs that are offered have a very short duration. Historically, the difference between actual experience compared to estimated redemptions and performance has not been significant to the quarterly or annual financial statements. However, actual expenses may differ if the level of redemption rates and performance were to vary from estimates.    

Goodwill and Indefinite-lived Trade Names

Goodwill and trade names are tested for impairment annually and whenever events and circumstances indicate that impairment may have occurred. The goodwill impairment review consists of a two-step process. We perform quantitative testing by calculating the fair value of each reporting unit. We then compare the fair value of the reporting unit with its carrying value. If this fair value exceeds the carrying value, no further analysis or goodwill impairment charge is required. If the fair value is below the carrying value, we proceed to the next step, which is to measure the amount of the impairment loss. The impairment loss is measured as the difference between the carrying value and implied fair value of goodwill. To measure the implied fair value of goodwill we make a hypothetical allocation of the estimated fair value of the reporting unit to the tangible and intangible assets (other than goodwill) within the respective reporting unit using the same rules for determining fair value and allocation under the authoritative guidance for business combinations as we would use if it were an original purchase price allocation. If the implied fair value of the reporting unit's goodwill is less than its carrying amount, the shortfall is charged to earnings.

In estimating the fair value of our reporting units we primarily use the income approach, which utilizes forecasted discounted cash flows to estimate the fair value for each reporting unit. We believe that the use of the discounted cash flow model results in the most accurate estimate of the reporting unit's fair value since market values for our reporting units are not readily available. The income approach utilizes management's business plans and projections as the basis for expected future cash flows for five years plus a terminal year. We make significant assumptions including projected sales growth rates and operating margins and the weighted average cost of capital. In our recent impairment tests, we forecasted cash flows for five years plus a terminal year and assumed a weighted average cost of capital of 6.75% . Our projections assume sales growth rates for the next five years and the terminal year that generally average between 1.0% and 3.0% and operating margins which increase moderately from historical levels over time as a result of planned capital improvements in our plants and manufacturing efficiency projects. These assumptions are determined based upon our expectations for each of the individual reporting units and in our judgment are consistent with other companies in the packaged food industry.

In fiscal 2017 , all reporting units tested had a fair value that exceeded their carrying value by at least 40%. We performed a sensitivity analysis on our weighted average cost of capital and we determined that a 50 basis point increase in the weighted average cost of capital would not have resulted in any of our reporting units implied fair value being less than their carrying value. Additionally, a 50 basis point decrease in the terminal growth rate used for each reporting unit would also not have resulted in any of our reporting units implied fair value being less than their carrying value

We also evaluate the carrying amount of our trade names for impairment on an annual basis, in conjunction with our Goodwill testing, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of an intangible asset with its carrying value. If the carrying value of a trade name exceeds its fair value at the time of the evaluation, we would charge the shortfall to earnings.

To estimate the fair value of our trade names we use the relief from royalty method, which utilizes forecasted discounted net sales to estimate the fair value. The utilization of the relief from royalty method requires us to make significant assumptions including sales growth rates, implied royalty rates and discount rates. As discussed in Note 9 to the Consolidated Financial Statements, Goodwill, Tradenames and Other Assets, in fiscal 2017 the Company recorded tradename impairments of $24.8 million on Celeste , $6.5 million on Snyder of Berlin , $4.2 million on Nalley , $3.1 million on Bernstein and $0.5 million on Swanson . Additionally, as a result of the Exit (As defined in Note 10 to the Consolidated Financial Statements, Restructuring Charges) in the second quarter of 2017, the Company recorded a tradename impairment charge of $27.4 million on the Aunt Jemima tradename, which resulted in a carrying value of $0 . The charge is reported in the Frozen segment. See Note 10 to the Consolidated Financial Statements, Restructuring Charges for further details. In fiscal 2016, we recognized impairments of  $7.3 million  on  Celeste ,  $3.0 million  on  Aunt Jemima  and  $0.9 million  on  Snyder of Berlin . These charges were the result of the Company's reassessment of the long-term sales projections for the brands during our annual planning cycle which occurs during the third quarter each year. In addition, we performed a sensitivity analysis on our weighted average cost of capital and we determined that a 50 basis point increase in the weighted average cost of capital would have resulted in an additional impairment of $8.5 million. Additionally, a 50 basis point decrease in the terminal growth rate used for each of the impaired tradenames would have resulted in an additional impairment of $2.4 million.


58

As of December 31, 2017 , we identified an additional three tradenames which do not have a fair value that exceeded their carrying value by at least  15% . The total carrying value of these tradenames as of December 31, 2017 is  $359.3 million . We performed a sensitivity analysis on our weighted average cost of capital and we determined that a 50 basis point increase in the weighted average cost of capital would have resulted in an additional impairment of $19.7 million. Additionally, a 50 basis point decrease in the terminal growth rate used for each tradename would have resulted in an additional impairment of $15.0 million.

Pension Benefits

The Company had provided pension benefits to certain employees and retirees. All pension plans are frozen for future benefits. Determining the cost associated with such benefits is dependent on various actuarial assumptions, including discount rates, expected return on plan assets and mortality rates. Independent actuaries, in accordance with GAAP, perform the required calculations to determine pension expense. Actual results that differ from the actuarial assumptions are generally accumulated and amortized over future periods.
 The discount rate is established as of the Company's fiscal year-end measurement date. In establishing the discount rate, the Company reviews published market indices of high-quality debt securities, adjusted as appropriate for duration. In addition, independent actuaries apply high-quality bond yield curves to the expected benefit payments of the plan. The expected return on plan assets is a long-term assumption based upon historical experience and expected future performance, considering our current and projected investment mix. This estimate is based on an estimate of future inflation, long-term projected real returns for each asset class, and a premium for active management. Within any given fiscal period, significant differences may arise between the actual return and the expected return on plan assets. The value of plan assets, used in the calculation of pension expense, is the fair market value. Gains and losses resulting from differences between actual experience and the assumptions are determined at each measurement date. If the net gain or loss exceeds 10% of the greater of plan assets or liabilities, a portion is amortized into earnings in the following year.
 Net periodic pension benefit was $2.0 million in fiscal 2017 , $0.2 million in fiscal 2016 and $1.8 million in fiscal 2015 . Significant weighted-average assumptions for all plans used in the calculation are:  
 
 
 
 
 
 

Pension Benefits
2017
 
2016
 
2015
 
 
 
 
 
 
Pension
 
 
 
 
 
Discount rate
4.0
%
 
4.2
%
 
3.9
%
Expected return on plan assets
6.0
%
 
6.0
%
 
6.3
%
 
Estimated sensitivities to annual net periodic pension cost are as follows: a 50-basis-point reduction in the discount rate would have a minimal effect on pension expense by decreasing it by $0.1 million; a 50-basis-point reduction in the estimated return on assets assumption would increase pension expense by approximately $1.0 million.
Net periodic pension benefit is expected to be approximately $3.1 million in 2018 . In fiscal 2018, the Company plans to make contributions of $7.0 million . We made contributions to our plans of $0.3 million in fiscal 2017 , $0.3 million in fiscal 2016 and $3.1 million in fiscal 2015 .
 See also Note 12 to the Consolidated Financial Statements, Pension and Retirement Plans, for additional information on pension expenses.

Income taxes

We record income taxes based on the amounts that are refundable or payable in the current year, and we include results of any difference between GAAP and tax reporting that we record as deferred tax assets or liabilities. We review our deferred tax assets for recovery. A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in our tax provision in the period of change. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets and the timing of income tax payments. Actual collections and payments may differ from these estimates as a result of changes in tax laws as well as unanticipated future transactions impacting related income tax balances.


59

Recently Issued Accounting Pronouncements

For more information on recently issued accounting pronouncements, see Note 2 of the Consolidated Financial Statements, Summary of Significant Accounting Policies.

60

ITEM 7A:     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

FINANCIAL INSTRUMENTS

The sensitivity analyses we present below do not consider the effect of possible adverse changes in the general economy, nor do they consider additional actions we may take to mitigate our exposure to such changes. Our effort to manage or continue to manage any of these risks in the future may not be successful.

Risk Management Strategy
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, foreign exchange rates or commodity prices. Please refer to Note 13 of the Consolidated Financial Statements, Financial Instruments, for additional details regarding our derivatives and refer to Note 11 of the Consolidated Financial Statements, Debt and Interest Expense, for additional details regarding our debt instruments.

Interest Rate Risk

We manage interest rate risk based on the varying circumstances of anticipated borrowings and existing variable and fixed rate debt, including our revolving line of credit. Examples of interest rate management strategies include capping interest rates using targeted interest cost benchmarks, hedging portions of the total amount of debt, hedging a period of months and not always hedging to maturity, and at other times locking in rates to fix interests costs.

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges in accordance with the authoritative guidance for derivative and hedge accounting involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

As discussed above, our variable rate financing arrangements subject us to interest rate risk. If the benchmark LIBOR interest rate were to increase by 50 basis points our annual interest payments on variable rate facilities would increase by approximately $10.4 million. However, we would also recognize a corresponding increase of $6.3 million in the payments received on our interest rate swap contracts, for a net impact on interest expense of $4.1 million. As of December 31, 2017 , a 50 basis point decrease in the benchmark LIBOR interest rate would have decreased the fair value of our interest rate swap assets by $14.2 million.

As discussed in more detail in Note 11 to the Consolidated Financial Statements, Debt and Interest Expense, on February 3, 2017, the Company amended its credit agreement which significantly changed our debt profile and associated risk.

Foreign Currency Risk

Certain parts of our foreign operations in Canada expose us to fluctuations in foreign exchange rates. Our goal is to reduce our exposure to such foreign exchange risks on our foreign currency cash flows and fair value fluctuations on recognized foreign currency denominated assets, liabilities and unrecognized firm commitments to acceptable levels primarily through the use of foreign exchange-related derivative financial instruments. We enter into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of our functional currency. As of December 31, 2017 , a 10% appreciation in the U.S. dollar relative to the Canadian dollar would have decreased the fair value of our foreign exchange forward contracts by $3.2 million .

Commodity Price Risk

We purchase raw materials in quantities expected to be used in a reasonable period of time in the normal course of business. We generally enter into agreements for either spot market delivery or forward delivery. The prices paid in the forward delivery contracts are generally fixed, but may also be variable within a capped or collared price range. The outstanding purchase commitment for

61
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these commodities at any point in time typically ranges from 6 to 12 months of anticipated requirements, depending on the commodity. These contracts are considered normal purchases and sales.

In addition, we may also purchase forward derivative contracts on certain commodities to manage the price risk associated with forecasted purchases of materials used in our manufacturing process. Although they are not speculative, generally these derivatives are not designated as hedges as they do not meet the authoritative guidance for derivative and hedge accounting. From time to time, we enter into commodity forward contracts to fix the price of diesel fuel, natural gas, soybean oil and other commodity purchases at a future delivery date. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in Cost of products sold in the Consolidated Statements of Operations.

As of December 31, 2017 , the potential change in fair value of commodity derivative instruments, assuming a 10% adverse movement in the underlying commodity prices, would have resulted in an unrealized net loss of $2.1 million.

Although we may utilize forward purchase contracts and other instruments to mitigate the risks related to commodity price fluctuation, such strategies do not fully mitigate commodity price risk. Adverse movements in commodity prices over the terms of the contracts or instruments could decrease the economic benefits we derive from these strategies.


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ITEM 8.      FINANCIAL STATEMENTS

Financial statements begin on the following page

 

63
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Pinnacle Foods Inc.
Parsippany, New Jersey

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Pinnacle Foods Inc. and subsidiaries (the "Company") as of December 31, 2017 and December 25, 2016, the related consolidated statements of operations, comprehensive earnings, shareholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 25, 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with the accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2018, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 1, 2018

We have served as the Company's auditor since 2010.



64


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of
Pinnacle Foods Inc.
Parsippany, New Jersey    

Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Pinnacle Foods Inc. and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated March 1, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 1, 2018





65

PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(thousands, except per share amounts)

   
Fiscal year
   
December 31,
2017
 
December 25,
2016
 
December 27,
2015
 
53 weeks
 
52 weeks
 
52 weeks
Net sales
$
3,144,002

 
$
3,127,938

 
$
2,655,792

Cost of products sold
2,275,854

 
2,211,864

 
1,915,286

Gross profit
868,148

 
916,074

 
740,506


 
 
 
 
 
Marketing and selling expenses
193,119

 
218,260

 
176,702

Administrative expenses
130,884

 
163,056

 
107,004

Research and development expenses
16,070

 
18,113

 
12,992

Tradename impairment charges
66,530

 
11,200

 
—

Other expense, net
12,889

 
25,800

 
19,106


419,492

 
436,429

 
315,804

Earnings before interest and taxes
448,656

 
479,645

 
424,702

Interest expense
169,587

 
139,243

 
88,513

Interest income
153

 
145

 
198

Earnings before income taxes
279,222

 
340,547

 
336,387

(Benefit)/Provision for income taxes
(252,999
)
 
129,430

 
123,879

Net earnings
532,221

 
211,117

 
212,508

Less: Net earnings attributable to non-controlling interest
172

 
—

 
—

Net earnings attributable to Pinnacle Foods, Inc. and Subsidiaries common stockholders
$
532,049

 
$
211,117

 
$
212,508

 
 
 
 
 
 
Net earnings per share:
 
 
 
 
 
Basic
$
4.50

 
$
1.81

 
$
1.83

Weighted average shares outstanding- basic
118,141

 
116,872

 
116,032

Diluted
$
4.45

 
$
1.79

 
$
1.81

Weighted average shares outstanding- diluted
119,552

 
118,161

 
117,323

Dividends declared
$
1.22

 
$
1.08

 
$
0.98

See accompanying Notes to Consolidated Financial Statements


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PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(thousands)

 
Fiscal year
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
53 Weeks
 
52 Weeks
 
52 Weeks
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
 
 
 
 
$
532,221

 
 
 
 
 
$
211,117

 
 
 
 
 
$
212,508

Other comprehensive earnings (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
6,084

 
—

 
6,084

 
2,429

 
—

 
2,429

 
(4,364
)
 
—

 
(4,364
)
Cash-flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
4,444

 
(1,920
)
 
2,524

 
(6,573
)
 
2,496

 
(4,077
)
 
(22,078
)
 
8,519

 
(13,559
)
Reclassification adjustment for (gains) losses included in net earnings
19,766

 
(7,485
)
 
12,281

 
8,219

 
(3,144
)
 
5,075

 
526

 
(323
)
 
203

Pension:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net actuarial gain (loss) arising during the period
(372
)
 
140

 
(232
)
 
6,023

 
(2,295
)
 
3,728

 
(7,305
)
 
2,763

 
(4,542
)
Reclassification of net actuarial loss included in net earnings
1,068

 
(406
)
 
662

 
1,071

 
(407
)
 
664

 
981

 
(373
)
 
608

Other comprehensive earnings (loss)
30,990


(9,671
)

21,319


11,169


(3,350
)

7,819


(32,240
)

10,586


(21,654
)
Total comprehensive earnings
 
 
 
 
$
553,540

 
 
 
 
 
$
218,936

 
 
 
 
 
$
190,854

Less: Comprehensive earnings attributable to non-controlling interest
 
 
 
 
172

 
 
 
 
 
—

 
 
 
 
 
—

Comprehensive earnings attributable to Pinnacle Foods Inc. and Subsidiaries
 
 
 
 
$
553,368

 
 
 
 
 
$
218,936

 
 
 
 
 
$
190,854

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying Notes to Consolidated Financial Statements



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PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(thousands, except share and per share amounts)
 
December 31,
2017
 
December 25,
2016
Current assets:
 
 
 
Cash and cash equivalents
$
249,828

 
$
353,076

Accounts receivable, net of allowances of $10,036 and $12,335, respectively
281,622

 
289,582

Inventories
489,806

 
445,491

Other current assets
11,061

 
10,687

Total current assets
1,032,317

 
1,098,836

Plant assets, net of accumulated depreciation of $566,202 and $491,397, respectively
739,713

 
723,345

Tradenames
2,463,374

 
2,529,558

Other assets, net
164,899

 
173,071

Goodwill
2,177,961

 
2,163,156

Total assets
$
6,578,264

 
$
6,687,966

 
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
2,739


$
2,389

Current portion of long-term obligations
33,934

 
23,801

Accounts payable
323,062

 
292,478

Accrued trade marketing expense
38,975

 
51,054

Accrued liabilities
122,131

 
166,741

Dividends payable
40,470

 
35,233

Total current liabilities
561,311

 
571,696

Long-term debt
2,925,594

 
3,140,496

Pension and other postretirement benefits
53,251

 
56,323

Other long-term liabilities
34,037

 
47,529

Deferred tax liabilities
623,833

 
922,980

Total liabilities
4,198,026

 
4,739,024

Commitments and contingencies (Note 14)


 


Shareholders' equity:
 
 
 
Pinnacle preferred stock: $.01 per share, 50,000,000 shares authorized, none issued
—

 
—

Pinnacle common stock: par value $.01 per share, 500,000,000 shares authorized; issued 120,018,215 and 119,127,269, respectively
1,200

 
1,191

Additional paid-in-capital
1,453,054

 
1,429,447

Retained earnings
987,238

 
601,049

Accumulated other comprehensive loss
(30,250
)
 
(51,569
)
Capital stock in treasury, at cost, 1,000,000 common shares
(32,110
)
 
(32,110
)
Total Pinnacle Foods Inc. and Subsidiaries shareholders' equity
2,379,132

 
1,948,008

Noncontrolling interest
1,106

 
934

Total Equity
2,380,238

 
1,948,942

Total liabilities and shareholders' equity
$
6,578,264

 
$
6,687,966


See accompanying Notes to Consolidated Financial Statements



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PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(thousands)
  
Fiscal year
  
December 31,
2017
 
December 25,
2016
 
December 27,
2015
 
53 weeks
 
52 weeks
 
52 weeks
Cash flows from operating activities
 
 
 
 
 
Net earnings
$
532,221

 
$
211,117

 
$
212,508

Non-cash charges (credits) to net earnings
 
 
 
 
 
Depreciation and amortization
132,887

 
105,772

 
89,660

Intangible asset impairment charge
66,530

 
11,200

 
—

Charges resulting from the wind down of Boulder Brands United Kingdom operations
—

 
4,265

 
—

Amortization of debt acquisition costs and discount on term loan
4,734

 
9,554

 
6,353

Recognition of deferred costs related to refinancing
28,494

 
600

 
—

Change in value of financial instruments, including amounts reclassified from Accumulated Other Comprehensive Loss from settlement of hedges
20,949

 
(12,511
)
 
(1,942
)
Equity based compensation expense
18,728

 
14,016

 
15,122

Pension expense, net of contributions
(2,372
)
 
(37
)
 
(4,700
)
Other long-term liabilities
(4,680
)
 
(3,007
)
 
4,506

Other long-term assets
—

 
(283
)
 
—

Foreign exchange (gains) losses
(1,484
)
 
(486
)
 
4,731

Excess tax benefits on equity-based compensation
—

 
(11,577
)
 
(1,442
)
Deferred income taxes
(305,425
)
 
48,182

 
115,584

Changes in working capital (net of effects of acquisition)
 
 
 
 
 
Other liabilities - cash settlement of hedges related to refinancing
(20,723
)
 
—

 
—

Accounts receivable
8,603

 
(29,417
)
 
(30,882
)
Inventories
(43,106
)
 
23,530

 
(49,210
)
Accrued trade marketing expense
(11,910
)
 
4,771

 
10,534

Accounts payable
26,772

 
61,016

 
15,050

Accrued liabilities
(41,291
)
 
36,443

 
(6,609
)
Other current assets
7,026

 
14,356

 
(6,352
)
Net cash provided by operating activities
415,953

 
487,504

 
372,911

Cash flows from investing activities
 
 
 
 
 
Business acquisition activity (net of cash acquired)
(37,487
)
 
(985,365
)
 
1,102

Capital expenditures
(94,226
)
 
(101,050
)
 
(108,477
)
Proceeds from sale of plant assets
1,947

 
—

 
1,618

Net cash used in investing activities
(129,766
)
 
(1,086,415
)
 
(105,757
)
Cash flows from financing activities
 
 
 
 
 
Net proceeds from issuance of common stock
15,097

 
26,436

 
1,231

Dividends paid
(140,738
)
 
(122,850
)
 
(111,758
)
Proceeds from bank term loans
2,262,000

 
547,250

 
—

Proceeds from notes offerings
—

 
350,000

 
—

Repayments of long-term obligations
(2,491,529
)
 
(13,741
)
 
(8,870
)
Proceeds from short-term borrowings
—

 
4,452

 
4,261

Repayments of short-term borrowings
(4,785
)
 
(4,259
)
 
(4,480
)
Repayment of capital lease obligations
(7,124
)
 
(3,950
)
 
(3,585
)
Excess tax benefits on stock-based compensation
—

 
11,577

 
1,442

Taxes paid related to net share settlement of equity awards
(10,238
)
 
(1,087
)
 
(2,401
)
Debt acquisition costs
(12,937
)
 
(22,564
)
 
—

Net cash (used in) provided by by financing activities
(390,254
)
 
771,264

 
(124,160
)
Effect of exchange rate changes on cash
819

 
174

 
(922
)
Net change in cash and cash equivalents
(103,248
)
 
172,527

 
142,072

Cash and cash equivalents - beginning of period
353,076

 
180,549

 
38,477

Cash and cash equivalents - end of period
$
249,828

 
$
353,076

 
$
180,549

Supplemental disclosures of cash flow information:
 
 
 
 
 
Interest paid
$
119,501

 
$
109,029

 
$
78,926

Interest received
153

 
145

 
145

Income taxes paid
57,290

 
31,645

 
18,885

Non-cash investing and financing activities:
 
 
 
 
 
New capital leases
12,116

 
18,014

 
—

New short-term financing
5,135

 
—

 
—

Dividends payable
40,470

 
35,233

 
30,798

Accrued additions to plant assets
26,508

 
27,183

 
23,878

See accompanying Notes to Consolidated Financial Statements

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PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(thousands, except share and per share amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Treasury Stock
 
Additional
Paid In
Capital
 
Retained
earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders'
Equity
 
Non-Controlling Interest
 
Total Equity
Shares
 
Amount
 
Shares
 
Amount
 
 
 
Balance, December 29 2014
117,293,745

 
$
1,173

 
(1,000,000
)
 
$
(32,110
)
 
$
1,363,129

 
$
419,531

 
$
(37,734
)
 
$
1,713,989

 
$
—

 
$
1,713,989

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Equity contributions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Equity based compensation plans
325,950

 
3

 

 

 
15,392

 

 

 
15,395

 
 
 
15,395

Treasury stock purchased

 

 


 


 

 


 


 
—

 
 
 
—

Dividends ($0.98 per share)(1)

 

 

 

 

 
(114,709
)
 


 
(114,709
)
 
 
 
(114,709
)
Comprehensive earnings

 

 

 

 

 
212,508

 
(21,654
)
 
190,854

 
 
 
190,854

Balance, December 27, 2015
117,619,695

 
$
1,176

 
(1,000,000
)
 
$
(32,110
)
 
$
1,378,521

 
$
517,330

 
$
(59,388
)
 
$
1,805,529

 
$
—

 
$
1,805,529

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Equity contributions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Equity based compensation plans
1,507,574

 
15

 


 


 
50,926

 

 

 
50,941

 
 
 
50,941

Dividends ($1.08 per share)(2)

 

 

 

 

 
(127,398
)
 


 
(127,398
)
 
 
 
(127,398
)
Non-controlling interest in acquisition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
934

 
934

Comprehensive earnings

 

 

 

 

 
211,117

 
7,819

 
218,936

 
 
 
218,936

Balance, December 25, 2016
119,127,269

 
$
1,191

 
(1,000,000
)
 
$
(32,110
)
 
$
1,429,447

 
$
601,049

 
$
(51,569
)
 
$
1,948,008

 
$
934

 
$
1,948,942

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Equity contributions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Equity based compensation plans
890,946

 
9

 


 

 
23,607

 

 

 
23,616

 
 
 
23,616

Dividends ($1.22 per share)(3)

 

 

 

 

 
(146,032
)
 


 
(146,032
)
 
 
 
(146,032
)
Non-controlling interest in acquisition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
172

 
172

Comprehensive earnings

 

 

 

 

 
532,221

 
21,319

 
553,540

 


 
553,540

Balance, December 31, 2017
120,018,215

 
$
1,200

 
(1,000,000
)
 
$
(32,110
)
 
$
1,453,054

 
$
987,238

 
$
(30,250
)
 
$
2,379,132

 
$
1,106

 
$
2,380,238


See accompanying Notes to Consolidated Financial Statements

(1) $0.235 per share declared February 2015 and June 2015, $0.255 per share declared September 2015 and December 2015.
(2) $0.255 per share declared February 2016 and June 2016, $0.285 per share declared August 2016 and December 2016.
(3) $0.285 per share declared February 2017 and June 2017, $0.325 per share declared August 2017 and December 2017


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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)



1. Summary of Business Activities
Business Overview
Pinnacle Foods Inc. ("Pinnacle" or the "Company") is a leading manufacturer, marketer and distributor of high quality, branded convenience food products, the products and operations of which are managed and reported in four  operating segments: (i) Frozen, (ii) Grocery, (iii) Boulder and (iv) Specialty.

The Frozen segment is comprised of the retail businesses of the Company’s frozen brands, including vegetables ( Birds Eye ), complete bagged meals ( Birds Eye Voila! and Birds Eye Signature Skillets ), full-calorie single-serve frozen dinners and entrées ( Hungry-Man ), prepared seafood ( Van de Kamp's and Mrs. Paul's ), frozen and refrigerated bagels ( Lender's ) and pizza for one ( Celeste ). The Frozen segment also includes all of the Company’s business in Canada, including those of the Garden Protein International and Boulder Brands acquisitions. The Grocery segment is comprised of the retail businesses of the Company’s grocery brands, including cake/brownie mixes and frostings ( Duncan Hines ), shelf-stable pickles ( Vlasic ), shelf-stable salad dressings ( Wish-Bone , Western and Bernstein’s ), table syrups ( Log Cabin and Mrs. Butterworth's ), premium margarine/spreads ( Smart Balance), canned meat ( Armour, Nalley and Brooks ), pie and pastry fillings ( Duncan Hines, Comstock and Wilderness ) and barbecue sauces ( Open Pit ). The Boulder segment is comprised of the retail businesses of the Company’s health and wellness lifestyle brands, including gluten-free products ( Udi's and Glutino) , natural frozen meal offerings ( EVOL) , plant-based refrigerated and shelf-stable spreads ( Earth Balance ) and plant-based protein frozen products ( gardein ). The Specialty segment includes the Company’s snack products ( Tim's Cascade and Snyder of Berlin ) and all of its U.S. foodservice and private label businesses, including those of the Garden Protein International and Boulder Brands acquisitions.
History and Current Ownership
On April 2, 2007, the Company was acquired by, and became a wholly owned subsidiary of Peak Holdings LLC ("Peak Holdings"), an entity controlled by investment funds affiliated with The Blackstone Group L.P ("Blackstone"). We refer to this merger transaction and related financing transactions as the Blackstone Transaction. As a result of the Blackstone Transaction, Blackstone owned, through Peak Holdings, approximately 98% of the common stock of the Company.


As of the launch of our initial public offering on April 3, 2013 (the “IPO”), we were controlled by Blackstone. Effective September 12, 2014, as a result of Blackstone’s reduced ownership in the Company, we no longer qualified as a “controlled company” under applicable New York Stock Exchange listing standards. On May 8, 2015, Blackstone sold their final  5,000,000  shares in an underwritten public offering. Upon completion of the offering, Blackstone no longer beneficially owned any of the Company's outstanding common stock and subsequently resigned from the Company's Board of Directors.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


2. Summary of Significant Accounting Policies

Consolidation. The Consolidated Financial Statements include the accounts of Pinnacle and its subsidiaries. The results of companies acquired during the year are included in the Consolidated Financial Statements from the effective date of the acquisition. Intercompany transactions have been eliminated in consolidation.

Foreign Currency Translation. Foreign-currency-denominated assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of Accumulated other comprehensive loss within shareholders' equity. The Company translates the results of operations of its foreign subsidiaries at the average exchange rates during the respective periods. Gains and losses resulting from foreign currency transactions are normally included in Cost of products sold on the Consolidated Statements of Operations and include the mark to market and realized gains and losses on our foreign currency swaps as discussed in Note 13 to our Consolidated Financial Statements, Financial Instruments. Additionally, the Company recorded $1.5 million and $ 0.5 million of foreign exchange gains in fiscal years 2017 and 2016, respectively. In fiscal 2015, the Company recorded a $4.7 million foreign exchange loss. These amounts represent foreign exchange gains/losses from intra-entity loans resulting from the Garden Protein acquisition that are anticipated to be settled in the foreseeable future and are recorded in Other expense (income), net on the Consolidated Statements of Operations.

Fiscal Year. The Company's fiscal year ends on the last Sunday in December resulting in a fifty-three-week fiscal year for 2017 and a fifty-two-week fiscal year for 2016 and 2015.

Cash and Cash Equivalents. The Company considers investments in all highly liquid instruments with an initial maturity of three months or less to be cash equivalents. Cash equivalents are measured at fair value and are Level 1 assets.

Inventories. Substantially all inventories are valued at the lower of average cost or net realizable value. The type of costs included in inventory are ingredients, containers, packaging, other raw materials, direct manufacturing labor and fully absorbed manufacturing overheads. When necessary, the Company adjusts the carrying value of its inventories to the lower of cost or net realizable value, including any costs to sell or dispose and consideration for obsolescence, excessive inventory levels, product deterioration and other factors in evaluating net realizable value.

Plant Assets. Plant assets are stated at historical cost, and depreciation is computed using the straight-line method over the lives of the assets. Buildings and machinery and equipment are depreciated over periods not exceeding 45 years and 15 years, respectively. The weighted average estimated remaining useful lives are approximately 15 years for buildings and 8 years for machinery and equipment. When assets are retired, sold, or otherwise disposed of, their gross carrying value and related accumulated depreciation are removed from the accounts and included in determining gain or loss on such disposals. Costs of assets acquired in a business combination are based on the estimated fair value at the date of acquisition.

Goodwill and Indefinite-lived Intangible Assets. The Company evaluates the carrying amount of goodwill and indefinite-lived tradenames for impairment on at least an annual basis in the third quarter and when events occur or circumstances change suggesting that an impairment might exist. The Company performs goodwill impairment testing for each business which constitutes a component of the Company's operating segments, known as reporting units. The Company performs quantitative testing by calculating the fair value of each reporting unit. The Company compares the fair value of these reporting units with their carrying values inclusive of goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company compares the implied fair value of the reporting unit's goodwill to its carrying amount and any shortfall is charged to earnings. In estimating the implied fair value of the goodwill, the Company estimates the fair value of the reporting unit's tangible and intangible assets (other than goodwill). In estimating the fair value of its reporting units, the Company primarily uses the income approach, which utilizes forecasted discounted cash flows to estimate the fair value for each reporting unit. The income approach utilizes management's business plans and projections as the basis for expected future cash flows for five years plus a terminal year. It requires significant assumptions including projected sales growth rates and operating margins and the weighted average cost of capital. In the most recent impairment tests, the Company forecasted cash flows for five years plus a terminal year and assumed a weighted average cost of capital of 6.75% . These projections assume sales growth rates for the next five years and the terminal year that generally average between 1.0% and 3.0% and operating margins, which increase moderately from historical levels over time as a result of planned capital improvements in the Company's plants and manufacturing efficiency projects. These assumptions are determined based upon management's expectations for each of the individual reporting units.


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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


For indefinite-lived tradename intangible assets, the Company determines recoverability by comparing the carrying value to its fair value estimated based on discounted cash flows attributable to the tradename and charges the shortfall, if any, to earnings. In estimating the fair value of trade names, the Company primarily uses the relief from royalty method. The relief from royalty method involves discounted net sales, which require management to make significant assumptions regarding the weighted average cost of capital, sales growth trends and representative royalty rates.

Assumptions underlying fair value estimates referred to above are subject to risks and uncertainties. These measurements are considered level 3 under the fair value hierarchy as described in Note 4 to the Consolidated Financial Statements, Fair Value Measurements. For more information on goodwill and indefinite-lived intangible assets, please refer to Note 9 to the Consolidated Financial Statements, Goodwill, Tradenames and Other Assets.

Valuation of Long-Lived Assets. The carrying value of long-lived assets held and used, other than goodwill and indefinite-lived intangibles are evaluated at the asset group level when events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of a long-lived asset group is considered impaired when the total projected undiscounted cash flows from such asset group are less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset group. Fair market value is determined primarily using the projected cash flows from the asset group discounted at a rate commensurate with the risk involved. Losses on long-lived asset groups held for sale, other than goodwill, are determined in a similar manner, except that fair market values are reduced for disposal costs.

Revenue Recognition and Trade Marketing. Revenue from product sales is recognized upon shipment to the customers as terms are free on board ("FOB") shipping point, at which point title and risk of loss is transferred and the selling price is fixed or determinable. This completes the revenue-earning process, specifically that an arrangement exists, delivery has occurred, ownership has transferred, the price is fixed and collectability is reasonably assured. A provision for payment discounts and product return allowances, which is estimated based upon the Company's historical performance, management's experience and current economic trends, is recorded as a reduction of sales in the same period that the revenue is recognized.

Trade promotions, consisting primarily of customer pricing allowances and merchandising funds, and consumer coupons are offered through various programs to customers and consumers. Sales are recorded net of estimated trade promotion spending, which is recognized as incurred at the time of sale. Certain retailers require the payment of slotting fees in order to obtain space for the Company's products on the retailer's store shelves. The fees are recognized as reductions of revenue on the date a liability to the retailer is created. These amounts are included in the determination of net sales. Accruals for expected payouts under these programs are included as accrued trade marketing expense in the Consolidated Balance Sheet. Coupon redemption costs are also recognized as reductions of net sales when the coupons are issued. Estimates of trade promotion expense and coupon redemption costs are based upon programs offered, timing of those offers, estimated redemption/usage rates from historical performance, management's experience and current economic trends.

Trade marketing expense is comprised of amounts paid to retailers for programs designed to promote our products. These costs include standard introductory allowances for new products (slotting fees). They also include the cost of in-store product displays, feature pricing in retailers' advertisements and other temporary price reductions. These programs are offered to our customers both in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is the subject of significant management estimates. The Company records as expense the estimated ultimate cost of the program in the period during which the program occurs. In accordance with the authoritative guidance for revenue recognition, these trade marketing expenses are classified in the Consolidated Statements of Operations as a reduction of net sales. Also, in accordance with the guidance, coupon redemption costs are also recognized as reductions of net sales when issued.

Advertising. Advertising costs include the cost of working media (advertising on television, radio or in print), the cost of producing advertising, and the cost of coupon insertion and distribution. Working media and coupon insertion and distribution costs are expensed in the period the advertising is run or the coupons are distributed. The cost of producing advertising is expensed as of the first date the advertisement takes place. Advertising included in the Company's marketing and selling expenses were $29.3 million for fiscal year ended December 31, 2017 , $33.0 million for fiscal year ended December 25, 2016 and $28.2 million for fiscal year ended December 27, 2015 .

Shipping and Handling Costs . Costs related to shipping and handling of products shipped to customers are classified as Cost of products sold.


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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Pension benefits. The Company had provided pension benefits to certain employees and retirees. Pension benefits are no longer offered to salaried employees. All pension plans are frozen for future benefits. Determining the cost associated with such benefits is dependent on various actuarial assumptions, including discount rates, expected return on plan assets and mortality rates. Independent actuaries, in accordance with generally accepted accounting principles in the U.S. ("GAAP"), perform the required calculations to determine pension expense. Actual results that differ from the actuarial assumptions are generally accumulated and amortized over future periods.

Equity Based Compensation expense . Grant-date fair value of performance share units ("PSU's") and performance shares ("PS's") are estimated using a Monte Carlo simulation. Grant-date fair value of stock options are estimated using the Black-Scholes option-pricing model, which includes using the simplified method to estimate the number of periods to exercise date. While we had equity compensation plans in place as a private company, our broader post-IPO equity compensation plans have not been in place for a sufficient amount of time to understand their post vesting behavior. As such, we will continue to use this methodology until such time we have sufficient history to provide a reasonable basis on which to estimate the expected term. Compensation expense is reduced based on estimated forfeitures with adjustments to actual expense recorded at the time of vesting. Forfeitures are estimated based on historical experience. The majority of our equity options have a three -year cliff vesting period. For those awards that have a performance condition, compensation expense is based upon the number of shares expected to vest after assessing the probability that the performance criteria will be met. We recognize compensation cost for awards over the vesting period, adjusted for any changes in our probability assessment.

Insurance reserves . The Company is self-insured under its worker's compensation insurance policy. The Company utilizes a stop loss policy issued by an insurance company to fund claims in excess of $0.4 million . The Company estimates the outstanding retained-insurance liabilities by projecting incurred losses to their ultimate liability and subtracting amounts paid-to-date to obtain the remaining liabilities. The Company bases actuarial estimates of ultimate liability on actual incurred losses, estimates of incurred but not yet reported losses and the projected costs to resolve these losses.

Income Taxes. Income taxes are accounted for in accordance with the authoritative guidance for accounting for income taxes under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.  The Company continually reviews its deferred tax assets for recovery.  A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized.  Changes in valuation allowances from period to period are included in the Company's tax provision in the period of change. On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law.  Among other provisions, the Act reduces the federal statutory corporate income tax rate from 35% to 21%.  The effect of this rate reduction and other pronouncements of the Act on our deferred tax asset and liability and current tax payable balances has been factored into our 2017 income tax provision.

Financial Instruments. The Company uses financial instruments to manage its exposure to movements in interest rates, foreign currencies and certain commodity prices. The use of these financial instruments modifies the exposure of these risks with the intent to reduce the risk or cost to the Company. The Company does not use derivatives for trading purposes and is not a party to leveraged derivatives. The authoritative guidance for derivative and hedge accounting requires that all derivatives be recognized as either assets or liabilities at fair value. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings. The cash flows associated with the financial instruments are included in the cash flow from operating activities.

Deferred financing costs . Deferred financing costs are amortized over the life of the related debt using the effective interest rate method. If debt is prepaid or retired early, the related unamortized deferred financing costs are written off in the period the debt is retired.

Capitalized Internal Use Software Costs. The Company capitalizes the cost of internal-use software that has a useful life in excess of one year. These costs consist of payments made to third parties and the salaries of employees working on such software development. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a task it previously did not perform. Capitalized internal use software costs are amortized using the straight-line method over their estimated useful lives, generally 2 ½ to 3 years. The Company amortized $11.6 million for fiscal year ended December 31, 2017 , $10.4 million for fiscal year ended December 25, 2016 and $9.6 million for fiscal year ended December 27, 2015 . Additionally, as of December 31, 2017 and December 25, 2016 , the net book value of capitalized internal use software totaled $26.8 million and $25.1 million, respectively and is included in Plant assets, net on the Consolidated Balance Sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)



Accumulated other comprehensive loss ("AOCL"). Accumulated other comprehensive loss includes loss on financial instruments, foreign currency translation adjustments, net gains or (losses) on pension actuarial assumptions and the related tax provisions or benefits that are currently presented as a component of shareholder's equity. For more information on accumulated other comprehensive loss, please refer to Note 6 to the Consolidated Financial Statements, Accumulated Other Comprehensive Loss.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-09, "Improvements to Employee Share-Based Payment Accounting". The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The updated guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The amendments related to the timing of when excess tax benefits are recognized are to be applied using a modified retrospective approach. The amendments related to the presentation of employee taxes paid on the statement of cash flows are to be applied retrospectively. The amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement are to be applied prospectively. The Company has adopted this new guidance in the first quarter of 2017. As a result of this adoption:

•
We recognized discrete tax benefits of $14.1 million in the income taxes line item of our consolidated income statement for the fiscal year ended December 31, 2017 related to excess tax benefits upon vesting or settlement in that period.
•
We elected to adopt the cash flow presentation of the excess tax benefits prospectively, commencing with our cash flow statement for the fiscal year ended December 31, 2017 , where these benefits are classified along with other income tax cash flows as an operating activity.
•
We have elected to continue to estimate the number of stock-based awards expected to vest, rather than electing to account for forfeitures as they occur to determine the amount of compensation cost to be recognized in each period.
•
At this time, we have not changed our policy on statutory withholding requirements and will continue to allow an employee to withhold at the minimum statutory withholding requirements. Amounts paid by us to taxing authorities when directly withholding shares associated with employees' income tax withholding obligations are classified as a financing activity in our cash flow statement.
•
We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the fiscal year ended December 31, 2017 .

In November 2015, the FASB issued ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes". The new guidance eliminates the requirement to separate deferred income tax liabilities and assets into current and noncurrent amounts. The amendments require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those annual periods. The Company has adopted this new guidance in the first quarter of 2017 with the changes in presentation applied retrospectively to all periods presented. As of December 25, 2016 the cumulative effect of these changes on the balance sheet were decreases of $51.7 million in Deferred tax assets as well as in Deferred tax liabilities.

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory", which requires entities to measure most inventory "at the lower of cost and net realizable value," thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The ASU will not apply to inventories that are measured by using either the last-in, first-out (LIFO) method or the retail inventory method (RIM). The updated guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company has adopted this new guidance in the first quarter of 2017 without material effect on the consolidated financial statements.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, guidance based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be entitled in exchange for the transfer of goods or services. In August 2015, the FASB deferred the effective date by one year while providing the option to early adopt the standard on the original effective date. Accordingly, the Company will adopt the standard in the first quarter of fiscal 2018. We analyzed the expected impact that the new guidance will have on our policies, processes, controls, and disclosures. This assessment required, among other things, a review of the contracts we have with our customers. Substantially all of our revenue is earned pursuant to agreements under which we have one performance obligation, which is satisfied at a point-in-time. Based on our analysis, we do not expect that this ASU will have a material effect on the timing or amount of revenue recognition, our results of operations, our financial position or our control environment. Our disclosures will change as appropriate to comply with the new guidance. The guidance allows for both retrospective and modified retrospective methods of adoption. Based on our analysis to date, we will apply the modified retrospective method of adoption.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


In February 2016, the FASB issued ASU No. 2016-02, “Leases”. The FASB is amending the FASB Accounting Standards Codification ("ASC") and creating Topic 842, Leases, which will supersede Topic 840, Leases. The main difference between previous GAAP and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Under the new guidance, lessees will be required to recognize the assets and liabilities arising from leases on the balance sheet. The updated guidance will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. In transition to the new guidance, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is in the process of evaluating this guidance.  

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The new standard is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied on a prospective basis. Early adoption is permitted for annual or interim goodwill impairment testing performed after January 1, 2017. The Company is currently evaluating the impact of adopting this guidance.

In March 2017, the FASB issued ASU 2017-07, "Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". ASU 2017-07 requires the service cost component of net periodic benefit cost be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period and other components of the net periodic benefit cost be presented separately from the line item that includes the service cost and outside of any subtotal of operating income. For public entities, the amendments in ASU 2017-07 are effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of adopting this guidance.

In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting". ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in the update are effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoptions is permitted, including adoption in any interim period for which financial statements have not yet been issued. The amendments will be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of adopting this guidance.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities". ASU 2017-12 provides guidance that amends hedge accounting. Under the new guidance, more hedging strategies will be eligible for hedge accounting and the application of hedge accounting is simplified. The new guidance amends presentation and disclosure requirements, and how effectiveness is assessed. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company plans on early adopting this guidance in the first quarter of 2018. Currently all of the Company's commodity risk derivatives are not designated as hedges and thus do not qualify for hedge accounting. Upon implementation of this guidance, the Company expects a portion of these commodity risk derivatives to qualify for hedge accounting and its disclosures to be updated accordingly.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


3. Acquisitions

Acquisition of a frozen warehouse and vegetable packaging business (the "Beaver Dam acquisition")

On December 15, 2017, the Company acquired a frozen warehouse and vegetable packaging business located in Beaver Dam, Wisconsin from Ryder Integrated Logistics, Inc. The cost of the acquisition was $37.5 million , which was paid in cash. Goodwill, which is not subject to amortization, has a book value of $10.7 million , all of which is deductible for tax purposes. The entire acquisition was allocated to the Frozen segment. Transaction costs of approximately $0.1 million incurred in connection with the acquisition were expensed as incurred and recorded in Other expense (income) in the Consolidated Statements of Operations. These costs primarily relate to legal and other professional fees.

The following table summarizes the allocation of the total cost of the acquisition to the assets acquired:

Assets acquired
 
  Land
$
700

  Buildings
22,043

  Plant assets
4,091

  Goodwill
10,653

Total cost of acquisition
$
37,487



Unaudited pro forma revenue and net earnings related to the acquisition are not presented because the pro forma impact is not
material.

Acquisition of Boulder Brands Inc. (the "Boulder Brands acquisition")

On January 15, 2016, the Company acquired 100% of the capital stock of Boulder Brands Inc. ("Boulder") which manufactures a portfolio of health and wellness brands, including Udi's and Glutino gluten-free products, EVOL natural frozen meal offerings, Smart Balance refrigerated and shelf-stable spreads and Earth Balance plant-based refrigerated and shelf-stable spreads. The Boulder Brands acquisition expands the Company's presence in growing and complementary health and wellness categories and in the natural and organic retail channels.

The cost of the Boulder Brands acquisition was $1,001.4 million, which included the repayment of debt. The following table summarizes the allocation of the total cost of the acquisition to the assets acquired and liabilities assumed:


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(thousands, except share and per share amounts and where noted in millions)


Assets acquired:
 
  Cash
$
16,054

  Accounts receivable
41,064

  Inventories
66,893

  Other current assets
12,043

  Deferred tax assets
27,955

  Property and equipment
59,405

  Tradenames
539,600

  Distributor relationships
40,600

  Customer relationships
11,400

  Other assets
12,298

  Goodwill
445,954

       Fair value of assets acquired
1,273,266

Liabilities assumed:
 
  Accounts payable
16,022

  Accrued liabilities
41,555

  Capital lease obligations
7,486

  Long term deferred tax liabilities
201,358

  Other long-term liabilities
4,504

  Non-controlling interest
922

Total cost of acquisition
$
1,001,419


Based upon the allocation, the value assigned to intangible assets and goodwill totaled $1,037.7 million . The goodwill was generated primarily as a result of expected synergies to be achieved because of the Boulder Brands acquisition. Distributor relationships and customer relationships are being amortized on an accelerated basis over 30 and 10 years, respectively. These useful lives are based on an attrition rate based on industry experience, which management believes is appropriate in the Company's circumstances. The Company has also assigned $539.6 million to the value of the tradenames acquired, which is not subject to amortization but is reviewed annually for impairment. Goodwill, which is also not subject to amortization, totaled $446.0 million (tax deductible goodwill of $85.5 million resulted from the Boulder Brands acquisition). Goodwill was allocated to the Frozen, Grocery, Boulder, and Specialty segments, as is illustrated in Note 9 to the Consolidated Financial Statements, Goodwill, Tradenames and Other Assets.

During the year ended December 25, 2016, the Boulder Brands acquisition resulted in an additional $469.7 million of net sales and a net loss of $19.3 million , related to Boulder operations from January 15, 2016 to December 25, 2016, which included a $10.4 million charge related to the fair value step-up of inventories acquired and sold during the period, $19.2 million of restructuring costs, primarily severance, $6.8 million of acquisition costs described below and additional interest expense incurred on debt issued to finance the acquisition.

The Boulder Brands acquisition was financed through borrowings of $550.0 million in incremental term loans (the "Tranche I Term Loans") due 2023, $350.0 million of 5.875% Senior Notes (the " 5.875% Senior Notes) due 2024, $118.3 million of cash on hand, prior to transaction costs of $6.8 million and $1.7 million in the twelve months ended December 25, 2016 and December 27, 2015, respectively, and debt acquisition costs of $24.0 million and $0.4 million in the twelve months ended December 25, 2016 and December 27, 2015, respectively. The debt acquisition costs, which included original issue discount are being amortized over the life of the associated debt using the effective interest method and are recorded in Long-Term debt on the Consolidated Balance Sheet. For more information, see Note 11 to the Consolidated Financial Statements, Debt and Interest Expense. Included in the acquisition costs of $6.8 million for the year ended December 25, 2016 are $6.1 million of merger, acquisition and advisory fees and $0.7 million of other costs. The $1.7 million of transaction costs incurred in fiscal 2015 primarily relate to legal, accounting and other professional fees. The transaction costs are recorded in Other expense (income), net in the Consolidated Statements of Operations.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Pro forma Information
 
The following unaudited pro forma summary presents the Company's consolidated results of operations as if Boulder had been acquired on December 29, 2014, which was the first day of fiscal 2015. These amounts adjusted Boulder's historical results to reflect the additional depreciation and amortization that would have been charged assuming the fair value adjustments to plant assets and intangible assets had been applied from December 29, 2014, together with the consequential tax effects. These adjustments also reflect the additional interest expense incurred on the debt to finance the purchase. The year ended December 25, 2016 pro forma earnings were adjusted to exclude the acquisition related and restructuring costs incurred and the nonrecurring expense related to the fair value inventory step-up adjustment. The year ended December 27, 2015 pro forma earnings were adjusted to include these charges. The pro forma financial information presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition and borrowings undertaken to finance the acquisition had taken place at the beginning of 2015.

Amounts in millions:

 
Year ended
December 25, 2016 (unaudited)
Year ended
December 27, 2015 (unaudited)
Net sales
$
3,145.5

$
3,162.8

Net earnings
$
235.2

$
167.3




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(thousands, except share and per share amounts and where noted in millions)


4. Fair Value Measurements
The authoritative guidance for financial assets and liabilities discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1:
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3:
Unobservable inputs that reflect the Company’s assumptions.
The Company’s financial assets and liabilities subject to recurring fair value measurements and the required disclosures are as follows:
 
 
Fair Value
as of
December 31, 2017
 
Fair Value Measurements
Using Fair Value Hierarchy
 
 
Fair Value
as of
December 25, 2016
 
Fair Value Measurements
Using Fair Value Hierarchy
 
Level 1
 
Level 2
 
Level 3
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
8,194

 
$
—

 
$
8,194

 
$
—

 
 
$
—

 
$
—

 
$
—

 
$
—

Foreign currency derivatives
—

 
—

 
—

 
—

 
 
86

 
—

 
86

 
—

Commodity derivatives
2,615

 
—

 
2,615

 
—

 
 
2,833

 
—

 
2,833

 
—

Total assets at fair value
$
10,809

 
$
—

 
$
10,809

 
$
—

 
 
$
2,919

 
$
—

 
$
2,919


$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
—

 
$
—

 
$
—

 
$
—

 
 
$
16,852

 
$
—

 
$
16,852

 
$
—

Foreign currency derivatives
750

 
—

 
750

 
—

 
 
—

 
—

 
—

 
—

Commodity derivatives
336

 
—

 
336

 
—

 
 
327

 
—

 
327

 
—

Total liabilities at fair value
$
1,086

 
$
—

 
$
1,086

 
$
—

 
 
$
17,179

 
$
—

 
$
17,179

 
$
—


The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk.

The valuations of these instruments are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate, commodity, and foreign exchange forward curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of the authoritative guidance for fair value disclosure, the Company incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. The Company had no recurring fair value measurements based upon significant unobservable inputs (Level 3) as of December 31, 2017 or December 25, 2016 .


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(thousands, except share and per share amounts and where noted in millions)


In addition to the instruments named above, the Company also makes fair value measurements in connection with its annual goodwill and tradename impairment testing. These measurements fall into Level 3 of the fair value hierarchy. See Note 9 to the Consolidated Financial Statements, Goodwill, Tradenames and Other Assets , for further details.


5. Shareholders' Equity, Equity Based Compensation Expense and Earnings Per Share

Equity based Compensation Expense

The Company has a long-term incentive program: The 2013 Omnibus Incentive Plan (as defined below). Equity based compensation expense recognized during the period is based on the value of the portion of equity based payment awards that is ultimately expected to vest during the period. As equity based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The Company estimates forfeitures at the time of grant and revises, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates the annual forfeiture rates to be approximately 11% under its long-term incentive plans.

Expense Information

The following table summarizes equity based compensation expense which was allocated as follows:

 
Fiscal year ended
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
Cost of products sold
$
1,419

 
$
1,556

 
$
3,647

Marketing and selling expenses
5,348

 
5,501

 
3,642

Administrative expenses
11,357

 
6,417

 
7,461

Research and development expenses
604

 
542

 
372

Pre-Tax Equity Based Compensation Expense
18,728

 
14,016

 
15,122

Income Tax Benefit
7,126

 
5,268

 
5,638

Net Equity Based Compensation Expense
$
11,602

 
$
8,748

 
$
9,484


As of December 31, 2017 , cumulative unrecognized equity compensation expense of the unvested portion of shares and options for the Company's long-term incentive program was $33.7 million . The weighted average period over which vesting will occur is approximately 1.3 years.

2013 Omnibus Incentive Plan

In connection with the IPO, the Company adopted an equity incentive plan (the “2013 Omnibus Incentive Plan”) providing for the issuance of up to 11,300,000 shares of common stock. On May 25, 2016, the Company’ shareholders approved the Company’s Amended and Restated 2013 Omnibus Incentive Plan (the “Amended and Restated Omnibus Incentive Plan”). Awards granted under this plan include equity options, non-vested shares and restricted stock units ("RSU's"). The Company also granted non-vested performance shares ("PS's") and performance share units ("PSU's") both of which vest based on achievement of total shareholder return performance goals. Under the program, awards of PS's and PSU's will be earned by comparing the company's total shareholder return during a three -year period to the respective total shareholder returns of companies in a performance peer group. Based upon the company's ranking in the performance peer group, a recipient of PS's or PSU's may earn a total award ranging from 0% to 200% of the initial grant.

Stock Options: During 2017, the Company granted 376,849 options. The options vest in full after three years . The exercise price of all options granted is equal to the market value of the shares on the date of grant. Options under the plans have a termination date of 10 years from the date of issuance.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)



The following table summarizes the equity option transactions in 2017 :

 
 
Number of
Options
 
Weighted Average Exercise Price
 
Weighted Average Fair Value at Grant Date
 
Weighted Average Remaining Life
 
Aggregate Intrinsic Value (000's)
Outstanding, December 25, 2016
 
2,055,070

 
$
31.44

 
$
7.39

 
7.64
 
$
44,821

 
 
 
 
 
 
 
 
 
 
 
 
Granted
376,849

 
57.87

 
12.46

 
 
 
 
 
Exercised
(611,483
)
 
23.57

 
6.10

 
 
 
 
 
Forfeitures
(31,924
)
 
55.06

 
11.82

 
 
 
 
Outstanding, December 31, 2017
 
1,788,512

 
$
39.28

 
$
8.82

 
7.48
 
$
36,112

 
 
 
 
 
 
 
 
 
 
 
Exercisable and expected to vest, December 31, 2017
 
1,493,964

 
$
37.56

 
$
8.53

 
7.26
 
$
32,897

 
 
 
 
 
 
 
 
 
 
 
Exercisable, December 31, 2017
 
634,210

 
$
24.23

 
$
6.38

 
5.66
 
$
22,350


The Company currently uses the Black-Scholes pricing model as its method of valuation for equity option awards. The fair value of the options granted during the fiscal years ended December 31, 2017 , December 25, 2016 and December 27, 2015 was estimated on the date of the grant with the following weighted average assumptions:

 
 
Fiscal year ended
 
 
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
Risk-free interest rate
 
2.15
%
 
1.53
%
 
1.57
%
 
Expected time to option exercise
 
6.50 years

 
6.50 years

 
6.50 years

 
Expected volatility
 
24
%
 
27
%
 
27
%
 
Expected dividend yield on Pinnacle Foods Inc. stock
 
2.0
%
 
2.4
%
 
2.3
%
 

Volatility for 2017 was based on the Company's historical experience. Volatility for fiscal 2016 and 2015 was based on the average volatility of a group of publicly traded food companies.

Cash received from option exercises for the fiscal years ended December 31, 2017 , December 25, 2016 and December 27, 2015 was $15.1 million, $26.4 million and $1.2 million, respectively.















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(thousands, except share and per share amounts and where noted in millions)


RSU's: During 2017, the Company granted 180,060 RSU's. The awards vest in full over a period of one to three years .

The following table summarizes the 2017 changes in non-vested shares and Restricted Stock Units ("RSU's").

 
 
Number of
Shares
 
Weighted Average Fair Value at Grant Date
 
Aggregate Intrinsic Value (000's)
Outstanding, December 25, 2016
 
618,485

 
$
39.63

 
$
32,303

 
 
 
 
 
 
 
 
Granted
180,060

 
58.04

 
 
 
Forfeitures
(72,296
)
 
47.65

 
 
 
Vested
(195,609
)
 
31.46

 
 
Outstanding, December 31, 2017
 
530,640

 
$
47.80

 
$
31,557

 
 
 
 
 
 
 
Expected to Vest, December 31, 2017
 
446,012

 
$
47.09

 
$
26,524



PSU's: During 2017, the Company granted 157,375 PSU's. The awards vest in full over a period of two and a half to three years .

The following table summarizes the 2017 changes in non-vested Performance Shares ("PS's") and Performance Share Units ("PSU's").

 
 
Number of
Instruments
 
Weighted Average Fair Value at Grant Date
 
Aggregate Intrinsic Value (000's)
Outstanding, December 25, 2016
 
471,349

 
$
45.88

 
$
24,619

 
 
 
 
 
 
 
 
Granted
157,375

 
67.01

 
 
 
Forfeitures
(31,860
)
 
56.44

 
 
 
Vested
(135,008
)
 
37.65

 
 
Outstanding, December 31, 2017
 
461,856

 
$
54.76

 
$
27,467

 
 
 
 
 
 
 
Expected to Vest, December 31, 2017
 
355,929

 
$
54.26

 
$
21,167


The Company estimated the fair value of PSU's at the date of grant using a Monte Carlo simulation. The fair value of the PSU's granted during the fiscal years ended December 31, 2017 , December 25, 2016 , and December 27, 2015 were estimated on the date of the grant with the following assumptions:

 
 
 
 
 
 
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
Risk-free interest rate
1.5
%
 
1.3
%
 
1.3
%
Expected term
2.98 years

 
2.91 years

 
3.00 years

Expected volatility
19
%
 
17
%
 
22
%
Expected dividend yield
2.0
%
 
2.3
%
 
2.3
%

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(thousands, except share and per share amounts and where noted in millions)




Earnings Per Share

Basic earnings per common share is computed by dividing net earnings or loss for common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net earnings by weighted-average common shares outstanding during the period plus dilutive potential common shares, which are determined as follows:
 
Fiscal year ended
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
Weighted-average common shares
118,140,957

 
116,871,948

 
116,031,648

Effect of dilutive securities
1,411,115

 
1,288,756

 
1,290,878

Dilutive potential common shares
119,552,072

 
118,160,704

 
117,322,526


Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities. For the fiscal years ended December 31, 2017 , December 25, 2016 and December 27, 2015 , conversion of securities totaling 406,637 , 501,014 and 267,565 respectively, into common share equivalents were excluded from this calculation as their effect would have been anti-dilutive.

6. Accumulated Other Comprehensive Loss

The components of Accumulated Other Comprehensive Loss ("AOCL") consist of the following:
 
Currency translation adjustments
 
Gains (Losses) on cash flow hedges
 
Change in pensions
 
Total
Balance at December 27, 2015
$
(6,418
)
 
$
(9,232
)
 
$
(43,738
)
 
$
(59,388
)
Other comprehensive gain (loss) before reclassification
2,429

 
(4,077
)
 
3,728

 
2,080

Amounts reclassified from accumulated other comprehensive loss
—

 
5,075

 
664

 
5,739

Net current period other comprehensive gain
2,429

 
998

 
4,392

 
7,819

Balance at December 25, 2016
$
(3,989
)
 
$
(8,234
)
 
$
(39,346
)
 
$
(51,569
)
Other comprehensive gain (loss) before reclassification
6,084

 
2,524

 
(232
)
 
8,376

Amounts reclassified from accumulated other comprehensive loss
—

 
12,281

 
662

 
12,943

Net current period other comprehensive gain
6,084

 
14,805

 
430

 
21,319

Balance at December 31, 2017
$
2,095

 
$
6,571

 
$
(38,916
)
 
$
(30,250
)




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Other Comprehensive Earnings

The following table presents amounts reclassified out of AOCL and into Net earnings for the Fiscal year ended December 31, 2017 , December 25, 2016 and December 27, 2015 .

Gain/(Loss)
 
Amounts Reclassified from AOCL
 
 
 
 
Fiscal year ended
 
 
Details about Accumulated Other Comprehensive Earnings Components
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
Reclassified from AOCL to:
Gains and losses on financial instrument contracts
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
(19,412
)
 
$
(8,539
)
 
$
(3,737
)
 
Interest expense
Foreign exchange contracts
 
(354
)
 
320

 
3,211

 
Cost of products sold
Total before tax
 
(19,766
)
 
(8,219
)
 
(526
)
 
 
Tax benefit
 
7,485

 
3,144

 
323

 
Provision for income taxes
Net of tax
 
(12,281
)
 
(5,075
)
 
(203
)
 
 
 
 
 
 
 
 
 
 
 
Pension actuarial assumption adjustments
 
 
 
 
 
 
 
 
Amortization of actuarial loss
 
(1,068
)
 
(1,071
)
 
(981
)
(a)
Cost of products sold
Tax (expense) benefit
 
406

 
407

 
373

 
Provision for income taxes
Net of tax
 
(662
)
 
(664
)
 
(608
)
 
 
Net reclassifications into net earnings
 
$
(12,943
)
 
$
(5,739
)
 
$
(811
)
 
 

(a) This is included in the computation of net periodic pension cost (see Note 12 to the Consolidated Financial Statements, Pension and Retirement Plans, for additional details).


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7. Other Expense (Income), net

Other Expense (Income), net

 
Fiscal year
 
December 31,
2017
 
December 25,
2016
 
December 27,
2015
Other expense (income), net consists of:

 

 
 
Amortization of intangibles/other assets
$
15,847

 
$
16,965

 
$
13,554

Boulder Brands acquisition costs (Note 3)
—

 
6,781

 
1,713

Foreign exchange (gains) losses
(1,484
)
 
(486
)
 
4,731

Wind down of the Boulder Brands United Kingdom operations
(771
)
 
4,265

 
—

Royalty income and other
(703
)
 
(1,725
)
 
(892
)
Total other expense (income), net
$
12,889

 
$
25,800

 
$
19,106


Foreign exchange (gains) losses. Represents foreign exchange (gains) losses from intra-entity loans resulting from the Garden Protein acquisition that are anticipated to be settled in the foreseeable future.

Wind down of Boulder Brands United Kingdom operations. In October 2016, the Company voluntarily ceased production at Boulder Brands private-label gluten-free bakery operation which is based in the United Kingdom. As such, the Company adopted a plan in the fourth quarter of 2016 to wind down operations and dispose of all associated assets such as land, buildings, machinery and equipment and inventory. In connection with the plan of disposal, the Company determined that the carrying values of some of the underlying assets exceeded their fair values. Consequently, the above 2016 charges are primarily comprised of impairment losses, which represent the estimated excess of the carrying values of the assets over their fair values. The 2016 charges also include employee termination benefits and professional fees resulting from the closing and disposition. The final sale and disposal of the assets is substantially complete as of December 31, 2017, with final settlement of certain immaterial liabilities expected in early 2018.





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


8. Balance Sheet Information

Accounts Receivable. Customer accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for cash discounts, returns and bad debts is the Company's best estimate of the amount of uncollectible amounts in its existing accounts receivable. The Company determines the allowance based on historical discounts taken and write-off experience. The Company reviews its allowance for doubtful accounts quarterly. Account balances are charged off against the allowance when the Company concludes it is probable the receivable will not be recovered. The Company does not have any off-balance sheet credit exposure related to its customers. Accounts receivable are as follows:

 
December 31, 2017
 
December 25, 2016
Customers
$
280,086

 
$
292,029

Allowances for cash discounts, bad debts and returns
(10,036
)
 
(12,335
)
Subtotal
270,050

 
279,694

Other receivables
11,572

 
9,888

Total
$
281,622

 
$
289,582


Following are the changes in the allowance for cash discounts, bad debts, and returns:
 
 Beginning
 
 
 Ending
 
 Balance
Revenue Reductions
 Deductions
 Balance
 Fiscal 2017
$
12,335

$
111,862

$
(114,161
)
$
10,036

 Fiscal 2016
7,902

106,103

(101,670
)
12,335

 Fiscal 2015
6,801

98,374

(97,273
)
7,902


Inventories. Inventories are as follows:
 
 
December 31,
2017
 
December 25,
2016
Raw materials, containers and supplies
$
78,567

 
$
81,660

Work in progress (1)
65,800

 
55,068

Finished product
345,439

 
308,763

Total
$
489,806

 
$
445,491


(1) Included in work in progress is primarily agricultural inventory.

The Company has various purchase commitments for raw materials, containers, supplies and certain finished products incident to the ordinary course of business. Such commitments are at current market prices.






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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Plant Assets. Plant assets are as follows:
 
December 31, 2017
 
December 25, 2016
Land
$
15,648

 
$
15,720

Buildings
327,501

 
272,510

Machinery and equipment
898,728

 
826,344

Projects in progress (a)
64,038

 
100,168

Subtotal
1,305,915

 
1,214,742

Accumulated depreciation
(566,202
)
 
(491,397
)
Total
$
739,713

 
$
723,345


Depreciation was $117.0 million, $88.8 million and $76.1 million during the fiscal year ended December 31, 2017 , December 25, 2016 and December 27, 2015 , respectively. As of December 31, 2017 and December 25, 2016 , Plant Assets included assets under capital lease with a book value of $44.6 million and $38.1 million (net of accumulated depreciation of $18.6 million and $14.3 million), respectively.

(a) The significant decrease in Projects in process as of December 31, 2017 as compared to December 25, 2016 primarily relates to the Hagerstown, Maryland facility becoming operational in 2017.

Accrued Liabilities. Accrued liabilities are as follows:
 
December 31,
2017

December 25,
2016
Employee compensation and benefits
$
39,699

 
$
65,402

Interest payable
19,254

 
23,854

Consumer coupons
2,400

 
5,048

Accrued restructuring charges (see Note 10)
1,414

 
7,587

Accrued financial instrument contracts (see Note 13)
988

 
4,940

Accrued broker commissions
6,994

 
7,982

Accrued income taxes
26,805

 
29,173

Other
24,577

 
22,755

Total
$
122,131

 
$
166,741

Other Long-Term Liabilities. Other long-term liabilities are as follows:
 
December 31,
2017
 
December 25,
2016
 Employee compensation and benefits
$
14,197

 
$
12,630

 Long-term rent liability and deferred rent allowances
6,217

 
6,794

 Liability for uncertain tax positions
11,140

 
9,786

 Accrued financial instrument contracts (see Note 13)
98

 
12,239

 Other
2,385

 
6,080

Total
$
34,037

 
$
47,529


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


9. Goodwill, Tradenames and Other Assets
Goodwill
Goodwill by segment is as follows:
 
 
Frozen
 
Grocery
 
Boulder
 
Specialty
 
Total
Balance, December 27, 2015
$
737,695

 
$
746,565

 
$
71,301

 
$
158,447

 
$
1,714,008

Boulder Brands acquisition (Note 3)
9,130

 
114,407

 
293,582

 
28,835

 
445,954

Foreign currency adjustment
3,194

 
—

 
—

 
—

 
3,194

Balance, December 25, 2016
$
750,019


$
860,972

 
$
364,883

 
$
187,282


$
2,163,156

Beaver Dam acquisition (Note 3)
10,653

 
—

 
—

 
—

 
10,653

Foreign currency adjustment
4,152

 
—

 
—

 
—

 
4,152

Balance, December 31, 2017
$
764,824


$
860,972

 
$
364,883

 
$
187,282


$
2,177,961

 
 
 
 
 
 
 
 
 
 

The authoritative guidance for business combinations requires that all business combinations be accounted for at fair value under the acquisition method of accounting. The authoritative guidance for goodwill provides that goodwill will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate. The Company completed its annual testing in the third quarter of 2017, resulting in no impairment and the fair value of each of our reporting units was found to be substantially in excess of its carrying value.

All of the Company's acquisitions are accounted for in accordance with the authoritative guidance for business combinations. The Beaver Dam acquisition resulted in $10.7 million of goodwill being recorded in 2017. The Boulder Brands acquisition resulted in $446.0 million of goodwill being recorded in 2016.

Tradenames

Tradenames by segment are as follows:

 
 Frozen
 
Grocery
 
Boulder
 
Specialty
 
 Total
Balance, December 27, 2015
$
800,928

 
$
1,118,712

 
$
45,408

 
$
36,000

 
$
2,001,048

Boulder Brands acquisition (Note 3)

—

 
142,200

 
397,400

 
—

 
539,600

Foreign currency adjustment
110

 
—

 
—

 
—

 
110

Impairments
(10,300
)
 
—

 
—

 
(900
)
 
(11,200
)
Balance, December 25, 2016
$
790,738


$
1,260,912


$
442,808


$
35,100


$
2,529,558

Foreign currency adjustment
346

 
—

 
—

 
—

 
346

Impairments
(52,740
)
 
(7,290
)
 
—

 
(6,500
)
 
(66,530
)
Balance, December 31, 2017
$
738,344


$
1,253,622


$
442,808


$
28,600


$
2,463,374

 
 
 
 
 
 
 
 
 
 

The allocation of the Boulder Brands acquisition purchase price resulted in $539.6 million of indefinite-lived tradename intangible assets being recorded in 2016.

The authoritative guidance for indefinite-lived assets provides that indefinite-lived assets will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate. Upon completion of the annual testing in the third quarter of 2017, the Company recorded tradename impairments of $24.8 million on Celeste , $6.5 million on Snyder of Berlin , $4.2 million on Nalley , $3.1 million on Bernstein and $0.5 million on Swanson . Celeste and Swanson are reported in the Frozen segment, Nalley and Bernstein are reported in the Grocery segment, and Snyder of Berlin is reported in the Specialty segment. Upon completion of the annual testing in the third quarter of 2016, the Company recorded tradename impairments of  $7.3

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


million  on  Celeste ,  $3.0 million  on  Aunt Jemima  and  $0.9 million  on  Snyder of Berlin .  Celeste  and  Aunt Jemima  are reported in our Frozen segment and  Snyder of Berlin  is reported in the Specialty segment. These charges were the result of the Company's reassessment of the long-term sales projections for the brands during our annual planning cycle which occurs during the third quarter each year. The total carrying value of the five tradenames as of December 31, 2017 is  $25.4 million .

Additionally, as a result of the Exit (as defined in Note 10 to the Consolidated Financial Statements, Restructuring Charges) in the second quarter of 2017, the Company recorded a tradename impairment charge of $27.4 million on the Aunt Jemima tradename, which resulted in a carrying value of $0 . The charge is reported in the Frozen segment.

To estimate the fair value of our Tradenames we use the relief from royalty method, which utilizes forecasted discounted cash flows to estimate the fair value. The utilization of this method requires us to make significant assumptions including sales growth rates, implied royalty rates and discount rates. As of December 31, 2017 , we identified an additional  three tradenames which do not have a fair value that exceeded their carrying value by at least  15% . The total carrying value of these tradenames as of December 31, 2017 is  $359.3 million .

Other Assets

 
 
December 31, 2017
 
Weighted
Avg Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortizable intangibles
 
 
 
 
 
 
 
Recipes
10

 
$
51,514

 
$
(46,458
)
 
$
5,056

Customer relationships - Distributors
34

 
176,376

 
(59,681
)
 
116,695

Customer relationships - Food Service
10

 
11,400

 
(4,004
)
 
7,396

Customer relationships - Private Label
7

 
1,290

 
(1,290
)
 
—

Total amortizable intangibles
 
 
$
240,580

 
$
(111,433
)
 
$
129,147

Financial instruments (see Note 13)
 
 
8,160

 
—

 
8,160

Other (1)
 
 
32,607

 
(5,015
)
 
27,592

Total other assets, net
 
 
 
 
 
 
$
164,899

 
Amortizable intangibles by segment
 
 
 
Frozen
 
 
 
$
39,229

 
Grocery
 
 
 
46,888

 
Boulder
 
 
 
33,057

 
Specialty
 
 
 
9,973

 
 
 
 
 
 
 
$
129,147

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


 
December 25, 2016
 
Weighted
Avg Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortizable intangibles
 
 
 
 
 
 
 
Recipes
10

 
$
60,109

 
$
(53,130
)
 
$
6,979

Customer relationships - Distributors
34

 
182,733

 
(54,678
)
 
128,055

Customer relationships - Private Label
7

 
1,290

 
(611
)
 
679

License
7

 
6,175

 
(6,175
)
 
—

Total amortizable intangibles
 
 
$
261,707

 
$
(116,749
)
 
$
144,958

Financial instruments (see Note 12)
 
 
2,288

 
—

 
2,288

Other (1)
 
 
30,646

 
(4,821
)
 
25,825

Total other assets, net
 
 
 
 
 
 
$
173,071

 
Amortizable intangibles by segment
 
 
 
Frozen
 
 
 
$
46,158

 
Grocery
 
 
 
50,405

 
Boulder (2)
 
 
 
35,710

 
Specialty (2)
 
 
 
12,685

 
 
 
 
 
 
 
$
144,958


(1) As of December 31, 2017 and December 25, 2016 , Other primarily consists of security deposits and supplemental savings plan investments.

(2) The amounts previously reported as amortizable intangible assets as of December 25, 2016 have been revised in the table above to correct the allocation amongst the segments. This resulted in the reclassification of approximately $9.2 million of amortizable intangible assets from the Boulder segment to the Specialty segment as of December 25, 2016 .

Amortization of intangible assets was $15.8 million, $17.0 million and $13.6 million during the fiscal year ended December 31, 2017 , December 25, 2016 and December 27, 2015 , respectively. Estimated amortization expense for each of the next five years and thereafter is as follows: 2018 - $9.3 million; 2019 - $8.6 million; 2020 - $7.9 million; 2021 - $6.6 million; 2022 - $6.4 million and thereafter - $90.3 million.

10. Restructuring Charges

Aunt Jemima retail and foodservice frozen breakfast products exit (the "Exit")

On May 8, 2017, in connection with the Company's ongoing portfolio strategic assessment and margin roadmap, it exited certain low-margin and non-strategic Aunt Jemima retail and foodservice frozen breakfast products following the Company's voluntary Recall (as defined in Note 14 to the Consolidated Financial Statements, Commitments and Contingencies). This decision resulted in restructuring charges primarily related to accelerated depreciation, asset impairment, charges to adjust inventory to net realizable value, workforce reductions and other charges. These actions and the associated charges detailed below are substantially complete as of December 31, 2017 .

In the second quarter of 2017, the Company recorded $63.2 million of charges related to the Exit which consisted of intangible asset impairment charges $31.2 million , accelerated depreciation charges of $22.6 million , charges to adjust inventory to net realizable value of $4.6 million and employee termination costs of $1.5 million . In addition, the Company also recorded $3.3 million of contract termination and other fees during the same time period. The net impact on 2017 pre-tax earnings of $63.2 million is included in the various lines of the Consolidated Statement of Operations as follows: $32.0 million in Cost of products sold, $27.4 million of Tradename impairment charges and accelerated amortization charges of $3.8 million in Other expense related to frozen breakfast products customer relationships. Of the total charges, $48.8 million is recorded in the Frozen segment and $14.4 million in the Specialty segment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


The following table summarizes charges accrued as of December 31, 2017 related to the Exit. These amounts are recorded in our Consolidated Balance Sheet in Accrued Liabilities.


 
 
Balance
 
 
 
 
 
Balance
Description
 
December 25, 2016
 
Expense
 
Payments
 
December 31, 2017
Accrued restructuring charges
 
$
—

 
$
4,324

 
$
(3,198
)
 
$
1,126


Boulder Brands Restructuring

As a result of the Boulder Brands acquisition, the Company incurred $19.2 million of restructuring charges in 2016, primarily related to employee termination and retention benefits which were recorded in Administrative expenses in the Consolidated Statements of Operations.

The following table summarizes charges accrued as of December 31, 2017 . These amounts are recorded in our Consolidated Balance Sheet in Accrued Liabilities.

 
 
Balance
 
 
 
 
 
Balance
Description
 
December 25, 2016
 
Expense
 
Payments
 
December 31, 2017
Accrued restructuring charges
 
$
7,587

 
$
—

 
$
(7,299
)
 
$
288




11. Debt and Interest Expense


December 31,
2017
 
December 25,
2016
Short-term borrowings

 

- Notes payable
$
2,739

 
$
2,389

Total short-term borrowings
$
2,739

 
$
2,389

Long-term debt
 
 
 
- Tranche B Term Loans due 2024
$
2,239,380

 
$
—

- Tranche G Term Loans due 2020
—

 
1,409,625

- Tranche H Term Loans due 2020
—

 
509,250

- Tranche I Term Loans due 2023
—

 
545,875

- 4.875% Senior Notes due 2021
350,000

 
350,000

- 5.875% Senior Notes due 2024
350,000

 
350,000

- 3.0% Note payable to Gilster Mary Lee Corporation
982

 
5,176

- Unamortized discount on long term debt and deferred financing costs
(21,846
)
 
(41,954
)
- Capital lease obligations
41,012

 
36,325


2,959,528

 
3,164,297

Less: current portion of long-term obligations
33,934

 
23,801

Total long-term debt
$
2,925,594

 
$
3,140,496



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


 
Interest expense
Fiscal year
 
December 31,
2017
 
December 25,
2016
 
December 27,
2015
Interest expense, third party
$
116,947

 
$
120,550

 
$
78,423

Amortization of debt acquisition costs and original issue discount
4,734

 
9,554

 
6,353

Non-cash recognition of deferred costs related to refinancing
28,494

 
600

 
—

Settlement of hedges related to refinancing
20,722

 
—

 
—

Interest rate swap (gains)/losses
(1,310
)
 
8,539

 
3,737

Total interest expense
$
169,587

 
$
139,243

 
$
88,513



Third Amended and Restated Credit Agreement

On February 3, 2017, Pinnacle Foods Finance LLC, (1) entered into the fifth amendment to the Second Amended and Restated Credit Agreement, which provided for a  seven  year term loan facility in the amount of  $2,262.0 million  (the "Tranche B Term Loans"), (2) replaced the existing revolving credit facility with a new  five  year  $225.0 million  revolving credit facility, and (3) amended and restated the existing credit agreement (the "Third Amended and Restated Credit Agreement") in its entirety to make certain other amendments and modifications (the "Refinancing").

As a result of the Refinancing, Pinnacle Foods Finance LLC used the proceeds from the Tranche B Term Loans and  $213.1 million  of cash on hand to repay all existing indebtedness outstanding under the then existing credit agreement, consisting of (a)  $1,409.6 million  of Tranche G Term Loans, (b)  $507.9 million  of Tranche H Term Loans and (c)  $544.5 million  of Tranche I Term Loans.

In connection with the Refinancing, Pinnacle Foods Finance LLC incurred  $12.9 million  of debt acquisition costs and original issue discounts, which were recorded as a reduction of the carrying value of debt and are detailed below. Pinnacle Foods Finance LLC also incurred a non-cash charge of  $28.5 million  related to existing debt acquisition costs and original issue discounts.

The Tranche B Term Loans bear interest at a floating rate and are maintained as base rate loans or as eurocurrency rate loans. Base rate loans bear interest at the base rate plus the applicable base rate margin, as described in the Third Amended and Restated Credit Agreement. The base rate is defined as the highest of (i) the administrative agent's prime rate, (ii) the federal funds effective rate plus 1/2 of 1.00% and (iii) the eurocurrency rate that would be payable on such day for a eurocurrency rate loan with a one-month interest period plus  1.00% . Eurocurrency rate loans bear interest at the adjusted eurocurrency rate plus the applicable eurocurrency rate margin, as described in the Third Amended and Restated Credit Agreement. The eurocurrency rate is determined by reference to the British Bankers Association "BBA" LIBOR rate for the interest period relevant to such borrowing. With respect to Tranche B Term Loans , the eurocurrency rate shall be no less than  0.00%  per annum and the base rate shall be no less than  1.00%  per annum. The interest rate margin for Tranche B Term Loans under the Third Amended and Restated Credit Agreement is  1.00% , in the case of the base rate loans and  2.00% , in the case of Eurocurrency rate loans.

The obligations under the Third Amended and Restated Credit Agreement are unconditionally and irrevocably guaranteed by Peak Finance Holdings LLC, any subsidiary of Peak Finance Holdings LLC that directly or indirectly owns 100% of the issued and outstanding equity interests of Pinnacle Foods Finance LLC, subject to certain exceptions, each of Pinnacle Foods Finance LLC's direct or indirect material wholly-owned domestic subsidiaries (collectively, the "Guarantors") and by the Company effective with the 2013 Refinancing. In addition, subject to certain exceptions and qualifications, borrowings under the Third Amended and Restated Credit Agreement are secured by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, each direct or indirect domestic material subsidiary of Pinnacle Foods Finance LLC and 65% of the capital stock of, or other equity interests in, each direct material "first tier" foreign subsidiary of Pinnacle Foods Finance LLC and (ii) certain tangible and intangible assets of Pinnacle Foods Finance LLC and those of the Guarantors (subject to certain exceptions and qualifications).
 
A commitment fee of 0.30% per annum is applied to the unused portion of the revolving credit facility.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


There were no revolver borrowings outstanding as of December 31, 2017 . There were no revolver borrowings made during the fiscal 2017 , however, the weighted average interest rate on the revolving credit facility would have been 3.1% calculated on the Eurocurrency rate or 5.1% calculated on the base rate. There were  no  revolver borrowings made during the fiscal 2016 , however, the weighted average interest rate on the revolving credit facility would have been  2.9%  calculated on the Eurocurrency rate or  4.7%  calculated on the base rate. There were  no  revolver borrowings made during the fiscal 2015 , however, the weighted average interest rate on the revolving credit facility would have been  2.5%  calculated on the Eurocurrency rate or  4.5%  calculated on the base rate.
For the fiscal years ended December 31, 2017 , December 25, 2016 , and December 27, 2015 , the weighted average interest rate on the term loan components of the Senior Secured Credit Facility were 3.14% , 3.26% and 3.00% , respectively. As of December 31, 2017 , December 25, 2016 , and December 27, 2015 the Eurocurrency interest rate on the term loan facilities was 3.37% , 3.26% , and 3.00% , respectively.
Pinnacle Foods Finance LLC pays a fee for all outstanding letters of credit drawn against the revolving credit facility at an annual rate equivalent to the applicable eurocurrency rate margin then in effect under the revolving credit facility, plus the fronting fee payable in respect of the applicable letter of credit. The fronting fee is equal to  0.125% per annum of the daily maximum amount then available to be drawn under such letter of credit. The fronting fees are computed on a quarterly basis in arrears. Total letters of credit issued under the revolving credit facility cannot exceed $50.0 million . As of December 31, 2017 and December 25, 2016 , Pinnacle Foods Finance had utilized $24.9 million and $24.3 million , respectively of the revolving credit facility for letters of credit. As of December 31, 2017 and December 25, 2016 , respectively, there was $200.1 million and $125.7 million of borrowing capacity under the revolving credit facility, of which $25.1 million and $25.7 million was available to be used for letters of credit.
Under the terms of the Third Amended and Restated Credit Agreement, Pinnacle Foods Finance LLC is required to use 50% of its “Excess Cash Flow” to prepay the term loans under the Senior Secured Credit Facility (which percentage will be reduced to 25% at a total net leverage ratio of between 4.50 and 5.49 and to 0% at a total net leverage ratio below 4.50 ). As of December 31, 2017 , Pinnacle Foods Finance LLC had a total net leverage ratio of 3.92 :1.0. Excess Cash Flow is defined as consolidated net income (as defined), as adjusted for certain items, including (1) all non-cash charges and credits included in arriving at consolidated net income, (2) changes in working capital, (3) capital expenditures (to the extent they were not financed with debt), (4) the aggregate amount of principal payments on indebtedness and (5) certain other items defined in the Senior Secured Credit Facility. For the 2017 reporting year, Pinnacle Foods Finance LLC determined that there were no amounts due under the Excess Cash Flow requirements of the Senior Secured Credit Facility.
 
The term loans under the Senior Secured Credit Facility amortize in quarterly installments of  0.25%  of their aggregate funded total principal amount. The scheduled principal payments of the Tranche B Term Loans outstanding as of  December 31, 2017  are  $17.0 million  in 2018,  $22.6 million  in 2019,  $22.6 million  in 2020,  $22.6 million  in 2021,  $22.6 million  in 2022,  $28.3 million  in 2023 and  $2,103.7 million  thereafter.

Pursuant to the terms of the Senior Secured Credit Facility, Pinnacle Foods Finance LLC is required to maintain a ratio of Net First Lien Secured Debt to Adjusted EBITDA of no greater than 5.75 to 1.00.  Net First Lien Secured Debt is defined as aggregate consolidated secured indebtedness, less the aggregate amount of all unrestricted cash and cash equivalents. In addition, under the Senior Secured Credit Facility and the indenture governing the Senior Notes, Pinnacle Foods Finance LLC's ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to the Senior Secured Leverage Ratio (which is currently the same as the ratio of Net First Lien Secured Debt to Adjusted EBITDA described above), in the case of the Senior Secured Credit Facility, or to the ratio of Adjusted EBITDA to fixed charges for the most recently concluded four consecutive fiscal quarters, in the case of the Senior Notes. The Senior Secured Credit Facility also permits restricted payments up to an aggregate amount of (together with certain other amounts) the greater of $75 million and 2% of Pinnacle Foods Finance LLC's consolidated total assets, so long as no default has occurred and is continuing and its pro forma Senior Secured Leverage Ratio would be no greater than 4.25 to 1.00. As of December 31, 2017 , the Company is in compliance with all covenants and other obligations under the Senior Secured Credit Facility and the indenture governing the Senior Notes.
Senior Notes

To partially fund the Boulder Brands acquisition, on January 15, 2016 as described in Note 3 to the Consolidated Financial Statements, Acquisitions, Pinnacle Foods LLC issued $350.0 million aggregate principal amount of 5.875% Senior Notes (the “5.875% Senior Notes”) due January 15, 2024.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


The Company's 4.875% Senior Notes due 2021 (the "4.875% Senior Notes") and 5.875% Senior Notes (together the "Senior Notes")  are general senior unsecured obligations of Pinnacle Foods Finance LLC, effectively subordinated to all existing and future senior secured indebtedness of Pinnacle Foods Finance LLC to the extent of the value of the assets securing that indebtedness and guaranteed on a full, unconditional, joint and several basis by Pinnacle Foods Finance LLC’s wholly-owned domestic subsidiaries that guarantee other indebtedness of Pinnacle Foods Finance LLC and by the Company. See Note 18 to the Consolidated Financial Statements, Guarantor and Nonguarantor Financial Statements, for further details.
Pinnacle Foods Finance LLC may redeem some or all of the 5.875% Senior Notes at any time prior to January 15, 2019, at a price equal to 100% of the principal amount of notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest to, the redemption date, subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date. The “Applicable Premium” is defined as the greater of (1)  1.0% of the principal amount of such 5.875% Senior Notes and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such 5.875% Senior Notes at January 15, 2019, plus (ii) all required interest payments due on such 5.875% Senior Notes through January 15, 2019 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the treasury rate plus 50 basis points over (b) the principal amount of such 5.875% Senior Notes.
Pinnacle Foods Finance LLC may redeem the 4.875% Senior Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on May 1 st of each of the years indicated below:

4.875% Senior Notes
Year
Percentage
2018
101.219%
2019 and thereafter
100.000%
Pinnacle Foods Finance LLC may redeem the 5.875% Senior Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on January 15 th of each of the years indicated below:

5.875% Senior Notes
Year
Percentage
2019
104.406%
2020
102.938%
2021
101.469%
2022 and thereafter
100.000%
 
In addition, until January 15, 2019 for the 5.875% Senior Notes, Pinnacle Foods Finance LLC may redeem up to 35% of the aggregate principal amount of the 5.875% Senior Notes at a redemption price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, subject to the right of holders of the 5.875% Senior Notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds received by Pinnacle Foods Finance LLC from one or more equity offerings; provided that (i) at least 50% of the aggregate principal amount of the 5.875% Senior Notes originally issued under the indenture remains outstanding immediately after the occurrence of each such redemption and (ii) each such redemption occurs within 120 days of the date of closing of each such equity offering.

Debt Acquisition Costs and Original Issue Discounts

As part of the Refinancing, debt acquisition costs and original issue discounts of  $12.9 million  were incurred and recorded as a reduction of the carrying value of debt during the twelve months ended   December 31, 2017 while non-cash charges of $28.5 million related to existing debt acquisition costs and original issue discounts were recognized in the period.

All debt acquisition costs and original issue discounts are amortized into interest expense over the life of the related debt using the effective interest method. Amortization of these costs were $4.6 million , $9.0 million , and $5.9 million during the fiscal years ended  December 31, 2017 , December 25, 2016 , and December 27, 2015 respectively.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


The following summarizes debt acquisition cost and original issue discount activity during the  twelve months ended   December 31, 2017 .
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Balance, December 25, 2016
$
82,750

 
$
(40,796
)
 
$
41,954

Additions
12,937

 
—

 
12,937

Amortization
—

 
(4,551
)
 
(4,551
)
Recognition of deferred costs related to the Refinancing
(65,998
)
 
37,504

 
(28,494
)
Balance, December 31, 2017
$
29,689

 
$
(7,843
)
 
$
21,846


The estimated fair value of the Company’s long-term debt, including the current portion, as of December 31, 2017 , is as follows:
 
 
 
December 31, 2017
Issue
 
Face Value
 
Fair Value
Tranche B Term Loans
 
$
2,239,380

 
$
2,259,534

3.0% Note payable to Gilster Mary Lee Corporation
 
982

 
982

4.875% Senior Notes
 
350,000

 
353,938

5.875% Senior Notes
 
350,000

 
370,125

 
 
$
2,940,362

 
$
2,984,579


The estimated fair value of the Company’s long-term debt, including the current portion, as of December 25, 2016 , is as follows:

 
 
December 25, 2016
Issue
 
Face Value
 
Fair Value
Tranche G Term Loans
 
$
1,409,625

 
$
1,423,721

Tranche H Term Loans
 
509,250

 
514,343

Tranche I Term Loans
 
545,875

 
554,745

3.0% Note payable to Gilster Mary Lee Corporation
 
5,176

 
5,176

4.875% Senior Notes
 
350,000

 
359,625

5.875% Senior Notes
 
350,000

 
369,250

 
 
$
3,169,926

 
$
3,226,860


The estimated fair values of the Company's long-term debt are classified as Level 2 in the fair value hierarchy. The fair value is based on the quoted market price for such notes and borrowing rates currently available to the Company for loans with similar terms and maturities.

12. Pension and Retirement Plans

The Company accounts for pension and retirement plans in accordance with the authoritative guidance for retirement benefit compensation . This guidance requires recognition of the funded status of a benefit plan in the statement of financial position. The guidance also requires recognition in accumulated other comprehensive earnings of certain gains and losses that arise during the period but are deferred under pension accounting rules.
On December 31, 2013, the Pinnacle Foods Pension Plan merged into the Birds Eye Foods Pension Plan in order to achieve administrative, operational and cost efficiencies. The merged plan was renamed the Pinnacle Foods Group LLC Pension Plan (the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


"Plan"). The Plan is frozen for future benefit accruals. The Company also has two qualified 401(k) plans, three non-qualified supplemental savings plans and participates in a multi-employer defined benefit plan.

Pinnacle Foods Group LLC Pension Plan
The Plan covers eligible union employees and provides benefits generally based on years of service and employees’ compensation. The Plan is frozen for future benefits. The Plan is funded in conformity with the funding requirements of applicable government regulations. The Plan assets consist principally of cash equivalents, equity and fixed income common collective trusts. The Plan assets do not include any of the Company’s own equity or debt securities.

The following table reconciles the changes in our benefit obligation:

 
Fiscal year ended
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
Change in Benefit Obligation
 
 
 
 
 
Net benefit obligation at beginning of the period
$
245,513

 
$
258,284

 
$
277,253

Interest cost
7,828

 
10,404

 
10,474

Actuarial loss (gain)
16,382

 
(3,660
)
 
(12,264
)
Gross benefits paid
(18,504
)
 
(19,515
)
 
(17,179
)
Net benefit obligation at end of the period
251,219

 
245,513

 
258,284

 
 
 
 
 
 
Change in Plan Assets
 
 
 
 
 
Fair value of plan assets at beginning of the period
190,951

 
197,022

 
218,127

Employer contributions
272

 
272

 
3,123

Actual return on plan assets
27,029

 
13,172

 
(7,049
)
Gross benefits paid
(18,504
)
 
(19,515
)
 
(17,179
)
Fair value of plan assets at end of the period
199,748

 
190,951

 
197,022

 
 
 
 
 
 
Funded status at end of the year
$
(51,471
)
 
$
(54,562
)
 
$
(61,262
)
 
 
 
 
 
 
Amounts recognized in the Consolidated Balance Sheets
 
 
 
 
 
Accrued pension benefits
$
(51,206
)
 
$
(54,297
)
 
$
(60,996
)
Accrued pension benefits (part of accrued liabilities)
(265
)
 
(265
)
 
(266
)
     Net amount recognized at end of the period
$
(51,471
)
 
$
(54,562
)
 
$
(61,262
)
 
 
 
 
 
 
Amounts recognized in Accumulated Other Comprehensive Loss
 
 
 
 
 
Net loss
$
49,374

 
$
50,171

 
$
56,762

     Net amount recognized at end of the period
$
49,374

 
$
50,171

 
$
56,762

 
 
 
 
 
 
Accumulated benefit obligation
251,219

 
245,513

 
258,284

 
 
 
 
 
 
Weighted average assumptions
 
 
 
 
 
Discount rate
3.50
%
 
3.99
%
 
4.20
%


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


The following represents the components of net periodic expense (benefit):
 
Pension Expense (Benefit)
 
 
Fiscal year
 
December 31,
2017
 
December 25,
2016
 
December 27,
2015
Interest cost
7,828

 
10,404

 
10,474

Expected return on assets
(11,008
)
 
(11,393
)
 
(13,233
)
Amortization of actuarial loss
1,157

 
1,152

 
1,005

Net periodic (benefit) expense
$
(2,023
)
 
$
163

 
$
(1,754
)
 
 
 
 
 
 
Weighted average assumptions:
 
 
 
 
 
Discount rate
3.99
%
 
4.20
%
 
3.85
%
Expected return on plan assets
6.00
%
 
6.00
%
 
6.25
%

To develop the expected long-term rate of return on assets assumption, the Company considered the current level of expected returns on risk-free investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in which the portfolio is invested and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the target asset allocation to develop the expected long-term rate of return on assets assumption.

Plan Assets

The following table sets forth the weighted-average asset allocations of the Company's pension plans by asset category:

 
December 31, 2017
 
December 25, 2016
 Asset category
 
 
 
 Equity securities
37
%
 
36
%
 Debt securities
62
%
 
63
%
 Cash
1
%
 
1
%
 Total
100
%
 
100
%

The Plan's investments in equity or debt securities is based on a glide path strategy where the investment in debt securities increases as the Plan's funded status becomes smaller. Based on the current funded status, the policy is to invest approximately 37% of plan assets in equity securities and 63% in fixed income securities. Periodically, the plan assets are rebalanced to maintain these allocation percentages and the investment policy is reviewed. Within each investment category, assets are allocated to various investment styles. Professional managers manage all assets and a consultant is engaged to assist in evaluating these activities. The expected long-term rate of return on assets was determined by assessing the rates of return on each targeted asset class, return premiums generated by portfolio management and by comparison of rates utilized by other companies.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


The following table summarizes the Pinnacle Foods Group LLC Pension Plan's investments measured at fair value on a recurring basis:

Level 1:
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3:
Unobservable inputs that reflect the Company's assumptions. There are no Level 3 assets.

 
Fair Value
as of
December 31, 2017
 
Fair Value Measurements
Using Fair Value Hierarchy
 
Level 1
 
Level 2
 
Level 3
 Short-term investments:
 
 
 
 
 
 
 
      Short-term Investment Fund
$
1,980

 
$
—

 
$
1,980

 
$
—

 Equity Common/collective trusts:
 
 
 
 
 
 
 
Small/ Mid Capitalization Fund
6,099

 
—

 
6,099

 
—

Large Capitalization Equity Fund
22,864

 
—

 
22,864

 
—

International Fund
44,076

 
—

 
44,076

 
—

 Fixed Income Common/collective trusts:


 
 
 
 
 
 
Fixed Income Fund
124,729

 
—

 
124,729

 
—

Total assets at fair value
$
199,748

 
$
—

 
$
199,748

 
$
—

 
 
 
 
 
 
 
 
 
Fair Value
as of
December 25, 2016
 
Fair Value Measurements
Using Fair Value Hierarchy
 
Level 1
 
Level 2
 
Level 3
 Short-term investments:
 
 
 
 
 
 
 
      Short-term Investment Fund
$
1,503

 
$
—

 
$
1,503

 
$
—

 Equity Common/collective trusts:
 
 
 
 
 
 
 
Small/ Mid Capitalization Fund
5,753

 
—

 
5,753

 
—

Large Capitalization Equity Fund
21,802

 
—

 
21,802

 
—

International Fund
41,670

 
—

 
41,670

 
—

 Fixed Income Common/collective trusts:


 
 
 
 
 
 
Fixed Income Fund
120,223

 
—

 
120,223

 
—

Total assets at fair value
$
190,951

 
$
—

 
$
190,951

 
$
—


Cash Flows
Contributions. The Company made contributions to the Plan totaling $0.3 million in fiscal 2017 , $0.3 million in fiscal 2016 and $3.1 million in fiscal 2015 . In fiscal 2018, the Company plans to make contributions of $7.0 million .

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Estimated Future Benefit Payments for all Plans
The following benefit payments are expected to be paid:

Year
Benefit Payment ($)
2018
15,088

2019
15,024

2020
14,940

2021
14,980

2022
14,983

2023-2026
74,563



Savings Plans

The Company's employees participated in two 401(k) plans in 2017. Pinnacle matches 50% of employee contributions up to six percent of compensation for salaried employees and the Company also matches 50% of employee contributions up to six percent of compensation for the majority of union employees. As of July 1, 2018, the Company will increase the match to 66% of employee contributions up to six percent of compensation for salaried and non-union hourly employees. Boulder Brands had a 401(k) plan which matched 100% of employee contributions up to 5 percent of compensation. The plan was liquidated on January 3, 2017, with all employees now participating in Pinnacle's 401(k) plans. Employer contributions made by the Company relating to these plans were $7.1 million for fiscal 2017 , $6.9 million for fiscal 2016 and $5.6 million for fiscal 2015 .

In addition, the Company sponsors three non-qualified Plans. One is the Birds Eye Foods non-qualified plan which was closed to new contributions on April 1, 2010. The second plan is the Pinnacle Foods Supplemental Savings Plan which was approved by the Compensation Committee of the Board of Directors on September 11, 2012 to become effective in 2013 and was adopted for the purpose of allowing certain employees the opportunity to receive the same 3% match on total compensation (base salary plus bonus). The third plan is the Boulder Brands Deferred Compensation Plan, which had three participants at the time of the Boulder Brands acquisition. The Board of Directors approved the termination of this plan effective August 16, 2016. All of the assets were liquidated and paid to the remaining participants in January 2017.

Multi-employer Plan
 
Pinnacle contributes to the United Food and Commercial Workers International Union Industry Pension Fund (EIN 51-6055922) (the "UFCW Plan") under the terms of the collective-bargaining agreement with its Fort Madison employees.

For the fiscal years ended December 31, 2017 , December 25, 2016 and December 27, 2015 contributions to the UFCW Plan were $0.6 million , $0.7 million and $0.8 million , respectively. The contributions to this plan are paid monthly based upon the number of employees. They represent less than 5% of the total contributions received by this plan during the most recent plan year.

The risks of participating in multi-employer plans are different from single-employer plans in the following aspects: (a) assets contributed to a multi-employer plan by one employer may be used to provide benefits to employees of other participating employers, (b) if a participating employer stops contributing to the multi-employer plan, the unfunded obligations of the plan may be borne by the remaining participating employers and (c) if the Company chooses to stop participating in the plan, the Company may be required to pay a withdrawal liability based on the underfunded status of the plan.
 
The UFCW Plan received a Pension Protection Act “green” zone status for the plan year ending June 30, 2017. The zone status is based on information the Company received from the plan and is certified by the plan's actuary. Among other factors, plans in the "green" zone are at least 80 percent funded. The UFCW Plan did not utilize any extended amortization provisions that effect its placement in the " green " zone. The UFCW Plan has never been required to implement a funding improvement plan nor is one pending at this time.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


13. Financial Instruments

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, foreign exchange rates or commodity prices.

The Company manages interest rate risk based on the varying circumstances of anticipated borrowings and existing variable and fixed rate debt, including the Company’s revolving credit facility. Examples of interest rate management strategies include capping interest rates using targeted interest cost benchmarks, hedging portions of the total amount of debt, or hedging a period of months and not always hedging to maturity, and at other times locking in rates to fix interests costs.

Certain parts of the Company’s foreign operations in Canada expose the Company to fluctuations in foreign exchange rates. The Company’s goal is to reduce its exposure to such foreign exchange risks on its foreign currency cash flows and fair value fluctuations on recognized foreign currency denominated assets, liabilities and unrecognized firm commitments to acceptable levels primarily through the use of foreign exchange-related derivative financial instruments. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency. The Company does not enter into these transactions for non-hedging purposes.

The Company purchases raw materials in quantities expected to be used in a reasonable period of time in the normal course of business. The Company generally enters into agreements for either spot market delivery or forward delivery. The prices paid in the forward delivery contracts are generally fixed, but may also be variable within a capped or collared price range. Forward derivative contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing processes.

Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  During the fiscal years ended December 31, 2017 , December 25, 2016 and December 27, 2015 such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

The Refinancing (discussed in Note 11 to the Consolidated Financial Statements, Debt and Interest Expense) resulted in significant changes to the Company's debt obligations. For the interest rate swaps in place at the time that were scheduled to mature between April 2017 and April 2020, it became probable that the associated original forecasted transactions would not occur. As such, the Company discontinued hedge accounting, accelerated the reclassification of amounts in Accumulated other comprehensive loss ("AOCL") and settled the interest rate swaps with the various counter parties. In the first quarter of 2017, these accelerated amounts resulted in a  $20.7 million  charge to interest expense ( $13.2 million , net of tax benefits). Subsequent to the Refinancing, the Company entered into new interest rate swap agreements with various financial institutions. As a result,  $1.5 billion  of debt is hedged in 2017 at a rate of  0.96% ,  $1.0 billion  in 2018 at a rate of  1.48% , and  $750 million  in 2019 at a rate of  1.81% . In the second quarter of 2017, the Company entered into additional interest rate swap agreements and as a result an additional  $250 million  of debt is hedged in 2019 at a rate of  1.76% ,  $500 million  in 2020 at  2.04%  and  $500 million  in 2021 at a rate of  2.17% .

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


As of December 31, 2017 , the Company had the following interest rate swaps that were designated as cash flow hedges of interest rate risk:
 
Product
 
Number of
Instruments
 
Current
Notional
Amount
Hedged
 
Fixed Rate Range
 
Index
 
Trade Dates
 
Maturity
Dates
Interest Rate Swaps
 
12
 
$
1,500,000

 
0.96% - 2.17%
 
USD-LIBOR-BBA
 
Feb 2017 - May 2017
 
Jan 2018 - Feb 2022

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCL in the Consolidated Balance Sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts reported in AOCL related to derivatives will be reclassified to Interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $3.0 million will be reclassified as a decrease to Interest expense.

Cash Flow Hedges of Foreign Exchange Risk
The Company’s operations in Canada expose the Company to changes in the U.S. Dollar – Canadian Dollar ("USD-CAD") foreign exchange rate. From time to time, the Company’s Canadian subsidiary purchases inventory denominated in U.S. Dollars ("USD"), a currency other than its functional currency. The subsidiary sells that inventory in Canadian dollars ("CAD"). The subsidiary uses currency forward and collar agreements to manage its exposure to fluctuations in the USD-CAD exchange rate. Currency forward agreements involve fixing the USD-CAD exchange rate for delivery of a specified amount of foreign currency on a specified date. Currency collar agreements involve the sale of CAD currency in exchange for receiving USD if exchange rates rise above an agreed upon rate and purchase of USD currency in exchange for paying CAD currency if exchange rates fall below an agreed upon rate at specified dates.
As of December 31, 2017 , the Company had the following foreign currency exchange contracts (in aggregate) that were designated as cash flow hedges of foreign exchange risk:
 
Product
 
Number of
Instruments
 
Notional Sold in
Aggregate in ("CAD")
 
Notional
Purchased in
Aggregate in ("USD")
 
USD to CAD
Exchange
Rates
 
Trade Date
 
Maturity
Dates
Canadian $ contracts
 
12
 
$
36,000

 
$
28,015

 
1.283 - 1.287
 
Jul 2017
 
Feb 2018 - Dec 2018

The effective portion of changes in the fair value of derivatives designated that qualify as cash flow hedges of foreign exchange risk is recorded in AOCL in the Consolidated Balance Sheets and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portions of the change in fair value of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, are recognized directly in Cost of products sold in the Consolidated Statements of Operations. During the next twelve months, the Company estimates that an additional $ 0.8 million  will be reclassified as an increase to Cost of Products Sold expense.
Non-designated Hedges of Commodity Risk
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to commodity price risk but do not meet the authoritative guidance for hedge accounting. From time to time, the Company enters into commodity forward contracts to fix the price of diesel fuel, natural gas, soybean oil purchases and other commodities at a future delivery date. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in Cost of products sold in the Consolidated Statements of Operations.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


As of December 31, 2017 , the Company had the following derivative instruments that were not designated in qualifying hedging relationships:

Commodity Contracts
 
Number of
Instruments
 
Notional
Purchased in
Aggregate
 
Price/Index
 
Trade Dates
 
Maturity
Dates
Fuel Contracts
 
23
 
6,772,576 Gallons
 
1.59 - 1.69 per Gallon
 
Mar 2017 - Dec 2017
 
Jan 2018 - Nov 2018
Natural Gas Contracts
 
36
 
2,849,225 MMBTU's
 
2.74 - 3.42 per MMBTU
 
Feb 2017 - Nov 2017
 
Jan 2018 - Dec 2019

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the Consolidated Balance Sheets as of December 31, 2017 and December 25, 2016 .
 
 
Tabular Disclosure of Fair Values of Derivative Instruments
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Balance Sheet Location
 
Fair Value
as of
December 31, 2017
 
Balance Sheet Location
 
Fair Value
as of
December 31, 2017
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest Rate Contracts
 
Other current assets
 
$
34

 
Accrued liabilities
 
$
—

 
 
Other assets, net
 
8,160

 
Other long-term liabilities
 
—

 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
 
Other current assets
 
—

 
Accrued liabilities
 
750

Total derivatives designated as hedging instruments
 
 
 
$
8,194

 
 
 
$
750

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Commodity Contracts
 
Other current assets
 
$
2,615

 
Accrued liabilities
 
$
238

 
 
Other assets, net
 
—

 
Other long-term liabilities
 
98

Total derivatives not designated as hedging instruments
 
 
 
$
2,615

 
 
 
$
336

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Location
 
Fair Value
as of
December 25, 2016
 
Balance Sheet Location
 
Fair Value
as of
December 25, 2016
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest Rate Contracts
 
Other current assets
 
$
—

 
Accrued liabilities
 
$
4,613

 
 
Other assets, net
 
—

 
Other long-term liabilities
 
12,239

 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
 
Other current assets
 
86

 
Accrued liabilities
 
—

Total derivatives designated as hedging instruments
 
 
 
$
86

 
 
 
$
16,852

Derivatives not designated as hedging instruments
 
 
 

 
 
 
 
Commodity Contracts
 
Other current assets
 
$
545

 
Accrued liabilities
 
$
327

 
 
Other assets, net
 
2,288

 
Other long-term liabilities
 
—

Total derivatives not designated as hedging instruments
 
 
 
$
2,833

 
 
 
$
327


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


The Company has elected not to offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheets as of December 31, 2017 and December 25, 2016 would be adjusted as detailed in the following table:
 
 
December 31, 2017
 
December 25, 2016
Derivative Instrument
 
Gross Amounts Presented in the Consolidated Balance Sheet
 
Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements
 
Net Amount
 
Gross Amounts Presented in the Consolidated Balance Sheet
 
Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements
 
Net Amount
Total asset derivatives
 
$
10,809

 
(1,086
)
 
$
9,723

 
$
2,919

 
(1,770
)
 
$
1,149

 
 
 
 
 
 
 
 
 
 
 
 
 
Total liability derivatives
 
$
1,086

 
(1,086
)
 
$
—

 
$
17,179

 
(1,770
)
 
$
15,409



The table below presents the effect of the Company’s derivative financial instruments in the Consolidated Statements of Operations and AOCL for the fiscal years ended December 31, 2017 , December 25, 2016 and December 27, 2015 .

Tabular Disclosure of the Effect of Derivative Instruments
Gain/(Loss)
 
 
 
 
 
 
 
 
 
 
Derivatives in Cash Flow Hedging
Relationships
 
Recognized in
AOCL on
Derivative
(Effective
Portion)
 
Effective portion
reclassified from AOCL to:
 
Reclassified
from AOCL
into Earnings
(Effective
Portion)
 
Ineffective portion
recognized in Earnings in:
 
Recognized in
Earnings on
Derivative
(Ineffective
Portion)
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Contracts
 
$
5,635

 
Interest expense
 
$
(19,412
)
(a)
Interest expense
 
$
—

Foreign Exchange Contracts
 
(1,191
)
 
Cost of products sold
 
(354
)
 
Cost of products sold
 
2

Fiscal year ended December 31, 2017
 
$
4,444

 
 
 
$
(19,766
)
 
 
 
$
2

 
 
 
 
 
 
 
 
 
 
 
Interest Rate Contracts
 
$
(6,523
)
 
Interest expense
 
$
(8,539
)
 
Interest expense
 
$
—

Foreign Exchange Contracts
 
(50
)
 
Cost of products sold
 
320

 
Cost of products sold
 
(8
)
Fiscal year ended December 25, 2016
 
$
(6,573
)
 
 
 
$
(8,219
)
 
 
 
$
(8
)
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Contracts
 
$
(24,482
)
 
Interest expense
 
$
(3,737
)
 
Interest expense
 
$
—

Foreign Exchange Contracts
 
2,404

 
Cost of products sold
 
3,211

 
Cost of products sold
 
(16
)
Fiscal year ended December 27, 2015
 
$
(22,078
)
 
 
 
$
(526
)
 
 
 
$
(16
)
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
Recognized in Earnings in:
 
Recognized in
Earnings on
Derivative
 
 
 
 
Commodity Contracts
 
 
 
Cost of products sold
 
$
849

 
 
 
 
Fiscal year ended December 31, 2017
 
 
 
$
849

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Contracts
 
 
 
Cost of products sold
 
$
3,304

 
 
 
 
Fiscal year ended December 25, 2016
 
 
 
$
3,304

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Contracts
 
 
 
Cost of products sold
 
$
(9,292
)
 
 
 
 
Fiscal year ended December 27, 2015
 
 
 
$
(9,292
)
 
 
 
 

(a) Includes $20.7 million of accelerated reclassification out of AOCL, related to the Refinancing.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Credit risk-related contingent features
The Company has agreements with certain counterparties that contain a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of December 31, 2017 , the Company has not posted any collateral related to these agreements. If the Company had breached this provision at December 31, 2017 , it could have been required to settle its obligations under the agreements at their termination value, which differs from the recorded fair value. The table below summarizes the aggregate fair values of those derivatives that contain credit risk-related contingent features as of December 31, 2017 and December 25, 2016 .
December 31, 2017
 
Asset/(Liability)
 
 
 
 
 
 
 
 
 
 
Counterparty
 
Contract
Type
 
Termination
Value
 
Performance
Risk
Adjustment
 
Accrued
Interest
 
Fair Value
(excluding
interest)
Barclays
 
Interest Rate Contracts
 
$
2,049

 
$
2

 
$
160

 
$
1,891

 
 
Foreign Exchange Contracts
 
(767
)
 
17

 
—

 
(750
)
Bank of America
 
Commodity Contracts
 
2,252

 
22

 
—

 
2,274

Credit Suisse
 
Interest Rate Contracts
 
2,065

 
3

 
160

 
1,908

Goldman Sachs
 
Interest Rate Contracts
 
4,412

 
144

 
156

 
4,400

Total
 
 
 
$
10,012


$
189


$
476


$
9,723


December 25, 2016
 
Asset/(Liability)
 
 
 
 
 
 
 
 
 
 
Counterparty
 
Contract
Type
 
Termination
Value
 
Performance
Risk
Adjustment
 
Accrued
Interest
 
Fair Value
(excluding
interest)
Barclays
 
Interest Rate Contracts
 
$
(10,091
)
 
$
422

 
$
(536
)
 
$
(9,133
)
 
 
Foreign Exchange Contracts
 
86

 
—

 
—

 
86

 
 
Commodity Contracts
 
569

 
(2
)
 
—

 
567

Bank of America
 
Interest Rate Contracts
 
(7,474
)
 
481

 
—

 
(6,992
)
 
 
Commodity Contracts
 
790

 
—

 
—

 
790

Credit Suisse
 
Interest Rate Contracts
 
(1,141
)
 
7

 
(407
)
 
(727
)
Macquarie
 
Commodity Contracts
 
1,149

 
—

 
—

 
1,149

Total
 
 
 
$
(16,113
)
 
$
909

 
$
(943
)
 
$
(14,260
)
 


14. Commitments and Contingencies

General
From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations, and proceedings, which are being handled and defended in the ordinary course of business. Although the outcome of such items cannot be determined with certainty, the Company’s general counsel and management are of the opinion that the final outcome of these matters will not have a material effect on the Company’s financial condition, results of operations or cash flows.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Aunt Jemima retail and foodservice frozen breakfast products recall (the "Recall")

On May 5, 2017, the Company issued a voluntary recall for certain Aunt Jemima retail and foodservice frozen breakfast products due to potential bacterial contamination. The cost impact of the Recall for the fiscal year ended December 31, 2017 is a charge to gross margin of $ 13.0 million , of which $10.8 million is recorded as a reduction of Net Sales related to customer returns with the remaining $2.2 million relating to freight and disposal costs, charged directly to Cost of products sold. Of these costs, $6.5 million is reported in the Frozen segment, with an additional $6.5 million recorded in the Specialty segment. As of December 31, 2017 , the reserve related to the Recall remaining on the Company's Consolidated Balance Sheets is $0.9 million in Accrued liabilities. The Company has insurance coverage that it expects will cover a portion of the cost of the Recall. Any insurance proceeds will be recorded in the period they are received.

Minimum Contractual Payments

As of December 31, 2017 , the Company had entered into non-cancellable lease and purchase contracts, with terms in excess of one year, requiring the following minimum payments:

 Description
2018
2019
2020
2021
2022
 Thereafter
 Operating leases
$
13,382

$
11,341

$
10,019

$
9,344

$
6,880

$
9,190

 Capital leases
14,514

14,396

13,952

13,607

11,027

28,746

 Purchase Commitments (1)
650,663

59,908

55,705

51,582

39,803

224,750


(1)
The amounts indicated in this line primarily reflect future contractual payments, including certain take-or-pay arrangements entered into as part of the normal course of business. The amounts do not include obligations related to other contractual purchase obligations that are not take-or-pay arrangements. Such contractual purchase obligations are primarily purchase orders at fair value that are part of normal operations and are reflected in historical operating cash flow trends. Purchase obligations also include trade and consumer promotion and advertising commitments.

Rent expense under our operating leases was $24.7 million , $19.8 million and $15.3 million during the fiscal years ended December 31, 2017 , December 25, 2016 and December 27, 2015 , respectively.

15. Segments

The Company is a leading manufacturer, marketer and distributor of high quality, branded food products in North America. The business is comprised of four segments: Frozen, Grocery, Boulder and Specialty.

The Frozen segment is comprised of the retail businesses of the Company’s legacy frozen brands, including vegetables ( Birds Eye ), complete bagged meals ( Birds Eye Voila! and Birds Eye Signature Skillets ), full-calorie single-serve frozen dinners and entrées ( Hungry-Man ), prepared seafood ( Van de Kamp's and Mrs. Paul's ), frozen and refrigerated bagels ( Lender's ) and pizza for one ( Celeste ). The Frozen segment also includes all of the Company’s business in Canada, including those of the Garden Protein International and Boulder Brands acquisitions.

The Grocery segment is comprised of the retail businesses of the Company’s grocery brands, including cake/brownie mixes and frostings ( Duncan Hines ), shelf-stable pickles ( Vlasic ), salad dressings ( Wish-Bone , Western and Bernstein’s ), table syrups ( Log Cabin and Mrs. Butterworth's ), refrigerated and shelf-stable spreads ( Smart Balance), canned meat ( Armour, Nalley and Brooks ), pie and pastry fillings ( Duncan Hines, Comstock and Wilderness ) and barbecue sauces ( Open Pit ).

The Boulder segment is comprised of the retail businesses of the Company’s health and wellness lifestyle brands, including gluten-free products ( Udi's and Glutino) , natural frozen meal offerings ( EVOL) , plant-based refrigerated and shelf-stable spreads ( Earth Balance ) and plant-based protein frozen products ( gardein ).

The Specialty segment includes the Company’s snack products ( Tim's Cascade and Snyder of Berlin ) and all of its U.S. foodservice and private label businesses, including those of the Garden Protein International and Boulder Brands acquisitions.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Segment performance is evaluated by the Company’s Chief Operating Decision Maker and is based on earnings before interest and taxes. Transfers between segments and geographic areas are recorded at cost plus markup or at market. Identifiable assets are those assets, including goodwill, which are identified with the operations in each segment or geographic region. Corporate assets consist of prepaid and deferred tax assets. Unallocated corporate expenses consist of corporate overhead such as executive management, finance, legal functions and acquisition costs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


 
Fiscal year
SEGMENT INFORMATION
December 31,
2017

December 25,
2016
 
December 27, 2015
 
53 weeks
 
52 weeks
 
52 weeks
Net sales
 
 
 
 
 
Frozen
$
1,299,146

 
$
1,304,791

 
$
1,235,951

Grocery
1,115,439

 
1,089,270

 
1,024,269

Boulder
403,447

 
364,716

 
41,494

Specialty
325,970

 
369,161

 
354,078

Total
$
3,144,002

 
$
3,127,938

 
$
2,655,792

Earnings (loss) before interest and taxes
 
 
 
 
 
Frozen
$
154,797

 
$
240,919

 
$
218,536

Grocery
248,967

 
229,155

 
203,146

Boulder
59,874

 
9,096

 
(5,498
)
Specialty
10,799

 
32,263

 
34,369

Unallocated corporate expenses
(25,781
)
 
(31,788
)
 
(25,851
)
Total
$
448,656

 
$
479,645

 
$
424,702

Depreciation and amortization
 
 
 
 
 
Frozen (1)
$
69,325

 
$
42,371

 
$
42,162

Grocery
31,383

 
32,971

 
30,671

Boulder
15,778

 
13,230

 
2,430

Specialty
16,401

 
17,200

 
14,397

Total
$
132,887

 
$
105,772

 
$
89,660

Capital expenditures (2)
 
 
 
 
 
Frozen
$
46,887

 
$
57,555

 
$
46,662

Grocery
27,644

 
28,038

 
42,289

Boulder
17,930

 
20,404

 
8,457

Specialty
13,881

 
13,067

 
11,069

Total
$
106,342

 
$
119,064

 
$
108,477

 
 
 
 
 
 
NET SALES BY PRODUCT TYPE
 
 
 
 
 
Net sales
 
 
 
 
 
Frozen
$
1,661,877

 
$
1,664,505

 
$
1,384,587

Meals and Meal Enhancers
999,742

 
990,642

 
859,598

Desserts
340,861

 
330,876

 
309,702

Snacks
141,522

 
141,915

 
101,905

Total
$
3,144,002

 
$
3,127,938

 
$
2,655,792

 
 
 
 
 
 
GEOGRAPHIC INFORMATION
 
 
 
 
 
Net sales
 
 
 
 
 
United States
$
3,084,630

 
$
3,064,800

 
$
2,635,141

Canada
155,569

 
165,761

 
118,194

United Kingdom
—

 
8,573

 
—

Intercompany
(96,197
)
 
(111,196
)
 
(97,543
)
Total
$
3,144,002

 
$
3,127,938

 
$
2,655,792



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


 (1) $22.6 million of depreciation is due to accelerated depreciation resulting from the Exit.
(2) Includes new capital leases.

SEGMENT INFORMATION
December 31,
2017
 
December 25,
2016
 
Total assets
 
 
 
 
Frozen
$
2,417,543

 
$
2,430,782

 
Grocery
2,787,209

 
2,833,186

 
Boulder
1,005,209

 
1,013,059

 
Specialty
357,040

 
400,521

 
Corporate
11,263

 
10,418

 
Total
$
6,578,264

 
$
6,687,966

 
GEOGRAPHIC INFORMATION
 
 
 
 
Long-lived assets
 
 
 
 
United States
$
707,670

 
$
690,515

 
Canada
32,043

 
31,399

 
United Kingdom
—

 
1,431

 
Total
$
739,713

 
$
723,345

 


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


16. (Benefit)/Provision for Income Taxes

The components of the provision for income taxes are as follows:
(Benefit)/Provision for income taxes
Fiscal year ended
 
December 31, 2017
December 25, 2016
December 27, 2015
 
53 weeks
52 weeks
52 weeks
Current
 
 
 
Federal
$
44,556

$
71,619

$
2,191

State
6,461

8,746

6,431

Non-U.S.
1,409

883

(327
)
 
52,426

81,248

8,295

Deferred
 
 
 
Federal
(327,002
)
36,213

106,975

State
20,847

12,058

7,452

Non-U.S.
730

(89
)
1,157

 
(305,425
)
48,182

115,584

 
 
 
 
(Benefit)/Provision for income taxes
$
(252,999
)
$
129,430

$
123,879

 
 
 
 
Earnings before income taxes
 
 
 
United States
$
270,598

$
346,865

$
332,020

Non-U.S.
8,624

(6,318
)
4,367

     Total
$
279,222

$
340,547

$
336,387

 
 
 
 
The effective tax rate differs from the federal statutory income tax rate as explained below:
 
 
 
 
Effective Income Tax Rate
 
 
 
 Federal statutory income tax rate
35.0
 %
35.0
 %
35.0
 %
 State income taxes (net of federal benefit)
1.8
 %
4.0
 %
2.7
 %
 Tax effect resulting from international activities
(0.3
)%
0.1
 %
(0.6
)%
 Domestic production activities deduction
(1.5
)%
(1.9
)%
(0.3
)%
 Non-deductible expenses
0.1
 %
0.7
 %
0.3
 %
 Equity based compensation
(4.5
)%
0.0
 %
0.1
 %
 Uncertain tax positions
(0.9
)%
0.0
 %
0.0
 %
 Impact of Tax Cuts and Jobs Act
(119.9
)%
0.0
 %
0.0
 %
 Other
(0.4
)%
0.1
 %
(0.4
)%
Effective income tax rate
(90.6
)%
38.0
 %
36.8
 %

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


 Deferred Tax Assets and Liabilities
 
 
 
 
December 31, 2017
 
December 25, 2016
 Accrued liabilities
$
6,725

 
$
11,537

 Inventories
9,066

 
11,489

 Benefits and compensation
15,439

 
37,049

 Hedges
—

 
6,511

 Net operating loss carryforwards
53,914

 
81,515

 Federal & state tax credits
1,859

 
2,386

 Postretirement benefits
11,831

 
20,863

 Alternative minimum tax
2,013

 
1,993

 Other
940

 
2,755

 Subtotal
101,787

 
176,098

 Valuation allowance
(1,695
)
 
(3,146
)
Total net deferred tax assets
100,092

 
172,952

 
 
 
 
 Other intangible assets
(632,794
)
 
(964,547
)
 Partnership interests
(6,922
)
 
(10,473
)
 Plant assets
(79,986
)
 
(118,223
)
 Hedges
(1,813
)
 
—

 Other
(1,796
)
 
(2,689
)
Total deferred tax liabilities
(723,311
)
 
(1,095,932
)
 Net deferred tax liability
$
(623,219
)
 
$
(922,980
)
 
 
 
 
 Amounts recognized in the Consolidated Balance Sheets
 
 
 
Long-term net deferred tax assets
614

 
—

Long-term net deferred tax liability
(623,833
)
 
(922,980
)
 Net deferred tax liability
$
(623,219
)
 
$
(922,980
)
Income taxes are accounted for in accordance with the authoritative guidance for accounting for income taxes under which deferred tax assets and liabilities are determined based on the difference between the financial statement basis and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. In the fiscal year ended December 31, 2017, we retrospectively adopted the guidance of ASU 2015-17, “Balance Sheet Classification of Deferred Taxes” (see Note 2 to the Consolidated Financial Statements, Summary of Significant Accounting Policies) and in connection, are presenting all deferred tax asset and liability balances as non-current on our consolidated balance sheet for the fiscal year ended December 31, 2017 and December 25, 2016 in this filing.

The effective tax rate was (90.6)% for the fiscal year ended December 31, 2017 compared to 38.0% for the fiscal year ended December 25, 2016.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other provisions, the Act reduced the federal statutory corporate income tax rate from 35% to 21%. We have estimated this rate reduction generated a one-time benefit of 119.9% on our year ended December 31, 2017 provision for income taxes as a result of the revaluation of our deferred tax assets and liabilities at the lower rate. The Company is evaluating the impact of certain foreign income provisions of the Act and we expect the impact of such provisions to not be material. We will treat impact of such provisions, if any, as a period expense beginning in our 2018 fiscal year. Other provisions of the Act did not have a material effect on our year ended December 31, 2017 income tax provision and we do not anticipate such provisions to have a material effect on our financial statements beginning in our 2018 fiscal year.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Further, the Company is still analyzing the other provisions of the Act and refining its calculations, which could potentially impact the measurement of its income tax balances. Once the Company finalizes its analysis and certain additional tax calculations and tax positions, which are subject to complex tax rules and interpretation when it files its 2017 U.S. tax return, it will be able to conclude on any further adjustments to be recorded on these provisional amounts. Any such change will be reported as a component of income taxes in the reporting period in which any such adjustments are determined, which will be no later than the fourth quarter of 2018.

The effective rate for the fiscal year ended December 31, 2017 also includes benefits of approximately 1.5% related to the domestic production activities deduction and 4.5% from share based payments transactions being recorded as an item of continuing operations in accordance with ASU 2016-09, “Improvements to Employee Share-Based Payments Accounting” effective for our 2017 fiscal year (see Note 2 to the Consolidated Financial Statements, Summary of Significant Accounting Policies).

The effective rate for the year ended December 25, 2016 includes benefits of approximately 1.9% related to the domestic production activities deduction. In connection with our acquisition of Boulder Brands, Inc., our effective income tax rate was adversely impacted for the tax effect associated with incurring certain non-deductible acquisition costs and compensation payments of 0.6% , a charge for an increase in our non-current state deferred income tax liability balance of approximately 1.0% , and a charge to record a valuation allowance on our foreign tax credit carryforward of approximately 0.2% .

The Company is a loss corporation as defined by Internal Revenue Code Section 382. Section 382 places an annual limitation on our ability to utilize our NOLs and other attributes to reduce future taxable income. As of December 31, 2017, we have federal NOL carryovers of $408.3 million , subject to an annual limitation of $17.1 million . As a result, $237.2 million of the carryovers exceed the estimated available Section 382 limitation. The Company has reduced its deferred tax assets for this limitation.

The Company's federal NOLs have expiration periods beginning in 2020 through 2027. The Company also has state NOLs that are limited and vary in amount by jurisdiction. Gross state NOLs are approximately $261.0 million with expiration periods beginning in 2018 through 2037. State tax credits are $2.8 million in total and will expire on or before 2022.

The authoritative guidance for accounting for income taxes requires that a valuation allowance is established when it is “more likely than not” that all or a portion of deferred tax assets will not be realized. The Company regularly evaluates its deferred tax assets for future realization. A review of all available positive and negative evidence must be considered, including a company's performance, the market environment in which the company operates, the utilization of past tax credits, length of carryback and carryforward periods, and existing contracts or sales backlog that will result in future profits. Based on a review of both the positive and negative evidence, it was determined that the Company had sufficient positive evidence to outweigh any negative evidence and support that it was more likely that not that substantially all of the deferred tax assets would be realized.

The table below lists the changes in the Company’s deferred tax valuation allowance. The valuation allowance increase of $0.2 million is primarily attributable to state credits, the realization of which is not more likely than not. The decrease of $1.9 million is attributable to the write-off of the deferred tax assets of Boulder Brand’s United Kingdom operations, the release of the foreign tax credit valuation allowance due to tax reform and write-off of expiring state NOLs that were subject to a full valuation allowance.

 
 Beginning
 
 
 
 
 
 
 
 Ending
 
 Balance
 
 Additions
 
Acquisitions
 
Deductions
 
 Balance
Fiscal year ended December 31, 2017
$
3,913

 
$
150

 
$
—

 
$
(1,917
)
 
$
2,146

Fiscal year ended December 25, 2016
2,287

 
1,775

 
59

 
(208
)
 
3,913

Fiscal year ended December 27, 2015
2,288

 
623

 
—

 
(624
)
 
2,287


 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


A reconciliation of the beginning and ending amount of gross unrecognized tax positions is as follows:

 
Fiscal year ended
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
53 weeks
 
52 weeks
 
52 weeks
Gross unrecognized tax positions at beginning of year
$
12,104

 
$
8,611

 
$
8,242

Increase for tax positions related to prior periods
858

 
4,225

 
—

Decrease for tax positions related to prior periods
(297
)
 
(444
)
 
—

Increase for tax positions related to the current period
4,080

 
507

 
558

Decrease related to settlement with tax authorities
(593
)
 
(89
)
 
—

Reductions due to lapse of applicable statutes of limitations
(2,537
)
 
(706
)
 
(189
)
Gross unrecognized tax positions at end of year
$
13,615

 
$
12,104

 
$
8,611


The Company's liability for unrecognized tax positions as of December 31, 2017 was $13.6 million , reflecting a net increase of $1.5 million . Net benefit of $2.5 million was recognized in the provision for income taxes resulting primarily from the expiration of statutes of limitations on certain matters offset by an increase in uncertainties related to current year federal matters. The amount that, if recognized, would impact the effective tax rate as of December 31, 2017 would be $7.8 million .

From time to time, various taxing authorities may audit the Company's tax returns. It is reasonably possible that a decrease in the uncertain tax positions of approximately $3.0 to $5.0 million may occur within the next twelve months due to the lapse of certain statutes of limitations or resolution of uncertainties.

The Company recorded a net (benefit) expense for interest and penalties associated with uncertain tax positions of $(0.1) million , $0.4 million and $0.1 million , to the provision for income taxes for the fiscal years ended December 31, 2017, December 25, 2016 and December 27, 2015, respectively. The Company's liability includes accrued interest and penalties of $1.0 million and $1.1 million as of December 31, 2017 and December 25, 2016, respectively.
    
The Company files income tax returns with the U.S. federal government and various state and international jurisdictions. With limited exceptions, the Company's calendar year 2000 and subsequent federal and state tax years remain open by statute, principally relating to NOLs. Audit activity for these years is minimal. With limited exception for certain states, federal and state tax years for pre-acquisition periods of Birds Eye Foods Inc. are either closed by statute or by completed tax examinations. Federal and state tax years for pre-acquisition periods, beginning in 2014, for Boulder Brands are open by statute with no current audit activity. As a matter of course, from time to time various taxing authorities may audit the Company's tax returns and the ultimate resolution of such audits could result in adjustments to amounts recognized by the Company.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


17. Quarterly Results (Unaudited)

Summarized quarterly financial data is presented below

 
Quarter Ended
 
 
 
March
2017
 
June
2017
 
September
2017
 
December
2017
 
Fiscal
2017
 
13 weeks
 
13 weeks
 
13 weeks
 
14 weeks
 
53 weeks
Net sales
$
766,074

 
$
744,608

 
$
749,814

 
$
883,506

 
$
3,144,002

Cost of products sold
555,010

 
580,190

 
530,523

 
610,131

 
2,275,854

Gross profit
211,064

 
164,418

 
219,291

 
273,375

 
868,148

 
 
 
 
 
 
 
 
 
 
Net earnings
23,149

 
18,618

 
46,581

 
443,873

 
532,221

Net earnings per share (1)
 
 
 
 
 
 
 
 
 
Basic
$
0.20

 
$
0.16

 
$
0.39

 
$
3.75

 
$
4.50

Weighted average shares outstanding-basic (2)
117,624

 
118,114

 
118,329

 
118,497

 
118,141

Diluted
$
0.19

 
$
0.16

 
$
0.39

 
$
3.71

 
$
4.45

Weighted average shares outstanding-diluted (2)
119,332

 
119,607

 
119,690

 
119,580

 
119,552

Dividends declared
$
0.285

 
$
0.285

 
$
0.325

 
$
0.325

 
$
1.22

Market price - high
$
58.96

 
$
66.17

 
$
62.00

 
$
59.79

 
$
66.17

Market price - low
$
52.74

 
$
57.54

 
$
56.99

 
$
53.09

 
$
52.74

 
 
 
 
 
 
 
 
 
 


 
Quarter Ended
 
 
 
March
2016
 
June
2016
 
September
2016
 
December
2016
 
Fiscal
2016
 
13 weeks
 
13 weeks
 
13 weeks
 
13 weeks
 
52 weeks
Net sales
$
754,255

 
$
756,381

 
$
758,821

 
$
858,481

 
$
3,127,938

Cost of products sold
555,688

 
535,189

 
530,117

 
590,870

 
2,211,864

Gross profit
198,567

 
221,192

 
228,704

 
267,611

 
916,074

 
 
 
 
 
 
 
 
 
 
Net earnings
24,837

 
45,783

 
52,353

 
88,144

 
211,117

 
 
 
 
 
 
 
 
 
 
Net earnings per share (1)
 
 
 
 
 
 
 
 
 
Basic
$
0.21

 
$
0.39

 
$
0.45

 
$
0.75

 
$
1.81

Weighted average shares outstanding-basic (2)
116,117

 
116,657

 
117,224

 
117,489

 
116,872

Diluted
$
0.21

 
$
0.39

 
$
0.44

 
$
0.74

 
$
1.79

Weighted average shares outstanding-diluted (2)
117,613

 
117,766

 
118,390

 
118,874

 
118,161

Dividends declared
$
0.255

 
$
0.255

 
$
0.285

 
$
0.285

 
$
1.08

Market price - high
$
46.08

 
$
45.37

 
$
51.85

 
$
53.25

 
$
53.25

Market price - low
$
39.89

 
$
41.82

 
$
43.34

 
$
46.62

 
$
39.89

 
 
 
 
 
 
 
 
 
 

(1) The sum of the individual per share amounts may not add due to rounding.
(2) Shares presented in thousands.







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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)



Net earnings during fiscal 2017 and fiscal 2016 were affected by the following charges (credits):

 
Quarter Ended
 
 
 
March
2017
 
June
2017
 
September
2017
 
December
2017
 
Fiscal
2017
 
13 weeks
 
13 weeks
 
13 weeks
 
14 weeks
 
53 weeks
Net sales
 
 
 
 
 
 
 
 
 
  Charges resulting from the Recall
—

 
(7,015
)
 
(2,752
)
 
(1,000
)
 
(10,767
)
 
 
 
 
 
 
 
 
 
 
Cost of products sold
 
 
 
 
 
 
 
 
 
Charges resulting from the Recall
—

 
1,535

 
680

 
—

 
2,215

Charges resulting from the Exit
—

 
33,006

 
—

 
(1,050
)
 
31,956

Acquisition integration costs (a)
5,016

 
4,021

 
1,146

 
1,009

 
11,192

 
 
 
 
 
 
 
 
 
 
Tradename impairments (b)
—

 
27,430

 
39,100

 
—

 
66,530

Benefit for income taxes (c)
—

 
—

 
—

 
(334,706
)
 
(334,706
)
 
Quarter Ended
 
 
 
March
2016
 
June
2016
 
September
2016
 
December
2016
 
Fiscal
2016
 
13 weeks
 
13 weeks
 
13 weeks
 
13 weeks
 
52 weeks
Cost of products sold
 
 
 
 
 
 
 
 
 
Acquisition integration costs (a)
842

 
539

 
1,077

 
3,108

 
5,566

 
 
 
 
 
 
 
 
 
 
Administrative expenses
 
 
 
 
 
 
 
 
 
 Boulder Brands integration costs
12,814

 
8,822

 
3,637

 
3,183

 
28,456

 
 
 
 
 
 
 


 


Other expense (income), net
 
 
 
 
 
 
 
 
 
Boulder Brands UK wind down (d)
—

 
—

 
—

 
4,265

 
4,265

Boulder Brands acquisition costs (e)
6,781

 
—

 
—

 
—

 
6,781

 
 
 
 
 
 
 
 
 
 
Tradename impairments (b)
—

 
—

 
11,200

 
—

 
11,200



(a)
The Company recorded integration costs related to the Boulder Brands and Garden Protein acquisitions.
(b)
The Company recorded various tradename impairments. See Note 9 , Goodwill, Tradenames and Other Assets for further detail.
(c)
Represents removal of the benefit of the decrease in our net deferred income tax liability as a result of the Tax Cuts and Jobs Act of 2017. For more information, see Note 16 , (Benefit)/Provision for Income Taxes.
(d)
The Company recorded $4.3 million of charges related to wind down of operations and the disposal of associated assets at Boulder Brands private label gluten-free bakery operation which is based in the United Kingdom. This is explained in greater detail in Note 7 , Other Expense (Income), net.
(e)
Boulder Brands acquisition costs primarily consist of legal, accounting and other professional fees.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


18. Guarantor and Nonguarantor Statements
The Senior Notes are general senior unsecured obligations of Pinnacle Foods Finance, effectively subordinated in right of payment to all existing and future senior secured indebtedness of Pinnacle Foods Finance and guaranteed on a full, unconditional, joint and several basis by the Company and Pinnacle Foods Finance's 100% owned domestic subsidiaries that guarantee other indebtedness of the Company. The indentures governing the Senior Notes contains customary exceptions under which a guarantee of a guarantor subsidiary will terminate, including (1) the sale, exchange or transfer (by merger or otherwise) of the capital stock or all of the assets of such guarantor subsidiary, (2) the release or discharge of the guarantee by such guarantor subsidiary of the Amended Credit Agreement or other guarantee that resulted in the creation of the guarantee, (3) the designation of such guarantor subsidiary as an “unrestricted subsidiary” in accordance with the indentures governing the Senior Notes and (4) upon the legal defeasance or covenant defeasance or discharge of the indentures governing the Senior Notes.
The following condensed consolidating financial information presents:
(1)
(a) Condensed consolidating balance sheets as of December 31, 2017 and December 25, 2016 .
(b) The related condensed consolidating statements of operations and comprehensive earnings for the Company, Pinnacle Foods Finance, all guarantor subsidiaries and the non-guarantor subsidiaries for the following:
i. Fiscal year ended December 31, 2017 ; and
ii. Fiscal year ended December 25, 2016 ; and
iii. Fiscal year ended December 27, 2015 .

(c) The related condensed consolidating statements of cash flows for the Company, Pinnacle Foods Finance, all guarantor subsidiaries and the non-guarantor subsidiaries for the following:
i. Fiscal year ended December 31, 2017 ; and
ii. Fiscal year ended December 25, 2016 ; and
iii. Fiscal year ended December 27, 2015 .

(2)
Elimination entries necessary to consolidate the Company, Pinnacle Foods Finance with its guarantor subsidiaries and non-guarantor subsidiaries.
Investments in subsidiaries are accounted for by the parent using the equity method of accounting. The guarantor subsidiaries and non-guarantor subsidiaries are presented on a combined basis. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions and include a reclassification entry of net non-current deferred tax assets to non-current deferred tax liabilities.


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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Pinnacle Foods Inc.
Condensed Consolidating Balance Sheet
December 31, 2017
  
Pinnacle Foods Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
and
Reclassifications
 
Consolidated
Total
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
—

 
$
241,772

 
$
8,056

 
$
—

 
$
249,828

Accounts receivable, net
—

 
—

 
272,401

 
9,221

 
—

 
281,622

Intercompany accounts receivable
102,335

 
—

 
1,001,329

 
—

 
(1,103,664
)
 
—

Inventories, net
—

 
—

 
469,813

 
19,993

 
—

 
489,806

Other current assets
—

 
2,649

 
8,124

 
288

 
—

 
11,061

Total current assets
102,335


2,649

 
1,993,439

 
37,558

 
(1,103,664
)
 
1,032,317

Plant assets, net
—

 
—

 
707,670

 
32,043

 
—

 
739,713

Investment in subsidiaries
2,317,445

 
3,180,932

 
43,056

 
—

 
(5,541,433
)
 
—

Intercompany note receivable
—

 
2,907,799

 
45,226

 
9,800

 
(2,962,825
)
 
—

Tradenames
—

 
—

 
2,458,681

 
4,693

 
—

 
2,463,374

Other assets, net
—

 
8,802

 
145,489

 
10,608

 
—

 
164,899

Deferred tax assets
—

 
233,391

 
—

 
—

 
(233,391
)
 
—

Goodwill
—

 
—

 
2,115,731

 
62,230

 
—

 
2,177,961

Total assets
$
2,419,780

 
$
6,333,573

 
$
7,509,292

 
$
156,932

 
$
(9,841,313
)
 
$
6,578,264

Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
$
—

 
$
—

 
$
2,739

 
$
—

 
$
—

 
$
2,739

Current portion of long-term obligations
—

 
22,620

 
11,311

 
3

 
—

 
33,934

Accounts payable
—

 
—

 
315,142

 
7,920

 
—

 
323,062

Intercompany accounts payable
—

 
1,078,535

 
—

 
25,129

 
(1,103,664
)
 
—

Accrued trade marketing expense
—

 
—

 
36,484

 
2,491

 
—

 
38,975

Accrued liabilities
178

 
19,913

 
95,010

 
7,030

 
—

 
122,131

Dividends payable
40,470

 
—

 
—

 
—

 
—

 
40,470

Total current liabilities
40,648

 
1,121,068

 
460,686

 
42,573

 
(1,103,664
)
 
561,311

Long-term debt
—

 
2,894,962

 
30,594

 
38

 
—

 
2,925,594

Intercompany note payable
—

 
—

 
2,896,811

 
66,014

 
(2,962,825
)
 
—

Pension and other postretirement benefits
—

 
—

 
53,251

 
—

 
—

 
53,251

Other long-term liabilities
—

 
98

 
32,971

 
968

 
—

 
34,037

Deferred tax liabilities
—

 
—

 
854,047

 
3,177

 
(233,391
)
 
623,833

Total liabilities
40,648

 
4,016,128

 
4,328,360

 
112,770

 
(4,299,880
)
 
4,198,026

Commitments and contingencies (Note 14)

 

 

 

 

 

Shareholder’s equity:
 
 
 
 
 
 
 
 
 
 
 
Pinnacle Common Stock
$
1,200

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,200

Additional paid-in-capital
1,453,054

 
1,454,253

 
1,376,175

 
32,771

 
(2,863,199
)
 
1,453,054

Retained earnings
987,238

 
893,441

 
1,834,555

 
10,756

 
(2,738,752
)
 
987,238

Accumulated other comprehensive (loss)/gain
(30,250
)
 
(30,249
)
 
(29,798
)
 
(471
)
 
60,518

 
(30,250
)
Capital stock in treasury
(32,110
)
 
—

 
—

 
—

 
—

 
(32,110
)
Total Pinnacle Foods Inc. and Subsidiaries stockholders' equity
2,379,132

 
2,317,445

 
3,180,932

 
43,056

 
(5,541,433
)
 
2,379,132

Non-controlling interest
—

 
—

 
—

 
1,106

 
—

 
1,106

Total Equity
2,379,132

 
2,317,445

 
3,180,932

 
44,162

 
(5,541,433
)
 
2,380,238

Total liabilities and shareholders' equity
$
2,419,780

 
$
6,333,573

 
$
7,509,292

 
$
156,932

 
$
(9,841,313
)
 
$
6,578,264



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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Pinnacle Foods Inc.
Condensed Consolidating Balance Sheet
December 25, 2016
  
Pinnacle Foods Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
and
Reclassifications
 
Consolidated
Total
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
—

 
$
341,238

 
$
11,838

 
$
—

 
$
353,076

Accounts receivable, net
—

 
—

 
281,189

 
8,393

 
—

 
289,582

Intercompany accounts receivable
96,923

 
—

 
804,203

 
—

 
(901,126
)
 
—

Inventories, net
—

 
—

 
429,009

 
16,482

 
—

 
445,491

Other current assets
—

 
631

 
8,402

 
1,654

 
—

 
10,687

Total current assets
96,923

 
631

 
1,864,041

 
38,367

 
(901,126
)
 
1,098,836

Plant assets, net
—

 
—

 
690,515

 
32,830

 
—

 
723,345

Investment in subsidiaries
1,886,496

 
2,589,850

 
30,600

 
—

 
(4,506,946
)
 
—

Intercompany note receivable
—

 
2,984,974

 
44,928

 
9,800

 
(3,039,702
)
 
—

Tradenames
—

 
—

 
2,525,200

 
4,358

 
—

 
2,529,558

Other assets, net
—

 
2,963

 
158,934

 
11,174

 
—

 
173,071

Deferred tax assets
—

 
335,178

 
—

 
—

 
(335,178
)
 
—

Goodwill
—

 
—

 
2,104,648

 
58,508

 
—

 
2,163,156

Total assets
$
1,983,419

 
$
5,913,596

 
$
7,418,866

 
$
155,037

 
$
(8,782,952
)
 
$
6,687,966

Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
$
—

 
$
—

 
$
2,389

 
$
—

 
$
—

 
$
2,389

Current portion of long-term obligations
—

 
10,750

 
13,028

 
23

 
—

 
23,801

Accounts payable
—

 
—

 
283,999

 
8,479

 
—

 
292,478

Intercompany accounts payable
—

 
863,358

 
—

 
37,766

 
(901,124
)
 
—

Accrued trade marketing expense
—

 
—

 
48,850

 
2,204

 
—

 
51,054

Accrued liabilities
178

 
28,557

 
133,316

 
4,690

 
—

 
166,741

Dividends payable
35,233

 
—

 
—

 
—

 
—

 
35,233

Total current liabilities
35,411

 
902,665

 
481,582

 
53,162

 
(901,124
)
 
571,696

Long-term debt
—

 
3,112,196

 
28,024

 
276

 
—

 
3,140,496

Intercompany note payable
—

 
—

 
2,975,471

 
64,233

 
(3,039,704
)
 
—

Pension and other postretirement benefits
—

 
—

 
56,323

 
—

 
—

 
56,323

Other long-term liabilities
—

 
12,239

 
31,994

 
3,296

 
—

 
47,529

Deferred tax liabilities
—

 
—

 
1,255,622

 
2,536

 
(335,178
)
 
922,980

Total liabilities
35,411

 
4,027,100

 
4,829,016

 
123,503

 
(4,276,006
)
 
4,739,024

Commitments and contingencies (Note 14)


 


 


 


 


 

Shareholder’s equity:
 
 
 
 
 
 
 
 
 
 
 
Pinnacle Common Stock
$
1,191

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,191

Additional paid-in-capital
1,429,447

 
1,430,639

 
1,352,568

 
32,770

 
(2,815,977
)
 
1,429,447

Retained earnings
601,049

 
507,426

 
1,272,939

 
3,936

 
(1,784,301
)
 
601,049

Accumulated other comprehensive (loss)/gain
(51,569
)
 
(51,569
)
 
(35,657
)
 
(6,106
)
 
93,332

 
(51,569
)
Capital stock in treasury, at cost
(32,110
)
 
—

 
—

 
—

 
—

 
(32,110
)
Total Pinnacle Foods Inc. and Subs stockholders equity
1,948,008


1,886,496


2,589,850


30,600


(4,506,946
)

1,948,008

Non-controlling interest
—

 
—

 
—

 
934

 
—

 
934

Total Equity
1,948,008

 
1,886,496

 
2,589,850

 
31,534

 
(4,506,946
)
 
1,948,942

Total liabilities and shareholders' equity
$
1,983,419

 
$
5,913,596

 
$
7,418,866

 
$
155,037

 
$
(8,782,952
)
 
$
6,687,966



119
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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Pinnacle Foods Inc.
Condensed Consolidating Statement of Operations and Comprehensive Earnings (Loss)
For the fiscal year ended December 31, 2017
  
Pinnacle Foods Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net sales
$
—

 
$
—

 
$
3,084,630

 
$
155,569

 
$
(96,197
)
 
$
3,144,002

Cost of products sold
—

 
—

 
2,239,102

 
131,826

 
(95,074
)
 
2,275,854

Gross profit
—

 
—

 
845,528

 
23,743

 
(1,123
)
 
868,148

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Marketing and selling expenses
—

 
—

 
189,345

 
3,774

 
—

 
193,119

Administrative expenses
—

 
—

 
123,788

 
7,096

 
—

 
130,884

Research and development expenses
—

 
—

 
15,207

 
863

 
—

 
16,070

Tradename impairment charges
—

 
—

 
66,530

 
—

 
—

 
66,530

Intercompany royalties
—

 
—

 
(695
)
 
695

 
—

 
—

Intercompany management fees
—

 
—

 
—

 
1,123

 
(1,123
)
 
—

Other (income) expense, net
—

 
(1,484
)
 
14,271

 
102

 
—

 
12,889

Equity in (earnings) of investees
(532,049
)
 
(707,649
)
 
(6,884
)
 
—

 
1,246,582

 
—

Total operating (income) expenses
(532,049
)
 
(709,133
)
 
401,562

 
13,653

 
1,245,459

 
419,492

Earnings before interest and taxes
532,049

 
709,133

 
443,966

 
10,090

 
(1,246,582
)
 
448,656

Intercompany interest (income) expense
—

 
(81,749
)
 
80,873

 
876

 
—

 
—

Interest expense
—

 
166,518

 
3,029

 
40

 
—

 
169,587

Interest income
—

 
—

 
132

 
21

 
—

 
153

Earnings before income taxes
532,049

 
624,364

 
360,196

 
9,195

 
(1,246,582
)
 
279,222

Provision (benefit) for income taxes
—

 
92,315

 
(347,453
)
 
2,139

 
—

 
(252,999
)
Net earnings
532,049

 
532,049

 
707,649

 
7,056

 
(1,246,582
)
 
532,221

Less: Net earnings attributable to non-controlling interest
—

 
—

 
—

 
172

 
—

 
172

Net earnings attributable to Pinnacle Foods, Inc. and Subsidiaries common stockholders
$
532,049

 
$
532,049

 
$
707,649

 
$
6,884

 
$
(1,246,582
)
 
$
532,049

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive earnings
553,368

 
553,368

 
713,502

 
12,520

 
(1,279,218
)
 
553,540

Less: Comprehensive loss attributable to non-controlling interest
—

 
—

 
—

 
172

 
—

 
172

Comprehensive earnings attributable to Pinnacle Foods, Inc. and Subsidiaries
$
553,368

 
$
553,368

 
$
713,502

 
$
12,348

 
$
(1,279,218
)
 
$
553,368

 


120
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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Pinnacle Foods Inc.
Condensed Consolidating Statement of Operations and Comprehensive Earnings (Loss)
For the fiscal year ended December 25, 2016
  
Pinnacle Foods Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net sales
$
—

 
$
—

 
$
3,064,800

 
$
174,334

 
$
(111,196
)
 
$
3,127,938

Cost of products sold
—

 
—

 
2,161,918

 
157,859

 
(107,913
)
 
2,211,864

Gross profit
—

 
—

 
902,882

 
16,475

 
(3,283
)
 
916,074

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Marketing and selling expenses
—

 
—

 
213,171

 
5,089

 
—

 
218,260

Administrative expenses
—

 
—

 
153,835

 
9,221

 
—

 
163,056

Research and development expenses
—

 
—

 
17,384

 
729

 
—

 
18,113

Tradename impairment charges
—

 
—

 
11,200

 


 


 
11,200

Intercompany royalties
—

 
—

 
(562
)
 
562

 
—

 
—

Intercompany management fees
—

 
—

 
—

 
2,286

 
(2,286
)
 
—

Intercompany technical service fees
—

 
—

 
—

 
997

 
(997
)
 
—

Other expense (income), net
—

 
(486
)
 
21,265

 
5,021

 
—

 
25,800

Equity in (earnings) loss of investees
(211,117
)
 
(231,305
)
 
10,275

 
—

 
432,147

 
—

Total operating expenses
(211,117
)
 
(231,791
)
 
426,568

 
23,905

 
428,864

 
436,429

Earnings before interest and taxes
211,117

 
231,791

 
476,314

 
(7,430
)
 
(432,147
)
 
479,645

Intercompany interest (income) expense
—

 
(105,328
)
 
103,268

 
2,060

 
—

 
—

Interest expense
—

 
137,227

 
1,973

 
43

 
—

 
139,243

Interest income
—

 
—

 
93

 
52

 
—

 
145

Earnings before income taxes
211,117

 
199,892

 
371,166

 
(9,481
)
 
(432,147
)
 
340,547

Provision (benefit) for income taxes
—

 
(11,225
)
 
139,861

 
794

 
—

 
129,430

Net earnings (loss)
211,117

 
211,117

 
231,305

 
(10,275
)
 
(432,147
)
 
211,117

Less: Net earnings attributable to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

Net earnings (loss) attributable to Pinnacle Foods, Inc. and Subsidiaries common stockholders
$
211,117

 
$
211,117

 
$
231,305

 
$
(10,275
)
 
$
(432,147
)
 
$
211,117

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive earnings (loss)
218,936

 
218,936

 
237,851

 
(8,127
)
 
(448,660
)
 
218,936

Less: Comprehensive loss attributable to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

Comprehensive earnings (loss) attributable to Pinnacle Foods, Inc. and Subsidiaries
$
218,936

 
$
218,936

 
$
237,851

 
$
(8,127
)
 
$
(448,660
)
 
$
218,936

 

121
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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Pinnacle Foods Inc.
Condensed Consolidating Statement of Operations and Comprehensive Earnings (Loss)
For the fiscal year ended December 27, 2015
  
Pinnacle Foods Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net sales
$
—

 
$
—

 
$
2,635,141

 
$
118,194

 
$
(97,543
)
 
$
2,655,792

Cost of products sold
—

 
—

 
1,915,267

 
96,545

 
(96,526
)
 
1,915,286

Gross profit
—

 
—

 
719,874

 
21,649

 
(1,017
)
 
740,506

Operating expenses
 
 
 
 
 
 
 
 
 
 
 
Marketing and selling expenses
—

 
—

 
168,239

 
8,463

 
—

 
176,702

Administrative expenses
—

 
—

 
100,556

 
6,448

 
—

 
107,004

Research and development expenses
—

 
—

 
12,492

 
500

 
—

 
12,992

Intercompany royalties
—

 
—

 
—

 
20

 
(20
)
 
—

Intercompany technical service fees
—

 
—

 
—

 
997

 
(997
)
 
—

Termination fee received, net of costs, associated with the Hillshire merger agreement
—

 
—

 
—

 


 
—

 
—

Other expense (income), net
—

 
3,663

 
15,338

 
105

 
—

 
19,106

Equity in (earnings) loss of investees
(212,508
)
 
(226,847
)
 
(3,235
)
 
—

 
442,590

 
—

Total operating expenses
(212,508
)
 
(223,184
)
 
293,390

 
16,533

 
441,573

 
315,804

Earnings (loss) before interest and taxes
212,508

 
223,184

 
426,484

 
5,116

 
(442,590
)
 
424,702

Intercompany interest (income) expense
—

 
(68,701
)
 
67,657

 
1,044

 
—

 
—

Interest expense
—

 
86,745

 
1,727

 
41

 
—

 
88,513

Interest income
—

 
—

 
163

 
35

 
—

 
198

Earnings (loss) before income taxes
212,508

 
205,140

 
357,263

 
4,066

 
(442,590
)
 
336,387

Provision (benefit) for income taxes
—

 
(7,368
)
 
130,416

 
831

 
—

 
123,879

Net earnings
212,508

 
212,508

 
226,847

 
3,235

 
(442,590
)
 
212,508

Less: Net earnings attributable to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

Net earnings attributable to Pinnacle Foods, Inc. and Subsidiaries common stockholders
$
212,508

 
$
212,508

 
$
226,847

 
$
3,235

 
$
(442,590
)
 
$
212,508

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive earnings (loss)
190,854

 
190,854

 
217,931

 
(1,747
)
 
(407,038
)
 
190,854

Less: Comprehensive loss attributable to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

Comprehensive earnings (loss) attributable to Pinnacle Foods, Inc. and Subsidiaries
$
190,854

 
$
190,854

 
$
217,931

 
$
(1,747
)
 
$
(407,038
)
 
$
190,854



122
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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Pinnacle Foods Inc.
Condensed Consolidating Statement of Cash Flows
For the fiscal year ended December 31, 2017
  
Pinnacle
Foods
Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
and
Reclassifications
 
Consolidated
Total
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
—

 
$
(150,227
)
 
$
551,034

 
$
15,146

 
$
—

 
$
415,953

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
 
Intercompany accounts receivable/payable
—

 
272,882

 
18,111

 
—

 
(290,993
)
 
—

Intercompany loans
—

 
129,106

 
—

 
—

 
(129,106
)
 
—

Payments for business acquisition
—

 
—

 
(37,487
)
 
—

 
—

 
(37,487
)
Investment in subsidiary
135,879

 
122,425

 
—

 
—

 
(258,304
)
 
—

Capital expenditures
—

 
—

 
(91,286
)
 
(2,940
)
 
—

 
(94,226
)
Sale of plant assets
—

 
—

 
517

 
1,430

 
—

 
1,947

Net cash provided by (used in) investing activities
135,879

 
524,413

 
(110,145
)
 
(1,510
)
 
(678,403
)
 
(129,766
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock
15,097

 
—

 
—

 
—

 
—

 
15,097

Taxes paid related to net share settlement of equity awards
(10,238
)
 
—

 
—

 
—

 
—

 
(10,238
)
Dividends paid
(140,738
)
 
—

 
—

 
—

 
—

 
(140,738
)
Proceeds from bank term loans
—

 
2,262,000

 
—

 
—

 
—

 
2,262,000

Repayments of long-term obligations
—

 
(2,487,370
)
 
(4,159
)
 
—

 
—

 
(2,491,529
)
Repayments of short-term borrowing
—

 
—

 
(4,785
)
 
—

 
—

 
(4,785
)
Intercompany accounts receivable/payable
—

 
—

 
(272,882
)
 
(18,111
)
 
290,993

 
—

Return of capital
—

 
(135,879
)
 
(122,425
)
 
—

 
258,304

 
—

Intercompany loans
—

 
—

 
(129,106
)
 
—

 
129,106

 
—

Repayment of capital lease obligations
—

 
—

 
(6,998
)
 
(126
)
 
—

 
(7,124
)
Debt acquisition costs
—

 
(12,937
)
 
—

 
—

 
—

 
(12,937
)
Net cash (used in) provided by financing activities
(135,879
)
 
(374,186
)
 
(540,355
)
 
(18,237
)
 
678,403

 
(390,254
)
Effect of exchange rate changes on cash
—

 
—

 
—

 
819

 
—

 
819

Net change in cash and cash equivalents
—

 
—

 
(99,466
)
 
(3,782
)
 
—

 
(103,248
)
Cash and cash equivalents - beginning of period
—

 
—

 
341,238

 
11,838

 
—

 
353,076

Cash and cash equivalents - end of period
$
—

 
$
—

 
$
241,772

 
$
8,056

 
$
—

 
$
249,828

 
 
 
 
 
 
 
 
 
 
 
 


123
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PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)



Pinnacle Foods Inc.
Condensed Consolidating Statement of Cash Flows
For the fiscal year ended December 25, 2016
  
Pinnacle
Foods
Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
and
Reclassifications
 
Consolidated
Total
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
—

 
$
(714
)
 
$
474,237

 
$
13,981

 
$
—

 
$
487,504

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
 
Intercompany accounts receivable/payable
—

 
24,977

 
541

 
—

 
(25,518
)
 
—

Repayments of intercompany loans
—

 
(880,122
)
 
—

 


 
880,122

 
—

Payments for business acquisition
—

 
—

 
(985,365
)
 
—

 
—

 
(985,365
)
Investment in subsidiary
85,924

 
76,472

 
—

 
—

 
(162,396
)
 
—

Capital expenditures
—

 
—

 
(96,404
)
 
(4,646
)
 
—

 
(101,050
)
Net cash (used in) provided by investing activities
85,924

 
(778,673
)
 
(1,081,228
)
 
(4,646
)
 
692,208

 
(1,086,415
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock
26,436

 
—

 
—

 
—

 
—

 
26,436

Excess tax benefits on stock-based compensation
11,577

 
—

 
—

 
—

 
—

 
11,577

Taxes paid related to net share settlement of equity awards
(1,087
)
 
—

 
—

 
—

 
—

 
(1,087
)
Dividends paid
(122,850
)
 
—

 
—

 
—

 
—

 
(122,850
)
Proceeds from notes offering
—

 
350,000

 
—

 
—

 
—

 
350,000

Proceeds from bank term loans
—

 
547,250

 
—

 
—

 
—

 
547,250

Repayments of long-term obligations
—

 
(9,375
)
 
(4,366
)
 
—

 
—

 
(13,741
)
Proceeds from short-term borrowing
—

 
—

 
4,452

 
—

 
—

 
4,452

Repayments of short-term borrowing
—

 
—

 
(4,259
)
 
—

 
—

 
(4,259
)
Intercompany accounts receivable/payable
—

 
—

 
(24,977
)
 
(541
)
 
25,518

 
—

Return of capital
—

 
(85,924
)
 
(76,472
)
 
—

 
162,396

 
—

Intercompany loans
—

 
—

 
880,122

 
—

 
(880,122
)
 
—

Repayment of capital lease obligations
—

 
—

 
(3,940
)
 
(10
)
 
—

 
(3,950
)
Debt acquisition costs
—

 
(22,564
)
 
—

 
—

 
—

 
(22,564
)
Net cash (used in) provided by financing activities
(85,924
)
 
779,387

 
770,560

 
(551
)
 
(692,208
)
 
771,264

Effect of exchange rate changes on cash
—

 
—

 
—

 
174

 
—

 
174

Net change in cash and cash equivalents
—

 
—

 
163,569

 
8,958

 
—

 
172,527

Cash and cash equivalents - beginning of period
—

 
—

 
177,669

 
2,880

 
—

 
180,549

Cash and cash equivalents - end of period
$
—

 
$
—

 
$
341,238

 
$
11,838

 
$
—

 
$
353,076

 
 
 
 
 
 
 
 
 
 
 
 

124
Table of Contents

PINNACLE FOODS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share amounts and where noted in millions)


Pinnacle Foods Inc.
Condensed Consolidating Statement of Cash Flows
For the fiscal year ended December 27, 2015
  
Pinnacle
Foods
Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
and
Reclassifications
 
Consolidated
Total
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
—

 
$
(12,155
)
 
$
394,876

 
$
(9,810
)
 
$
—

 
$
372,911

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
 
Intercompany accounts receivable/payable
—

 
128,891

 
(14,400
)
 
—

 
(114,491
)
 
—

Repayments of intercompany loans
—

 
—

 
(801
)
 


 
801

 
—

Payments for business acquisition
—

 
—

 
1,102

 
—

 
—

 
1,102

Investment in subsidiary
111,486

 
—

 
—

 
—

 
(111,486
)
 
—

Capital expenditures
—

 
—

 
(101,353
)
 
(7,124
)
 
—

 
(108,477
)
Sale of plant assets held for sale
—

 
—

 
1,618

 
—

 
—

 
1,618

Net cash (used in) provided by investing activities
111,486

 
128,891

 
(113,834
)
 
(7,124
)
 
(225,176
)
 
(105,757
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of common stock
1,231

 
—

 
—

 
—

 
—

 
1,231

Excess tax benefits on stock-based compensation
1,442

 
—

 
—

 
—

 
—

 
1,442

Taxes paid related to net share settlement of equity awards
(2,401
)
 
—

 
—

 
—

 
—

 
(2,401
)
Dividends paid
(111,758
)
 
—

 
—

 
—

 
—

 
(111,758
)
Repayments of long-term obligations
—

 
(5,250
)
 
(3,620
)
 
—

 
—

 
(8,870
)
Proceeds from short-term borrowing
—

 
—

 
4,261

 
—

 
—

 
4,261

Repayments of short-term borrowing
—

 
—

 
(4,480
)
 
—

 
—

 
(4,480
)
Borrowings under revolving credit facility
—

 
—

 
—

 
—

 
—

 
—

Repayments of revolving credit facility
—

 
—

 
—

 
—

 
—

 
—

Intercompany accounts receivable/payable
—

 
—

 
(128,891
)
 
14,400

 
114,491

 
—

Return of Capital
—

 
(111,486
)
 
—

 
—

 
111,486

 
—

Repayments of intercompany loans
—

 
—

 
—

 
801

 
(801
)
 
—

Repayment of capital lease obligations
—

 
—

 
(3,585
)
 
—

 
—

 
(3,585
)
Purchase of stock for treasury


 
—

 
—

 
—

 
—

 
—

Debt acquisition costs
—

 
—

 
—

 
—

 
—

 
—

Net cash (used in) provided by financing activities
(111,486
)

(116,736
)

(136,315
)

15,201


225,176


(124,160
)
Effect of exchange rate changes on cash
—

 
—

 
—

 
(922
)
 
—

 
(922
)
Net change in cash and cash equivalents
—

 
—

 
144,727

 
(2,655
)
 
—

 
142,072

Cash and cash equivalents - beginning of period
—

 
—

 
32,942

 
5,535

 
—

 
38,477

Cash and cash equivalents - end of period
$
—

 
$
—

 
$
177,669

 
$
2,880

 
$
—

 
$
180,549

 
 
 
 
 
 
 
 
 
 
 
 


125
Table of Contents


ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.      CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in our reports that we file or submit under the Exchange Act (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, with the participation of our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objective of the disclosure controls and procedures are met. The design of any controls and procedures also is based on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017 . Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2017 at a level of reasonable assurance.

(b) Management's Annual Report on Internal Control Over Financial Reporting.

The management of Pinnacle Foods Inc. and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) and 15d-15(f). The Company's internal control system was designed to provide reasonable assurance to the Company's management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2017 . In making this assessment, management used the criteria established in  Internal Control - Integrated Framework (2013)  issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management believes that, as of December 31, 2017 , the Company's internal control over financial reporting is effective based on those criteria.


/s/ Mark Clouse
Mark Clouse
Chief Executive Officer

/s/ Craig Steeneck
Craig Steeneck
Executive Vice President and Chief Financial Officer

(c) Attestation Report of the Registered Public Accounting Firm.

The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.


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Table of Contents

(d) Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

   
ITEM 9B:    OTHER INFORMATION

Rule 10b5-1 Plans
Our policy governing transactions in our securities by our directors, officers and employees permits such persons to adopt stock trading plans pursuant to Rule 10b5-1 promulgated by the SEC under the Securities Exchange Act of 1934, as amended. Our directors, officers and employees have in the past and may from time to time establish such stock trading plans. We do not undertake any obligation to disclose, or to update or revise any disclosure regarding, any such plans and specifically do not undertake to disclose the adoption, amendment, termination or explanation of any such plans.

Annual Meeting Date

The Board of Directors of the Company has fixed the date of the Annual Meeting of Stockholders for May 30, 2018 .

PART III

ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item 10 will be included in our definitive Proxy Statement to be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.

See information on executive officers in Part I.


127
Table of Contents

ITEM 11.
EXECUTIVE COMPENSATION

Information required by this Item 11 will be included in our definitive Proxy Statement to be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this Item 12 will be included in our definitive Proxy Statement to be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Information required by this Item 13 will be included in our definitive Proxy Statement to be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this Item 14 will be included in our definitive Proxy Statement to be filed no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.

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PART IV

ITEM 15:     EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES

Financial Statements: The information required by this Item is contained in Item 8 of Part II of this Annual Report on Form
10-K.

Financial Statement Schedules: Schedule I - Condensed Financial Statements (Parent Company)

Exhibit Number
Exhibit Description
Filed Herewith
Incorporated by Reference from
Form
Exhibit
Filing Date
3.1
 
8-K
3.1
4/3/2013
3.2
 
8-K
3.1
2/16/2016
4.1
 
S-1/A
4.1
3/7/2013
4.2
 
8-K
4.1
4/30/2013
4.3
 
8-K
4.1
1/15/2016
4.4
 
8-K
4.2
1/15/2016
4.5
 
8-K
4.4
1/15/2016
4.6
 
10-Q
4.5
4/28/2016
10.1
 
8-K
10.1
4/30/2013
10.2
 
8-K
10.2
4/30/2013
10.3
 
8-K
10.1
10/1/2013
10.4
 
8-K
10.1
1/15/2016
10.5
 
10-K
10.5
2/23/2017
10.6
 
10-K
10.6
2/23/2017

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Table of Contents

10.7
 
8-K
10.1
2/3/2017
10.8
 
8-K
10.2
2/3/2017
10.9
 
S-4
4.10
12/21/2007
10.10
 
S-4
4.11
12/21/2007
10.11
 
S-1
10.7
11/26/2013
10.12
 
S-1
10.8
11/26/2013
10.13
 
8-K
2.1
11/14/2014
10.14
 
8-K
2.1
11/24/2015
10.15*
 
10-K
10.42
3/5/2013
10.16*
 
DEF 14A
 
4/14/2016
10.17*
 
8-K
10.3
4/3/2013
10.18*
 
10-Q
10.7
5/15/2013
10.19*
 
S-1/A
10.45
3/7/2013
10.20*
 
S-1/A
10.46
3/7/2013
10.21
 
10-K
10.33
3/27/2006
10.22
 
S-4
10.27
8/20/2004
10.23
 
S-4
10.28
8/20/2004
10.24
 
S-4
10.21
12/21/2007
10.25
 
10-Q
10.1
5/9/2012
10.26
 
S-4
10.29
8/20/2004
10.27*
 
S-4
10.19
12/21/2007

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Table of Contents

10.28*
 
S-4
10.20
12/21/2007
10.29*
 
10-K
10.27
3/3/2009
10.30
 
10-Q
10.40
8/9/2010
10.31
 
10-Q
10.45
5/11/2011
10.32
 
10-K
10.27
2/25/2016
10.33
 
10-K
10.28
2/25/2016
10.34
 
10-K
10.29
2/25/2016
10.35*
 
10-K
10.42
3/5/2013
10.36*
 
10-Q
10.2
11/13/2013
10.37*
 
10-Q
10.1
11/13/2013
10.38*
 
10-Q
10.3
5/14/2014
10.39*
 
10-Q
10.1
4/30/2015
10.40
 
10-K
10.40
3/6/2014
10.41*
 
10-Q
10.3
7/28/2016
10.42*
 
10-Q
10.4
7/28/2016
10.43*
 
10-Q
10.5
7/28/2016
10.44*
 
10-Q
10.6
7/28/2016
10.45*
 
10-Q
10.7
7/28/2016
10.46*
 
10-Q
10.8
7/28/2016
10.47*
 
10-Q
10.9
7/28/2016
10.48
 
8-K
10.1
7/29/2014
12.1
X
 
 
 
21.1
X
 
 
 
23.1
X
 
 
 
31.1
X
 
 
 
31.2
X
 
 
 
32.1**
X
 
 
 
32.2**
X
 
 
 

131
Table of Contents

101.1
The following materials are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Earnings, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Member’s Equity, (vi) Notes to Consolidated Financial Statements, and (vii) document and entity information.
X
 
 
 

*Identifies exhibits that consist of a management contract or compensatory plan or arrangement.
**This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.




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Table of Contents

ITEM 16:     FORM 10-K SUMMARY    

None.

PARENT COMPANY INFORMATION
PINNACLE FOODS INC
SCHEDULE I - CONDENSED FINANCIAL STATEMENTS
(thousands of dollars)

STATEMENTS OF OPERATIONS

  
 
Fiscal year ended
 
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
 
53 weeks
 
52 weeks
 
52 weeks
Equity in earnings of investees
 
532,049

 
211,117

 
212,508

Earnings before interest and taxes
 
532,049

 
211,117


212,508

Provision for income taxes
 
—

 
—

 
—

Net earnings
 
$
532,049

 
$
211,117

 
$
212,508

Comprehensive earnings
 
$
553,368

 
$
218,936

 
$
190,854


 
BALANCE SHEETS
 
 
December 31, 2017
 
December 25, 2016
Current Assets:
 
 
 
 
Due from subsidiaries
 
102,335

 
96,923

    Total current assets
 
102,335

 
96,923

Non current assets:
 
 
 
 
Investment in subsidiaries
 
2,317,445

 
1,886,496

    Total assets
 
$
2,419,780

 
$
1,983,419

 
 
 
 
 
Current liabilities:
 
 
 
 
Accrued liabilities
 
178

 
178

Dividends payable
 
40,470

 
35,233

Total liabilities
 
$
40,648

 
$
35,411

 
 
 
 
 
Commitment and contingencies:
 

 

Shareholders' equity
 
2,379,132

 
1,948,008

Total liabilities and shareholders’s equity
 
$
2,419,780

 
$
1,983,419



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Table of Contents

STATEMENTS OF CASH FLOWS

  
Fiscal year ended
  
December 31, 2017
 
December 26, 2016
 
December 27, 2015
 
53 weeks
 
52 weeks
 
52 weeks
Cash flows from operating activities
 
 
 
 
 
Net earnings
$
532,049

 
$
211,117

 
$
212,508

Non-cash credits to net earnings
 
 
 
 
 
Deferred taxes
—

 
—

 
—

Equity in earnings of investees
(532,049
)
 
(211,117
)
 
(212,508
)
Net cash provided by operating activities
—

 
—

 
—

 
 
 
 
 
 
Cash flows from investing activities
 
 
 
 
 
Reduction in investment in subsidiaries
135,879

 
85,924

 
111,486

Net cash provided by investing activities
135,879

 
85,924

 
111,486

 
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
 
Equity contributions
15,097

 
26,436

 
1,231

Dividends paid
(140,738
)
 
(122,850
)
 
(111,758
)
Excess tax benefits on stock-based compensation
—

 
11,577

 
1,442

Taxes paid related to net share settlement of equity awards
(10,238
)
 
(1,087
)
 
(2,401
)
Net cash used by financing activities
(135,879
)
 
(85,924
)
 
(111,486
)
 
 
 
 
 
 
Cash and cash equivalents - beginning of period
—

 
—

 
—

Cash and cash equivalents - end of period
$
—

 
$
—

 
$
—


See notes to Consolidated Financial Statements of Pinnacle Foods Inc.


PINNACLE FOODS INC.
SCHEDULE I - NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE A - BASIS OF PRESENTATION

Pinnacle Foods Inc. (the “Company”) is a holding company whose sole asset is 100% ownership of Peak Finance Holdings LLC (“PFH”). PFH is a holding company whose sole asset is 100% ownership of Pinnacle Foods Finance LLC (“PFF”). As specified in PFF’s debt agreements, there are restrictions on the Company’s ability to obtain funds from its subsidiary through dividends, loans or advances. Accordingly, these condensed financial statements have been prepared on a “parent-only” basis. Under a parent-only presentation, the Company’s investments in its consolidated subsidiaries are presented under the equity method of accounting. The Company has no material contingencies, long-term obligations or guarantees, except as described in Note 18 to the Consolidated Financial Statements, Guarantor and Nonguarantor Statements. This parent-only financial statements should be read in conjunction with Pinnacle Foods Inc.’s audited Consolidated Financial Statements included elsewhere herein.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, in the City of Parsippany, New Jersey, on March 1, 2018 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 

PINNACLE FOODS INC.

By:
/s/ Craig Steeneck
Name:
Craig Steeneck
Title:
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
Date:
March 1, 2018










































135
Table of Contents

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name
Title
Date
 
 
 
/s/ Mark Clouse
Chief Executive Officer and Director
March 1, 2018
By: Mark Clouse
(Principal Executive Officer)
 
 
 
 
/s/ Craig Steeneck
Executive Vice President and Chief Financial Officer
March 1, 2018
By: Craig Steeneck
(Principal Financial Officer and
Principal Accounting Officer)
 
 
 
 
/s/ Roger Deromedi
Chairman of the Board and Director
March 1, 2018
By: Roger Deromedi
 
 
 
 
 
/s/ Ann Fandozzi
Director
March 1, 2018
By: Ann Fandozzi
 
 
 
 
 
/s/ Yannis Skoufalos
Director
March 1, 2018
By: Yannis Skoufalos
 
 
 
 
 
/s/ Mark A. Jung
Director
March 1, 2018
By: Mark A. Jung
 
 
 
 
 
/s/ Jane Nielsen
Director
March 1, 2018
By: Jane Nielsen
 
 
 
 
 
/s/ Muktesh Pant
Director
March 1, 2018
By: Muktesh Pant
 
 
 
 
 
/s/ Raymond P. Silcock
Director
March 1, 2018
By: Raymond P. Silcock
 
 

136


Exhibit 12.1


COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
 
 
 
 
 
 
 
 
 
 
 
Fiscal Year ended
 
Fiscal Year ended
 
Fiscal Year ended
 
Fiscal Year ended
 
Fiscal Year ended
 
December 31, 2017
 
December 25, 2016
 
December 27, 2015
 
December 28, 2014
 
December 29, 2013
 
 
 
 
 
 
 
 
 
 
Fixed charges as defined:
 
 
 
 
 
 
 
 
 
Interest expense
$
169,587

 
$
139,243

 
$
88,513

 
$
96,174

 
$
132,354

One-third of non-cancelable lease rent
8,235

 
6,604

 
5,101

 
4,699

 
4,317

 
 
 
 
 
 
 
 
 
 
Total fixed charges (A)
$
177,822

 
$
145,847

 
$
93,614

 
$
100,873

 
$
136,671

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings as defined:
 
 
 
 
 
 
 
 
 
Earnings before income taxes
$
279,222

 
$
340,547

 
$
336,387

 
$
416,218

 
$
160,824

Add fixed charges
177,822

 
145,847

 
93,614

 
100,873

 
136,671

 
 
 
 
 
 
 
 
 
 
Earnings and fixed charges (B)
$
457,044

 
$
486,394

 
$
430,001

 
$
517,091

 
$
297,495

 


 


 
 
 
 
 
 
Ratio of earnings to fixed charges: (B/A)
2.57x

 
3.33x

 
4.59x

 
5.13x

 
2.18x







Exhibit 21.1

List of Subsidiaries (as of March 1, 2018)
 
Subsidiary
  
Jurisdiction
  
Owner
  
Percentage Owner
 
 
Pinnacle Foods Finance LLC
  
Delaware
  
Peak Finance Holdings LLC
  
100
%
 
Pinnacle Foods Group LLC
  
Delaware
  
Pinnacle Foods Finance LLC
  
100
%
 
Pinnacle Foods Finance Corp.
  
Delaware
  
Pinnacle Foods Finance LLC
  
100
%
 
Pinnacle Foods International Corp.
  
Delaware
  
Pinnacle Foods Group LLC
  
100
%
 
Pinnacle Foods Canada Corporation
  
Ontario
  
Pinnacle Foods International Corp.
  
100
%
 
Birds Eye Foods, Inc.
  
Delaware
  
Pinnacle Foods Group LLC
  
100
%
 
Avian Holdings LLC
  
Delaware
  
Birds Eye Foods, Inc.
  
100
%
 
Birds Eye Foods LLC
  
Delaware
  
Avian Holdings LLC
  
100
%
 
Kennedy Endeavors, Incorporated
  
Washington
  
Birds Eye Foods LLC
  
100
%
 
Seasonal Employers, Inc.
  
New York
  
Birds Eye Foods LLC
  
100
%
 
Curtice Burns Foods of Canada Limited
  
Ontario
  
Birds Eye Foods LLC
  
100
%
 
GLK Holdings, Inc.
  
Delaware
  
Birds Eye Foods LLC
  
100
%
 
GLK, LLC
  
New York
  
Birds Eye Foods LLC
  
55.6
%
 
GLK, LLC
  
New York
  
GLK Holdings, Inc.
  
44.4
%
 
Pinnacle Foods Fort Madison LLC
  
Delaware
  
Pinnacle Foods Group LLC
  
100
%
 
Garden Protein International Inc.
  
British Columbia
  
Pinnacle Foods Canada Corporation
  
100
%
 
Boulder Brands, Inc.
 
Delaware
 
Pinnacle Foods Group LLC
 
100
%
 
Boulder Brands USA, Inc.
 
Delaware
 
Boulder Brands, Inc.
 
100
%
 
Boulder Brands Investment Group, LLC
 
Delaware
 
Boulder Brands USA, Inc.
 
80
%
 
Boulder Brands UK Ltd.
 
England and Wales
 
Boulder Brands USA, Inc.
 
100
%
 
Importations DE-ROM-MA (1983) Ltee
 
Quebec, Canada
 
Boulder Brands USA, Inc.
 
100
%





                            
Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statements No. 333-187774 on Form S-8 and No. 333-198640 on Form S-3 of our reports dated March 1, 2018, relating to the consolidated financial statements and financial statement schedule of Pinnacle Foods Inc. and subsidiaries (the “Company”), and the effectiveness of the Company’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2017.

/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 1, 2018






Exhibit 31.1
CERTIFICATION
I, Mark Clouse, certify that:

1.
I have reviewed this annual report on Form 10-K of Pinnacle Foods Inc. (the “Registrant”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.
The Registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5.
The Registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
 
Date:
 
March 1, 2018
 
 
 
 
 
/s/ MARK CLOUSE
 
 
 
 
 
Mark Clouse
 
 
Chief Executive Officer






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

Date:
 
March 1, 2018
 
 
 
 
 
/s/ CRAIG STEENECK
 
 
 
 
 
Craig Steeneck
 
 
Executive Vice President and Chief Financial Officer






Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Pinnacle Foods Inc. (the “Registrant”) on Form 10-K for the fiscal year ended December 31, 2017 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark Clouse, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date:
 
March 1, 2018
 
 
 
 
 
/s/ MARK CLOUSE
 
 
 
 
 
Mark Clouse
 
 
Chief Executive Officer






Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Pinnacle Foods Inc. (the “Registrant”) on Form 10-K for the fiscal year ended December 31, 2017 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Craig Steeneck, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date:
 
March 1, 2018
 
 
 
 
 
/s/ CRAIG STEENECK
 
 
 
 
 
Craig Steeneck
 
 
Executive Vice President and Chief Financial Officer