Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-K, Received: 02/28/2017 19:42:02)

Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
[   ]
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 0-398
SNYDERSLANCELOGONEWA09.JPG
SNYDER’S-LANCE, INC.
(Exact name of Registrant as specified in its charter)
North Carolina
 
56-0292920
(State of incorporation)
 
(I.R.S. Employer Identification Number)
13515 Ballantyne Corporate Place, Charlotte, North Carolina 28277
(Address of principal executive offices) (zip code)
Post Office Box 32368, Charlotte, North Carolina 28232-2368
(Mailing address of principal executive offices) (zip code)
Registrant’s telephone number, including area code:     (704) 554-1421
Securities Registered Pursuant to Section 12(b) of the Act: 
Title of Each Class
 
Name of Each Exchange on Which Registered
$0.83-1/3 Par Value Common Stock
 
The NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act:   NONE
Indicate by checkmark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by checkmark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
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 þ   No o
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 þ   No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check One):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company   o  
 
 
 
 
(do not check if a smaller reporting company)
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of shares of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of voting or nonvoting common equity, held by non-affiliates as of July 1, 2016 , the last business day of the Registrant’s most recently completed second fiscal quarter, was $2,530,743,572 .
The number of shares outstanding of the Registrant’s $0.83-1/3 par value Common Stock, its only outstanding class of Common Stock, as of February 21, 2017 , was 96,313,948 shares.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on May 3, 2017 are incorporated by reference into Part III of this Form 10-K.
 



Table of Contents

FORM 10-K
TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
 
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
 
 
Item 9
Item 9A
Item 9B
 
 
 
 
 
Item 10
Directors, Executive Officers and Corporate Governance
 
Item 11
Executive Compensation
 
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13
Certain Relationships and Related Transactions and Director Independence
 
Item 14
Principal Accountant Fees and Services
 
 
 
 
 
 
Item 15
Item 16
 
 
 
 
Exhibit 12
Ratio of Earnings to Fixed Charges
 
Exhibit 21
Subsidiaries of Snyder’s-Lance, Inc.
 
Exhibit 23.1
Consent of PricewaterhouseCoopers LLP
 
Exhibit 31.1
Section 302 Certification of the CEO
 
Exhibit 31.2
Section 302 Certification of the CFO
 
Exhibit 32
Section 906 Certification of the CEO and CFO
 
Note: Items 10-14 of Part III are incorporated by reference to the Proxy Statement and the Executive Officers of the Company is included in Part I of this annual report.



Table of Contents


PART I
Cautionary Information About Forward-Looking Statements
This document includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, beliefs, intentions or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” "continues," "could," "designed," “estimates,” “expects,” “forecasts,” "goal," "initiate," "intends," “may,” “objective,” "plan," "potential," "pursue," "should," "target," "will," "would," or the negative of any of these words or similar expressions to identify our forward-looking statements that represent our judgment about possible future events. In making these statements we rely on assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments as well as other factors we consider appropriate under the circumstances. We believe these judgments are reasonable, but these statements are not guarantees of any events or financial results, and our actual results may differ materially due to a variety of important factors, both positive and negative. Factors that could cause these differences include, but are not limited to, the factors set forth under Part I, Item 1A - Risk Factors.

Caution should be taken not to place undue reliance on our forward-looking statements, which reflect the expectations of management only as of the time such statements are made. Except as required by law, we undertake no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Item 1.  Business
General
Snyder's-Lance, Inc., a North Carolina corporation incorporated in 1926, is a branded snack food company with operations in North America and Europe. Our brands include Snyder’s of Hanover ® , the market share leader in the pretzel category in the United States ("US"), and Lance ® , which is the number one ranked sandwich cracker in the US, as well as Cape Cod ® kettle cooked chips and Kettle Brand ® potato chips, which combined make us the market leader in the kettle chips category in the US. In addition, Snack Factory ® Pretzel Crisps ® and Pop Secret ® popcorn currently rank second in the US in their respective categories and Late July ® is the number one organic and non-genetically modified organism ("non-GMO") tortilla chip in the US. These products demonstrate our successful history of providing irresistible, high-quality snacks dating back over 100 years.

Snyder’s-Lance, Inc. is headquartered in Charlotte, North Carolina. References to “Snyder’s-Lance,” the “Company,” “we,” “us” or “our” refer to Snyder’s-Lance, Inc. and its subsidiaries, as the context requires.

Recent Acquisitions and Divestiture
In recent years, we have acquired several companies and brands as we seek future growth both organically as well as through acquisitions.

In October of 2012, we completed the acquisition of Snack Factory, LLC and certain of its affiliates ("Snack Factory"), which added a Core brand to our portfolio, Snack Factory ® Pretzel Crisps ® . The Snack Factory ® brand is known for its innovative flavor profiles, commitment to providing the highest-quality ingredients and a broadening base of passionate consumers. In June of 2014, we completed the acquisition of Baptista’s Bakery, Inc. ("Baptista's"), which is the sole manufacturer of our Snack Factory ® Pretzel Crisps ® products. In addition, Baptista's is an industry leader in the development, innovation and manufacturing of highly-differentiated snack foods, including organic, non-GMO, all natural and gluten-free products. In October of 2014, we made an additional investment in Late July Snacks, LLC ("Late July") which increased our total ownership interest to 80%. Late July is a leader in organic and non-GMO salty snacks and the investment supports our goal of having a stronger presence in "better-for-you" snacks.

On February 29, 2016, we completed the acquisition of all of the outstanding stock of Diamond Foods, Inc. ("Diamond Foods"). The strategic combination of Snyder's-Lance and Diamond Foods brought together two established companies with strong brands, and created an innovative, highly complementary and diversified portfolio of branded snacks. Diamond Foods was a leading snack food company with five brands, including: Kettle Brand ® potato chips; KETTLE ® Chips; Pop Secret ® popcorn; Emerald ® snack nuts; and Diamond of California ® culinary nuts. The transaction expanded our footprint in "better-for-you" snacking, and increased our existing natural food channel presence. In addition, this transaction expanded and strengthened our distribution network in the US, and will provide us with a platform for growth in the United Kingdom ("U.K.") and certain other countries within Europe. We are now even better positioned in the growing snack food industry, and we continue to see significant opportunities for both cost and revenue synergies, which we expect will enable us to deliver earnings accretion, and support further investment behind our brands. The integration of Diamond Foods is on track as we continue to achieve key milestones following the close of the acquisition.

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On September 1, 2016, we completed the acquisition of Metcalfe's Skinny Limited ("Metcalfe") by acquiring the remaining 74% interest. Metcalfe owns the U.K.'s leading premium ready-to-eat ("RTE") popcorn brand, and also incorporates a fast growing range of corn and rice cake products. The U.K. popcorn market is one of the fastest growing categories within the U.K. snack food industry, as consumers increasingly seek out "better-for-you" snacking options. The addition of a leading premium RTE popcorn brand, Metcalfe's skinny ® , to the U.K.'s leading premium chip brand, KETTLE ® Chips, reflects our plan to become a leading provider of premium snack foods in Europe.

On December 31, 2016, we completed the carve-out and sale of our culinary nuts business (comprised primarily of the Diamond of California ® brand, and the Stockton, CA facility; collectively "Diamond of California"). We had previously entered the culinary nuts business as a result of the Diamond Foods acquisition. This divestiture aligns with our strategy to focus more resources on growth opportunities for our snack food brands.
Products
We are engaged in the manufacturing, distribution, marketing and sale of snack food products. These products include pretzels, sandwich crackers, kettle cooked chips, pretzel crackers, cookies, potato chips, tortilla chips, restaurant style crackers, popcorn, nuts and other salty snacks. Our products are packaged in various single-serve, multi-pack, family-size and party-size configurations. Our branded products are principally sold under trademarks owned by us. While the majority of our branded products are manufactured by us, certain branded products are contract manufactured, due to required expertise, ingredients or equipment, or increased demand.

We also sell Partner brand products, which consist of third-party branded products that we sell to our independent business owners ("IBO") through our national direct-store-delivery distribution network ("DSD network"), in order to broaden the portfolio of product offerings for our IBOs. In addition, we contract with other branded food manufacturers to produce their products and periodically sell certain semi-finished goods to other manufacturers.
Overall sales of our products are relatively consistent throughout the year, although demand for certain products may be influenced by holidays, changes in seasons, or other annual events. In 2016 , Branded products represented approximately 78% of net revenue from continuing operations, while Partner brand and Other products represented approximately 14% and 8% of net revenue, respectively. In 2015 , Branded products represented approximately 72% of net revenue, while net revenue from Partner brand and Other products represented approximately 18% and 10% , respectively. In 2014 , Branded products represented 71% of net revenue, while net revenue from Partner brand and Other products represented 19% and 10% , respectively. While Partner brands will continue to be a significant component of net revenue and an important focus within our business strategy, the acquisition of Diamond Foods resulted in additional revenue primarily within the Branded product category.
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Intellectual Property
Trademarks that are important to our business are protected by registration or other means in the US and most other international markets where the related products are sold. We own various registered trademarks for use with our Branded products, including: Snyder’s of Hanover ® ; Lance ® ; Cape Cod ® ; Snack Factory ® Pretzel Crisps ® ; Pop Secret ® ; Emerald ® ; Kettle Brand ® ; KETTLE ® Chips; and Late July ® (collectively, "Core" brands), and Metcalfe’s skinny ® ; Tom’s ® ; Archway ® ; Jays ® ; Stella D’oro ® ; Eatsmart Snacks TM ; Krunchers! ® ; and O-Ke-Doke ® (collectively, "Allied" brands) as well as a variety of other marks and designs. On a limited basis, we license trademarks for use on certain products that are classified as Branded products. Solely for convenience, trademarks and trade names referred to in this Annual Report on Form 10-K may appear without the ® or symbols, but references are not intended to indicate, in any way, that we will not assert our rights to these trademarks and trade names to the fullest extent under applicable law.

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Overall Strategy
Our goal is to change the way the world snacks with better ingredients, quality and taste, as we introduce new products and enter new categories, in order to reach more consumers and broaden our customer base. As we grow, we will remain focused on delivering margin expansion, through the attainment of expected cost synergies and ongoing enterprise wide cost reduction efforts. We expect our growth will be a result of organic investments in our research and development capabilities, and inorganic growth through strategic acquisitions. During 2017, our goal is to invest in key strategic areas to bolster our product portfolio positioning and gain market share. These investments will include research and development, innovation, advertising, and retail activation.

Our strategy is built around five key strategic initiatives:

Build premium, differentiated brands - We are focused on premium and differentiated positioning for our brands, and ensuring that we provide value in the competitive snack food marketplace. Our goal is to offer something unique and fun to our consumers. We execute this goal through continuous product innovation by leveraging our research and development capabilities, with support from our marketing and advertising initiatives. In addition, we are consistently evaluating our portfolio for opportunities to reinvigorate our iconic brands to remain ahead of consumer trends. Our recent focus has been leveraging our innovation capabilities to expand the breadth of our “better-for-you” offerings. We finished the year with over 30% of our retail sales coming from products with "better-for-you" defined attributes, and we expect this to increase in 2017.

Continuously expand retail distribution - We continuously focus on expanding our distribution to reach more consumers. We support our growth through our DSD network, direct to warehouse network, and through exports to international markets. Our DSD network is supported by our IBO business partners. In order to better leverage our DSD network, we also distribute third-party Partner brand products that provide efficiencies through increased scale.

Lead with quality - Our core DNA is making sure that we provide the very best quality in all of our products - day in and day out. We believe that quality can be a competitive advantage, and our organization strives to deliver products with the finest ingredients. We will continue to invest in our quality assurance capabilities to ensure that we meet our consumers and retail partners’ expectations. Delivering on this commitment will enable us to continuously enhance our value proposition and continue to build further brand loyalty. We believe our market-leading share positions are a testament to this strategic focus.



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Fund the future - In order to balance our investments to drive consistent organic growth, while also delivering greater shareholder value, our team is grounded in a culture of continuous improvement designed to drive productivity, reduce costs, and expand margins, to increase returns on invested capital. At Snyder's-Lance, we continuously challenge ourselves to be efficient, productive and to do our best to drive non-value added costs out of the business. This mantra throughout our entire organization drives a core belief that by achieving these goals we will better position our Company for sustainable, long-term growth, while also driving increased shareholder value.

Invest in our people - We are focused on attracting, engaging, and growing our talent. We demonstrate our passion for our people by delivering programs and initiatives to support their personal and professional development, while also striving to recruit world-class talent to better enable our Company to execute on its long-term strategic plan. In addition, we have a pay-for-performance culture, where the organization is incentivized to deliver annual and long-term results that align with our goal of creating value for our shareholders. We believe that this philosophy encourages a culture of discipline and operational excellence, which benefits our stakeholders.
Research and Development
We consider research and development of new products to be a significant part of our overall strategy, and are committed to developing innovative, high-quality products that exceed consumer expectations. A team of professional product developers, including microbiologists, food scientists and culinary experts, work in collaboration with innovation, marketing, manufacturing and sales leaders, to develop products that meet changing consumer demands. Our research and development staff incorporates product ideas from all areas of our business in order to formulate new products. In addition to developing new products, the research and development staff routinely reformulates and improves existing products based on advances in ingredients and technology, and conducts value engineering to maintain competitive price points. We own a 60,000 square foot Research and Development Center in Hanover, Pennsylvania, where we conduct much of our research and development. In addition, we have a research and development facility adjacent to our production facility in Salem, Oregon. Our research and development costs were approximately $10.0 million , $6.2 million and $7.6 million in 2016 , 2015 and 2014 , respectively.

Marketing
Our marketing efforts are focused on building long-term brand equity through effective consumer marketing. In addition to volume building trade promotions to market our products, our advertising efforts utilize television, radio, print, digital, mobile and social media aimed at increasing consumer preference and usage of our brands. We also use consumer promotions, sponsorships and partnerships which include free trial offers, targeted coupons and on-package offers to generate trial usage and increase purchase frequency.  These marketing efforts are an integral part of our overall strategy to grow our brands and reach more consumers in order to enhance our position as a provider of premium, differentiated snacks.
We work with third-party information agencies, such as Information Resources, Inc. ("IRI"), Nielsen and other syndicated market data providers, to monitor the effectiveness of our marketing and measure product growth. All information regarding our brand market positions in the US included in this Annual Report on Form 10-K is from IRI and is based on retail dollar sales.
Distribution
We distribute snack food products throughout the US using our DSD network. Our DSD network is made up of approximately 3,200 routes that are primarily owned and operated by IBOs. We also ship products directly to third-party distributors in areas where our DSD network does not operate. Through our direct distribution network, we distribute products directly to retail customers or to third-party distributors using freight carriers or our own transportation fleet. In Europe, we sell our salty snack products through our sales personnel directly to national grocery, co-op and impulse store chains. In 2016 , approximately 56% of net revenue was generated by products distributed through our DSD network while the remaining 44% was generated by products distributed through our direct distribution network. As a result of the acquisition of Diamond Foods, the percentage of our net revenue generated by products distributed through our direct distribution network has increased.

In order to maintain and expand our DSD network, we routinely participate in certain ongoing route business purchase and sales activities. These activities include the following:
Acquisition of regional distributor businesses - As we expand our DSD network, we continue to look for potential regional distributor business acquisition targets in areas where we do not currently have our own DSD network. Upon acquisition, the acquired routes may be reengineered to include our products and retail locations and are then sold to a new or current IBO, as described below.


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Reengineering of zones - Periodically, we undertake a route reengineering project for a particular geography or zone. The reasons for route reengineering projects vary, but are typically due to increased sales volume associated with new retail locations and/or the addition of new Branded or Partner brand products to the routes in that zone. In these cases, we repurchase all of the IBO route businesses in that zone. The repurchased route businesses are then reengineered, which normally results in the addition of new IBO route territories because of the additional volume. Route businesses are then resold, usually to the original IBO, however, the original IBO has no obligation to repurchase. Upon completion, these route reengineering projects usually result in modest net gains on the sale of route businesses due to the value added during the reengineering through additional volume and/or retail locations.
Sale of company-owned routes - Some routes remain company-owned primarily because they need additional sales volume in order to become sustainable route businesses for IBOs. As we build up the volume on these routes through increased distribution of our Branded and Partner brand products, we may sell these route businesses to IBOs which could result in gains.
IBO defaults - There are times when IBO route businesses are not successful and the IBO's distributor agreement with us is terminated due to a breach of the distributor agreement or default under the loan agreement. In these instances, if the existing IBO is unable to sell the route business to another third party, we may repurchase the route business at a price defined in the distributor agreement. We generally put the repurchased route business up for sale to another third-party IBO immediately. The subsequent sales transaction generally results in a nominal gain or loss.
Capital Expenditures
We have invested significant capital in our facilities to ensure sufficient capacity, efficient production, effective use of technology, excellent quality, and a positive working environment for our associates. In 2016 , 2015 and 2014 , we had capital expenditures of $73.3 million , $51.5 million and $72.1 million , respectively. For 2017 , we expect capital expenditures of approximately $90 million to $100 million . The planned increase in capital expenditures for 2017 is to upgrade equipment, increase capacity at our manufacturing facilities, and relocate the production of one of our branded products.
Customers
Through our DSD network, we sell our Branded and Partner brand products to IBOs that, in turn, sell to grocery/mass merchandisers, club stores, discount stores, convenience stores, food service establishments and various other retail customers, including drug stores, schools, military and government facilities and “up and down the street” outlets such as recreational facilities, offices and other independent retailers. In addition, we sell our Branded products directly to retail customers and third-party distributors, both in the US and abroad. We also contract with other branded food manufacturers to produce their products or provide semi-finished goods.

Substantially all of our revenue is from sales to customers in the US. Sales to our largest retail customer, Wal-Mart Stores, Inc. ("Wal-Mart"), either through IBOs or our direct distribution network, were approximately 13% of net revenue in 2016 and 13% and 14% of net revenue for 2015 and 2014 , respectively. Our sales to Wal-Mart do not include sales of our products made to Wal-Mart by third-party distributors outside of our DSD network. Sales to these third-party distributors represent approximately 5% of our net revenue and may increase sales of our products to Wal-Mart by an amount we are unable to estimate. Our top ten retail customers accounted for approximately 52% of our net revenue during 2016 , excluding sales of our products made by third-party distributors, both in the US and abroad, who are outside our DSD network.
Raw Materials
The principal raw materials used to manufacture our products are flour, potatoes, oil, peanuts, other nuts, corn, sugar, chocolate, cheese and seasonings. The principal packaging supplies used are flexible film, cartons, trays, boxes and bags. These raw materials and supplies are normally available in adequate quantities in the commercial market and are generally contracted from three to twelve months in advance, depending on market conditions.
Competition and Industry
Our products are sold in highly competitive markets. Generally, we compete with companies engaged in the manufacturing, distribution, marketing and sale of snack food products, some of which have greater revenue and resources than we do. The principal methods of competition are price, service, product quality, product offerings and distribution. The methods of competition and our competitive position vary according to the geographic location, the particular product categories and the activities of our competitors.

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Environmental Matters
Our operations are subject to various federal, state and local laws and regulations with respect to environmental matters. We are not a party to any material proceedings arising under these laws or regulations for the periods covered by this Annual Report on Form 10-K. We believe we are in compliance with all material environmental regulations affecting our facilities and operations and that continued compliance will not have a material impact on our capital expenditures, earnings or competitive position.

Sustainability
We are committed to reducing the impact that our products and operations have on the environment. We work to minimize our environmental impact by implementing more sustainable business operations and doing more with less, as we remain committed to being a responsible corporate citizen. Several of our manufacturing sites use solar or wind energy to generate the power needed to make our snacks. At our bakery in Hanover, Pennsylvania, we own a solar farm that produces 3.5 megawatts of electricity that supplies 100% of the power needed at our research and development center on site as well as approximately 30% of the power used by the bakery for production during the day. Our kettle chip plant in Salem, Oregon captures solar energy using solar panels on the roof and is one of the largest solar installations in the northwest. The kettle chip plant in Beloit, Wisconsin, which was the first LEED Gold Certified food manufacturing plant in the US, uses wind turbines to offset utility usage from the local power plant. In addition, our Supply Chain team has implemented improved recycling initiatives across the organization that now bring at least 25% of our manufacturing plants, including all of our pretzel bakeries, to landfill-free status. At our chip producing plants, we recycle the oil used in kettle chip production to vendors that convert it to biodiesel for use in many other applications.
Employees
As of December 31, 2016, we had approximately 6,100 active employees located in the US and U.K. compared to approximately 5,000 active employees in the US, as of January 2, 2016. None of our employees are covered by a collective bargaining agreement.
Available Information
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, amendments to these reports, and exhibits are available on our Investor Relations website free of charge at www.snyderslance.com. All required reports are made available on the website as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission.
Item 1A.  Risk Factors
In addition to the other information in this Annual Report on Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition or results of operations may be adversely affected by any of these risks. Additional risks and uncertainties, including risks that we do not presently know of or currently deem insignificant, may also impair our business, financial condition or results of operations.

Risks related to our business
Our performance may be impacted by general economic conditions or an economic downturn.
An overall decline in economic activity could adversely impact our business and financial results. Economic uncertainty may reduce consumer spending as consumers make decisions on what to include in their food budgets. This could also result in a shift in consumer preference toward private label products. Shifts in consumer spending could result in increased pressure from competitors or customers that may require us to increase promotional spending or reduce the prices of some of our products and/or limit our ability to increase or maintain prices, which could lower our revenue and profitability.
Instability in financial markets may impact our ability, or increase the cost, to enter into new credit agreements in the future. Additionally, it may weaken the ability of our customers, suppliers, IBOs, third-party distributors, banks, insurance companies and other business partners to perform their obligations in the normal course of business, which could expose us to losses or disrupt the supply of inputs we rely upon to conduct our business. If one or more of our key business partners fail to perform as expected or contracted for any reason, our business could be negatively impacted.
Volatility in the price or availability of the inputs we depend on, including raw materials, packaging, energy and labor, could adversely impact our financial results.
Our financial results could be adversely impacted by changes in the cost or availability of raw materials and packaging. While we often obtain substantial commitments for future delivery of certain raw materials, continued long-term increases in the costs of raw materials and packaging, including but not limited to cost increases due to the tightening of supply, could adversely affect our financial results.

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Our transportation and logistics system is dependent upon gasoline and diesel fuel, and our manufacturing operations depend on natural gas. While we may enter into forward purchase contracts to reduce the volatility associated with some of these costs, continued long-term changes in the cost or availability of these energy sources could adversely impact our financial results.
Our continued growth requires us to hire, retain and develop a highly skilled workforce and talented management team. Our financial results could be adversely affected by increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs.
We operate in the highly competitive food industry.
Price competition and industry consolidation could adversely impact our financial results. The sales of most of our products are subject to significant competition primarily through promotional discounting and other price cutting techniques by competitors, some of whom are significantly larger with greater resources. In addition, there is continuing consolidation in the snack food industry and in retail outlets for snack foods, either of which could increase competition. Significant competition increases the possibility that we could lose one or more major customers, lose existing product authorizations at customer locations, lose market share and/or shelf space, increase expenditures or reduce selling prices, which could have an adverse impact on our business or financial results.

Price increases for our products that we initiate may negatively impact our financial results if not properly implemented or accepted by our customers. Future price increases, such as those made in order to offset increased input costs, may reduce our overall sales volume, which could reduce our revenue and operating profit. We may be unable to implement price increases driven by higher input costs on a timely basis or at all, either of which may reduce our operating profit. Additionally, if market prices for certain inputs decline significantly below the prices we are required by contract to pay, customer pressure to reduce the prices for our products could lower our revenue and operating profit.
Changes in our top retail customer relationships could impact our revenue and profitability.
We are exposed to risks resulting from several large retail customers that account for a significant portion of our revenue. Our top ten retail customers accounted for approximately 52% of our net revenue during 2016 , excluding sales of our products made by third-party distributors who are outside of our DSD network, with our largest retail customer, Wal-Mart, representing approximately 13% of our 2016 and 2015 net revenue. The loss of one or more of our large retail customers could adversely affect our financial results. These customers typically make purchase decisions based on a combination of price, service, product quality, product offerings, consumer demand, as well as distribution capabilities and generally do not enter into long-term contracts. In addition, these significant retail customers may change their business practices related to inventories, product displays, logistics or other aspects of the customer-supplier relationship. Our results of operations could be adversely affected if revenue from one or more of these customers is significantly reduced or if the cost of complying with customers’ demands is significant. If receivables from one or more of these customers become uncollectible, our financial results may be adversely impacted.
We may be unable to maintain our profitability in the face of a consolidating retail environment.
As the retail grocery industry continues to consolidate and our retail customers grow larger and become more sophisticated, our retail customers may demand lower pricing and increased promotional programs. Further, these customers are reducing their inventories and increasing their emphasis on products that hold either the number one or number two market position and private label products. 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.

Demand for our products may be adversely affected by changes in consumer preferences and tastes or if we are unable to innovate or market our products effectively.
We are a consumer products company operating in highly competitive markets and rely on continued demand for our products. To generate revenue and profits, we must sell products that appeal to our customers and consumers. Any significant changes in consumer preferences or any inability on our part to anticipate or react to such changes could result in reduced demand for our products and erosion of our competitive and financial position. Our success depends on our ability to respond to consumer trends, including concerns of consumers regarding health and wellness, obesity, product attributes and ingredients. In addition, changes in product category consumption or consumer demographics could result in reduced demand for our products. Consumer preferences may shift due to a variety of factors, including the aging of the general population, changes in social trends, or changes in travel, vacation or leisure activity patterns. Any of these changes may reduce consumers’ willingness to purchase our products and negatively impact our financial results.


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Our continued success also is dependent on product innovation, including maintaining a robust pipeline of new products, and the effectiveness of advertising and promotional campaigns, marketing programs and product packaging. Although we devote significant resources to meet this goal, there can be no assurance as to the continued ability to develop and launch successful new products or variants of existing products, or to effectively execute advertising and promotional campaigns and marketing programs.
The decision by British voters to exit the European Union may further negatively impact our operations.
The June 2016 referendum by British voters to exit the European Union (“Brexit”) caused uncertainty in global markets and resulted in a sharp decline in the value of the British pound, as compared to the US dollar and other currencies. As the U.K. negotiates its exit from the European Union, volatility in exchange rates and in U.K. interest rates may continue. In the near term, a weaker British pound compared to the US dollar during a reporting period causes local currency results of our U.K. operations to be translated into fewer US dollars; a weaker British pound compared to other currencies increases the cost of goods imported into our U.K. operations and may decrease the profitability of our U.K. operations; and a higher U.K. interest rate may have a dampening effect on the U.K. economy. In the longer term, any impact from Brexit on our U.K. operations will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations.
Our results may be adversely affected by the failure to execute acquisitions and divestitures successfully.
Our ability to meet our objectives with respect to the acquisition of new businesses or the divestiture of existing businesses may depend in part on our ability to identify suitable buyers and sellers, negotiate favorable financial terms and other contractual terms, and obtain all necessary regulatory approvals. If we pursue strategic acquisitions, divestitures, or joint ventures, we may incur significant costs and may not be able to consummate the transactions or obtain financing. Potential risks of acquisitions also include the inability to integrate acquired businesses efficiently into our existing operations; diversion of management's attention from other business concerns; potential loss of key employees and/or customers of acquired businesses; potential assumption of unknown liabilities; the inability to implement promptly an effective control environment; potential impairment charges if purchase assumptions are not achieved or market conditions decline; and the risks inherent in entering markets or lines of business with which we have limited or no prior experience. Acquisitions outside the US may present unique challenges and increase our exposure to risks associated with foreign operations, including foreign currency risks and risks associated with local regulatory agencies.
Future acquisitions also could result in potentially dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our financial results. In the event we enter into strategic transactions or relationships, our financial results may differ from expectations. We may not be able to achieve expected returns and other benefits as a result of potential acquisitions or divestitures.
Potential risks for divestitures include the inability to separate divested businesses or business units from our Company effectively and efficiently and to reduce or eliminate associated overhead costs. We are reliant on Diamond of California to provide certain back office services under the Transaction Services Agreement, production of our products under the Facilities Use Agreement, and the supply of walnuts under the Supply Agreement. Failure of Diamond of California to provide services or quality products under any of these arrangements could adversely affect our financial results.

Our business or financial results may be negatively affected if acquisitions or divestitures are not successfully implemented or completed.
The loss of key personnel could have an adverse effect on our financial results and growth prospects.
There are risks associated with our ability to retain key employees. If certain key employees terminate their employment, it could negatively impact manufacturing, sales, marketing or development activities. In addition, we may not be able to locate suitable replacements for key employees or offer employment to potential replacements on acceptable terms.
Failure to effectively execute and accomplish our strategy could adversely affect our financial results.
We utilize several operating strategies to increase revenue and improve operating performance. If we are unsuccessful due to unplanned events, our ability to manage change or unfavorable market conditions, our financial performance could be adversely affected.

Concerns with the safety and quality of certain food products or ingredients could cause consumers to avoid our products.
We could be adversely affected if consumers in our principal markets lose confidence in the safety and quality of certain products or ingredients. Negative publicity about these concerns, whether or not valid, may discourage consumers from buying our products or cause disruptions in production or distribution of our products and negatively impact our business and financial results.


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If our products become adulterated, misbranded or mislabeled, we might need to recall those items and we may experience product liability claims if consumers are injured or become sick.
We may need to recall some of our products if they become adulterated or if they are mislabeled, and may also be liable if the consumption of any of our products causes injury to consumers. A widespread recall could result in significant losses due to the costs of a recall, the destruction of product inventory, and lost sales due to the unavailability of the affected product for a period of time. A significant product recall or product liability claim could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in the safety and/or quality of our products, ingredients or packaging. Such a loss of confidence could occur even in the absence of a recall or a major product liability claim. We also may become involved in lawsuits and legal proceedings if it is alleged that the consumption of any of our products causes injury or illness. A product recall or an adverse result in any such litigation could have an adverse effect on our operating and financial results. We may also lose customer confidence for our entire Branded portfolio as a result of any such recall or proceeding.

Disruption of our supply chain could have an adverse impact on our business and financial results.
Our ability to manufacture and sell our products may be impaired by damage or disruption to our manufacturing or distribution capabilities, or to the capabilities of our suppliers or contract manufacturers, due to factors that are hard to predict or beyond our control, such as adverse weather conditions, natural disasters, fire, pandemics or other events. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, may adversely affect our business or financial results, particularly in circumstances where a product or ingredient is sourced from a single supplier or location.

We may be adversely impacted by inadequacies in, or security breaches of, our information technology systems.
We increasingly rely on information technology systems to conduct our business. These systems can enhance efficiency and business processes but also present risks of unauthorized access to our networks or data centers. If unauthorized parties gain access to our systems, they could obtain and exploit confidential business, customer, or employee information and harm our competitive position. In addition, these information systems may experience damage, failures, interruptions, errors, inefficiencies, attacks or suffer from fires or natural disasters, any of which could have an adverse effect on our business and financial results if not adequately mitigated by our security measures and disaster recovery plans.
Furthermore, with multiple information technology systems as a result of acquisitions, we may encounter difficulties assimilating or integrating data. In addition, we are currently in the process of consolidating systems which could provide additional security or business disruption risks which could have an adverse impact on our business and financial results.
Improper use or misuse of social media may have an adverse effect on our business and financial results.
Consumers are moving away from traditional means of electronic mail towards new forms of electronic communication, including social media. We support new ways of sharing data and communicating with customers using methods such as social networking. However, misuse of social networking by individuals, customers, competitors, or employees may result in unfavorable media attention which could negatively affect our business. Further, our competitors are increasingly using social media networks to market and advertise products. If we are unable to compete in this environment it could adversely affect our financial results.
Our DSD network relies on a significant number of IBOs, and such reliance could affect our ability to efficiently and profitably distribute and market products, maintain existing markets and expand business into other geographic markets.
Our DSD network relies on approximately 2,700 IBOs for the sale and distribution of Branded and Partner brand products. IBOs must make a commitment of capital and/or obtain financing to purchase a route business and other equipment to conduct their business. Certain financing arrangements, through third-party lending institutions, are made available to IBOs and require us to repurchase a route business if the IBO defaults on their loan and we then are required to collect any shortfall from the IBO, to the extent possible. The inability of IBOs, in the aggregate, to make timely payments could require write-offs of accounts receivable or increased provisions made against accounts receivable, either of which could adversely affect our financial results.
The ability to maintain a DSD network depends on a number of factors, many of which are outside of our control. Some of these factors include: (i) the level of demand for the brands and products which are available in a particular distribution area; (ii) the ability to price products at levels competitive with those offered by competing producers; and (iii) the ability to deliver products in the quantity and at the time ordered by IBOs and retail customers. There can be no assurance that we will be able to mitigate the risks related to all or any of these factors in any of our current or prospective geographic areas of distribution. To the extent that any of these factors have an adverse effect on our relationships with IBOs, thus limiting maintenance and expansion of the sales market, our revenue and financial results may be adversely impacted.

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Identifying new IBOs can be time-consuming and any resulting delay may be disruptive and costly to the business. There also is no assurance that we will be able to maintain current distribution relationships or establish and maintain successful relationships with IBOs in new geographic distribution areas. There is the possibility that we will have to incur significant expenses to attract and maintain IBOs in one or more geographic distribution areas. The occurrence of any of these factors could result in increased expense or a significant decrease in sales volume through our DSD network and harm our business and financial results.
A disruption in the operation of our DSD network could negatively affect our results of operations, financial condition and cash flows.
We believe that our DSD network is a significant competitive advantage. A material negative change in our relationship with the IBOs could materially and negatively affect our financial condition, results of operations, cash flows, and ability to operate and conduct our business. In addition, litigation or one or more adverse rulings by courts or regulatory or governmental bodies regarding our DSD network, including actions or decisions that could affect the independent contractor classifications of the IBOs, or an adverse judgment against us for actions taken by the IBOs could materially and negatively affect our financial condition, results of operations, cash flows, and ability to operate and conduct our business.

Continued success depends on the protection of our trademarks and other proprietary intellectual property rights.
We maintain numerous trademarks and other intellectual property rights, which are important to our success and competitive position, and the loss of or our inability to enforce trademark and other proprietary intellectual property rights could harm our business. We devote substantial resources to the establishment and protection of our trademarks and other proprietary intellectual property rights on a worldwide basis. Efforts to establish and protect trademarks and other proprietary intellectual property rights may not be adequate to prevent imitation of products by others or to prevent others from seeking to block sales of our products. In addition, the laws and enforcement mechanisms of some foreign countries may not allow for the protection of proprietary rights to the same extent as in the US and other countries.
Impairment in the carrying value of goodwill or other intangible assets could have an adverse impact on our financial results.
The net carrying value of goodwill represents the fair value of acquired businesses in excess of identifiable assets and liabilities, and the net carrying value of other intangibles represents the fair value of trademarks, customer relationships, route intangibles and other acquired intangibles. Pursuant to generally accepted accounting principles in the US ("GAAP"), we are required to perform impairment tests on our goodwill and indefinite-lived intangible assets annually, or at any time when events occur, which could impact the value of our reporting unit or our indefinite-lived intangibles. These values depend on a variety of factors, including the success of our business, market conditions, earnings growth and expected cash flows. Impairments to goodwill and other intangible assets may be caused by factors outside our control, such as increasing competitive pricing pressures, changes in discount rates based on changes in cost of capital or lower than expected sales and profit growth rates. In addition, if we see the need to consolidate certain brands, we could experience impairment of our trademark intangible assets. Significant and unanticipated changes in our business could require a non-cash charge for impairment in a future period which may significantly affect our financial results in the period of such charge.

A significant portion of our outstanding shares of common stock is controlled by a few individuals, and their interests may conflict with those of other stockholders.
As of December 31, 2016 , Patricia A. Warehime beneficially owned in the aggregate approximately 10% of our outstanding common stock. Mrs. Warehime serves as one of our directors. As a result, Mrs. Warehime may be able to exercise significant influence over us and certain matters requiring approval of our stockholders, including the approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This could limit the ability of our other stockholders to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control of our Company. In addition, Mrs. Warehime may have actual or potential interests that diverge from the interests of our other stockholders.

New regulations or legislation could adversely affect our business and financial results.
Food production and marketing are highly regulated by a variety of federal, state and other governmental agencies. New or increased government regulation of the food industry, including but not limited to areas related to food safety, chemical composition, production processes, traceability, product quality, packaging, labeling, school lunch guidelines, promotions, marketing and advertising (particularly such communications that are directed toward children), product recalls, records, storage and distribution could adversely impact our results of operations by increasing production costs or restricting our methods of operation and distribution. These regulations may address food industry or societal factors, such as obesity, nutritional and environmental concerns and diet trends.


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We are subject to increasing legal complexity and could be party to litigation that may adversely affect our business.
Increasing legal complexity may continue to affect our operations and results in material ways. We are or could be subject to legal proceedings that may adversely affect our business, including class actions, administrative proceedings, government investigations, employment and personal injury claims, disputes with current or former suppliers, claims by current or former IBOs, and intellectual property claims (including claims that we infringed another party’s trademarks, copyrights, or patents). Inconsistent standards imposed by governmental authorities can adversely affect our business and increase our exposure to litigation. Litigation involving our independent contractor classification of our IBOs, as well as litigation related to disclosure made by us in connection therewith, if determined adversely, could increase costs, negatively impact our business prospects and the business prospects of our IBOs and subject us to incremental liability for their actions. We are also subject to the legal and compliance risks associated with privacy, data collection, protection and management, in particular as it relates to information we collect from our employees, as well as information we collect when we provide products to customers, IBOs and retailers.

We may fail to realize the anticipated benefits and cost savings we expect to realize from our acquisition of Diamond Foods, which could adversely affect the value of our common stock.
The success of our acquisition of Diamond Foods will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining Diamond Foods’ business with ours. Our ability to realize these anticipated benefits and cost savings is subject to many risks, including but not limited to:
Our ability to continue to combine Diamond Foods’ business with ours; and
Whether our combined businesses will perform as expected.
If we are not able to combine Diamond Foods’ business with ours successfully within the anticipated time frame, or at all, the anticipated cost savings and other benefits of the acquisition may not be realized fully, or at all, or may take longer to realize than expected, and we may not perform as expected and the value of our common stock may be adversely affected.
We may not be able to successfully execute our international expansion strategies.
We plan to drive additional growth and profitability through international distribution channels. Consumer demand, behavior, taste and purchasing trends may differ in international markets and, as a result, sales of our products may not be successful or meet expectations, or the margins on those sales may be less than currently anticipated. We may also face difficulties integrating foreign business operations with our current sourcing, distribution, information technology systems and other operations. Any of these challenges could hinder our success in new markets or new distribution channels. There can be no assurance that we will successfully complete any planned international expansion or that any new business will be profitable or meet our expectations.

Our foreign operations pose additional risks to our business.
We operate our business and market our products internationally. Our foreign operations are subject to the risks described above, as well as risks related to fluctuations in currency values, foreign currency exchange controls, compliance with foreign laws, compliance with applicable US laws, including the Foreign Corrupt Practices Act, and other economic or political uncertainties. International sales are subject to risks related to general economic conditions, imposition of tariffs, quotas, trade barriers and other restrictions, enforcement of remedies in foreign jurisdictions and compliance with applicable foreign laws, and other economic and political uncertainties. All of these risks could result in increased costs or decreased revenues, which could adversely affect our financial results.


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Risks related to our substantial indebtedness
We have substantial debt, which could adversely affect our financial health, our ability to obtain financing in the future, react to changes in our business, and make payments on our debt.
As of January 2, 2016 we had an aggregate principal amount of $388 million of outstanding debt, which increased to approximately $1.3 billion as of December 31, 2016. The increase in our outstanding debt was the result of our acquisition of Diamond Foods. Our substantial debt could have important consequences to holders of our common stock, including the following:

Our ability to obtain additional financing for working capital, capital expenditures, acquisitions, debt service requirements, acquisitions or general corporate purposes may be impaired in the future
A substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes
We are exposed to the risk of increased interest rates because a substantial portion of our borrowings are at variable rates
It may be more difficult for us to satisfy our obligations to our lenders, resulting in possible defaults on and acceleration of such indebtedness
We may be more vulnerable to general adverse economic and industry conditions
We may be at a competitive disadvantage compared to our competitors with less debt or comparable debt at more favorable interest rates and they, as a result, may be better positioned to withstand economic downturns
Our ability to refinance indebtedness may be limited or the associated costs may increase
Our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited, or we may be prevented from carrying out capital spending that is necessary or important to our growth strategy and efforts to improve operating margins or our business

The agreements and instruments governing our debt contain restrictions and limitations that could significantly impact our ability to operate our business.
Our credit facilities contain covenants that, among other things, restrict our ability to do the following:

Dispose of assets
Incur additional indebtedness (including guarantees of additional indebtedness)
Pay dividends and make certain payments
Create liens on assets
Make investments (including joint ventures)
Engage in mergers, consolidations or sales of all or substantially all of our assets
Engage in certain transactions with affiliates
Change the business conducted by us
Amend specific debt agreements

Our ability to comply with these provisions in future periods will depend on our ongoing financial and operating performance, which in turn will be subject to economic conditions and to financial, market and competitive factors, many of which are beyond our control. Our ability to comply with these provisions in future periods will also depend substantially on the pricing of our products, our success at implementing cost reduction initiatives and our ability to successfully implement our overall business strategy.

The restrictions under the terms of our credit facilities may prevent us from taking actions that we believe would be in the best interest of our business, and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted. We may also incur future debt obligations that might subject us to additional restrictive covenants that could affect our financial and operational flexibility. We cannot assure you that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all.

Our ability to comply with the covenants and restrictions contained in our credit facilities may be affected by economic, financial and industry conditions beyond our control. The breach of any of these covenants or restrictions could result in a default under our credit facilities that would permit the applicable lenders or note holders, as the case may be, to declare all amounts outstanding thereunder to be due and payable, together with accrued and unpaid interest. In any such case, we may be unable to borrow under and may not be able to repay the amounts due under our credit facilities. This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent.


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Our ability to generate the significant amount of cash needed to pay interest and principal on our debt facilities and our ability to refinance all or a portion of our indebtedness or obtain additional financing depends on many factors beyond our control.
Our ability to make scheduled payments on, or to refinance our obligations under our debt will depend on our financial and operating performance. This, in turn, will be subject to prevailing economic and competitive conditions and to the financial and business factors, many of which may be beyond our control, as described under “Risk Factors-Risks Related to Our Business” above.

If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek to obtain additional equity capital or restructure our debt. In the future, our cash flow and capital resources may not be sufficient for payments of interest on and principal of our debt, and such alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

We cannot be assured that we will be able to refinance any of our indebtedness or obtain additional financing, particularly because of our anticipated high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt, as well as prevailing market conditions. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our credit facilities restrict our ability to dispose of assets and use the proceeds from any such dispositions. As a result, we cannot assure you we will be able to consummate those sales, or if we do, what the timing of the sales will be, or whether the proceeds that we realize will be adequate to meet the debt service obligations when due.

We are exposed to interest rate volatility, which could negatively impact our financial results.
We are exposed to interest rate volatility since the interest rates associated with portions of our debt are variable. While we mitigate a portion of this volatility by entering into interest rate swap agreements, those agreements could lock our interest rates above the market rates. As a result, an increase in interest rates, whether because of an increase in market interest rates or a decrease in our creditworthiness, would increase the cost of servicing our debt and could materially reduce our profitability and cash flows.

Item 1B.  Unresolved Staff Comments 
None.


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Item 2.  Properties
Our corporate headquarters is located in Charlotte, North Carolina. We have additional administrative offices in Hanover, Pennsylvania supporting our DSD network and in Norwich, England supporting our European operations. Our manufacturing operations are located in Charlotte, North Carolina; Hanover, Pennsylvania; Franklin, Wisconsin; Goodyear, Arizona; Columbus, Georgia; Jeffersonville, Indiana; Hyannis, Massachusetts; Perry, Florida; Ashland, Ohio; Salem, Oregon; Beloit, Wisconsin; Norwich, England and Van Buren, Indiana. Additionally, our research and development centers are located in Hanover, Pennsylvania and Salem, Oregon.
A2016PROPERTIESMAP.JPG
The map above illustrates some of the products manufactured at each facility.
We also lease or own over 100 warehouses as well as numerous stockrooms, sales offices and administrative offices throughout the US to support our operations and DSD network. In addition, we lease warehousing facilities in Snetterton, England.
The facilities and properties that we own, lease and operate are maintained in good condition and are believed to be suitable and adequate for our present needs. We believe that we have sufficient production capacity or the ability to increase capacity to meet anticipated demand in 2017 .
Item 3.  Legal Proceedings

IBO Litigation
Roxberry, et. al, v. S-L Distribution Company, LLC
On July 25, 2016, plaintiffs comprised of IBOs filed a putative class action against Snyder’s-Lance, Inc. and our distribution subsidiary, S-L Distribution Company, Inc. in the Eastern District Court of Tennessee.  The case was transferred to the Middle District of Pennsylvania.  The lawsuit seeks statewide class certification on behalf of a class comprised of IBOs in Tennessee, and nationwide certification for the Federal law collective action. The plaintiffs allege that they were misclassified as independent contractors and should be considered employees.  We believe we have strong defenses to all the claims that have been asserted against us.  At this time, no demand has been made, and we cannot reasonably estimate the possible loss or range of loss, if any, from this lawsuit.

Scheurer v. S-L Distribution Company, LLC
On December 8, 2016, plaintiff served a putative class action on behalf of all similarly situated IBOs in New Jersey against our distribution subsidiary, S-L Distribution Company, LLC. Plaintiff is a former IBO whose distribution agreement was terminated pursuant to the re-engineering and buyback of routes in New Jersey in 2011, resulting from the merger of Snyder’s of Hanover, Inc. and Lance, Inc. The lawsuit seeks statewide class certification on behalf of a class comprised of IBOs in New Jersey for alleged violations of the New Jersey Franchise Practices Act ("NJFPA") relative to various terminations of the distributor agreement. We believe we have strong defenses to all the claims that have been asserted against us. At this time, no demand has been made, and we cannot reasonably estimate the possible loss or range of loss, if any, from this lawsuit.

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Merger-related Litigation
On November 10, 2015, a putative class action lawsuit was filed on behalf of Diamond Foods' stockholders in the Court of Chancery of the State of Delaware. The complaint names as defendants Diamond Foods, the members of Diamond Foods’ board of directors, Snyder’s-Lance, Shark Acquisition Sub I, Inc., a Delaware corporation and a wholly-owned subsidiary of Snyder’s-Lance (“Merger Sub I”) and Shark Acquisition Sub II, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Snyder’s-Lance (“Merger Sub II”). The complaint generally alleges, among other things, that the members of Diamond Foods’ board of directors breached their fiduciary duties to Diamond Foods’ stockholders in connection with negotiating, entering into and approving the merger agreement with Snyder’s-Lance, Inc. The complaint additionally alleges that Snyder’s-Lance, Merger Sub I and Merger Sub II aided and abetted such breaches of fiduciary duties. The complaint sought injunctive relief, including the enjoinment of the merger, certain other declaratory and equitable relief, damages, costs and fees. An amended complaint was filed on December 21, 2015. The amended complaint adds further allegations related to the merger process and disclosures contained in the Registration Statement on Form S-4 filed by Snyder’s-Lance on November 25, 2015. On January 15, 2016, plaintiff filed a motion for expedited proceedings requesting a preliminary injunction and expedited discovery, which the Court denied on February 3, 2016. Plaintiff also filed a books and records demand case in North Carolina, which the court subsequently dismissed with prejudice. On January 19, 2016, another action was filed in the court of chancery in the state of Delaware similar to the above matter. On October 24, 2016, plaintiff filed a second amended complaint, which modified some of plaintiff's allegations, including now expressly seeking a quasi-appraisal remedy or rescissory damages. Defendants moved to dismiss the second amended complaint on December 22, 2016. On February 3, 2017, plaintiffs moved to consolidate the two Delaware cases, which defendants did not oppose, and which the Court granted on February 3, 2017. On February 24, 2017, the parties filed a stipulated proposed order of dismissal, seeking voluntary dismissal of the Delaware litigation with prejudice as to the named plaintiffs and without prejudice as to the putative class. The court granted the stipulated order of dismissal on February 27, 2017.
California Labor Code Litigation
Former employee Patricia Sparks filed a putative class action lawsuit against Diamond Foods on November 25, 2015 in San Francisco Superior Court alleging Diamond Foods’ violation of the California Labor Code by failing to include on wage statements the start date of the pay period and by failing to include on wage statements the name and address of the legal entity that is the employer.  Plaintiff amended her complaint on January 4, 2016 to add a claim for penalties under California’s Private Attorneys General Act based on the same underlying violations.  Diamond Foods timely answered the First Amended Complaint on March 7, 2016.  The parties attended the initial case management conference on May 2, 2016 and a further case management conference occurred on August 1, 2016. We accrued $8.3 million associated with this outstanding claim in the Diamond Foods opening balance sheet as that represented our best estimate of the probable liability at that time. We determined such accrual by estimating the aggregate potential penalties that we believed it was probable could be assessed under the applicable California laws, which are strict liability penalties. On September 19, 2016, the parties to this litigation reached a tentative settlement pursuant to which we have agreed to pay $0.7 million on a class wide basis. We signed a memorandum of understanding reflecting this preliminary settlement amount. The parties submitted a settlement agreement to the court and the court granted preliminary approval of the settlement. As a result, we have recorded a measurement period adjustment to reduce the opening balance sheet accrual. Accordingly this settlement amount did not impact our Consolidated Statements of Income for the year ended December 31, 2016.

Employment Tax Audit by the California Employment Development Department
On February 22, 2016, the company received notice from the Employment Development Department of the State of California (“EDD”) that S-L Distribution Company, Inc. (“SLD”) had been selected for an employment tax audit. An onsite audit was conducted April 27, 2016, of payroll records for 2015 as a general matter. In addition, the auditor examined the Forms 1099Misc that the company had issued. The audit is still outstanding and will confirm whether the IBOs who received 1099s are bona-fide contractors within the definition of an employer/employee relationship under the relevant statutes and regulations in California. If the auditor issues an unfavorable determination and finds that the IBOs are actually employees, such a finding could have a material adverse impact on our operations in California and potentially the other jurisdictions where the company utilizes IBO business partners. At this time we cannot reasonably estimate the possible loss or range of loss, if any, from this audit, nor are we able to quantify the likelihood of a positive determination from the auditor.

Evaporated Cane Juice Litigation
A putative class action suit was filed against Late July on September 18, 2013, and is pending in the US District Court for the Northern District of California. The action accuses Late July of violating federal and state law by using the term "evaporated cane juice" ("ECJ") in the ingredients list on its products' labels. The plaintiffs' complaint alleges ECJ is not the common and usual name for the ingredient at issue and is misleading. The complaint attempts to state claims for violation of California's Unfair Competition Law, California's False Advertising Law, California's Consumers Legal Remedies Act, and unjust enrichment. Late July filed a motion to dismiss the complaint on November 27, 2013, based on the primary jurisdiction doctrine, lack of standing, and failure to state a claim.


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On May 22, 2014, the Court stayed the action, applying the doctrine of primary jurisdiction, due to the FDA's ongoing consideration of the issue of using the term ECJ on food labels. On May 26, 2016, the FDA issued its guidance for industry on the topic. As a result, the stay was lifted on July 22, 2016. On August 31, 2016, plaintiffs filed an amended complaint that, among other things, relies on the FDA's recently issued guidance. Late July filed a motion to dismiss such amended complaint, and a hearing on that motion was held on February 16, 2017. At this time, we cannot reasonably estimate the possible loss or range of loss, if any, from this lawsuit.

Other
We are currently subject to other lawsuits and environmental matters arising in the normal course of business. In our opinion, such matters should not have a material effect upon our consolidated financial statements taken as a whole.
Item 4.  Mine Safety Disclosures
Not applicable.

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Executive Officers of the Company
Information about each of our executive officers, as defined in Rule 3b-7 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of February 5, 2017, is as follows:
Name
 
Age
 
Information About Officers
 
Hire Date
Carl E. Lee, Jr.
 
57
 
President and Chief Executive Officer of Snyder's-Lance, Inc. since May 2013; President and Chief Operating Officer of Snyder’s-Lance, Inc. from December 2010 to May 2013; President and Chief Executive Officer of Snyder’s of Hanover, Inc. from 2005 to December 2010.
 
2005
Alexander W. Pease
 
45
 
Executive Vice President and Chief Financial Officer of Snyder’s-Lance, Inc. since November 2016; Principal of McKinsey and Company from 2015 to 2016; Senior Vice President and Chief Financial Officer of Enpro Industries from 2011 to 2015; Principal of McKinsey and Company from 2007 to 2011.
 
2016
Rodrigo F. Troni Pena
 
50
 
Senior Vice President and Chief Marketing Officer of Snyder's-Lance, Inc. since December 2013; Senior Vice President, Birds Eye at Pinnacle Foods from May 2010 to November 2013.
 
2013
Frank B. Schuster
 
50
 
President, DSD Division of Snyder’s-Lance, Inc. since February 2016; Senior Vice President and Chief Sales Officer of Snyder’s-Lance, Inc. from October 2015 to February 2016; Senior Vice President, Sales Division of Snyder's-Lance, Inc. from December 2010 to October 2015; Senior Vice President, Sales Division of Lance, Inc. from June 2009 to December 2010.
 
2009
Margaret E. Wicklund
 
56
 
Vice President, Corporate Controller, Principal Accounting Officer and Assistant Secretary of Snyder’s-Lance, Inc. since December 2010.
 
1992
Gail Sharps Myers
 
47
 
Senior Vice President, General Counsel and Secretary of Snyder's-Lance, Inc. since January 2015; Senior Vice President, Deputy General Counsel, Chief Compliance Counsel and Assistant Secretary of US Foods, Inc. from 2014 to 2015, Senior Vice President, Deputy General Counsel and Secretary of US Foods from 2011 to 2014; Vice President Business Law and Assistant Secretary of US Foods, Inc. from 2009 to 2011.
 
2015
Andrea Frohning
 
47
 
Chief Human Resources Officer of Snyder's-Lance, Inc. since March 2016; Vice President Human Resources of Crane Co. from 2013 to 2016; Vice President Human Resources of Hubbell Electrical Systems, Hubbell Inc. from 2009 to 2013.
 
2016

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our $0.83-1/3 par value Common Stock trades under the symbol "LNCE" on the NASDAQ Global Select Market. We had 4,916 stockholders of record as of February 23, 2017 .
The following table sets forth the high and low intraday sale price quotations and dividend information for each interim period of the years ended December 31, 2016 and January 2, 2016 :
2016 Interim Periods
 
High
Price
 
Low
Price
 
Dividend
Paid
First quarter (13 weeks ended April 2, 2016)
 
$
36.20

 
$
27.93

 
$
0.16

Second quarter (13 weeks ended July 2, 2016)
 
34.12

 
28.92

 
0.16

Third quarter (13 weeks ended October 1, 2016)
 
36.61

 
32.99

 
0.16

Fourth quarter (13 weeks ended December 31, 2016)
 
38.99

 
33.18

 
0.16

 
 
 
 
 
 
 
2015 Interim Periods
 
High
Price
 
Low
Price
 
Dividend
Paid
First quarter (13 weeks ended April 4, 2015)
 
$
32.83

 
$
28.82

 
$
0.16

Second quarter (13 weeks ended July 4, 2015)
 
33.04

 
28.98

 
0.16

Third quarter (13 weeks ended October 3, 2015)
 
35.98

 
31.32

 
0.16

Fourth quarter (13 weeks ended January 2, 2016)
 
39.10

 
32.00

 
0.16


On February 8, 2017 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on March 3, 2017 to stockholders of record on February 23, 2017 . Our Board of Directors will consider the amount of future cash dividends on a quarterly basis.

In conjunction with our acquisition of Diamond Foods, we entered into a new senior unsecured credit agreement as amended (the “Credit Agreement”) on December 16, 2015 with the term lenders and Bank of America, N.A., as administrative agent. The Credit Agreement restricts our payment of cash dividends and repurchases of our common stock if, after payment of any such dividends or any such repurchases of our common stock, our consolidated stockholders’ equity would be less than $500 million. As of December 31, 2016 , our consolidated stockholders’ equity was $1,875.7 million and we were in compliance with this covenant.
The following table presents information with respect to repurchases of our common stock made during the fourth quarter of 2016, by us or any of our “affiliated purchasers” as defined in Rule 10b-18(a)(3) under the Exchange Act:

Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2)
October 2, 2016 - October 31, 2016
 

 

 

 

November 1, 2016 - November 30, 2016
 

 

 

 

December 1, 2016 - December 31, 2016
 
1,159

 
$
38.34

 

 

Total
 
1,159

 
$
38.34

 

 

(1) Represents shares withheld by us pursuant to provisions in agreements with recipients of restricted stock granted under our equity compensation plans that allow us to withhold the number of shares with a fair value equal to the tax withholding due upon vesting of the restricted shares.
(2) At this time the board of directors has not authorized management to repurchase any of our common stock in the market.



18


Table of Contents


Item 6.  Selected Financial Data
The following table sets forth selected historical financial data for the five-year period ended December 31, 2016 . The selected financial data set forth below should be read in conjunction with “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and the audited financial statements. The prior year amounts have been reclassified as necessary for consistent presentation.
 
 
 
 
 
 
 
 
 
 
 
Results of Operations (in thousands):
 
2016
 
2015
 
2014
 
2013
 
2012
Net revenue (1) (2) (3) (4) (5)
 
$
2,109,227

 
$
1,656,399

 
$
1,620,920

 
$
1,504,332

 
$
1,362,911

Cost of sales
 
1,345,437

 
1,077,110

 
1,042,458

 
963,073

 
872,316

Gross profit
 
763,790

 
579,289

 
578,462

 
541,259

 
490,595

Gross margin
 
36.2
%
 
35.0
%
 
35.7
%
 
36.0
%
 
36.0
%
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes (6) (7) (8) (9) (10)
 
67,123

 
79,603

 
91,508

 
87,900

 
79,408

Income from continuing operations
 
41,803

 
50,718

 
59,217

 
55,603

 
45,489

(Loss)/income from discontinued operations, net of income tax (11) (12)
 
(27,100
)
 

 
133,316

 
23,481

 
14,021

Net income attributable to
Snyder’s-Lance, Inc.
 
$
14,885

 
$
50,685

 
$
192,591

 
$
78,720

 
$
59,085

 
 
 
 
 
 
 
 
 
 
 
Average Number of Common Shares
Outstanding (in thousands):
 
 
 
 
 
 
 
 
 
 
Basic
 
91,873

 
70,487

 
69,966

 
69,102

 
68,131

Diluted  
 
92,891

 
71,142

 
70,656

 
69,877

 
68,964

 
 
 
 
 
 
 
 
 
 
 
Per Share of Common Stock:
 
 
 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
 
$
0.46

 
$
0.72

 
$
0.84

 
$
0.80

 
$
0.66

Basic (loss)/earnings per share from discontinued operations
 
(0.29
)
 

 
1.90

 
0.33

 
0.20

Total basic earnings per share
 
$
0.17

 
$
0.72

 
$
2.74

 
$
1.13

 
$
0.86

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
$
0.45

 
$
0.71

 
$
0.84

 
$
0.79

 
$
0.65

Diluted (loss)/earnings per share from discontinued operations
 
(0.29
)
 

 
1.88

 
0.33

 
0.20

Total diluted earnings per share
 
$
0.16

 
$
0.71

 
$
2.72

 
$
1.12

 
$
0.85

 
 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
0.64

 
$
0.64

 
$
0.64

 
$
0.64

 
$
0.64

 
 
 
 
 
 
 
 
 
 
 
Financial Status at Year-end
(in thousands):
 
 
 
 
 
 
 
 
 
 
Total assets (13) (14) (15)
 
$
3,834,076

 
$
1,810,704

 
$
1,849,056

 
$
1,752,758

 
$
1,733,201

Long-term debt, net of
current portion (13) (15)
 
$
1,245,959

 
$
372,301

 
$
437,233

 
$
478,671

 
$
512,681

Total debt  (13) (15)
 
$
1,294,959

 
$
380,842

 
$
445,794

 
$
495,962

 
$
533,143


19


Table of Contents


Footnotes:
(1)
2016 net revenue included $443 million of incremental net revenue attributable to the acquisition of Diamond Foods.
(2)
2015 net revenue increased compared to 2014, in part due to the full year impact of the acquisition of Baptista's Bakery and consolidation of Late July, which occurred in June 2014 and October 2014, respectively. The increase was partially offset by approximately $30 million of net revenue generated during 2014 as a result of the fifty-third week.
(3)
2014 net revenue increased compared to 2013 approximately $30 million, as a result of the fifty-third week and $44 million as a result of the acquisition of Baptista's in June 2014 and the consolidation of the results of Late July subsequent to our additional investment in October 2014.
(4)
2013 net revenue increased compared to 2012, in part due to the full year impact of the acquisition of Snack Factory, which occurred in October 2012.
(5)
2012 net revenue included approximately $30 million as a result of acquisitions, including the acquisition of Snack Factory in October 2012.
(6)
2016 pretax income was impacted by approximately $66 million of transaction and integration related expenses due to the acquisition of Diamond Foods, approximately $11 million of additional cost of sales due to the step-up of inventory from the acquisition of Diamond Foods, approximately $5 million for the loss on prepayment of debt, and approximately $4 million in asset impairments primarily related to the transfer of production location for certain products.
(7)
2015 pretax income was impacted by approximately $8 million in transaction-related fees associated with the pending acquisition of Diamond Foods, approximately $12 million in asset impairment charges primarily related to the transfer of production location for certain products and approximately $6 million in settlements of certain litigation.
(8)
2014 pretax income was impacted by a gain on the revaluation of our prior equity investment in Late July of approximately $17 million, impairment charges of approximately $13 million and approximately $4 million of expense associated with our margin improvement and restructuring plan.
(9)
2013 pretax income was impacted by certain self-funded medical claims that resulted in approximately $5 million in incremental expenses as well as impairment charges of approximately $2 million associated with one of our trademarks.
(10)
2012 pretax income included the impact of approximately $4 million in severance costs and professional fees related to the Snyder's-Lance Merger and integration activities, approximately $9 million in impairment charges offset by approximately $22 million in gains on the sale of route businesses associated with the IBO conversion.
(11)
2016 loss from discontinued operations, net of income tax, included a $33 million pretax loss on the sale of Diamond of California.
(12)
2014 income from discontinued operations, net of income tax, included a $223 million pretax gain on the sale of Private Brands.
(13)
2016 total assets includes $2.2 billion acquired from Diamond Foods, and total debt increased due to the issuance of $1.1 billion of debt in conjunction with the Diamond Foods acquisition.
(14)
2014 total assets increased from 2013 primarily due to the acquisition of Baptista's and Late July, partially offset by the sale of Private Brands.
(15)
We adopted ASU No. 2015-03 in the first quarter of 2016 which had the effect of retrospectively presenting debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. As such, debt issuance costs are presented as a reduction of long-term debt in the Consolidated Balance Sheets and removed from other noncurrent assets.


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Table of Contents

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand Snyder's-Lance, Inc., our operations and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and accompanying notes to the financial statements. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under Part I, Item 1A—Risk Factors and other sections in this Annual Report on Form 10-K.
MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Future events and their effects cannot be determined with absolute certainty. Therefore, management’s determination of estimates and judgments about the carrying values of assets and liabilities requires the exercise of judgment in the selection and application of assumptions based on various factors, including historical experience, current and expected economic conditions and other factors believed to be reasonable under the circumstances. We routinely evaluate our estimates, including those related to sales and promotional allowances, customer returns, allowances for doubtful accounts, inventory valuations, useful lives of fixed assets and related impairment, long-term investments, hedge transactions, goodwill and intangible asset valuations and impairments, incentive compensation, income taxes, self-insurance, contingencies and litigation. Actual results may differ from these estimates under different assumptions or conditions.
Executive Summary
2016 was an exciting year for our Company. Coming into 2016, we were focused on growing our distribution footprint and our Core brand revenue and market share and returning our Snyder's of Hanover brand back to growth, as well as growing our "better-for-you" portfolio. We were successful in achieving all of these goals. Our growth strategy for our Core brands continues to focus on quality, innovation and expanded distribution. We are achieving our goals regarding the mix of "better-for-you" products relative to our entire portfolio, with 31% of our 2016 revenue coming from products considered to be "better-for-you" and we expect to increase this percentage in 2017.

On February 29, 2016, we completed the acquisition of all of the outstanding stock of Diamond Foods. The acquisition of Diamond Foods significantly changed our capital structure and debt profile. Diamond Foods stockholders received 0.775 shares of Snyder's-Lance common stock and $12.50 in cash for each Diamond Foods share, for a total purchase price of approximately $1.86 billion, based on the closing price of our common stock on February 26, 2016, the last trading day prior to the closing date and including our repayment of approximately $651 million of Diamond Foods' indebtedness, accrued interest and related fees. The strategic combination of Snyder's-Lance and Diamond Foods brought together two established companies with strong brands and created an innovative, highly complementary and diversified portfolio of branded snacks, including: Kettle Brand ® potato chips; KETTLE ® Chips; Pop Secret ® popcorn; Emerald ® snack nuts; and Diamond of California ® culinary nuts. The transaction expanded our footprint in "better-for-you" snacking and increased our existing natural food channel presence. In addition, this transaction expanded and strengthened our national distribution network, and provided a platform for growth in the U.K. and across Europe. We believe we are now even better positioned in the growing snack food industry, and we continue to see significant opportunities for both cost and revenue synergies, which we expect to deliver earnings accretion and support further investment behind our brands.

On September 1, 2016, we completed the acquisition of Metcalfe by acquiring the remaining 74% interest. Metcalfe owns the U.K.'s leading premium RTE popcorn brand, and also incorporates a fast growing range of corn and rice cake products. The U.K. popcorn market is one of the fastest growing categories within the U.K. snack food industry, as consumers increasingly seek out "better-for-you" snacking options. The addition of a leading premium RTE popcorn brand, Metcalfe’s skinny ® , to the U.K.'s leading premium chip brand, KETTLE ® Chips, reflects our plan to become a leading provider of premium snack foods in Europe.
In addition to these strategic acquisitions, on December 31, 2016, we completed the sale of our Diamond of California culinary nuts business. The sale of Diamond of California aligns with our strategy to focus more resources on the growth opportunities for our snack food brands, and provides proceeds to reduce our overall debt and invest in other strategic transactions.


21


Table of Contents

2016 Performance

Overall, net revenue increased in 2016 compared to 2015, primarily due to increased revenue associated with the contribution of Diamond Foods, as well as strong Core Brand revenue growth in our legacy Snyder's-Lance business, despite headwinds coming into 2016 due to:
Declines related to strategic changes at our largest customer which impacted space, displays and store inventory levels for certain branded products; and
Overall slow growth in the snack food industry which led to declines in revenue from partner brand products and certain branded products.
Our 2016 results were also impacted by the following:
Transaction and integration related expenses - We incurred $66.3 million in transaction and integration related expenses in selling, general and administrative expense related to the acquisition of Diamond Foods during 2016, compared to $7.7 million in 2015.
Inventory step-up - As a result of the acquisition of Diamond Foods, we were required to step-up the value of the acquired inventory to fair value. This resulted in $11.3 million in additional cost of sales during the year, or a 0.5% impact on gross margin.
Amortization expense - We acquired $355.3 million of customer relationships intangibles in the Diamond Foods acquisition. Although $19.9 million of this balance was disposed of in the Diamond of California divestiture, we recognized in continuing operations $14.0 million of incremental amortization expense in 2016, compared to 2015.
Impairment charges - During 2016, we made the decision to move the production of certain products to improve operational efficiency. As a result, we recognized a total of $3.7 million of fixed asset impairment charges in 2016.
Incentive compensation expense - Excluding accelerated stock-based compensation expense associated with the Diamond Foods transaction and integration, we incurred 0.3% of incremental expense as a percentage of net revenue in 2016, compared to 2015, primarily due to lower attainment of incentive targets in 2015.
Promotional spending - We increased promotional spending as a percentage of revenue during 2016 for our legacy Snyder's-Lance Core brands, which resulted in approximately $27 million of additional promotional expense compared to 2015, or 1.3% lower gross margin compared to 2015.
Interest expense - In order to complete the acquisition of Diamond Foods, we borrowed $1.13 billion in long-term debt, which significantly increased our outstanding debt throughout the year and resulted in $21.8 million in incremental interest expense in 2016, compared to 2015.

In spite of these challenges in 2016, we were able grow market share in all of our legacy Snyder's-Lance Core brands. A discussion of the trends for each of our Core brands is included below:
Despite a slight revenue decline from Snyder's of Hanover ® in 2016, compared to 2015, we were able to undertake a renovation of the brand during 2016, including television advertising, digital media, as well as aggressive coupon programs. Our commitment to the brand enabled Snyder’s of Hanover ® to return to revenue growth in the fourth quarter of 2016, continue to grow market share during the year and maintain a substantial lead over our closest competitor in the category.
Net revenue from our Lance ® sandwich crackers increased in 2016, compared to the prior year primarily due to distribution gains in the club channel. The Lance ® sandwich cracker brand also gained market share throughout the year.
Snack Factory ® Pretzel Crisps ® experienced mid-single-digit revenue growth as well as market share growth in the deli snacks category in 2016, primarily through expanded distribution in the grocery channel.
We continued to grow sales with existing customers as well as expand the distribution of our Cape Cod ® kettle cooked chips in 2016, which resulted in mid-single-digit revenue growth compared to 2015 and increased market share for the Cape Cod ® brand in a growing kettle chip category.
Late July ® continued to expand distribution and gain market share in the grocery and natural channels, leading to double-digit revenue growth in 2016.

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Table of Contents

For the acquired Diamond Foods brands, Kettle Brand ® and Emerald ® grew market share, while Pop Secret ® experienced a slight reduction in market share.
As we move into 2017, we plan to substantially complete the integration of Diamond Foods and continue to grow our business both domestically and abroad as we focus on quality, innovation and expanded distribution while "changing the way the world snacks with better ingredients, quality and taste." Some items to note for our 2017 business outlook are as follows:
We expect to continue to make investments in marketing and advertising, and promotional spending to support our Core brands and our new innovation in the first half of 2017.
We expect to continue to introduce new innovation, including Cape Cod ® Thins, Wholey Cheese! TM , and "better-for-you" multi-packs.
We expect our weighted average diluted share count to be approximately 98 million shares for fiscal 2017, compared to 92.9 million shares for fiscal 2016, which will impact our diluted earnings per share.
The first quarter of 2017 will include the full impact of the Diamond Foods acquisition, which was acquired on February 29, 2016.

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Table of Contents

Results of Operations
Year Ended December 31, 2016 Compared to Year Ended January 2, 2016
(in millions)
 
2016
 
2015
 
Favorable/
(Unfavorable)
Variance
Net revenue
 
$
2,109.2

 
100.0
 %
 
$
1,656.4

 
100.0
%
 
$
452.8

 
27.3
 %
Cost of sales
 
1,345.4

 
63.8
 %
 
1,077.1

 
65.0
%
 
(268.3
)
 
(24.9
)%
Gross profit
 
763.8

 
36.2
 %
 
579.3

 
35.0
%
 
184.5

 
31.8
 %
Selling, general and administrative
 
594.0

 
28.2
 %
 
464.5

 
28.0
%
 
(129.5
)
 
(27.9
)%
Transaction and integration related expenses
 
66.3

 
3.1
 %
 
7.7

 
0.5
%
 
(58.6
)
 
(761.0
)%
Settlement of certain litigation
 

 
 %
 
5.7

 
0.3
%
 
5.7

 
100.0
 %
Impairment charges
 
4.5

 
0.2
 %
 
12.0

 
0.7
%
 
7.5

 
62.5
 %
Other income, net
 
(5.5
)
 
(0.3
)%
 
(1.1
)
 
%
 
4.4

 
400.0
 %
Income before interest and income taxes
 
104.5

 
5.0
 %
 
90.5

 
5.5
%
 
14.0

 
15.5
 %
Loss on early extinguishment of debt
 
4.7

 
0.2
 %
 

 
%
 
(4.7
)
 
(100.0
)%
Interest expense, net
 
32.7

 
1.6
 %
 
10.9

 
0.7
%
 
(21.8
)
 
(200.0
)%
Income tax expense
 
25.3

 
1.2
 %
 
28.9

 
1.7
%
 
3.6

 
12.5
 %
Income from continuing operations
 
41.8

 
2.0
 %
 
50.7

 
3.1
%
 
(8.9
)
 
(17.6
)%
Loss from discontinued operations,
net of income tax
 
(27.1
)
 
(1.3
)%
 

 
%
 
(27.1
)
 
(100.0
)%
Net income
 
$
14.7

 
0.7
 %
 
$
50.7

 
3.1
%
 
$
(36.0
)
 
(71.0
)%

Net Revenue
Net revenue by product category was as follows:
(in millions)
 
2016
 
2015
 
Favorable/
(Unfavorable)
Variance
Branded
 
$
1,638.3

 
77.7
%
 
$
1,190.2

 
71.9
%
 
$
448.1

 
37.6
 %
Partner brand
 
300.4

 
14.2
%
 
300.5

 
18.1
%
 
(0.1
)
 
 %
Other
 
170.5

 
8.1
%
 
165.7

 
10.0
%
 
4.8

 
2.9
 %
Net revenue
 
$
2,109.2

 
100.0
%
 
$
1,656.4

 
100.0
%
 
$
452.8

 
27.3
 %
Prior year Partner brand revenues from the sale of Kettle Brand ® potato chips are now classified as Branded revenues as a result of the Diamond Foods acquisition. For 2015, we have reclassified $34.8 million of Partner brand revenue associated with Kettle Brand ® potato chips to Branded revenue to be consistent with current year presentation.
Net revenue increased $452.8 million , or 27.3% , in 2016 compared to 2015 , primarily due to increased revenue associated with the contribution of Diamond Foods. Excluding the revenue increase from Diamond Foods, overall net revenue increased 0.6% as increased Branded revenue was partially offset by a decrease in the Other revenue category.

24



The following table reflects revenue by product category adjusted for incremental revenue attributable to Diamond Foods and compares net revenue excluding the Diamond Foods contribution for 2016 to net revenue for 2015:
(in millions)

2016 Net Revenue

Incremental Diamond Foods Net Revenue

2016 Net Revenue excluding Diamond Foods (1)

2015 Net Revenue

Favorable/
(Unfavorable)
Variance
Branded

$
1,638.3


$
430.2


$
1,208.1


$
1,190.2


$
17.9


1.5
 %
Partner brand

300.4




300.4


300.5


(0.1
)

 %
Other

170.5


13.3


157.2


165.7


(8.5
)

(5.1
)%
Net revenue

$
2,109.2


$
443.5


$
1,665.7


$
1,656.4


$
9.3


0.6
 %
(1) The non-GAAP measure and related comparisons in the table above should be considered in addition to, not as a substitute for, our net revenue disclosure, as well as other measures of financial performance reported in accordance with GAAP, and may not be comparable to similarly titled measures used by other companies. Our management believes the presentation of 2016 Net Revenue excluding Diamond Foods is useful for providing increased transparency and assisting investors in understanding our ongoing operating performance.
Branded net revenue increased $448.1 million , or 37.6% , compared to 2015 , primarily due to incremental revenue from Diamond Foods. Branded net revenue, excluding Diamond Foods, was up $17.9 million, or 1.5%, compared to 2015. Overall Branded volume increased approximately 5% during 2016 and all of our Core brands increased market share in the IRI covered channels. The volume increase was partially offset by lower net price realization due to additional investments in promotional spending necessary to drive sales in a highly competitive environment. Net revenue from our legacy Core brands increased by more than 2% as 3-5% growth in Lance ® , Snack Factory ® Pretzel Crisps ® , and Cape Cod ® , and greater than 10% growth in Late July ® was partially offset by a slight decline in net revenue from Snyder's of Hanover ® . However, Snyder's of Hanover ® net revenue showed marked improvement in the second half of the year due to the brand renovation efforts undertaken in the first half of the year, including the successful Pretzels Baby ® marketing and advertising campaign.
Partner brand net revenue declined slightly in 2016 compared to 2015 as volume declines for certain Partner brand products were substantially offset by volume increases in other Partner brands.

Other net revenue, excluding Diamond Foods, decreased $8.5 million, or 5.1%, due primarily to the planned exit of certain contract manufacturing agreements, as well as increased Branded production at certain manufacturing facilities which limited the capacity for contract manufacturing.
Gross Profit
Gross profit increased $184.5 million , and 1.2% as a percentage of net revenue compared to 2015 . The dollar increase in gross margin was due to increased sales volume primarily due to the acquisition of Diamond Foods. The increase in gross profit as a percentage of net revenue in 2016 was due to lower input costs, increased productivity at our manufacturing facilities, and a higher mix of Branded sales, which typically have a higher gross margin than Partner brand or Other sales. These increases were partially offset by increased investment in promotional spending compared to 2015, to support the growth of our Core brands, as well as the inventory step-up of $11.3 million required for purchase accounting associated with the Diamond Foods acquisition. The increase in promotional spending as a percentage of revenue, excluding Diamond Foods, resulted in approximately $27.0 million of additional promotional expense compared to 2015, or approximately 1.3% lower gross profit as a percentage of revenue for 2016, compared to 2015.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $129.5 million in 2016 , compared to 2015 , and increased 0.2% as a percentage of net revenue. The increase in selling, general and administrative expenses was primarily due to additional expenses attributable to Diamond Foods. The increase in selling, general and administrative expenses as a percentage of revenue was due to increased investments in marketing and advertising to support our Branded products, as well as higher incentive compensation expense due to improved operating performance. These increases were largely offset by synergies realized in conjunction with the integration of Diamond Foods as well as other margin enhancement initiatives.


25



Transaction and Integration Related Expenses
We recognized $66.3 million in Diamond Foods transaction and integration related expenses during 2016. These expenses in continuing operations included $17.5 million of severance and retention benefits and $16.4 million of accelerated stock-based compensation, which related primarily to change in control provisions and severance agreements with Diamond Foods personnel. The remaining costs include investment banking fees as well as other professional fees and legal costs associated with the acquisition and integration of Diamond Foods. We recognized $7.7 million of Diamond Foods related transaction expenses during 2015 for professional fees and legal costs associated with the acquisition.

Settlement of certain litigation
During 2015, we recognized $5.7 million in expense associated with settlements reached in our "all-natural" and IBO class action lawsuits. See Note 16 to the consolidated financial statements included in Item 8 for additional information related to these settlements. There were no significant litigation settlements in 2016.
Impairment Charges
Impairment charges of $4.5 million were recorded during 2016 , compared to $12.0 million during 2015 . During 2016, we sold the Diamond of California business which included certain tangible assets (see Note 3 to the consolidated financial statements included in Item 8 for further information). In connection with this transaction, we recorded impairment of $2.3 million for certain machinery and equipment we retained, but no longer have the ability to use. We also incurred impairment charges of $1.4 million related to the discontinuation of manufacturing certain products. During 2015, we made the decision to move the production of certain products and provide additional packaging alternatives to improve operational efficiency, which resulted in fixed asset impairment charges of $11.5 million in 2015.

In addition, in 2016, we recorded $0.8 million of impairments related to route businesses compared to $0.5 million in 2015.

Other Income, Net
We recognized other income of $5.5 million in 2016 primarily due to a $4.3 million insurance settlement related to a business interruption claim that resulted from an unexpected production outage in the fourth quarter of 2015. Other income in 2015 of $1.1 million primarily consisted of $1.9 million in net gains on the sale of route businesses, partially offset by $0.7 million of expense associated with the derecognition of our cumulative translation adjustment due to the liquidation of our Canadian subsidiary.

During 2016 , we also recognized $1.3 million in net gains on the sale of route businesses. Net gains on the sale of route businesses in 2016 consisted of $5.5 million in gains and $4.2 million in losses. For 2015, net gains on the sale of route businesses consisted of $3.3 million in gains and $1.4 million in losses. The majority of the route business sales in 2016 were due to route reengineering projects that were initiated in order to maximize the efficiency of route territories for the IBOs. The majority of the net gains on the sale of route business during 2015 were due to the decision to sell certain route businesses that were previously Company-owned as well as route reengineering projects.

Loss on Early Extinguishment of Debt
In February of 2016, using available borrowings from our existing credit facilities, we repaid our $100 million private placement senior notes, which were due in June 2017. The total repayment was approximately $106 million, and resulted in a loss on early extinguishment of approximately $4.7 million.

Interest Expense, Net
Interest expense increased $21.8 million during 2016 compared to 2015. The increase in net interest expense was the result of additional debt obtained to finance the acquisition of Diamond Foods.
Income Tax Expense
The effective income tax rate increased to 37.7% in 2016 from 36.3% in 2015. The increase in the effective income tax rate in 2016 was primarily due to non-deductible Diamond Foods related transaction costs in 2016.
Loss from Discontinued Operations, Net of Income Tax
Loss from discontinued operations, net of income tax, included in 2016 was primarily due to the loss on the sale of Diamond of California, partially offset by income generated by discontinued operations prior to the sale. See Note 3 to the consolidated financial statements included in Item 8 for additional information related to this sale. There were no discontinued operations in 2015.

26



Year Ended January 2, 2016 (52 weeks) Compared to Year Ended January 3, 2015 (53 weeks)
(in millions)
 
2015
 
2014
 
Favorable/
(Unfavorable)
Variance
Net revenue
 
$
1,656.4

 
100.0
%
 
$
1,620.9

 
100.0
 %
 
$
35.5

 
2.2
 %
Cost of sales
 
1,077.1

 
65.0
%
 
1,042.4

 
64.3
 %
 
(34.7
)
 
(3.3
)%
Gross profit
 
579.3

 
35.0
%
 
578.5

 
35.7
 %
 
0.8

 
0.1
 %
Selling, general and administrative
 
464.5

 
28.0
%
 
478.5

 
29.5
 %
 
14.0

 
2.9
 %
Transaction-related expenses
 
7.7

 
0.5
%
 

 
 %
 
(7.7
)
 
(100.0
)%
Settlements of certain litigation
 
5.7

 
0.3
%
 

 
 %
 
(5.7
)
 
(100.0
)%
Impairment charges
 
12.0

 
0.7
%
 
13.0

 
0.8
 %
 
1.0

 
7.7
 %
Gain on the revaluation of prior equity investment
 

 
%
 
(16.6
)
 
(1.0
)%
 
(16.6
)
 
(100.0
)%
Other income, net
 
(1.1
)
 
%
 
(1.3
)
 
(0.1
)%
 
(0.2
)
 
(15.4
)%
Income before interest and income taxes
 
90.5

 
5.5
%
 
104.9

 
6.5
 %
 
(14.4
)
 
(13.7
)%
Interest expense, net
 
10.9

 
0.7
%
 
13.4

 
0.8
 %
 
2.5

 
18.7
 %
Income tax expense
 
28.9

 
1.7
%
 
32.3

 
2.0
 %
 
3.4

 
10.5
 %
Income from continuing operations
 
50.7

 
3.1
%
 
59.2

 
3.7
 %
 
(8.5
)
 
(14.4
)%
Income from discontinued operations,
net of income tax
 

 
%
 
133.3

 
8.2
 %
 
(133.3
)
 
(100.0
)%
Net income
 
$
50.7

 
3.1
%
 
$
192.5

 
11.9
 %
 
$
(141.8
)
 
(73.7
)%

Net Revenue
Net revenue by product category was as follows:
(in millions)
 
2015
 
2014
 
Favorable/
(Unfavorable)
Variance
Branded
 
$
1,190.2

 
71.9
%
 
$
1,154.7

 
71.2
%
 
$
35.5

 
3.1
 %
Partner brand
 
300.5

 
18.1
%
 
306.2

 
18.9
%
 
(5.7
)
 
(1.9
)%
Other
 
165.7

 
10.0
%
 
160.0

 
9.9
%
 
5.7

 
3.6
 %
Net revenue
 
$
1,656.4

 
100.0
%
 
$
1,620.9

 
100.0
%
 
$
35.5

 
2.2
 %
Previous Partner brand revenues from the sale of Kettle Brand ® potato chips are now classified as Branded revenues as a result of the Diamond Foods acquisition. For 2015 and 2014, we have reclassified $34.8 million and $33.8 million of Partner brand revenue associated with Kettle Brand ® potato chips to Branded revenue to be consistent with the 2016 presentation.
Net revenue increased $35.5 million , or 2.2% , in 2015 compared to 2014 , primarily due to acquisitions, which was partially offset by the additional week of revenue recognized in 2014.

27



The following table reflects revenue by product category adjusted for amounts attributable to the 53rd week and compares 2015 net revenue to 2014 Adjusted Net Revenue:
(in millions)
 
2015 Net Revenue
 
2014 Net Revenue
 
Estimated 53rd week
 
2014 Adjusted Net Revenue   (1)
 
Favorable/
(Unfavorable)
Variance
Branded
 
$
1,190.2

 
$
1,154.7

 
$
21.2

 
$
1,133.5

 
$
56.7

 
5.0
%
Partner brand
 
300.5

 
306.2

 
5.9

 
300.3

 
0.2

 
0.1
%
Other
 
165.7

 
160.0

 
3.3

 
156.7

 
9.0

 
5.7
%
Net revenue
 
$
1,656.4

 
$
1,620.9

 
$
30.4

 
$
1,590.5

 
$
65.9

 
4.1
%
(1) The non-GAAP measures and related comparisons in the table above should be considered in addition to, not as a substitute for, our net revenue disclosure, as well as other measures of financial performance reported in accordance with GAAP, and may not be comparable to similarly titled measures used by other companies. Our management believes the presentation of 2014 Adjusted Net Revenue is useful for providing increased transparency and assisting investors in understanding the ongoing operating performance of our Company.
Branded net revenue increased $35.5 million , or 3.1% , compared to 2014, primarily due to incremental Late July ® revenue resulting from the consolidation of Late July ® beginning at the end of October 2014, as well as revenue growth in our other Core brands. Revenue from branded products increased approximately $56.7 million , or 5.0% in 2015, when excluding our estimate of the 53rd week in 2014. Revenue growth from our Core brands, excluding the impact of Late July ® , was led by double digit revenue increases in Cape Cod ® branded products as well as revenue increases in our Snack Factory ® Pretzel Crisps ® and Lance ® branded products. Our Cape Cod ® kettle cooked chips experienced strong volume growth and increased market share when compared to 2014, due to growth in core markets and continued expanded distribution. We also continued to experience revenue and market share growth in Snack Factory ® Pretzel Crisps ® . Our Lance ® branded products performed well compared to 2014, with increased revenue and market share driven in part by distribution gains in the second half of the year. These revenue increases were partially offset by slight revenue declines from our Snyder’s of Hanover ® branded products in 2015, compared to 2014, after excluding the impact of the 53rd week in 2014. The volume decline was primarily due to overall softness in the pretzel category in the second half of 2015. Revenue from our Allied branded products was down in 2015 compared to 2014, after adjusting for the 53rd week, primarily due to volume declines in certain salty product lines.
Partner brand net revenue increased 0.1% in 2015 compared to 2014 after adjusting for the 53rd week. During the second half of 2015, we experienced volume declines as a result of lower promotional activities for many of the Partner brands that we sell through our DSD distribution network.

Other revenue, which primarily consists of revenue from contract manufactured products, increased $5.7 million , or 3.6% , from 2015 to 2016 , and was up $9.0 million , or 5.7% , after adjusting for the 53rd week in 2014. The increase was primarily due to a full year of revenue from Baptista's, which was acquired in June of 2014. However, this increase was partially offset by a reduction in orders from Shearer's Foods LLC as part of our manufacturing and supply agreement, as well as lost revenue due to a power outage at one of our major manufacturing facilities.
Gross Profit
Gross profit increased $0.8 million , but declined 0.7% as a percentage of net revenue compared to 2014. The dollar increase in gross margin was due to increased sales volume compared to the prior year. The decline as a percentage of revenue was primarily the result of increased promotional spending to support our new product offerings and generate volume for our Branded products. The increase in promotional spending as a percentage of revenue during 2015, resulted in approximately $13.5 million of additional promotional expense compared to 2014, or approximately 0.8% lower gross profit as a percentage of revenue for 2015, compared to 2014.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $14.0 million in 2015 , compared to 2014 , and decreased 1.5% as a percentage of net revenue. The decrease in selling, general and administrative expenses compared to 2014 was primarily due to cost reduction efforts associated with our margin improvement and restructuring plan, declines in fuel and freight costs, lower incentive compensation expense and less marketing and advertising costs. These reductions were partially offset by a full year of Baptista's and Late July expense.


28



Transaction-related Expenses
We recognized $7.7 million of Diamond Foods related transaction expenses during 2015, related to professional fees and legal costs associated with the acquisition. There were no Diamond Foods related transaction expenses recognized in 2014.

Settlement of Certain Litigation
During 2015, we recognized $5.7 million in expense associated with settlements reached in our "all-natural" and IBO class action lawsuits. See Note 16 to the consolidated financial statements included in Item 8 for additional information related to these settlements. There were no significant litigation settlements in 2014.
Impairment Charges
Impairment charges of $12.0 million were recorded during 2015, compared to $13.0 million during 2014. During 2015, we made the decision to move the production of certain products and provide additional packaging alternatives to improve operational efficiency. As a result, we recognized fixed asset impairment charges of $11.5 million in 2015, compared to $5.7 million in asset impairment charges in 2014. In addition, in 2015, we recorded $0.5 million of impairments related to route businesses compared to $3.7 million in 2014. We also recorded $3.6 million in trademark impairments in 2014, while no trademark impairments were necessary in 2015.
Gain on the Revaluation of Prior Equity Investment
During 2014, we recognized a $16.6 million gain on the revaluation of our prior 18.7% equity investment in Late July. Because of our purchase of a controlling interest in Late July, the equity of the entire entity was increased to fair value, which resulted in a $16.6 million increase in the value of our prior investment.

Other Income, Net
Other income decreased from $1.3 million in 2014 to $1.1 million in 2015. Other income in 2015 of $1.1 million primarily consisted of $1.9 million in net gains on the sale of route businesses, partially offset by $0.7 million of expense associated with the derecognition of our cumulative translation adjustment due to the liquidation of our Canadian subsidiary. Other income in 2014 principally consisted of $1.1 million in net gains on the sale of route businesses.

Net gains on the sale of route businesses in 2015 consisted of $3.3 million in gains and $1.4 million in losses. For 2014, net gains on the sale of route businesses consisted of $3.3 million in gains and $2.2 million in losses. The majority of the net gains on the sale of route business during 2015 were due to the decision to sell certain route businesses that were previously Company-owned as well as route reengineering projects that were initiated in order to maximize the efficiency of route territories for the IBOs. The majority of the route business sales activity in 2014 was due to the resale of routes purchased because of IBO defaults or route reengineering projects.
Interest Expense, Net
Interest expense decreased $2.5 million during 2015, compared to 2014. The decrease was due to lower debt levels in 2015, as well as a $0.8 million write-off of previously capitalized debt issuance costs that occurred in 2014 due to debt refinancing.
Income Tax Expense
The effective income tax rate increased to 36.3% in 2015 from 35.3% in 2014. The increase in the effective income tax rate in 2015 was primarily due to non-deductible Diamond Foods related transaction costs in late 2015.
Income from Discontinued Operations, Net of Income Tax
Income from discontinued operations, net of income tax, included in 2014 is primarily due to the gain recognized as a result of the completion of the sale of Private Brands. There were no discontinued operations in 2015.


29



Liquidity and Capital Resources
Liquidity
Liquidity represents our ability to generate sufficient cash flows from operating activities to meet our obligations as well as our ability to obtain appropriate financing. Therefore, liquidity should not be considered separately from capital resources that consist primarily of current and potentially available funds for use in achieving our objectives. Currently, our liquidity needs arise primarily from acquisitions, working capital requirements, capital expenditures for fixed assets and dividends. We believe we have sufficient liquidity available to enable us to meet these demands throughout the next twelve months as well as over the long-term.
Cash Flows
The following table sets forth a summary of our cash flows for each of the past three years:
(in thousands)
 
2016
 
2015
 
2014
Net cash provided by/(used in):
 
 
 
 
 
 
Operating activities
 
$
261,199

 
$
146,154

 
$
13,025

Investing activities
 
(1,116,861
)
 
(44,026
)
 
99,035

Financing activities
 
853,008

 
(98,396
)
 
(90,767
)
Effect of exchange rate changes on cash
 
(1,042
)
 

 

Net (decrease)/increase in cash and cash equivalents
 
$
(3,696
)
 
$
3,732

 
$
21,293

Operating Cash Flows
Cash flow provided by operating activities increas ed $115.0 million in 201 6, compared to 2015. Operating cash flows increased approximately $42 million, due to an increase in the payable to growers balance from the time of the Diamond Foods acquisition to the time of the divestiture of Diamond of California. We also paid considerably less income taxes in 2016, because we used net operating losses acquired in the Diamond Foods acquisition to offset most current taxes payable. In addition, depreciation and amortization was $28.9 million higher in 2016, due primarily to the additional intangible and fixed assets associated with the Diamond Foods acquisition, and stock based compensation was $21.0 million higher in 2016, due to acceleration of vesting for former Diamond Foods personnel.
Cash flow provided by operating activities i ncreased $133.1 million in 2015, comp ared to 2014. The increase in net cash provided by operating activities was primarily driven by taxes paid in 2014, due to the gain on the sale of Private Brands. Approximately $127 million in income taxes related to the gain on the sale of Private Brands were paid in 2014. Excluding the payment of these income taxes, net cash provided by operating activities was favorable by approximately $6 million from 2014, compared to 2015.
Investing Cash Flows
Cash used by investing activitie s totaled $1,116.9 million in 2016, compared with $44.0 million in 2015. The increase in cash used in investing activities was primarily driven by the acquisition of Diamond Foods, which accounted for approximately $1.0 billion of the increase.
Capital expenditures for fixed assets, principally manufacturing equipment , increased from $51.5 million in 2015 to $73.3 million in 2016, primarily due to additional capital expenditures necessary to support the acquired Diamond Foods business, of which approximately $0.5 million r elated to discontinued operations. Purchases of route businesses, net of sales, resulted in cash outflows of $2.6 million in 2016, compared to net cash inflows of $4.8 million in 2015. The majority of the net cash outflows generated from the purchase of routes, net of proceeds from route sales, in 2016 were due to restructuring certain routes at the end of 2016, which we have not sold as of the year end.
Cash used by investing activities totaled $44.0 million i n 2015, compared with cash provided by investing activities of $99.0 million in 2014. The significant decrease in cash provided by investing activities was due to the proceeds received from the sale of Private Brands in 2014 of $430 million , which was partially offset by cash used for the acquisition of Baptista's and our additional investment in Late July totaling $262.3 million. Capital expenditures for fixed assets, principally manufacturing equipment , decreased from $72.1 million in 2014 to $51.5 million in 2015. The decrease from 2014 to 2015 was due to additional capital expenditures in 2014 used to u pgrade equipment and enhance capacity, while the capital expenditures in 2015 were primarily used to maintain our machinery and equipment and support revenue growth. Proceeds from the sale of route businesses, net of purchases, generated cash inflows of $4.8 million i n 2015, compared to net cash inflows of $1.0 million in 2014. The majority of the net cash inflows generated from the sale of routes in 2015 were due to the decision to sell certain route businesses that were previously Company-owned.

30



Financing Cash Flows
Net cash provided by fi nancing activities of $853.0 million in 2016, was principally due to proceeds from the issuance of long-term debt of $1.13 billion that were used primarily to fund the acquisition of Diamond Foods . This significant cash inflow was partially offset by dividends paid of $57.6 million and repayments of long-term debt of $438.6 million. In addition we received net proceeds from our revolving credit facility of $227.0 million. This compared to cash used in financing activities of $98.4 million in 2015, which was principally due to dividends paid of $45.2 million , as well as debt repayments of $57.5 million . Cash used in financing activities in 2014 was $90.8 million , primarily due to dividends paid of $44.9 million as well as debt repayments of $50.4 million .
On February 8, 2017 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on March 3, 2017 to stockholders of record on February 23, 2017 .
Debt
Unused and available borrowings were $148.0 million under our existing credit facilities at December 31, 2016 , as compared to $375 million at January 2, 2016 . Under certain circumstances and subject to certain conditions, we have the option to increase available credit under the Credit Agreement by up to $200 million during the life of the facility. We also maintain standby letters of credit in connection with our self-insurance reserves for casualty claims. The total amount of these letters of credit was $12.6 million as of December 31, 2016 .

In February of 2016, using available borrowings from our existing credit facilities and cash on hand, we repaid our $100 million private placement senior notes which were due in June 2017. The total repayment was approximately $106 million, and resulted in a loss on early extinguishment of approximately $4.7 million.

Credit Agreement
In conjunction with our acquisition of Diamond Foods, we entered into a senior unsecured credit agreement with the term lenders party thereto (the "Term Lenders") and Bank of America, N.A., as administrative agent ("Credit Agreement"). Under the Credit Agreement, the Term Lenders provided (i) senior unsecured term loans in an original aggregate principal amount of $830 million maturing five years after the funding date (the “Senior Five Year Term Loans”) and (ii) senior unsecured term loans in an original aggregate principal amount of $300 million maturing ten years after the funding date (the “Senior Ten Year Term Loans”). The $1.13 billion in proceeds from the Credit Agreement were used to finance, in part, the cash component of the acquisition consideration, to repay indebtedness of Diamond Foods and Snyder's-Lance, and to pay certain fees and expenses incurred in connection with the acquisition.

Loans outstanding under the Credit Agreement bear interest, at our option, either at (i) a Eurodollar rate plus an applicable margin specified in the Credit Agreement or (ii) a base rate plus an applicable margin specified in the Credit Agreement. The applicable margin added to the Eurodollar rate or base rate, as the case may be, is subject to adjustment after the end of each fiscal quarter based on changes in the Company’s adjusted total net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio.
The outstanding principal amount of the Senior Five Year Term Loans is payable in equal quarterly installments of $10.4 million on the last business day of each quarter. These payments began in the second quarter of 2016 and continue through December 2020. The remaining unamortized balance is payable in February 2021. The outstanding principal amount of the Senior Ten Year Term Loans is payable in quarterly principal installments of $15.0 million beginning in the second quarter of 2021 and continuing through December 2025. The remaining unamortized balance is payable in February 2026. The Credit Agreement also contains optional prepayment provisions.
Our obligations under the Credit Agreement are guaranteed by all of our existing and future direct and indirect wholly-owned domestic subsidiaries other than any such subsidiaries that, taken together, do not represent more than 10.0% of the total domestic assets or domestic revenues of the Company and its wholly-owned domestic subsidiaries. The Credit Agreement contains customary representations, warranties and covenants. The financial covenants include a maximum total debt to EBITDA ratio of 4.75 to 1.00 for the first two quarters following the acquisition and decreasing over the period of the loan to 3.50 to 1.00 in the eighth quarter following the acquisition. For the year ended December 31, 2016 the maximum ratio allowed was 4.25 to 1.00, and our total debt to EBITDA ratio was 4.17 to 1.00. It should be noted that this ratio removes the earnings of Diamond of California but not the cash received shortly after year end. We received the cash consideration of $118.6 million for the sale of Diamond of California on January 3, 2017, which we used to repay a portion of our indebtedness, resulting in a decrease of our debt to EBITDA ratio to 3.80. We are in compliance and expect to remain in compliance with this covenant for the remainder of 2017.

31



The financial covenants also include a minimum interest coverage ratio of 2.50 to 1.00. As of December 31, 2016, our interest coverage ratio was 6.51. We are currently in compliance and expect to remain in compliance with this covenant. Other covenants include, but are not limited to, limitations on: (i) liens, (ii) dispositions of assets, (iii) mergers and consolidations, (iv) loans and investments, (v) subsidiary indebtedness, (vi) transactions with affiliates and (vii) certain dividends and distributions. The Credit Agreement contains customary events of default, including a cross default provision and change of control provisions. If an event of default occurs and is continuing, we may be required to repay all amounts outstanding under the Credit Agreement.

Total interest expense under all credit agreements for 2016 , 2015 and 2014 was $32.9 million , $11.1 million , and $13.4 million , respectively.
Contractual Obligations
We lease certain facilities and equipment under contracts classified as operating leases. Total rental expense, excluding discontinued operations, was $37.6 million in 2016 , $27.2 million in 2015 and $25.3 million in 2014 .
In order to mitigate the risks of volatility in commodity markets to which we are exposed, we have entered into forward purchase agreements with certain suppliers based on market prices, forward price projections and expected usage levels. Purchase commitments for certain ingredients, packaging materials and energy totaled $157.2 million and $97.2 million as of December 31, 2016 and January 2, 2016 , respectively. The increase in purchase commitments was due to incremental Diamond Foods commitments. In addition to these commitments, we have contracts for certain ingredients and packaging materials where we have secured a fixed price but do not have a minimum purchase quantity. We generally contract from approximately three months to twelve months in advance for certain major ingredients and packaging. We also have a licensing contract which totaled $13.9 million as of December 31, 2016, and continues through 2020.
We have contracts to receive services from syndicated market data providers through 2023. Our commitment for these services ranges from $4.6 million to $5.3 million per year, throughout the life of the contracts and totals $31.6 million as of December 31, 2016.
Contractual obligations as of December 31, 2016 were:  
(in thousands)
 
 
 
Payments Due by Period
Total    
 
2017
 
2018-2019
 
2020-2021
 
Thereafter
Purchase commitments
 
$
202,740

 
$
166,032

 
$
19,030

 
$
10,397

 
$
7,281

Debt, including interest payable  (1)
 
1,482,036

 
89,390

 
519,637

 
521,411

 
351,598

Capital lease, including interest
 
4,580

 
1,647

 
2,600

 
333

 

Operating lease obligations
 
114,753

 
21,097

 
33,209

 
21,341

 
39,106

Accrued long-term incentive plan
 
7,077

 
2,427

 
4,650

 

 

Unrecognized tax benefits  (2)
 
5,196

 

 

 

 

Other liabilities  (3)
 
22,395

 

 

 

 

Total contractual obligations
 
$
1,838,777

 
$
280,593

 
$
579,126

 
$
553,482

 
$
397,985

(1) Variable interest will be paid in future periods based on the outstanding balance at that time.
(2) Unrecognized tax benefits relate to uncertain tax positions recorded under accounting guidance that we have adopted and include associated interest and penalties. As we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the "Payments Due by Period" section of the table.
(3) Amounts represent future cash payments to satisfy certain noncurrent liabilities recorded on our Consolidated Balance Sheets, including the short-term portion of these long-term liabilities. Included in these noncurrent liabilities on our Consolidated Balance Sheets as of December 31, 2016 were $17.3 million in accrued insurance liabilities and $5.1 million in other liabilities. As the specific payment dates for these liabilities is unknown, the related balances have not been reflected in the "Payments Due by Period" section of the table.

32



Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity or cash flows.
We currently provide a partial guarantee for loans made to IBOs by certain third-party financial institutions for the purchase of route businesses. The outstanding aggregate balance on these loans was approximately $154.1 million as of December 31, 2016 compared to approximately $139.3 million as of January 2, 2016 . The $14.8 million increase in the guarantee was primarily due to new IBO loans as a result of zone restructuring and sale of additional routes. The annual maximum amount of future payments we could be required to make under the guarantees equates to 25% of the outstanding loan balance on the first day of each calendar year plus 25% of the amount of any new loans issued during such calendar year. These loans are collateralized by the route businesses for which the loans are made. Accordingly, we have the ability to recover substantially all of the outstanding loan value upon default, and our liability associated with this guarantee is not material.
Critical Accounting Estimates
Preparing the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. We believe the following estimates and assumptions to be critical accounting estimates. These estimates and assumptions may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and may have a material impact on our financial condition or operating performance. Actual results may differ from these estimates under different assumptions or conditions.
Revenue Recognition
We recognize revenue when title and risk of loss passes to our customers. Allowances for sales returns, stale products, promotions and discounts are recorded as reductions of revenue in the consolidated financial statements. The timing of revenue recognition varies based on the types of products sold and the distribution method.
Revenue for products sold to IBOs in our DSD network is recognized when the IBO purchases the inventory from our warehouses or the products are shipped to the stockroom. Revenue for products sold to retail customers through routes operated by our associates is recognized when the product is delivered to the customer.
Revenue for products shipped directly to customers from our warehouses is recognized based on the shipping terms listed on the shipping documentation. Products shipped with terms FOB shipping point are recognized as revenue at the time the product leaves our warehouses. Products shipped with terms FOB destination are recognized as revenue based on the anticipated receipt date by the customer.
We allow certain customers to return products under agreed upon circumstances. We record a returns allowance for damaged products and other products not sold by the expiration date on the product label. This allowance is estimated based on a percentage of historical sales returns and current market information.
We record certain reductions to revenue for promotional allowances. There are several different types of promotional allowances such as off-invoice allowances, rebates and shelf space allowances. An off-invoice allowance is a reduction to the sales price that is directly deducted from the invoice amount. We record the amount of the deduction as a reduction to revenue when the transaction occurs. Rebates are offered to retail customers based on the quantity of product purchased over a period of time. Based on the nature of these allowances, the exact amount of the rebate is not known at the time the product is sold to the customer. An estimate of the expected rebate amount is recorded as a reduction to revenue at the time of the sale and a corresponding accrued liability is recorded. The accrued liability is monitored throughout the time period covered by the promotion, and is based on historical information and the progress of the customer against the target amount. We also record certain allowances for coupon redemptions, scan-back promotions and other promotional activities as a reduction to revenue. The accrued liabilities for these allowances are monitored throughout the time period covered by the coupon or promotion.
Shelf space allowances are capitalized and amortized over the lesser of twelve months or the life of the agreement and recorded as a reduction to revenue. Capitalized shelf space allowances are evaluated for impairment on an ongoing basis.
Total allowances for sales returns, rebates, coupons, scan-backs and other promotional activities recorded in the Consolidated Balance Sheets was $39.8 million and $25.4 million as of December 31, 2016 and January 2, 2016, respectively. The increase related to incremental Diamond Foods promotional allowances.

33



Allowance for Doubtful Accounts
The determination of the allowance for doubtful accounts is based on management’s estimate of uncollectible accounts receivable. We record a general reserve based on analysis of historical data and aging of accounts receivable. In addition, management records specific reserves for receivable balances that are considered at higher risk due to known facts regarding the customer. The assumptions for this determination are reviewed quarterly to ensure that business conditions or other circumstances are consistent with the assumptions. The allowance for doubtful accounts was $1.3 million and $0.9 million as of December 31, 2016 and January 2, 2016 , respectively. The increase in the allowance for doubtful accounts from 2015 to 2016 was primarily due to additional accounts receivable associated with the acquisition of Diamond Foods.
Self-Insurance Reserves
We maintain reserves for the self-funded portions of employee medical insurance benefits. Our portion of employee medical claims is limited to $0.4 million per participant annually by stop-loss insurance coverage. The accrual for incurred but not reported medical insurance claims was $3.9 million and $3.8 million in 2016 and 2015 , respectively.
We maintain self-insurance reserves for workers’ compensation and auto liability for individual losses up to the deductibles which are currently $0.8 million per individual loss for workers' compensation, $0.5 million for auto liability per accident and $0.3 million for auto physical damage per accident. In addition, certain general and product liability claims are self-funded for individual losses up to the $0.5 million insurance deductible. Claims in excess of the deductible are fully insured up to $100 million per occurrence and in the aggregate. We evaluate input from a third-party actuary in the estimation of the casualty insurance obligation on an annual basis. In determining the ultimate loss and reserve requirements, we use various actuarial assumptions, including compensation trends, health care cost trends and discount rates. In 2016 , we used a discount rate of 2.0% , the same rate used in 2015 , based on treasury rates over the estimated future payout period.
We also use historical information for claims frequency and severity in order to establish loss development factors. For 2016 and 2015 , we had accrued liabilities related to the retained risks of $17.3 million and $16.2 million , respectively, included in the accruals for casualty insurance claims in our Consolidated Balance Sheets. The liabilities related to our casualty insurance claims were partially offset by estimated reimbursements for amounts in excess of our deductibles associated with these claims of $4.6 million and $5.2 million for 2016 and 2015, respectively, which are included in other noncurrent assets in our Consolidated Balance Sheets.
Impairment Analysis of Goodwill and Intangible Assets
Goodwill is tested for impairment on an annual basis, and between annual tests if indicators of potential impairment exist, for each identified reporting unit using a fair-value-based approach. As part of our 2016 analysis, we identified two reporting units, North America and Europe.

The annual impairment analysis of goodwill requires us to project future financial performance, including revenue and profit growth, fixed asset and working capital investments, income tax rates and our weighted average cost of capital. These projections rely upon historical performance, anticipated market conditions and forward-looking business plans.
The North America and Europe impairment analysis of goodwill was performed using a discounted cash flow model, as of December 31, 2016 , and assumed a combined average annual revenue growth of approximately 3.1% and 4.9%, respectively during the valuation period. The 4.9% combined annual growth for Europe is only 3.1% when excluding the increased revenue from 2016 to 2017, which is substantially higher due to two additional months of KETTLE ® Chips revenue and eight additional months of revenue from our Metcalfe acquisition. We also assumed a 3% terminal growth rate for each reporting unit. This compares to a combined average annual revenue growth of approximately 3.5% and a terminal growth rate of 3% used in the impairment analysis as of January 2, 2016 , which was done using only one reporting unit as the UK operations had not been acquired at that time.

34



We use a combination of internal and external data to develop the weighted average cost of capital, which was 7.0% and 7.5% for North America and Europe, respectively, for 2016. For our 2015 goodwill impairment analysis, we used an 8.0% weighted average cost of capital for the test of our one reporting unit. The decrease in the weighted average cost of capital in 2016 was primarily due to the growth of our Company in the past year. Significant investments in fixed assets and working capital to support the assumed revenue growth are estimated and factored into the analysis. If the assumed revenue growth is not achieved, anticipated investments in fixed assets and working capital could be reduced. As of December 31, 2016, the goodwill impairment analysis resulted in our North America reporting unit having a fair value substantially in excess of its carrying value, and our European reporting unit with excess fair value over carrying value of approximately 15% . Even with a significant amount of excess fair value over carrying value, major changes in assumptions or changes in conditions could result in a goodwill impairment charge in the future. 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 either of our reporting units' implied fair value being less than their carrying value.
Our trademarks are valued using the relief-from-royalty method under the income approach, which requires us to estimate unobservable factors such as a royalty rate and discount rate and identify relevant projected revenue. In 2016 and 2015 , there were no impairments recorded for our trademarks. We recorded impairment charges of $3.6 million in 2014 for certain trademarks. In addition to the $550.7 million acquired in the Diamond Foods acquisition, certain trade names with a total book value of $12.9 million as of December 31, 2016 , currently have a fair value which exceeds the book value by less than 15%. The trademarks related to the acquisition of Diamond Foods remain reasonably close to fair value. Any adverse changes in the use of these trademarks or the sales volumes of the associated products could result in an impairment charge in the future.
Our route intangible assets are valued by comparing the current fair market value for the route assets to the associated book value. The fair market value is computed using the route sales average for each route multiplied by the market multiple for the area in which the route is located. We recognized route intangible asset impairments of $0.8 million, $0.5 million and $3.7 million of in 2016 , 2015 and 2014, respectively, as a result of this analysis. Many of our route territories have fair values that approximate book value. Any economic declines or other adverse changes such as decreased demand for our products in those areas could result in future impairment charges.
Other intangible assets, primarily customer and contractual relationships and patents, are tested for impairment if events or changes in circumstances indicate that it is more likely than not that fair value is less than book value. No event-driven impairment assessments were deemed necessary for 2016 , 2015 or 2014 .
Route Intangible Purchase and Sale Transactions
We purchase and sell route businesses as a part of maintenance of our DSD network. Route businesses subject to purchase and sale transactions represent integrated sets of inputs, activities and processes that are capable of being conducted and managed for the purpose of providing a return directly to the IBOs and meet the definition of a business in accordance with ASC 805, Business Combinations . Upon acquisition of a route business, we allocate the purchase price based on the fair value of the indefinite-lived route intangible, representing our perpetual and exclusive distribution right in the route territory, with any excess purchase price attributed to goodwill. We recognize a gain or a loss on the sale of a route business upon completion of the sales transaction and signing of the relevant documents. Gain or loss on sale is determined by comparing the basis of the route business sold, which includes a relative fair value allocation of goodwill in accordance with ASC 350, Intangibles-Goodwill and Other , to the proceeds received from the IBO. For 2016 , 2015 and 2014 , we recognized net gains on the sale of route businesses of $1.3 million , $1.9 million and $1.1 million , respectively. Net gains on the sale of route businesses in 2016 consisted of $5.5 million in gains and $4.2 million in losses. Net gains on the sale of route businesses in 2015 consisted of $3.3 million in gains and $1.4 million in losses. For 2014 , net gains on the sale of route businesses consisted of $3.3 million in gains and $2.2 million in losses.


35



Impairment Analysis of Fixed Assets
Fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets or asset groups to be held and used is measured by a comparison of the carrying amount of an asset or asset group to future net cash flows expected to be generated by the asset or asset group. If such assets or asset groups are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets or asset groups exceeds the fair value of the assets or asset groups. There were $3.7 million in fixed asset impairment charges recorded during 2016 , compared to $11.5 million during 2015 , and $5.7 million during 2014 .
Equity-Based Incentive Compensation Expense
Determining the fair value of share-based awards at the grant date requires judgment, including estimating the expected term, expected stock price volatility, risk-free interest rate and expected dividends. Judgment is required in estimating the amount of share-based awards that are expected to be forfeited before vesting. In addition, our long-term equity incentive plans require assumptions and projections of future operating results and financial metrics. Actual results may differ from these assumptions and projections, which could have a material impact on our financial results. Information regarding assumptions can be found in Note 6 to the consolidated financial statements included in Item 8 .
Discontinued Operations Presentation
In order to be reported within discontinued operations, our disposal of a component or group of components must represent a strategic shift that will have a major effect on our operations and financial results. Discontinued Operations are reported when a component of an entity (“component”) that can be clearly distinguished operationally, and for financial reporting purposes from the rest of the entity meets the threshold for reporting in discontinued operations, provided that a) the component meets the “held for sale” criteria; b) the operations and cash flows of the component have been, or will be, eliminated from the ongoing operations of the entity as a result of the disposal transaction; and c) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. In the Consolidated Statements of Income, income from discontinued operations is reported separately from income and expenses from continuing operations and prior periods are presented on a comparable basis. In the Consolidated Balance Sheets, the assets and liabilities of discontinued operations are presented separately from assets and liabilities of continuing operations and prior periods are presented on a comparable basis. Many provisions of reporting discontinued operations involve judgment in determining whether results from operations, assets and liabilities will be reported as continuing or discontinued operations. As a result of the sale of Diamond of California, revenues and expenses that no longer continued after the sale of Diamond of California, and where we had no substantial continuing involvement, were reclassified to discontinued operations in the Consolidated Statements of Income.
Provision for Income Taxes
Our effective tax rate is based on the level and mix of income of our separate legal entities, statutory tax rates, business credits available in the various jurisdictions in which we operate and permanent tax differences. Significant judgment is required in evaluating tax positions that affect the annual tax rate. We recognize the effect of income tax positions only if these positions are more likely than not of being sustained. We adjust these liabilities in light of changing facts and circumstances, such as the progress of a tax audit.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. We estimate valuation allowances on deferred tax assets for the portions that we do not believe will be fully utilized based on projected earnings and usage. In accordance with Accounting Standards Update ("ASU") No. 2015-17, deferred tax assets and liabilities, along with related valuation allowances, are netted by tax jurisdiction and classified as noncurrent on the balance sheet. During the fourth quarter of 2015, we elected to early-adopt ASU No. 2015-17, and the changes to deferred tax assets and liabilities were applied retrospectively.

Applicable U.S. income taxes are provided on earnings of certain foreign subsidiaries in the periods in which they are no longer considered indefinitely reinvested. In the event that management elects for any reason in the future to repatriate some or all of the foreign earnings that were previously deemed to be indefinitely reinvested outside of the United States, we would incur additional tax expense upon such repatriation.
New Accounting Standards
See Note 2 to the consolidated financial statements included in Item  8 for a summary of new accounting standards.

36




Item 7A.  Quantitative and Qualitative Disclosures about Market Risk
We are exposed to certain commodity, interest rate, and foreign currency risks as part of our ongoing business operations. We may use derivative financial instruments, where appropriate, to manage some of these risks related to interest rates. We do not use derivatives for trading purposes.
Commodity Risk
We purchase certain raw materials that are subject to price volatility caused by weather, market conditions, growing and harvesting conditions, governmental actions and other factors beyond our control. Our most significant raw material requirements include flour, potatoes, oil, peanuts, other nuts, corn, sugar, chocolate, cheese and seasonings. We also purchase packaging materials that are subject to price volatility. In the normal course of business, in order to mitigate the risks of volatility in commodity markets to which we are exposed, we enter into forward purchase agreements with certain suppliers based on market prices, forward price projections and expected usage levels. Amounts committed under these forward purchase agreements are discussed in Note 16 to the consolidated financial statements in Item 8 .
Interest Rate Risk
Our variable-rate debt obligations incur interest at floating rates based on changes in the Eurodollar rate and US base rate interest. To manage exposure to changing interest rates, we selectively enter into interest rate swap agreements to maintain a desired proportion of fixed to variable-rate debt. See Note 14 to the consolidated financial statements in Item  8 for further information related to our interest rate swap agreements. While these interest rate swap agreements fixed a portion of the interest rate at a predictable level, pre-tax interest expense would have been $1.0 million lower without these swaps during 2016 , $1.3 million lower without these swaps during 2015 and $0.6 million lower without these swaps during 2014 . Including the effect of the interest rate swap agreement, the weighted average interest rate was 2.95% and 3.14% , respectively, as of December 31, 2016 and January 2, 2016 . A 10% increase in the Eurodollar rate would not have significantly impacted interest expense during 2016 .
Credit Risk
We are exposed to credit risks related to our accounts and notes receivable. We perform ongoing credit evaluations of our customers to minimize the potential exposure. For 2016 , 2015 and 2014 , net bad debt expense was $0.5 million , $1.1 million and $1.6 million , respectively. Allowances for doubtful accounts were $1.3 million as of December 31, 2016 , and $0.9 million as of January 2, 2016 .
Foreign Currency Exchange Risk
We have operations outside the US with foreign currency denominated assets and liabilities, primarily in the U.K. Because we have foreign currency denominated assets and liabilities, financial exposure may result, primarily from the timing of transactions and the movement of exchange rates. Our risks pertaining to Brexit are discussed in Part I, Item1A - Risk Factors.

For our US operations, our sales of finished goods and purchases of raw materials and supplies from outside the US are predominantly denominated in US dollars. However, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have an impact on operating results.




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Table of Contents


Item  8 .  Financial Statements and Supplementary Data
SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Fiscal Years Ended December 31, 2016 (52 weeks),  January 2, 2016 (52 weeks) and January 3, 2015 (53 weeks)
 
(in thousands, except per share data)

2016

2015

2014
Net revenue

$
2,109,227


$
1,656,399


$
1,620,920

Cost of sales

1,345,437


1,077,110


1,042,458

Gross profit

763,790


579,289


578,462











Selling, general and administrative

593,957


464,534


478,532

Transaction and integration related expenses
 
66,272

 
7,702

 

Settlements of certain litigation



5,675



Impairment charges

4,466


11,997


13,047

Gain on the revaluation of prior equity investment





(16,608
)
Other income, net

(5,390
)

(1,075
)

(1,359
)
Income before interest and income taxes

104,485


90,456


104,850











Loss on early extinguishment of debt
 
4,749

 

 

Interest expense, net

32,613


10,853


13,342

Income before income taxes

67,123


79,603


91,508











Income tax expense

25,320


28,885


32,291

Income from continuing operations

41,803


50,718


59,217

(Loss)/income from discontinued operations, net of income tax

(27,100
)



133,316

Net income

14,703


50,718


192,533

Net (loss)/income attributable to non-controlling interests

(182
)

33


(58
)
Net income attributable to Snyder’s-Lance, Inc.

$
14,885


$
50,685


$
192,591











Amounts attributable to Snyder's-Lance, Inc.:









Continuing operations

$
41,985


$
50,685


$
59,275

Discontinued operations

(27,100
)



133,316

Net income attributable to Snyder's-Lance, Inc.

$
14,885


$
50,685


$
192,591











Basic earnings per share:









Continuing operations

$
0.46


$
0.72


$
0.84

Discontinued operations

(0.29
)



1.90

Total basic earnings per share

$
0.17


$
0.72


$
2.74











Diluted earnings per share:









Continuing operations

$
0.45


$
0.71


$
0.84

Discontinued operations

(0.29
)



1.88

Total diluted earnings per share

$
0.16


$
0.71


$
2.72











Dividends declared per common share

$
0.64


$
0.64


$
0.64

See Notes to the consolidated financial statements.

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Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Fiscal Years Ended December 31, 2016 (52 weeks),  January 2, 2016 (52 weeks) and January 3, 2015 (53 weeks)
 
(in thousands)
 
2016
 
2015
 
2014
Net income
 
$
14,703

 
$
50,718

 
$
192,533

 
 
 
 
 
 
 
Net unrealized (gain)/loss on derivative instruments, net of income tax expense/(benefit) of $4,447, ($247), and $186
 
(6,953
)
 
360

 
(304
)
Foreign currency translation adjustment
 
24,300

 
(737
)
 
11,482

Total other comprehensive loss/(income)
 
17,347

 
(377
)
 
11,178

 
 
 
 
 
 
 
Total comprehensive (loss)/income
 
(2,644
)
 
51,095

 
181,355

Comprehensive (loss)/income attributable to non-controlling interests
 
(182
)
 
33

 
(58
)
Total comprehensive (loss)/income attributable to Snyder’s-Lance, Inc.
 
$
(2,462
)
 
$
51,062

 
$
181,413

See Notes to the consolidated financial statements.

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Table of Contents

SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
As of December 31, 2016 and January 2, 2016  
(in thousands, except share data)

2016

2015
ASSETS

 

 
Current assets:




Cash and cash equivalents

$
35,409


$
39,105

Restricted cash

714


966

Accounts receivable, net of allowances of $1,290 and $917, respectively

210,723


131,339

Receivable from sale of Diamond of California
 
118,577

 

Inventories, net

173,456


110,994

Prepaid income taxes and income taxes receivable

5,744


2,321

Assets held for sale

19,568


15,678

Prepaid expenses and other current assets

27,666


21,210

Total current assets

591,857


321,613