Snyder's-Lance, Inc.
SNYDER'S-LANCE, INC. (Form: 10-K, Received: 02/28/2018 15:50:50)

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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 30, 2017
[   ]
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)
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 June 30, 2017 , the last business day of the Registrant’s most recently completed second fiscal quarter, was $2,603,789,780 .
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 23, 2018 , was 98,320,444 shares.


Documents Incorporated by Reference
The information that is required to be included in Part III of this Annual Report on Form 10-K is incorporated by reference to either a definitive proxy statement or an amendment to this Annual Report on Form 10-K, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year ended December 30, 2017 .
 



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
Item 11
Item 12
Item 13
Item 14
 
 
 
 
 
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: Portions of the Company's Amendment to Form 10-K, which will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant's fiscal year ended December 30, 2017 , are incorporated into Part III, Items 10, 11, 12, 13, and 14. Executive Officers of the Company is included in Part I of this Form 10-K.



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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 engaged in the manufacturing, distribution, marketing and sale of snack food products in North America and Europe. These products include pretzels, sandwich crackers, kettle cooked chips, pretzel crackers, popcorn, nuts, potato chips, tortilla chips, cookies, restaurant style crackers, and other salty snacks. 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 ® is the market share leader in deli snacks and Pop Secret ® popcorn currently ranks second in the microwave popcorn category. 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.

Agreement and Plan of Merger
On December 18, 2017, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Campbell Soup Company, a New Jersey corporation (“Campbell”), and Twist Merger Sub, Inc., a North Carolina corporation and a wholly-owned subsidiary of Campbell (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of Campbell (the “Merger”). The parties anticipate that the Merger will close late in the first quarter of calendar year 2018.

Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of our common stock, $0.83-1/3 par value, outstanding immediately prior to the Effective Time will be converted into the right to receive an amount in cash equal to $50.00 per share, without interest and subject to any required tax withholding.

The Merger Agreement contains various representations, warranties and covenants by the Company and Campbell. The Merger Agreement requires the Company to call and hold a special shareholder meeting, which is scheduled for March 23, 2018, and requires our Board of Directors to recommend that the Company’s shareholders approve the Merger Agreement and the Merger, except our Board of Directors may, in certain circumstances, change its recommendation, subject to complying with specified notice and other conditions set forth in the Merger Agreement. Additionally, the Company agreed that, among other things, it will not (i) solicit, initiate, facilitate or encourage the submission of any Acquisition Proposal (as defined in the Merger Agreement) or any proposal or offer that may reasonably be expected to lead to an Acquisition Proposal or (ii) enter into, continue or otherwise participate in discussions or negotiations with, or disclose non-public information to, any third party relating to any Acquisition Proposal or any proposal or offer that may reasonably be expected to lead to an Acquisition Proposal. Subject to the terms of the Merger Agreement, prior to the approval of the Merger Agreement by the Company’s shareholders, the Company may, however, engage in negotiations or discussions with and provide non-public information to a third party that has made an unsolicited, bona fide, written Acquisition Proposal that our Board of Directors determines in good faith, after consultation with its outside legal

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counsel and financial advisor, constitutes, or could reasonably be expected to result in, a Superior Proposal (as defined in the Merger Agreement) and that failure to take such actions would be reasonably likely to be inconsistent with its fiduciary duties under applicable law.

Prior to the approval of the Merger Agreement by the Company’s shareholders, our Board of Directors may, upon receipt of a Superior Proposal, and in certain other circumstances set forth in the Merger Agreement, change its recommendation that the Company’s shareholders approve the Merger Agreement and the Merger, subject to complying with specified notice and other conditions set forth in the Merger Agreement, including, if requested by Campbell, negotiating in good faith with Campbell to make such revisions to the Merger Agreement in response to such Superior Proposal. If our Board of Directors changes its recommendation that the Company’s shareholders approve the Merger Agreement and the Merger, Campbell may terminate the Merger Agreement. In addition, prior to obtaining such shareholder approval, the Company may terminate the Merger Agreement to enter into a definitive agreement providing for a Superior Proposal, subject to payment of the termination fee described below and only following compliance with specified notice and other conditions set forth in the Merger Agreement, including giving Campbell the opportunity to propose changes to the Merger Agreement so that any such proposal would cease to constitute a Superior Proposal.

The Merger Agreement requires the Company and Campbell to use reasonable best efforts to take all actions necessary under applicable law to consummate the transactions contemplated by the Merger Agreement. The Merger Agreement contains certain termination rights for each of the Company and Campbell, including the right of each party to terminate the Merger Agreement if the Merger has not been consummated by the “end date” of September 18, 2018.

The Merger Agreement provides for the payment by the Company to Campbell of a termination fee in the amount of $149 million in the case of a termination of the Merger Agreement under certain circumstances described in the Merger Agreement, including if: (i) (a) the Merger Agreement is terminated by Campbell or the Company because the Merger is not consummated by the end date or the Company’s shareholders do not approve the Merger Agreement, or by Campbell because of a breach of a representation, warranty or covenant of the Company that would cause the related closing condition to be incapable of being satisfied or cured by the end date or, if curable, is not cured by the Company by the earlier of 30 days after receipt of written notice of such breach and three business days prior to the end date, (b) any person publicly discloses a bona fide Acquisition Proposal, which Acquisition Proposal had not been publicly withdrawn prior to the special meeting of the Company’s shareholders, and (c) within 12 months after such termination the Company enters into a definitive agreement with respect to any Acquisition Proposal, (ii) our Board of Directors changes its recommendation or (iii) the Company enters into definitive transaction documentation providing for a Superior Proposal.

Campbell will be required to pay the Company a termination fee of $198.6 million in the event the Merger Agreement is terminated by the Company, subject to certain limitations set forth in the Merger Agreement, if (i) there has been a breach of a representation, warranty or covenant of Campbell or Merger Sub that would cause the related closing condition to be incapable of being satisfied or cured by the end date or, if curable, is not cured by Campbell or Merger Sub by the earlier of 30 days after receipt of written notice of such breach and three business days prior to the end date, or (ii) the conditions to Campbell and Merger Sub’s obligations to consummate the closing have been satisfied or waived (other than those conditions that by their terms are to be satisfied by actions taken at the closing; provided that such conditions are then capable of being satisfied), Campbell has failed to consummate the Merger within two business days of the date the closing should have occurred and the Company has notified Campbell in writing that all of the conditions to closing have been satisfied (or waived) and it intends to terminate the Merger Agreement if Campbell and Merger Sub fail to consummate the transactions contemplated thereby within two business days.

The Merger Agreement has been approved by the boards of directors of each of the Company and Campbell. The obligations of the parties to consummate the Merger are subject to customary closing conditions, including, among others: approval of the Merger Agreement and Merger by holders of 75% of the outstanding shares of the our common stock; the accuracy of the representations and warranties of each party (subject to certain exceptions as set forth in the Merger Agreement); each of the parties having performed in all material respects all of their respective obligations under the Merger Agreement; and the absence of any injunctions or other legal restraints.

On December 18, 2017, certain trusts affiliated with Patricia A. Warehime, a member of our Board, and members of her immediate family, each such trust being a shareholder of the Company (collectively, the “Warehime Holders”), entered into a voting agreement with Campbell, pursuant to which the Warehime Holders agreed, among other things, to vote the shares of Company common stock over which they have voting power in favor of the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger. As of February 16, 2018, the record date for the special meeting of our shareholders, the Warehime Holders owned 12,851,757 shares, or approximately 13.1% of the shares of our common stock outstanding and entitled to vote at the special meeting.

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Certain terms of the Merger Agreement and Voting Agreement are summarized, and the Merger Agreement and Voting Agreement have been filed as exhibits to the Current Report on Form 8-K filed by the Company on January 18, 2018.

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 provided us with a platform for growth in the United Kingdom ("U.K.") and certain other countries within Europe.

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.

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, popcorn, nuts, potato chips, tortilla chips, cookies, restaurant style crackers, 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 independent business owners ("IBO") through the national direct-store-delivery distribution network ("DSD network"), in order to broaden the portfolio of product offerings for the 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 2017 , Core branded products represented approximately 73% of net revenue from continuing operations, while net revenue from Allied brand, Partner brand and Other products represented approximately 7% , 13% and 7% , respectively. In 2016 , Core branded products represented approximately 70% of net revenue, while net revenue from Allied brand, Partner brand and Other products represented approximately 8% , 14% and 8% , respectively. In 2015 , Branded products represented 62% of net revenue, while net revenue from Allied brand, Partner brand and Other products represented 10% , 18% and 10% , respectively. The decrease each year in both Partner brand and Other products is a result of the acquisition of the Diamond Foods core brands and the shift in our strategic direction.

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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 ® ; Kettle Brand ® ; Cape Cod ® ; Snack Factory ® Pretzel Crisps ® ; Pop Secret ® ; KETTLE ® Chips; Emerald ® ; and Late July ® (collectively, "Core" brands), and Tom’s ® ; Jays ® ; Archway ® ; Stella D’oro ® ; O-Ke-Doke ® ; Metcalfe’s skinny ® ; Krunchers! ® ; and Eatsmart Snacks TM (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.
Overall Strategy
Our goal is to deliver simple moments of happiness to everyone, everywhere, by providing uncompromisingly delicious snacks made with simple ingredients. We believe that snacks made with simple ingredients, are simply better food. As we grow, we will remain focused on delivering margin expansion through our Performance Transformation Plan, announced by us in April 2017 (the “Transformation Plan”). We expect our growth will be a result of organic investments in our research and development capabilities, and inorganic growth through strategic acquisitions.

Our strategy is built around five supporting initiatives:

Optimize the portfolio for growth in wholesome natural snacks. To do so we are focusing on strengthening our core brand innovation pipeline and bringing our existing brands to greater scale to more effectively compete.  This involves exiting platforms with little advantage or disadvantaged scale while simultaneously evaluating new, scalable snack markets through both organic growth and inorganic mergers and acquisitions.

Build superior brand preference. We build brand preference by continuously elevating our focus on product taste and quality, increasing investments in world class marketing vehicles, and renovating product ingredients around those qualifications most preferred by our consumers.  In parallel we aim to continuously increase the sustainability, convenience, and functional advantage of our product packaging.  These efforts will complement our focus on building improved price realization across our portfolio consistent with our value proposition.

Provide the right products, in the right places, at the right times. The DSD network combined with our direct distribution capability allow us to offer our products in a broad array of large and fast growing retail channels where consumers prefer to shop.  We are focused on growing in emerging channels and always delivering our products on-time and in-full.    

Pursue operational efficiencies. We are improving complexity by reducing manufacturing and distribution complexity and optimizing our product offering through stock keeping unit ("SKU") rationalization.  In addition, we leverage zero-based-budgeting to eliminate non-critical expenses and implement proven technologies to improve operational performance. 


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Foster a diverse culture centered on our values. We believe that a culture rich in diversity of thought, experiences and identity yields a strong and resilient organization.  We also seek to build a safe and supporting environment, invest in our employees to build their capabilities and experiences, and recognize and reward everyone for their contributions.  We believe that this philosophy ultimately benefits our shareholders in the form of a higher performing company. 
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 $6.2 million , $10.0 million and $6.2 million in 2017 , 2016 and 2015 , 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 build superior brand preference.
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 the DSD network. The DSD network is made up of over 3,200 routes that are primarily owned and operated by IBOs. We also ship products directly to third-party distributors in areas where the 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 2017 , approximately 55% of net revenue was generated by products distributed through the DSD network while the remaining 45% was generated by products distributed through our direct distribution network.

In order to maintain and expand the DSD network, we routinely participate in certain route purchase and sale activities. These activities include the following:
Acquisition of regional distributor businesses - As we expand the DSD network, we continue to look for potential regional distributor business acquisition targets in areas where we do not currently have a 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.
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 routes in that zone. The repurchased routes are then reengineered, which normally results in the addition of new IBO routes (territories) because of the additional volume. Routes are then resold, usually to the original IBO, however, the original IBO has no obligation to repurchase. Upon completion, these route reengineering projects may 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 routes for IBOs. As we build up the volume on these routes through increased distribution of our Branded and Partner brand products, we would sell these routes to IBOs which could result in gains.

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IBO defaults - There are times when the IBOs are not successful and the IBO's distributor agreement with us is terminated. In these instances, if the existing IBO is unable to sell the route to another third party, we may repurchase the route at a price defined in the distributor agreement. We generally put the repurchased route up for sale to another third-party IBO. 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 2017 , 2016 and 2015 , we had capital expenditures of $69.4 million , $73.3 million and $51.5 million , respectively. For 2018 , we expect capital expenditures to be in line with 2017 expenditures. Capital spending will be used to upgrade equipment, increase capacity at our manufacturing facilities and is believed to be adequate to maintain and support our revenue growth over the next few years.
Customers
Through the 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 2017 , 2016 and 2015 . Our sales to Wal-Mart do not include sales of our products made to Wal-Mart by third-party distributors outside of the DSD network. Sales to these third-party distributors represent approximately 6% 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 55% of our net revenue during 2017 , excluding sales of our products made by third-party distributors.
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.
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.

Regulation
The manufacture and sale of snack food products is highly regulated. In the US our activities are subject to regulation by various federal government agencies, including the Food and Drug Administration, US Department of Agriculture, Federal Trade Commission, Department of Labor and Department of Commerce, as well as various state and local agencies. Our business is also regulated by similar agencies outside of the US.

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. 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 R&D Center onsite 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 by taking advantage of 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 United States, uses wind turbines to offset utility usage

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from the local power plant. In addition, our Supply Chain team has implemented improved recycling initiatives across the organization in order to strive to bring our manufacturing plants to landfill free operations and manufacturing. At our chip producing plants, we recycle the oil used in kettle chip production to vendors that convert it to other products like biodiesel for use in many other applications. We carry the focus on sustainability beyond production. Our headquarters facility implements a single stream waste vendor so that no matter which receptacle you use, everything that can be is sorted and recycled. We also implemented motion activated light sensors in our offices and manufacturing plants to make sure we only use light when a facility is occupied.
Employees
As of December 30, 2017, we had approximately 5,900 active employees located in the US and U.K. compared to approximately 6,100 active employees as of December 31, 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 Merger with Campbell
The failure to complete or delays in completing the merger with Campbell could adversely affect our business and our stock price.
Consummation of the merger with Campbell is subject to customary closing conditions, including approval by our shareholders. There can be no assurance that these conditions will be satisfactorily met or validly waived, or that our Company and Campbell will be able to successfully consummate the Merger, on the anticipated terms or at all. We will have incurred significant costs, including the diversion of management resources and transaction-related expenses for which we will receive little or no benefit, if the Merger is not consummated. Additionally, we may be required, in certain circumstances, to pay a termination fee of $149 million, as provided in the Merger Agreement. The Merger Agreement may be terminated by either party if the merger is not completed on or September 18, 2018. In addition, the Merger Agreement contains certain other termination rights for both us and Campbell. A failed transaction may result in negative publicity. Any of these events, individually or in combination, could have an adverse effect on our results of operations and financial condition.

The pending merger could adversely affect our business, financial results and operations, including our relationships with customers, vendors and employees.
The proposed merger with Campbell could cause material disruptions in and create uncertainty surrounding our business. This could affect our relationships with customers, vendors and employees, which could have an adverse effect on our business, financial results and operations. In particular, we could lose important personnel if some employees decide to leave in light of the proposed Merger. We could potentially lose customers or suppliers, or our customers or suppliers could modify their relationships with us in an adverse manner. In addition, we have devoted, and will continue to devote, significant management resources to complete the Merger. This may cause our business and operating results to suffer.

The Merger Agreement also places restrictions on how we conduct our business before the merger is completed. These restrictions could result in our inability to respond effectively, and in a timely manner, to competitive pressures, industry developments and future opportunities. This could harm our business, financial results and 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.

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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.
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 55% of our net revenue during 2017 , excluding sales of our products made by third-party distributors who are outside of the DSD network, with our largest retail customer, Wal-Mart, representing approximately 13% of our 2017 , 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.

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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.

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.

Tax matters, including changes in tax laws and rates, disagreements with taxing authorities and imposition of new taxes, could adversely impact our results of operations and financial condition.
In December 2017, the United States enacted tax reform legislation (“Tax Act”). The Tax Act implements many new US domestic and international tax provisions. Many aspects of the Tax Act are unclear, and although additional clarifying guidance is expected to be issued in the future (by the Internal Revenue Service (“IRS”), the US Treasury Department or via a technical correction law change), it may not be clarified for some time. In addition, many US states have not yet updated their laws to take into account the new federal legislation. As a result, we have not yet been able to determine the full impact of the new laws on our results of operations and financial condition. It is possible that Tax Act, or interpretations under it, could change and could have an adverse effect on us, and such effect could be material.
 
In addition, foreign jurisdictions may also enact tax legislation that could significantly affect our ongoing operations. For example, foreign tax authorities could impose rate changes along with additional corporate tax provisions that would disallow or tax perceived base erosion or profit shifting. Aspects of the Tax Act may lead foreign jurisdictions to respond by enacting additional tax legislation that is unfavorable to us.
Adverse changes in the underlying profitability or financial outlook of our operations in several jurisdictions could lead to changes in the ability to realize our deferred tax assets and result in a charge to our income tax provision. Additionally, changes in tax laws in the US or in other countries where we have significant operations could materially affect deferred tax assets and liabilities and our income tax provision.
We are also subject to tax audits by governmental authorities. Although we believe our tax estimates are reasonable, if a taxing authority disagrees with the positions we have taken, we could face additional tax liabilities, including interest and penalties. Unexpected results from one or more such tax audits could significantly adversely affect our income tax provision and our results of operations.
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. However, as a result of weakening demand, whether a function of Brexit or consumer preference, we recognized impairment charges of $46.3 million and $11.8 million against our European goodwill and KETTLE ® Chips U.K. trademark, respectively during 2017. Further erosion of such operations, whether by consumer demand or the impact of Brexit could result in additional impairments related to our U.K. operations.

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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 any future divestitures, if any, 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 supply walnuts under a Supply Agreement. Failure of Diamond of California to provide quality products under this arrangement 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.

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

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location. In addition, in light of recent transportation industry legislation, the number of freight carriers could decrease and create carrier shortages and higher freight costs.

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.
The 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.
The DSD network relies on over 2,800 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.
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 the DSD network and harm our business and financial results.
A disruption in the operation of the DSD network could negatively affect our results of operations, financial condition and cash flows.
We believe that the 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 the 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.


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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. During 2017, we recognized impairment charges of $46.3 million and $58.4 million for goodwill and trademarks, respectively. Significant and unanticipated changes in our business could require additional non-cash charges 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 shareholders.
As of December 18, 2017, Patricia A. Warehime beneficially owned in the aggregate approximately 14.5% of our outstanding common stock based upon a Schedule 13D/A filed on January 22, 2018 by Mrs. Warehime. 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 shareholders, 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 shareholders 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 shareholders.

On December 18, 2017, the Warehime Holders entered into a voting agreement with Campbell, pursuant to which the Warehime Holders agreed, among other things, to vote the shares of Company common stock over which they have voting power in favor of the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger. As of February 16, 2018, the record date for the special meeting of our shareholders, the Warehime Holders owned 12,851,757 shares, or approximately 13.1% of the shares of our common stock outstanding and entitled to vote at the special meeting.

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.

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 the independent contractor classification of the 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 the IBOs and subject us to incremental liability for their actions. We are also subject to the legal and compliance risks associated with privacy,

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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 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.

We may not realize the benefits that we expect from our Transformation Plan.
In April 2017, we announced the Transformation Plan, our plan to significantly improve our financial performance by focusing on the following six areas: (i) reduce direct spending and accelerate zero-based budgeting to improve indirect costs, (ii) reduce manufacturing and distribution network complexity and improve productivity, (iii) reduce business complexity through SKU rationalization and ongoing portfolio maintenance, (iv) improve trade spend productivity and effectiveness and optimize brand assortment, (v) reset working/non-working ratios and increase investment in our core branded portfolio and (vi) elevate the performance of the existing IBOs and DSD network. As a part of the plan, on June 26, 2017, our Board of Directors approved the closure of our manufacturing facility in Perry, Florida and an incremental reduction in workforce across the organization. In 2017, we have eliminated approximately 300 jobs. The full scope of the Transformation Plan and specific actions to be taken are currently being developed by senior management and our Board of Directors.
The successful design and implementation of the Transformation Plan present significant challenges, many of which are beyond our control. In addition, the Transformation Plan may not advance our business strategy as expected. Events and circumstances, such as financial or strategic difficulties, delays, and unexpected costs may occur that could result in our not realizing all or any of the anticipated benefits or our not realizing the anticipated benefits on our expected timetable. If we are unable to realize the anticipated financial performance of the Transformation Plan, our ability to fund other initiatives may be adversely affected. Any failure to implement the Transformation Plan in accordance with our expectations could adversely affect our financial condition, results of operations, and cash flows.
In addition, the complexity of the Transformation Plan requires a substantial amount of management and operational resources. Our management team must successfully implement administrative and operational changes necessary to achieve the anticipated benefits of the Transformation Plan. These and related demands on our resources may divert the organization's attention from existing core businesses, integrating financial or other systems, have adverse effects on existing business relationships with suppliers and customers, and impact employee morale. As a result, our financial condition, results of operations, or cash flows may be adversely affected.


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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 December 30, 2017 we had an aggregate principal amount of $1.1 billion of outstanding debt. 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 the 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; Ashland, Ohio; Salem, Oregon; Beloit, Wisconsin; Norwich, England; Wednesbury, England and Van Buren, Indiana. Additionally, our research and development centers are located in Hanover, Pennsylvania and Salem, Oregon.
FOOTPRINTMAP201710K.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 2018 .
Item 3.  Legal Proceedings

Information regarding legal proceedings is available in Note 17 , Commitments and Contingencies, to the consolidated financial statements in this report.
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 22, 2018 , is as follows:
Name
 
Age
 
Information About Officers
 
Hire Date
Brian J. Driscoll
 
59
 
President and Chief Executive Officer of Snyder's-Lance, Inc. since June 2017; Interim President and Chief Executive Officer of Snyder’s-Lance, Inc. from April 2017 to June 2017; President and Chief Executive Officer of Diamond Foods, Inc. from May 2012 to February 2016; Chief Executive Officer of Hostess Brands from June 2010 to March 2012; Various senior management positions at Kraft Foods, Inc. from 2002 to June 2010, including President, Sales, Customer Service and Logistics, Kraft North America from 2007 to 2010. Mr. Driscoll has also served as a director on multiple company boards including Snyder’s-Lance, Inc., beginning in February 2016 and Diamond Foods, Inc. from May 2012 to February 2016.

 
2017
Alexander W. Pease
 
46
 
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
Andrea Frohning
 
48
 
Senior Vice President and 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
John T. Maples
 
58
 
Chief Customer Officer, Direct Sales of Snyder's-Lance, Inc. since July 2017; Vice President & General Manager, Direct Sales at Snyder’s-Lance, Inc. from January 2015 to January 2016. Senior Vice President of Sales Strategy at ConAgra Foods from June 2012 to December 2014. Chief Marketing Officer at Primo Water from March 2011 to May 2012. Various roles with PepsiCo from June 1982 to February 2011 including Senior Vice President of Sales and Business Development for PepsiCo in Wal-Mart and Sam’s Club and Vice President of Channel Sales for Quaker Oats. Mr. Maples has also served as a member of the board of directors of Delta Dental of Illinois since 2003.

 
2015
Gail Sharps Myers
 
48
 
Senior Vice President, Chief Legal Officer, 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, Inc. from 2011 to 2014; Vice President Business Law and Assistant Secretary of US Foods, Inc. from 2009 to 2011.
 
2015
Margaret E. Wicklund
 
57
 
Senior Vice President, Corporate Controller, Principal Accounting Officer and Assistant Secretary of Snyder’s-Lance, Inc. since December 2010. She has held various positions in Snyder’s-Lance, Inc. and, Lance, Inc. in her over 25 years of service to the Company.
 
1992

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Registrant’s Capital Stock
Our $0.83-1/3 par value Common Stock trades under the symbol "LNCE" on the NASDAQ Global Select Market. We ha d 4,599 shareholders of record as of February 22, 2018 .
The following table sets forth the high and low intraday sale price quotations and dividend information for each i nterim period of the years ended December 30, 2017 and December 31, 2016 :
2017 Interim Periods
 
High
Price
 
Low
Price
 
Dividend
Paid
First quarter (13 weeks ended April 1, 2017)
 
$
40.69

 
$
36.71

 
$
0.16

Second quarter (13 weeks ended July 1, 2017)
 
40.85

 
31.03

 
0.16

Third quarter (13 weeks ended September 30, 2017)
 
39.52

 
33.83

 
0.16

Fourth quarter (13 weeks ended December 30, 2017)
 
50.67

 
33.70

 
0.16

 
 
 
 
 
 
 
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


On February 7, 2018 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on March 2, 2018 to shareholders of record on February 22, 2018 . Our Board of Directors will consider the amount of future cash dividends on a quarterly basis.

We entered into a 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 30, 2017 , our consolidated stockholders’ equity was $2,022.3 million and we were in compliance with this covenant.

Issuer Purchases of Equity Securities
The following table presents information with respect to repurchases of our common stock made during the fourth quarter of 2017, 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 1, 2017 - October 31, 2017
 
3,951

 
$
38.81

 

 

November 1, 2017 - November 30, 2017
 
66

 
35.98

 

 

December 1, 2017 - December 30, 2017
 

 

 

 

Total
 
4,017

 
$
38.76

 

 

(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.

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The following table provides information concerning our outstanding equity compensation arrangements as of December 30, 2017.
Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
 
Weighted-average exercise price of outstanding options, warrants and rights
(b)
 
Number of securities available for future issuance under equity compensation plans, excluding securities reflected in column (a)
(c)
Equity compensation plans approved by stockholders (1)
 
3,238,525

 
$
33.23

 
1,837,570

Equity compensation plans not approved by stockholders (2)(3)
 
833,113

 
10.86

 

Total
 
4,071,638

 
$
28.65

 
1,837,570

(1) Includes the Lance, Inc. 2003 Key Employee Stock Plan, which was approved by the stockholders on April 24, 2003, the Lance, Inc. 2007 Key Employee Stock Plan, as amended, which was approved by the stockholders on May 4, 2010, the Snyder’s-Lance, Inc. 2012 Key Employee Incentive Plan, which was approved by the stockholders on May 3, 2012, and the Snyder’s-Lance, Inc. 2016 Key Employee Incentive Plan, which was approved by the stockholders on May 4, 2016.
(2) Includes the Snyder’s of Hanover, Inc. Non-qualified Stock Option Plan, as amended on September 30, 2010. Outstanding options under the plan were assumed by the Company in connection with the merger.
(3) Includes the Diamond Foods, Inc. 2005 Equity Incentive Plan which was approved by Diamond stockholders on March 10, 2005 and the 2015 Equity Incentive Plan which was approved by Diamond stockholders on January 13, 2015. Outstanding options under the plan were assumed by the Company in connection with the acquisition.


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Return to Shareholders Performance Graph
This graph and table compares the yearly percentage change in the cumulative total shareholder return on the Company’s common stock against the cumulative total shareholder return or the Russell 2000 Index and a group of the Company’s peers for the five-year period commencing on the last trading day of the Company’s fiscal year 2012 and ending on the Company’s last trading day of fiscal 2017. The graph and table assumes that $100 was invested on December 29, 2012 in the Company’s common stock, in the Russell 2000 Index and in a portfolio of companies in the peer group. The value in each consecutive year includes share price appreciation and assumes that dividends paid were reinvested.
STOCKHOLDERPERFORMANCE.JPG
 
 
12/2012
 
12/2013
 
12/2014
 
12/2015
 
12/2016
 
12/2017
Snyder's-Lance, Inc.
 
$
100

 
$
125

 
$
133

 
$
155

 
$
177

 
$
235

Russell 2000 Index
 
100

 
141

 
148

 
142

 
172

 
198

Peer Group
 
100

 
130

 
140

 
165

 
176

 
170

The peer group consists of Campbell Soup Co., ConAgra Foods, Inc., Flowers Foods, Inc. General Mills, Inc., J&J Snack Foods Corp., Kellogg Co., Mondelez International, Inc., The Hain Celestial Group, Inc. and the J.M Smucker Company.


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Item 6.  Selected Financial Data
The following table sets forth selected historical financial data for the five-year period ended December 30, 2017 . 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):
 
2017
 
2016
 
2015
 
2014
 
2013
Net revenue (1) (2) (3)
 
$
2,226,837

 
$
2,109,227

 
$
1,656,399

 
$
1,620,920

 
$
1,504,332

Cost of sales
 
1,426,666

 
1,345,437

 
1,077,110

 
1,042,458

 
963,073

Gross profit
 
800,171

 
763,790

 
579,289

 
578,462

 
541,259

Gross margin
 
35.9
%
 
36.2
%
 
35.0
%
 
35.7
%
 
36.0
%
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes (4) (5) (6) (7) (8)
 
1,263

 
67,123

 
79,603

 
91,508

 
87,900

Income from continuing operations, net of tax (9)
 
147,407

 
41,803

 
50,718

 
59,217

 
55,603

Income/(loss) from discontinued operations, net of income tax (10) (11) (12)
 
1,936

 
(27,100
)
 

 
133,316

 
23,481

Net income attributable to
Snyder’s-Lance, Inc.
 
$
148,492

 
$
14,885

 
$
50,685

 
$
192,591

 
$
78,720

 
 
 
 
 
 
 
 
 
 
 
Average Number of Common Shares
Outstanding (in thousands):
 
 
 
 
 
 
 
 
 
 
Basic
 
96,594

 
91,873

 
70,487

 
69,966

 
69,102

Diluted  
 
97,467

 
92,891

 
71,142

 
70,656

 
69,877

 
 
 
 
 
 
 
 
 
 
 
Per Share of Common Stock:
 
 
 
 
 
 
 
 
 
 
Basic earnings per share from continuing operations
 
$
1.51

 
$
0.46

 
$
0.72

 
$
0.84

 
$
0.80

Basic earnings/(loss) per share from discontinued operations
 
0.02

 
(0.29
)
 

 
1.90

 
0.33

Total basic earnings per share
 
$
1.53

 
$
0.17

 
$
0.72

 
$
2.74

 
$
1.13

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share from continuing operations
 
$
1.50

 
$
0.45

 
$
0.71

 
$
0.84

 
$
0.79

Diluted earnings/(loss) per share from discontinued operations
 
0.02

 
(0.29
)
 

 
1.88

 
0.33

Total diluted earnings per share
 
$
1.52

 
$
0.16

 
$
0.71

 
$
2.72

 
$
1.12

 
 
 
 
 
 
 
 
 
 
 
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)
 
$
3,618,337

 
$
3,834,076

 
$
1,810,704

 
$
1,849,056

 
$
1,752,758

Long-term debt, net of
current portion (13)
 
$
1,025,533

 
$
1,245,959

 
$
372,301

 
$
437,233

 
$
478,671

Total debt  (13)
 
$
1,074,533

 
$
1,294,959

 
$
380,842

 
$
445,794

 
$
495,962


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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)
2017 pretax income was impacted by approximately $104.7 million of goodwill and intangible asset impairments, approximately $30 million of costs associated with the Transformation plan, and approximately $9 million of costs related to the transfer of production of the Emerald products.
(5)
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.
(6)
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.
(7)
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.
(8)
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.
(9)
2017 income from continuing operations, net of income tax included a $162.4 million income tax benefit for the provisional tax impacts related to a one-time transition tax and the revaluation of the deferred tax balances as a result of the Tax Act enacted in December 2017.
(10)
2016 loss from discontinued operations, net of income tax, included a $33 million pretax loss on the sale of Diamond of California.
(11)
2014 income from discontinued operations, net of income tax, included a $223 million pretax gain on the sale of Private Brands.
(12)
2013 income from discontinued operations, net of income tax is the operating activities of our Private Brands, which were sold in 2014.
(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.


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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
2017 was a year of transition and transformation within our Company. We began the year with a disappointing first quarter caused by the convergence of category softness, lower net price realization, unfavorable mix, cost headwinds and certain execution lapses, which stalled our earnings momentum, pressured our full year outlook and exposed underlying cost inefficiencies. The results of the first quarter and the issues identified, resulted in our Board of Directors and senior management team conducting a comprehensive review of our Company's operations. This comprehensive review had the goal of significantly improving our financial performance to deliver greater value to our shareholders. As a result of this review, we initiated the Transformation Plan focused on six key areas:

SG&A Expense Efficiency. Reduce direct spending and accelerate zero-based budgeting to improve indirect costs.
Manufacturing and Supply Chain Productivity. Reduce manufacturing and distribution network complexity and improve productivity.
Product and Portfolio Optimization. Reduce business complexity through SKU rationalization and ongoing portfolio maintenance.
Price Realization. Improve trade spend productivity and effectiveness and optimize brand assortment.
Marketing Investment Optimization. Reset working/non-working ratios and increase investment in our core branded portfolio.
Channel Execution Excellence. Elevate the performance of the existing IBOs and DSD network.

We are anticipating that the Transformation Plan will result in 14% operating profit margin (on an adjusted basis) and an incremental operating income of $175 million improvement to our operating income by 2020. During 2017, the initial actions taken under the plan included the closure of our Perry, Florida manufacturing facility, reductions in workforce across the organization, and initial steps in the process of SKU rationalization. In 2018, we expect to take additional steps to achieve all of the key areas outlined above.

Agreement and Plan of Merger

On December 18, 2017, we entered into the Merger Agreement with Campbell and Merger Sub, pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and as a wholly-owned subsidiary of Campbell. The parties anticipate that the Merger will close late in the first quarter of calendar year 2018.

Subject to the terms and conditions of the Merger Agreement, at the Effective Time, each share of our common stock, $0.83-1/3 par value, outstanding immediately prior to the Effective Time will be converted into the right to receive an amount in cash equal to $50.00 per share, without interest and subject to any required tax withholding.


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The Merger Agreement contains various representations, warranties and covenants by the Company and Campbell. The Merger Agreement requires the Company to call and hold a special shareholder meeting, which is scheduled for March 23, 2018, and requires our Board of Directors to recommend that the Company’s shareholders approve the Merger Agreement and the Merger, except our Board of Directors may, in certain circumstances, change its recommendation, subject to complying with specified notice and other conditions set forth in the Merger Agreement. Additionally, the Company agreed that, among other things, it will not (i) solicit, initiate, facilitate or encourage the submission of any Acquisition Proposal or any proposal or offer that may reasonably be expected to lead to an Acquisition Proposal or (ii) enter into, continue or otherwise participate in discussions or negotiations with, or disclose non-public information to, any third party relating to any Acquisition Proposal or any proposal or offer that may reasonably be expected to lead to an Acquisition Proposal. Subject to the terms of the Merger Agreement, prior to the approval of the Merger Agreement by the Company’s shareholders, the Company may, however, engage in negotiations or discussions with and provide non-public information to a third party that has made an unsolicited, bona fide, written Acquisition Proposal that our Board of Directors determines in good faith, after consultation with its outside legal counsel and financial advisor, constitutes, or could reasonably be expected to result in, a Superior Proposal and that failure to take such actions would be reasonably likely to be inconsistent with its fiduciary duties under applicable law.

Prior to the approval of the Merger Agreement by the Company’s shareholders, our Board of Directors may, upon receipt of a Superior Proposal, and in certain other circumstances set forth in the Merger Agreement, change its recommendation that the Company’s shareholders approve the Merger Agreement and the Merger, subject to complying with specified notice and other conditions set forth in the Merger Agreement, including, if requested by Campbell, negotiating in good faith with Campbell to make such revisions to the Merger Agreement in response to such Superior Proposal. If our Board of Directors changes its recommendation that the Company’s shareholders approve the Merger Agreement and the Merger, Campbell may terminate the Merger Agreement. In addition, prior to obtaining such shareholder approval, the Company may terminate the Merger Agreement to enter into a definitive agreement providing for a Superior Proposal, subject to payment of the termination fee described below and only following compliance with specified notice and other conditions set forth in the Merger Agreement, including giving Campbell the opportunity to propose changes to the Merger Agreement so that any such proposal would cease to constitute a Superior Proposal.

The Merger Agreement requires the Company and Campbell to use reasonable best efforts to take all actions necessary under applicable law to consummate the transactions contemplated by the Merger Agreement. The Merger Agreement contains certain termination rights for each of the Company and Campbell, including the right of each party to terminate the Merger Agreement if the Merger has not been consummated by the “end date” of September 18, 2018.

The Merger Agreement provides for the payment by the Company to Campbell of a termination fee in the amount of $149 million in the case of a termination of the Merger Agreement under certain circumstances described in the Merger Agreement, including if: (i) (a) the Merger Agreement is terminated by Campbell or the Company because the Merger is not consummated by the end date or the Company’s shareholders do not approve the Merger Agreement, or by Campbell because of a breach of a representation, warranty or covenant of the Company that would cause the related closing condition to be incapable of being satisfied or cured by the end date or, if curable, is not cured by the Company by the earlier of 30 days after receipt of written notice of such breach and three business days prior to the end date, (b) any person publicly discloses a bona fide Acquisition Proposal, which Acquisition Proposal had not been publicly withdrawn prior to the special meeting of the Company’s shareholders, and (c) within 12 months after such termination the Company enters into a definitive agreement with respect to any Acquisition Proposal, (ii) our Board of Directors changes its recommendation or (iii) the Company enters into definitive transaction documentation providing for a Superior Proposal.

Campbell will be required to pay the Company a termination fee of $198.6 million in the event the Merger Agreement is terminated by the Company, subject to certain limitations set forth in the Merger Agreement, if (i) there has been a breach of a representation, warranty or covenant of Campbell or Merger Sub that would cause the related closing condition to be incapable of being satisfied or cured by the end date or, if curable, is not cured by Campbell or Merger Sub by the earlier of 30 days after receipt of written notice of such breach and three business days prior to the end date, or (ii) the conditions to Campbell and Merger Sub’s obligations to consummate the closing have been satisfied or waived (other than those conditions that by their terms are to be satisfied by actions taken at the closing; provided that such conditions are then capable of being satisfied), Campbell has failed to consummate the Merger within two business days of the date the closing should have occurred and the Company has notified Campbell in writing that all of the conditions to closing have been satisfied (or waived) and it intends to terminate the Merger Agreement if Campbell and Merger Sub fail to consummate the transactions contemplated thereby within two business days.


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The Merger Agreement has been approved by the boards of directors of each of the Company and Campbell. The obligations of the parties to consummate the Merger are subject to customary closing conditions, including, among others: approval of the Merger Agreement and Merger by holders of 75% of the outstanding shares of the our common stock; the accuracy of the representations and warranties of each party (subject to certain exceptions as set forth in the Merger Agreement); each of the parties having performed in all material respects all of their respective obligations under the Merger Agreement; and the absence of any injunctions or other legal restraints.

On December 18, 2017, the Warehime Holders entered into a voting agreement with Campbell, pursuant to which the Warehime Holders agreed, among other things, to vote the shares of Company common stock over which they have voting power in favor of the approval of the Merger Agreement and the transactions contemplated thereby, including the Merger. As of February 16, 2018, the record date for the special meeting of our shareholders, the Warehime Holders owned 12,851,757 shares, or approximately 13.1% of the shares of our common stock outstanding and entitled to vote at the special meeting.

Certain terms of the Merger Agreement and Voting Agreement are summarized, and the Merger Agreement and Voting Agreement have been filed as exhibits to the Current Report on Form 8-K filed by the Company on January 18, 2018.

See “Item 1A. Risk Factors - Risks Relating to our Merger with Campbell” for a description of certain risks related to the proposed Merger.

2017 Performance

Overall, net revenue increased in 2017 compared to 2016 due to the incremental revenue associated with the contribution of the legacy Diamond Foods brands as we did not own Diamond Foods for the first nine weeks of 2016 and growth in all our legacy Snyder's-Lance core brands. Our 2017 results were also impacted by the following:
Transaction and integration related expenses - We incurred $3.0 million in transaction and integration related expenses in selling, general and administrative expense related to the acquisition of Diamond Foods during 2017, compared to $66.3 million in 2016.
Goodwill and tradename impairments - We recognized $104.7 million in non-cash impairment charges to our U.K. goodwill and certain tradenames.
Transformation Plan charges and expenses - We incurred $29.6 million in charges related to the Transformation Plan.
Emerald move and required packaging changes - We incurred $9.1 million related to relocating production from Stockton, California, and associated professional fees due to our divestiture of the Diamond of California business. In addition, we incurred higher than normal manufacturing costs due to the inefficiencies caused by the ramping up of Emerald production capacity in our new Charlotte, North Carolina facility.
Merger Agreement with Campbell - We incurred $2.1 million in charges related to the anticipated acquisition by Campbell.
Service and distribution costs - Our service and distribution costs were higher than the prior year due to carrier capacity issues in the trucking industry and higher fuel costs as compared to 2016. These issues resulted in service and distribution costs being 0.9% of net revenue higher than the prior year.
Incentive compensation expense - As a result of our performance, our annual cash incentive award achieved lower attainment levels in the year, resulting in $15 million lower incentive compensation expense as compared to the prior year.
US Tax Reform - As a result of the 2017 Tax Act, we recorded a one-time benefit in income taxes of $162.4 million primarily from the revaluation of our deferred tax balances.


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In spite of the operational challenges in 2017, our Core brands had strong performance in the marketplace during the year. A discussion of the trends for each of our Core brands is included below:
Our Snyder's of Hanover ® products improved its substantial lead over our closest competitor in the category during the year. The pretzel category improved slightly throughout the year and our growth outpaced the category.
Our Lance ® branded sandwich crackers also gained market share throughout 2017 and increased its substantial market share leadership position. The sandwich crackers category as a whole was flat during the year as our growth was offset by declines from other competitors.
Combined, our Kettle Brand ® and Cape Cod ® branded chips hold a dominant share of the kettle chips market. Both brands grew in terms of dollars and market share in a category that declined during the year.
During 2017, Snack Factory ® Pretzel Crisps ® became the market leader in deli snacks. In a growing category, our products outpaced the category to take the number one position.
Our Pop Secret ® branded microwave popcorn faced a challenging year in a declining category. While we maintained our position as the second largest microwave popcorn brand, our brands lost market share in the current year.
Our KETTLE Chips ® in the U.K. faced strong competitive and economic headwinds during the year as consumers preference shifted towards private label products. As a result, our branded products declined in market share.
Our operational challenges with our Emerald ® branded products lead to our inability to fulfill certain customer orders during the second half of the year. As a result, we lost sales and market share in a flat category.
The double-digit growth in our Late July ® products drove growth in the category. Our products gained market share as our growth outpaced the category growth during the year.


26


Table of Contents

Results of Operations
Year Ended December 30, 2017 Compared to Year Ended December 31, 2016
(in millions)
 
2017
 
2016
 
Favorable/
(Unfavorable)
Variance
Net revenue
 
$
2,226.8

 
100.0
 %
 
$
2,109.2

 
100.0
 %
 
$
117.6

 
5.6
 %
Cost of sales
 
1,426.6

 
64.1
 %
 
1,345.4

 
63.8
 %
 
(81.2
)
 
(6.0
)%
Gross profit
 
800.2

 
35.9
 %
 
763.8

 
36.2
 %
 
36.4

 
4.8
 %
Selling, general and administrative expenses
 
643.9

 
28.9
 %
 
594.0

 
28.2
 %
 
(49.9
)
 
(8.4
)%
Transaction and integration related expenses
 
3.0

 
0.1
 %
 
66.3

 
3.1
 %
 
63.3

 
95.5
 %
Impairment charges
 
114.8

 
5.2
 %
 
4.5

 
0.2
 %
 
(110.3
)
 
(2,451.1
)%
Other operating (income), net
 

 
 %
 
(5.6
)
 
(0.3
)%
 
(5.6
)
 
100.0
 %
Operating income
 
38.5

 
1.7
 %
 
104.6

 
5.0
 %
 
(66.1
)
 
(63.2
)%
Other (income)/expense, net
 
(1.5
)
 
(0.1
)%
 
0.1

 
 %
 
1.6

 
nm

Income before interest and income taxes
 
40.0

 
1.8
 %
 
104.5

 
5.0
 %
 
(64.5
)
 
(61.7
)%
Loss on early extinguishment of debt
 

 
 %
 
4.7

 
0.2
 %
 
4.7

 
100.0
 %
Interest expense, net
 
38.8

 
1.8
 %
 
32.7

 
1.6
 %
 
(6.1
)
 
(18.7
)%
Income tax (benefit)/expense
 
(146.2
)
 
(6.6
)%
 
25.3

 
1.2
 %
 
171.5

 
nm

Income from continuing operations
 
147.4

 
6.6
 %
 
41.8

 
2.0
 %
 
105.6

 
252.6
 %
Income/(loss) from discontinued operations, net of income tax
 
1.9

 
0.1
 %
 
(27.1
)
 
(1.3
)%
 
29.0

 
nm

Net income
 
$
149.3

 
6.7
 %
 
$
14.7

 
0.7
 %
 
$
134.6

 
915.6
 %
nm = not meaningful

Net Revenue
Net revenue by product category was as follows:
(in millions)
 
2017
 
2016
 
Favorable/
(Unfavorable)
Variance
Branded
 
 
 
 
 
 
 
 
 
 
 
 
   Core brand
 
$
1,613.7

 
72.5
%
 
$
1,478.6

 
70.1
%
 
$
135.1

 
9.1
 %
Allied brand
 
163.4

 
7.3
%
 
159.7

 
7.6
%
 
$
3.7

 
2.3
 %
Total Branded
 
1,777.1

 
79.8
%
 
1,638.3

 
77.7
%
 
$
138.8

 
8.5
 %
Partner brand
 
291.6

 
13.1
%
 
300.4

 
14.2
%
 
(8.8
)
 
(2.9
)%
Other
 
158.1

 
7.1
%
 
170.5

 
8.1
%
 
(12.4
)
 
(7.3
)%
Net revenue
 
$
2,226.8

 
100.0
%
 
$
2,109.2

 
100.0
%
 
$
117.6

 
5.6
 %
Net revenue increased $117.6 million , or 5.6% , in 2017 , compared to 2016 , primarily due to increased revenue associated with the contribution of Diamond Foods. Approximately 3% of the revenue increase relates to the incremental revenue from the acquisition of Diamond Foods given that we did not own Diamond Foods for the first nine weeks of 2016.
Our core brand net revenue increased $135.1 million , or 9.1% , compared to 2016 . The incremental revenue from the first nine weeks of 2017 from the acquired Diamond Foods core brands accounted approximately 5% of the increase. The legacy Snyder's-Lance brands growth was driven by the following:
Snack Factory ® and Late July ® brands have experienced significant growth and strong market share gains in the current year due to expanded distribution and increased volumes across our sales channels.
Snyder's of Hanover ® and Cape Cod ® brands were both up mid-single digits, driven by new product introductions and increased distribution.

27



Lance ® branded products are up mid-single digits with volume increases more than offsetting slight distribution losses during the year.

For the legacy Diamond Foods brands, all brands were up year-over-year compared to 2016, due to the incremental revenue from the first nine weeks of the year. However, the incremental revenue was partially offset by decreases in revenue in comparable periods due to the following:
Pop Secret ® branded products experienced volume declines due changing consumer preferences and less effective promotional spending which more than offset slight distribution gains during the year.
Emerald ® branded product revenue was negatively impacted, particularly in the second half of the year, as we were unable to meet customer demand due to the transition of production to our Charlotte, NC facility. These production shortfalls were substantially resolved by the end of the year.
Kettle Brand ® chips in the US and KETTLE Chips ® in the U.K. had slight volume declines as a result of category softness and competitive challenges.
Allied branded products net revenue increased $3.7 million , or 2.3% , compared to 2016 . This increase is primarily due to our acquisition of the remaining 74% interest in Metcalfe on September 1, 2016. The increase from this incremental revenue was partially offset by declines across many of our Allied brands.
Partner brand net revenue decreased $8.8 million , or 2.9% , compared to 2016, primarily due to volume declines for certain partner brand products. Other net revenue decreased $12.4 million , or 7.3% , compared to 2016, due primarily to the planned exit of certain contract manufacturing agreements and the loss of certain contract manufactured products. We expect this trend to continue in the near term as our strategic priorities are focused on our branded products.
Gross Profit
Gross profit increased $36.4 million , but decreased 0.3% as a percentage of net revenue compared to 2016 . The dollar increase in gross profit was due to increased sales volume primarily due to the acquisition of Diamond Foods and volume increases in legacy Snyder's-Lance branded revenue. 2017 gross profit margin was negatively impacted by $7.2 million of expense related to the Transformation Plan, and $6.7 million of discrete expenses related to relocating production from Stockton, California, due to our divestiture of the Diamond of California business, and higher than normal manufacturing costs due to the inefficiencies caused by the ramping up of Emerald production capacity in our new Charlotte, North Carolina facility. In addition, the increase in promotional spending as a percentage of revenue, resulted in approximately 1.5% lower gross profit margin for 2017 compared to 2016 . These challenges were partially offset by manufacturing efficiencies across our production facilities and scrap reductions. Gross profit in 2016 was negatively impacted by an $11.3 million inventory step-up recognized in the prior year on inventory acquired in the acquisition of Diamond Foods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $49.9 million in 2017 , compared to 2016 , and increased 0.7% as a percentage of net revenue. The increase in selling, general and administrative expenses was primarily due to additional expenses attributable to Diamond Foods and increases variable costs related to volume increases in legacy Snyder's-Lance branded revenue. In addition, in 2017, we incurred $13.5 million of expense related to the Transformation Plan, $2.3 million of expense related to costs associated with the Stockton TSA and associated professional fees due to our divestiture of the Diamond of California business, and $2.1 million in charges related to the anticipated acquisition by Campbell. In addition, we incurred $7.1 million of expenses related to the retirement of our former president and chief executive officer. This amount includes $3.7 million of retirement agreement expenses and $3.4 million of non-cash stock-based compensation expenses which resulted from the modification of certain non-vested awards previously granted to him. Selling, general and administrative expenses as a percentage of revenue were flat excluding the items above due to higher distribution expenses from carrier shortages and rising fuel costs, offset by lower incentive compensation expenses due to lower attainment for our performance-based awards and lower salary costs due to the reductions in workforce as a part of the Transformation Plan.

Transaction and Integration Related Expenses
We recognized $3.0 million in Diamond Foods transaction and integration related expenses during 2017 , compared to $66.3 million in 2016 . The costs incurred in 2017 included legal and other professional fees and idle facility lease costs. The 2016 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 2016 costs include investment banking fees as well as other professional fees and legal costs associated with the acquisition and integration of Diamond Foods.

28



Impairment Charges
We recognized $114.8 million in impairment charges during 2017 , compared to $4.5 million during 2016 . Our 2017 charges include $46.3 million related to goodwill in our European reporting unit and $58.4 million related to certain of our trademarks. For additional information, see “Critical Accounting Estimates” in this discussion and analysis. The total impairment charge also includes $8.9 million of asset impairment expense as a result of our Transformation Plan. The remaining $1.2 million of impairment charges in 2017 are related to manufacturing assets that no longer had business use.

During 2016, we recorded impairment of $2.3 million for certain machinery and equipment we retained after the sale of Diamond of California, but no longer had the ability to use. We also incurred impairment charges of $1.4 million related to the discontinuation of manufacturing certain products. In addition, in 2016, we recorded $0.8 million of impairments related to route businesses.

Other Operating Income, Net
Our other operating income netted to zero in 2017 primarily due to net gains on route businesses of $2.3 million offset by a loss of sale of property and equipment of $1.4 million and an early termination of a capital lease fee of $0.8 million. Net gains on the sale of route businesses in 2017 consisted of $9.4 million in gains, partially offset by $7.1 million in losses. The majority of the route business sales in 2017 were due to route reengineering projects that were initiated in order to maximize the efficiency of route territories for the IBOs.

We recognized $5.6 million of other operating income, net 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. In addition, 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, partially offset by $4.2 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.

Other (Income)/Expense, Net
We recognized other income of $1.5 million in 2017 primarily due to the proceeds from a class action insurance settlement of $0.8 million and $0.6 million of net equity income from our interests in Yellow Chips Holding B.V. and Natural Food Works Group, LLC.

Interest Expense, Net
Interest expense increased $6.1 million during 2017 compared to 2016 . The increase in net interest expense was the result of additional debt obtained to finance the acquisition of Diamond Foods and somewhat higher interest rates on outstanding debt.
Income Tax (Benefit) / Expense
The effective income tax rate was a benefit of 11,567.5% in 2017 , compared to expense of 37.7% in 2016. In 2017, the effective income tax rate was favorably impacted by the enactment of the Tax Act, which included numerous changes to many aspects of U.S. corporate income taxation by, among other things, lowering the corporate income tax rate from 35% to 21%, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earning of foreign subsidiaries. As a result, we have recognized a net tax benefit of $162.4 million for the provisional tax impacts related to the one-time transition tax and the revaluation of deferred tax balances for the year ended December 30, 2017. In 2016, the effective income tax rate is in excess of the statutory rate primarily due to non-deductible Diamond Foods related transaction costs in 2016.
Income/(Loss) from Discontinued Operations, Net of Income Tax
Income from discontinued operations, net of income tax, included in 2017 was primarily a result of the pretax out-of-period adjustment of $2.6 million for the walnut price liability during the year.

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.

29



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 expenses
 
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
)%
Settlements 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 operating income, net
 
(5.6
)
 
(0.3
)%
 
(1.2
)
 
%
 
4.4

 
366.7
 %
Operating income
 
104.6

 
5.0
 %
 
90.6

 
5.5
%
 
14.0

 
15.5
 %
Other expense, net
 
0.1

 
 %
 
0.1

 
%
 

 
 %
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
)
 
nm

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
)
 
nm

Net income
 
$
14.7

 
0.7
 %
 
$
50.7

 
3.1
%
 
$
(36.0
)
 
(71.0
)%
nm = not meaningful

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


 
 
 


 


 


   Core brand
 
$
1,478.6

 
70.1
%
 
$
1,032.5

 
62.3
%
 
$
446.1

 
43.2
 %
Allied brand
 
159.7

 
7.6
%
 
157.7

 
9.6
%
 
2.0

 
1.3
 %
Total 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
 %
Net revenue increased $452.8 million , or 27.3% , in 2016 compared to 2015 , primarily due to the increased revenue associated with the contribution of Diamond Foods. Excluding the revenue increase from Diamond Foods, overall net revenue increased 0.6% , as increased Total Branded revenue was partially offset by a decrease in the Other revenue category.

30



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
 
 
 
 
 
 
 
 
 
 
 
 
   Core brand
 
$
1,478.6

 
$
430.2

 
$
1,048.4

 
$
1,032.5

 
$
15.9

 
1.5
 %
Allied brand
 
159.7

 

 
159.7

 
157.7

 
$
2.0

 
1.3
 %
Total 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.
Core brand net revenue increased $446.1 million , or 43.2% , compared to 2015 , primarily due to incremental revenue from Diamond Foods. Core brand net revenue, excluding Diamond Foods, was up $15.9 million , or 1.5% compared to 2015 . Core branded volume increased by approximately 6% and allied branded volume decreased by approximately 1% in 2016. 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 Pretzels Baby ® marketing and advertising campaign.
Allied brand net revenue increased 2.0 million , or 1.3% compared to 2015 , primarily due to our acquisition of the remaining 74% interest of the Metcalfe business on September 1, 2016.
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.


31



Transaction-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. 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 4 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 Operating Income, Net
We recognized other operating income of $5.6 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. In addition, 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, partially offset by $4.2 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.

Other operating income in 2015 of $1.3 million primarily consisted of $1.9 million in net gains on the sale of route businesses, partially offset by loss on sale of fixed assets. For 2015, net gains on the sale of route businesses consisted of $3.3 million in gains, partially offset by $1.4 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.

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 $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 4 to the consolidated financial statements included in Item 8 for additional information related to this sale. There were no discontinued operations in 2015 .

32



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)
 
2017
 
2016
 
2015
Net cash provided by/(used in):
 
 
 
 
 
 
Operating activities
 
$
196,859

 
$
267,369

 
$
146,154

Investing activities
 
50,477

 
(1,117,113
)
 
(44,026
)
Financing activities
 
(264,946
)
 
846,838

 
(98,396
)
Effect of exchange rate changes on cash
 
636

 
(1,042
)
 

Net (decrease)/increase
 
$
(16,974
)
 
$
(3,948
)
 
$
3,732


We adopted ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting in the first quarter of 2017. As a result, excess tax benefits for share-based payments, which were previously presented as a financing cash flow, are now reflected in operating cash flows. We elected to adopt this provision of the accounting standard prospectively, which resulted in income tax benefit of $6.9 million included in operating activities in 2017.

Additionally, we early adopted ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments and ASU No. 2016-18, Restricted Cash in the first quarter of 2017. These amendments are required to be adopted retrospectively. The impact of adopting ASU No. 2016-15 was a reclassification of $6.2 million cash outflows from operating activities to financing activities for the penalty recognized on early extinguishment of our private placement senior notes during 2016. The adoption of ASU No. 2016-18 resulted in reclassifications of $0.3 million cash inflows from investing activities to operating activities for each of the years 2017 and 2016.
Operating Cash Flows
Cash provided by operating activities decreased $70.5 million in 201 7, compared to 2016. I n 2017, there were certain negative working capital trends including increased inventory for promotional events and a decrease in accrued incentive compensation, which was partially offset by increased accounts payable. The majority of the positive working capital in 2016 was associated with a reduction in Diamond Foods related inventory, the increase in the payable to growers, as well as an increase in accounts payable.
Cash flow provided by operating activities increas ed $121.2 million in 201 6, compared to 2015. This includes the aforementioned $6.2 million reclassification from cash outflows from operating activities to repayments of long-term debt within financing activities. 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.
Investing Cash Flows
Cash provided by investing ac tivities totaled $50.5 million in 2017, compared to cash used in investing activities of $1,117.1 million in 2016. The increase in cash provided by investing activities was primarily driven by the 2016 acquisition of Diamond Foods, which accounted for approximately $1.0 billion of the cash used in 2016. In addition, we had proceeds from the sale of Diamond of California in 2017, which accounted for $119.7 million of the increase.
Capital expenditures for fixed assets, principally manufacturing equipment , decreased to $69.4 million in 2017 from $73.3 million in 2016 . Purchases of route businesses, net of sales, resulted in cash inflows of $2.7 million in 2017, compared to net cash outflows of $2.6 million in 2016. 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 had not sold as of the end of 2016.
Cash used by investing activitie s totaled $1,117.1 million in 2016, compared with $44.0 million in 2015. This includes a reclassification of $0.3 million cash inflows from investing activities to operating activities in 2016 due to the adoption of ASU

33



No. 2016-18, Restricted Cash as discussed in Note 3 , New Accounting Standards. 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 had not sold as of the end of 2016.
Financing Cash Flows
Net cash used in financing activities of $264.9 million in 2017, was primarily attributable to repayments of long-term debt and net repayments on the revolving credit facility of $221.1 million and dividends paid of $62.0 million . These cash outflows were partially offset by net proceeds of $28.0 million from the issuance of common stock upon the exercise of employee stock options.

Net cash provided by fi nancing activities of $846.8 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 $444.8 million . Included in the 2016 repayments of long-term debt are $6.2 million of cash outflows reclassified from operating cash flows, due to the adoption of ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments as discussed in Note 3, New Accounting Standards. 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 .
On February 7, 2018 , our Board of Directors declared a quarterly cash dividend of $0.16 per share payable on March 2, 2018 to shareholders of record on February 22, 2018 .
Debt
Unused and available borrowings were $320.0 million under our existing credit facilities at December 30, 2017 , as compared to $148.0 million at December 31, 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 $9.0 million as of December 30, 2017 .

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.

34



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 Amended and Restated 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% of the total domestic assets or domestic revenues of the Company and its wholly-owned domestic subsidiaries. The Amended and Restated Credit Agreement contains customary representations, warranties and covenants. The financial covenants pursuant to the Amended and Restated Credit Agreement included a maximum total debt to EBITDA ratio, as defined in the Amended and Restated Credit Agreement ("Original EBITDA Covenant Ratio"). On May 8, 2017, we amended our Amended and Restated Credit Agreement to extend the maximum total debt to EBITDA ratio covenant ("May 2017 Amended EBITDA Covenant Ratio"). Such EBITDA ratios were as follows:
 
 
Original EBITDA Covenant Ratio
 
May 2017 Amended EBITDA Covenant Ratio
Second and Third Quarters 2016
 
4.75

 
N/A

Fourth Quarter 2016 and First Quarter 2017
 
4.25

 
N/A

Second Quarter 2017
 
4.00

 
4.25

Third Quarter 2017
 
3.75

 
4.25

Fourth Quarter 2017 and First Quarter 2018
 
3.50

 
4.25

Second Quarter 2018
 
3.50

 
4.00

Third Quarter 2018
 
3.50

 
3.75

Fourth Quarter 2018 and Thereafter to Maturity
 
3.50

 
3.50

In addition to the EBITDA ratio, the financial covenants also include a minimum interest coverage ratio of 2.50 to 1.00 . 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 2017 , 2016 and 2015 was $39.3 million , $32.9 million , and $11.1 million , respectively.
Contractual Obligations
We lease certain facilities and equipment under contracts classified as operating leases. Total rental expense, excluding discontinued operations, was $42.7 million , $37.6 million and $27.2 million in 2017, 2016 and 2015 , respectively.
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 $226.3 million and $157.2 million as of December 30, 2017 and December 31, 2016 , respectively. 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 $9.6 million as of December 31, 2017, 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 $27.0 million as of December 30, 2017.

35



Contractual obligations as of December 30, 2017 were:  
(in thousands)
 
 
 
Payments Due by Period
Total
 
2018
 
2019-2020
 
2021-2022
 
Thereafter
Purchase commitments
 
$
262,988

 
$
235,758

 
$
15,264

 
$
9,496

 
$
2,470

Debt, including interest payable  (1)
 
1,225,029

 
84,169

 
366,582

 
527,821

 
246,457

Capital lease, including interest
 
915

 
671

 
244

 

 

Operating lease obligations
 
106,654

 
22,374

 
33,426

 
17,924

 
32,930

Accrued long-term incentive plan
 
3,783

 
1,300

 
1,424

 
1,059

 

Unrecognized tax benefits  (2)
 
4,094

 

 

 

 

Other liabilities  (3)
 
23,378

 

 

 

 

Total contractual obligations
 
$
1,626,841

 
$
344,272

 
$
416,940

 
$
556,300

 
$
281,857

(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 30, 2017 were $18.4 million in accrued insurance liabilities and $5.0 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.
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 $177.2 million as of December 30, 2017 compared to approximately $154.1 million as of December 31, 2016 . The $23.1 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 the 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.

36



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 $43.8 million and $39.8 million as of December 30, 2017 and December 31, 2016 .
As further discussed in Note 3 , we have adopted ASC 606, Revenue from Contracts with Customers, on December 31, 2017, the first day of our fiscal 2018. See Note 3 for additional information.
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 $2.6 million and $1.3 million as of December 30, 2017 and December 31, 2016 , respectively.
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 $4.2 million and $3.9 million in 2017 and 2016 , 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 $0.8 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 2017 , we used a discount rate of 2.0% , the same rate used in 2016 , 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 2017 and 2016 , we had accrued liabilities related to the retained risks of $18.4 million and $17.3 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 $4.9 million and $4.6 million for 2017 and 2016, 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. Consistent with the prior year analysis, we have 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.

37




As a result of the decrease in actual and forecasted net revenue and operating income in our European reporting unit, as well as the narrow difference between estimated fair value and carrying value as of our 2016 analysis, we performed an interim impairment analysis on the goodwill of the European reporting unit as of September 30, 2017. The impairment analysis of goodwill was performed using a discounted cash flow model and assumed a combined average annual revenue growth of approximately 1.4% during the valuation period. We also assumed a 1.5% terminal growth rate for the reporting period. This compares to a combined average annual revenue growth of approximately 3.1% and a terminal growth rate of 3.0% used in the impairment analysis as of December 31, 2016. We use a combination of internal and external data to develop the weighted average cost of capital, which was 7.5% for Europe. This assumption remained unchanged from the previous analysis. 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. At September 30, 2017, the goodwill impairment analysis resulted in impairment indicated for our European reporting unit. As described in Note 3 , we adopted ASU 2017-04 in the current year. As such, we calculated the impairment as the excess fair value over carrying value of the reporting unit. We recognized a non-cash impairment charge of $46.3 million as of September 30, 2017.

For the year end European impairment analysis of goodwill, we used a discounted cash flow model, as of December 30, 2017, and assumed a combined average annual revenue growth rate of approximately 1.7%. The increase of 0.3% from the September 30, 2017 analysis is attributable to a slight increase in anticipated inflation in the European market. We assumed a terminal growth rate of 1.5%, which is consistent with the previous analysis. We use a combination of internal and external data to develop the weighted average cost of capital, which was 8.0% for the European reporting unit, which is a 0.5% increase from the September 30, 2017 analysis. The increase is attributable to an increase in the currency risk premium for the U.K. As of December 30, 2017, the goodwill impairment analysis resulted in our European reporting unit having a fair value less than 15% higher than the carrying value. We performed 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 indicate additional impairment of approximately $6 million. A 50 basis point decrease in the terminal growth rate used for the European reporting unit would not have resulted in the implied fair value being less than the carrying value.
We performed our annual analysis for the goodwill associated with the North American reporting unit as of December 30, 2017. We used a discounted cash flow model and assumed a combined average annual revenue growth rate of approximately 2.1%, which is a decrease of 1.0% from the prior year analysis. We assumed a terminal growth rate of 2.0%, which also represents a decrease of 1.0% from the prior year analysis. We use a combination of internal and external data to develop the weighted average cost of capital, which was 7.0% for the North American reporting unit, consistent with the prior year analysis. As of December 30, 2017, the goodwill impairment analysis resulted in our North American reporting unit having a fair value substantially in excess of its carrying value. We performed 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 our North American reporting units' implied fair value being less than the carrying value. Additionally, a 50 basis point decrease in the terminal growth rate used for the North American reporting unit would also not have resulted in the implied fair value being less than the carrying value.
Indefinite-lived intangible assets are also tested for impairment on an annual basis, and between tests if indicators of potential impairment exist. 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. As of December 31, 2016, we identified $563.6 million of trademarks which had a fair value which was reasonably close to the carrying value, of which $550.7 million related to trademarks acquired as a part of the acquisition of Diamond Foods during the first quarter of 2016. As a result of the decrease in current year net sales and the impact on future projections in our Pop Secret, Emerald, and KETTLE Chips (U.K.) branded products, as well as the narrow difference between estimated fair value and carrying value as of our annual test, we performed an interim impairment analysis of those trademarks as of September 30, 2017. The tables below compare the assumptions used in the third quarter’s analysis to the last annual analysis.
Assumptions as of the third quarter and last annual analysis:

38



 
 
September 30, 2017
 
December 31, 2016
 
Emerald®
 
Pop Secret®
 
KETTLE® Chips (U.K.)
 
Emerald®
 
Pop Secret®
 
KETTLE® Chips (U.K.)
Annual revenue growth during valuation period
 
1.1
%
 
(2.0
)%
 
1.2
%
 
1.9
%
 
0.7
%
 
2.8
%
Terminal growth rate
 
1.0
%
 
1.0
 %
 
1.5
%
 
2.0
%
 
1.0
%
 
2.0
%
WACC
 
7.0
%
 
7.0
 %
 
7.5
%
 
7.0
%
 
7.0
%
 
7.5
%
Royalty rate
 
1.5
%
 
7.0
 %
 
6.0
%
 
1.0
%
 
8.0
%
 
6.0
%
We calculated the impairment as the excess fair value over carrying value of each trademark. We recognized a non-cash impairment charge of $58.4 million as of September 30, 2017 for Pop Secret and KETTLE Chips (U.K.). As a result of this interim analysis, no impairment of the Emerald trademark was recognized.
For our indefinite-lived intangible assets annual impairment analysis, we valued our trademarks 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. As of December 30, 2017 we identified $160.2 million of trademarks which had a fair value which exceeds the carrying value by less than 15%. This includes our KETTLE Chips (U.K.) and Pop Secret tradenames. Any adverse changes in the use of these trademarks or the sales volume of the associated products could result in an impairment charge in the future. The difference between the fair value and carrying value of our Emerald tradename is greater than 15% as of December 30, 2017.
Our route intangible assets are valued by comparing the current fair market value for the route assets to the associated carrying value. The fair market value is computed using the route sales average for each route or group of routes multiplied by the market multiple for the area in which the route is located. As a result of the analysis, we recognized no route intangible asset impairments in 2017 and recognized impairment charges of $0.8 million and $0.5 million in 2016 and 2015, respectively. Many of our route territories have fair values that approximate carrying value. Any economic declines or other adverse changes such as decreased demand for our products in those areas could result in future impairment charges.
Our definite-lived 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 carrying value. No event-driven impairment assessments were deemed necessary for 2017 , 2016 or 2015 .
Route Intangible Purchase and Sale Transactions
We purchase and sell routes as a part of the DSD network.  Routes subject to purchase and sale transactions represent integrated sets of inputs, activities and processes that are capable of being conducted and managed by IBOs for the purpose of providing a return directly to the IBOs. However, they do not meet the definition of a business for accounting purposes in accordance with ASU 2017-01, Clarifying the Definition of a Business which we adopted in the fourth quarter of 2017 as discussed in Note 3 . Upon acquisition of a route, we allocate the entire purchase price to an indefinite-lived route intangible, representing the perpetual and exclusive distribution right in the route (territory). We recognize a gain or a loss on the sale of a route 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 sold, which will be comprised primarily of the associated indefinite-lived intangible, to the proceeds received from the IBO. For 2017 , 2016 and 2015 , we recognized net gains on the sale of route businesses of $2.3 million , $1.3 million and $1.9 million , respectively. Net gains on the sale of route businesses in 2017 consisted of $9.4 million in gains, partially offset by $7.1 million in losses. Net gains on the sale of route businesses in 2016 consisted of $5.5 million in gains, partially offset by $4.2 million in losses. For 2015 , net gains on the sale of route businesses consisted of $3.3 million in gains, partially offset by $1.4 million in losses.

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 $10.1 million in fixed asset impairment charges recorded during 2017 , compared to $3.7 million during 2016 , and $11.5 million during 2015 .
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

39



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 8 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:
the component meets the “held for sale” criteria;
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
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. Deferred tax assets and liabilities, along with related valuation allowances, are netted by tax jurisdiction and classified as noncurrent on the balance sheet.
US Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law. The Tax Act made numerous changes to many aspects of U.S. corporate income taxation by, among other things, lowering the US corporate income tax rate from 35% to 21%, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earning of foreign subsidiaries. As a result of the Tax Act, the Company revalued its net deferred tax liabilities to reflect the tax rate expected to apply in the years in which the temporary differences are expected to reverse. This resulted in an approximate $123.2 million tax benefit. The Tax Act provides a dividends received deduction for any future dividends from non-U.S. subsidiaries to their U.S. parent company. The Tax Act also imposes a one-time deemed repatriation of accumulated post-1986 foreign earnings which have not been previously taxed. The Company recorded a provisional estimate for this transition tax of approximately $7.5 million. Through the third quarter of 2017 the Company had recorded taxes of approximately $46.7 million on the amount of basis difference in foreign subsidiaries which is not indefinitely reinvested. In the fourth quarter of 2017 the Company has recorded a benefit to reflect the reduced rate at which any remaining basis difference will be taxed.

The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act and allows the registrant to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We have recognized a net tax benefit of $162.4 million for the provisional tax impacts related to the one-time transition tax and the revaluation of deferred tax balances and included these estimates in our consolidated financial statements for the year ended December 30, 2017. We are in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional

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amounts due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. We expect to complete our analysis within the measurement period in accordance with SAB 118. See Note 13, Income Taxes, for further details on the impact of the Tax Act.
New Accounting Standards
See Note 3 to the consolidated financial statements included in Item  8 for a summary of new accounting standards.
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 17 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 15 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 $1.2 million, $1.0 million , and $0.6 million lower without these swaps during 2017 , 2016 and 2015 , respectively. Including the effect of the interest rate swap agreement, the weighted average interest rate was 3.41% and 2.95% , respectively, as of December 30, 2017 and December 31, 2016 . A 10% increase in the Eurodollar rate would not have significantly impacted interest expense during 2017 .

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 2017 , 2016 and 2015 , net bad debt expense was $1.7 million , $0.5 million and $1.1 million , respectively. Allowances for doubtful accounts were $2.6 million and $1.3 million as of December 30, 2017 and December 31, 2016 , respectively.
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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Item  8 .  Financial Statements and Supplementary Data
SNYDER’S-LANCE, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the Fiscal Years Ended December 30, 2017 December 31, 2016 and January 2, 2016
 
(in thousands, except per share data)

2017

2016

2015
Net revenue

$
2,226,837


$
2,109,227


$
1,656,399

Cost of sales

1,426,666


1,345,437


1,077,110