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EX-32.2 - EXHIBIT 32.2 - PINNACLE FOODS INC.pinnp20170326ex322.htm
EX-32.1 - EXHIBIT 32.1 - PINNACLE FOODS INC.pinnp20170326ex321.htm
EX-31.2 - EXHIBIT 31.2 - PINNACLE FOODS INC.pinnp20170326ex312.htm
EX-31.1 - EXHIBIT 31.1 - PINNACLE FOODS INC.pinnp20170326ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
_____________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to _____________.
Commission File Number 001-35844
___________________________________
Pinnacle Foods Inc.
(Exact name of registrant as specified in its charter)
___________________________________
Delaware
 
35-2215019
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
399 Jefferson Road
Parsippany, New Jersey
 
07054
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (973) 541-6620
___________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ý No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer (Do not check if a smaller reporting company)
¨
Smaller Reporting Company
¨
 
 
 
 
 
 
Emerging growth company
o
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 Exchange Act)
Yes  ¨     No  ý
The Registrant had 118,677,004 shares of common stock, $0.01 par value, outstanding at April 24, 2017.



 
TABLE OF CONTENTS
FORM 10-Q
Page
No.
ITEM 1:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
ITEM 2:
ITEM 3:
ITEM 4:
ITEM 1:
ITEM 1A:
ITEM 2:
ITEM 3:
ITEM 4:
ITEM 5:
ITEM 6:
 





PART I - FINANCIAL INFORMATION


ITEM 1.    FINANCIAL STATEMENTS



PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(thousands, except per share amounts)
 
  
Three months ended
  
March 26,
2017

March 27,
2016
Net sales
$
766,074


$
754,255

Cost of products sold
555,010


555,688

Gross profit
211,064


198,567





Marketing and selling expenses
55,594


58,898

Administrative expenses
36,011


45,888

Research and development expenses
4,021


4,185

Other expense, net
4,230


9,315


99,856


118,286

Earnings before interest and taxes
111,208


80,281

Interest expense
80,731


31,640

Interest income
15


77

Earnings before income taxes
30,492


48,718

Provision for income taxes
7,343


23,881

Net earnings
23,149


24,837

Less: Net earnings attributable to non-controlling interest
223

 
1

Net earnings attributable to Pinnacle Foods, Inc. and subsidiaries common shareholders
$
22,926

 
$
24,836

 
 
 
 
 





Net earnings per share attributable to Pinnacle Foods, Inc. and subsidiaries common shareholders:





Basic
$
0.20


$
0.21

Weighted average shares outstanding - basic
117,624


116,117

Diluted
$
0.19


$
0.21

Weighted average shares outstanding - diluted
119,332


117,613

Dividends declared
$
0.285


$
0.255

See accompanying Notes to Unaudited Consolidated Financial Statements


1


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

 
Three months ended
March 26, 2017
 
March 27, 2016
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
 
Pre-tax amount
 
Tax (expense) benefit
 
After-tax amount
Net earnings
 
 
 
 
$
23,149

 
 
 
 
 
$
24,837

Other comprehensive earnings (loss)
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
1,113

 

 
1,113

 
5,443

 

 
5,443

Cash-flow hedges:
 
 
 
 


 
 
 
 
 
 
Unrealized gains (losses) arising during the period
495

 
(192
)
 
303

 
(11,121
)
 
4,274

 
(6,847
)
Reclassification adjustment for (gains) losses included in net earnings
21,875

 
(8,351
)
 
13,524

 
1,386

 
(549
)
 
837

Pension:
 
 
 
 


 
 
 
 
 
 
Reclassification of net actuarial loss included in net earnings
269

 
(102
)
 
167

 
308

 
(117
)
 
191

Other comprehensive earnings (loss)
23,752

 
(8,645
)
 
15,107

 
(3,984
)

3,608


(376
)
Total comprehensive earnings
 
 
 
 
38,256

 
 
 
 
 
24,461

Less: Comprehensive earnings attributable to non-controlling interest
 
 
 
 
223

 
 
 
 
 
1

Comprehensive earnings attributable to Pinnacle Foods Inc. and Subsidiaries
 
 
 
 
$
38,033

 
 
 
 
 
$
24,460


See accompanying Notes to Unaudited Consolidated Financial Statements





2


PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands, except share and per share amounts)
 
March 26,
2017
 
December 25,
2016
Current assets:



Cash and cash equivalents
$
141,454


$
353,076

Accounts receivable, net of allowances of $12,469 and $12,335, respectively
301,266


289,582

Inventories
454,395


445,491

Other current assets
15,155


10,687

Total current assets
912,270


1,098,836

Plant assets, net of accumulated depreciation of $513,406 and $491,397, respectively
721,065


723,345

Tradenames
2,529,610


2,529,558

Other assets, net
169,462


173,071

Goodwill
2,163,851


2,163,156

Total assets
$
6,496,258


$
6,687,966

 



Current liabilities:



Short-term borrowings
$
2,954


$
2,389

Current portion of long-term obligations
36,204


23,801

Accounts payable
308,018


292,478

Accrued trade marketing expense
45,808


51,054

Accrued liabilities
134,480


166,741

Dividends payable
35,600


35,233

Total current liabilities
563,064


571,696

Long-term debt
2,944,179


3,140,496

Pension and other postretirement benefits
55,421


56,323

Other long-term liabilities
33,844


47,529

Deferred tax liabilities
936,600


922,980

Total liabilities
4,533,108


4,739,024

Commitments and contingencies (Note 13)





Shareholders' equity:



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



Pinnacle common stock: par value $.01 per share, 500,000,000 shares authorized; issued 119,422,754 and 119,127,269, respectively
1,194


1,191

Additional paid-in-capital
1,439,145


1,429,447

Retained earnings
590,226


601,049

Accumulated other comprehensive loss
(36,462
)

(51,569
)
Capital stock in treasury, at cost, 1,000,000 common shares
(32,110
)
 
(32,110
)
Total Pinnacle Foods Inc. and subsidiaries shareholders' equity
1,961,993


1,948,008

Non-controlling interest
1,157

 
934

Total Equity
1,963,150

 
1,948,942

Total liabilities and equity
$
6,496,258


$
6,687,966


See accompanying Notes to Unaudited Consolidated Financial Statements



3


PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands)
  
Three months ended
  
March 26,
2017

March 27,
2016
Cash flows from operating activities



Net earnings
$
23,149


$
24,837

Non-cash charges (credits) to net earnings



Depreciation and amortization
27,088


24,917

Amortization of debt acquisition costs and discount on term loan
1,580


2,246

Recognition of deferred costs related to refinancing
28,494



Change in value of financial instruments, including amounts reclassified from Accumulated Other Comprehensive Loss from settlement of hedges
22,724


(3,892
)
Equity-based compensation charges
4,109


3,910

Pension expense, net of contributions
(634
)

1,135

Other long-term liabilities
(1,473
)

(468
)
Other long-term assets


(1,635
)
Foreign exchange gains
(233
)
 
(784
)
Deferred income taxes
5,058


12,551

Changes in working capital (net of effects of acquisition)



Other liabilities - cash settlement of hedges related to refinancing
(20,722
)
 

Accounts receivable
(11,583
)

(47,189
)
Inventories
(8,747
)

26,468

Accrued trade marketing expense
(5,220
)

10,113

Accounts payable
28,680


27,173

Accrued liabilities
(27,328
)

(13,427
)
Other current assets
(1,949
)

10,803

Net cash provided by operating activities
62,993


76,758

Cash flows from investing activities



Business acquisition activity (net of cash acquired)

 
(985,365
)
Capital expenditures
(29,243
)

(33,931
)
Proceeds from sale of plant assets
679



Net cash used in investing activities
(28,564
)

(1,019,296
)
Cash flows from financing activities



Proceeds from bank term loans
2,262,000


547,250

Proceeds from notes offerings


350,000

Repayments of long-term obligations
(2,465,700
)

(2,234
)
Proceeds from short-term borrowings
1,634


1,023

Repayments of short-term borrowings
(1,068
)

(1,017
)
Repayment of capital lease obligations
(2,224
)

(1,313
)
Dividends paid
(33,602
)
 
(29,675
)
Net proceeds from issuance of common stock
5,894

 
395

Excess tax benefits on equity-based compensation

 
137

Taxes paid related to net share settlement of equity awards
(303
)
 

Debt acquisition costs
(12,810
)

(21,262
)
Net cash (used in) provided by financing activities
(246,179
)

843,304

Effect of exchange rate changes on cash
128


124

Net change in cash and cash equivalents
(211,622
)

(99,110
)
Cash and cash equivalents - beginning of period
353,076


180,549

Cash and cash equivalents - end of period
$
141,454


$
81,439





Supplemental disclosures of cash flow information:



Interest paid
$
35,479


$
19,059

Interest received
15


77

Income taxes paid/(refunded)
2,512


(3,486
)
Non-cash investing and financing activities:



New capital leases
4,822

 

Dividends payable
35,600


30,959

Accrued additions to plant assets
13,681

 
10,589



See accompanying Notes to Unaudited Consolidated Financial Statements

4


PINNACLE FOODS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
(thousands, except share and per share amounts)
 
Common Stock
 
Treasury Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total Shareholders' Equity
 
Non-Controlling Interest
 
Total
Equity
Shares
 
Amount
 
Shares
 
Amount
 
Balance, December 27, 2015
117,619,695

 
$
1,176

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

 
$
517,330

 
$
(59,388
)
 
$
1,805,529

 
$

 
$
1,805,529

Equity-based compensation plans
(1,780
)
 


 
 
 
 
 
4,442

 
 
 
 
 
4,442

 
 
 
4,442

Dividends ($0.255 per share) (a)
 
 
 
 
 
 
 
 
 
 
(29,840
)
 
 
 
(29,840
)
 
 
 
(29,840
)
Non-controlling interest in acquisition

 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
712

 
712

Comprehensive earnings
 
 
 
 
 
 
 
 
 
 
24,836

 
(376
)
 
24,460

 
1

 
24,461

Balance, March 27, 2016
117,617,915

 
$
1,176

 
(1,000,000
)
 
$
(32,110
)
 
$
1,382,963

 
$
512,326

 
$
(59,764
)
 
$
1,804,591

 
$
713

 
$
1,805,304

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 25, 2016
119,127,269

 
$
1,191

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

 
$
601,049

 
$
(51,569
)
 
$
1,948,008

 
$
934

 
$
1,948,942

Equity-based compensation plans
295,485

 
3

 
 
 
 
 
9,698

 
 
 
 
 
9,701

 
 
 
9,701

Dividends ($0.285 per share) (b)
 
 
 
 
 
 
 
 
 
 
(33,972
)
 
 
 
(33,972
)
 
 
 
(33,972
)
Net earnings attributable to non-controlling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
223

 
223

Comprehensive earnings
 
 
 
 
 
 
 
 
 
 
23,149

 
15,107

 
38,256

 

 
38,256

Balance, March 26, 2017
119,422,754

 
$
1,194

 
(1,000,000
)
 
$
(32,110
)
 
$
1,439,145

 
$
590,226

 
$
(36,462
)
 
$
1,961,993

 
$
1,157

 
$
1,963,150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


(a) $0.255 per share declared February 2016
(b) $0.285 per share declared February 2017

See accompanying Notes to Unaudited Consolidated Financial Statements


5

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



1. Summary of Business Activities
Business Overview
Pinnacle Foods Inc. ("Pinnacle" or the "Company") is a leading manufacturer, marketer and distributor of high quality, branded convenience food products, the products and operations of which are managed and reported in four operating segments: (i) Frozen, (ii) Grocery, (iii) Boulder and (iv) Specialty. During the fourth quarter of fiscal 2016, the Company reorganized its reporting structure in a manner that resulted in the above four reportable segments. Refer to Note 14, Segments, for additional information and selected financial information.

The Frozen segment is comprised of the retail businesses of the Company's frozen brands, including vegetables (Birds Eye), complete bagged meals (Birds Eye Voila! and Birds Eye Signature Skillets), full-calorie single-serve frozen dinners and entrées (Hungry-Man), prepared seafood (Van de Kamp's and Mrs. Paul's), pancakes / waffles / French Toast (Aunt Jemima), frozen and refrigerated bagels (Lender's) and pizza for one (Celeste). The Frozen segment also includes all of the Company’s business in Canada, including those of the Garden Protein International and Boulder Brands acquisitions. The Grocery segment is comprised of the retail businesses of the Company's grocery brands, including cake/ brownie mixes and frostings (Duncan Hines), shelf-stable pickles (Vlasic), salad dressings (Wish-Bone, Western and Bernstein’s), table syrups (Log Cabin and Mrs. Butterworth's), refrigerated and shelf-stable spreads (Smart Balance), canned meat (Armour, Nalley and Brooks), pie and pastry fillings (Duncan Hines Comstock and Wilderness), and barbecue sauces (Open Pit). The Boulder segment is comprised of the retail businesses of the Company's health and wellness lifestyle brands including gluten-free products (Udi's and Glutino), natural frozen meal offerings (EVOL), plant-based refrigerated and shelf-stable spreads (Earth Balance) and plant-based protein frozen products (gardein). The Specialty Foods segment includes the Company’s snack products (Tim's Cascade and Snyder of Berlin) and all of its U.S. foodservice and private label businesses, including those of the Garden Protein International and Boulder Brands acquisitions.

History and Current Ownership
On April 2, 2007, the Company was acquired by, and became a wholly owned subsidiary of Peak Holdings LLC (“Peak Holdings”), an entity controlled by investment funds affiliated with The Blackstone Group L.P. (“Blackstone”). Blackstone owned, through Peak Holdings, approximately 98% of the common stock of the Company. 

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

2. Interim Financial Statements

Basis of Presentation

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting primarily of normal recurring adjustments) necessary for a fair statement of the Company’s financial position as of March 26, 2017, the results of operations for the three months ended March 26, 2017 and March 27, 2016, and the cash flows for the three months ended March 26, 2017 and March 27, 2016. The results of operations are not necessarily indicative of the results to be expected for the full fiscal year. The accompanying unaudited consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 25, 2016.




6

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


3. Acquisitions

The Company accounts for business combinations by using the acquisition method of accounting. The following acquisition has been accounted for in accordance with these standards.

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

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

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


Assets acquired:
 
  Cash
$
16,054

  Accounts receivable
41,064

  Inventories
66,893

  Other current assets
12,043

  Deferred tax asset
27,955

  Property and equipment
59,405

  Tradenames
539,600

  Distributor relationships
40,600

  Customer relationships
11,400

  Other assets
12,298

  Goodwill
445,954

       Fair value of assets acquired
1,273,266

Liabilities assumed
 
  Accounts payable
16,022

  Accrued liabilities
41,555

  Capital lease obligations
7,486

  Long term deferred tax liability
201,358

  Other long-term liabilities
4,504

  Non-controlling interest
922

Total cost of acquisition
$
1,001,419


Based upon the allocation, the value assigned to intangible assets and goodwill totaled $1,037.7 million. The goodwill was generated primarily as a result of expected synergies to be achieved because of the Boulder Brands acquisition. Distributor relationships and customer relationships are being amortized on an accelerated basis over 30 and 10 years, respectively. These useful lives are based on an attrition rate based on industry experience, which management believes is appropriate in the Company's circumstances. The Company has also assigned $539.6 million to the value of the tradenames acquired, which is not subject to amortization but is reviewed annually for impairment. Goodwill, which is also not subject to amortization, totaled $446.0 million (tax deductible goodwill of $85.5 million resulted from the Boulder Brands acquisition). Goodwill was allocated to the Frozen ($9.1 million), Grocery ($114.4 million), Boulder ($293.6 million) and Specialty ($28.9 million) segments.
 



7

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


The Boulder Brands acquisition was financed through borrowings of $550.0 million in incremental term loans (the "Tranche I Term Loans") due 2023 (subsequently refinanced in February 2017 (Note 10)), $350.0 million of 5.875% Senior Notes (the "5.875% Senior Notes) due 2024 and $118.3 million of cash on hand, prior to transaction costs of $6.8 million and debt acquisition costs of $24.0 million in the three months ended March 27, 2016. Included in the acquisition costs of $6.8 million are $6.1 million of merger, acquisition and advisory fees and $0.7 million of other costs. The transaction costs are recorded in Other expense, net in the Consolidated Statements of Operations.

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

Amounts in millions:

 
Three months ended March 27, 2016 (unaudited)
Net sales
$
771.9

Net earnings
$
46.2



Boulder Brands Restructuring

As a result of the Boulder Brands acquisition, the Company incurred $10.6 million of restructuring charges in the three months ended March 27, 2016, primarily related to employee termination and retention benefits. Charges incurred in the three months ended March 26, 2017 were immaterial.

The following table summarizes total restructuring charges accrued as of March 26, 2017. These amounts are recorded in our Consolidated Balance Sheet in Accrued Liabilities.

 
 
Balance
 
 
 
 
 
Balance
Description
 
December 25, 2016
 
Expense
 
Payments
 
March 26, 2017
Accrued restructuring charges
 
$
7,587

 
$
37

 
$
(5,911
)
 
$
1,713



4. Fair Value Measurements
The authoritative guidance for financial assets and liabilities discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
Level 1:
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:
Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

8

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


Level 3:
Unobservable inputs that reflect the Company’s assumptions.
The Company’s financial assets and liabilities subject to recurring fair value measurements and the required disclosures are as follows:
 
 
March 26, 2017
 
Fair Value Measurements
Using Fair Value Hierarchy
 
 
December 25, 2016
 
Fair Value Measurements
Using Fair Value Hierarchy
 
Level 1
 
Level 2
 
Level 3
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
5,161

 
$

 
$
5,161

 
$

 
 
$

 
$

 
$

 
$

Foreign currency derivatives
449

 

 
449

 

 
 
86

 

 
86

 

Commodity derivatives
539

 

 
539

 

 
 
2,833

 

 
2,833

 

Total assets at fair value
$
6,149

 
$

 
$
6,149

 
$

 
 
$
2,919

 
$

 
$
2,919


$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$

 
$

 
$

 
$

 
 
$
16,852

 
$

 
$
16,852

 
$

Commodity derivatives
34

 

 
34

 

 
 
327

 

 
327

 

Total liabilities at fair value
$
34

 
$

 
$
34

 
$

 
 
$
17,179

 
$

 
$
17,179

 
$


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

The valuations of these instruments are determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate, commodity, and foreign exchange forward curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of the authoritative guidance for fair value disclosure, the Company incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. The Company had no fair value measurements based upon significant unobservable inputs (Level 3) as of March 26, 2017 or December 25, 2016.

In addition to the instruments named above, the Company also makes fair value measurements in connection with its annual goodwill and tradename impairment testing. These measurements fall into Level 3 of the fair value hierarchy.

5. Other Expense, net

Other Expense (Income), net
 
Three months ended
 
March 26,
2017
 
March 27,
2016
Other expense, net consists of:
 
 
 
Amortization of intangibles/other assets
$
4,542

 
$
4,047

Foreign exchange gains
(233
)
 
(784
)
Boulder Brands acquisition costs (Note 3)

 
6,781

Royalty income and other
(79
)
 
(729
)
Total other expense, net
$
4,230

 
$
9,315


9

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



Foreign exchange gains. These represent foreign exchange gains from intra-entity loans resulting from the Company's November 2014 Garden Protein acquisition that are anticipated to be settled in the foreseeable future.


6. Equity-Based Compensation Expense and Earnings Per Share

Equity-based Compensation

The Company currently grants equity awards under the Amended and Restated 2013 Omnibus Incentive Plan (the “Incentive Plan”). Equity-based compensation expense recognized during the period is based on the value of the portion of equity-based payment awards that is ultimately expected to vest during the period. As equity-based compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. The authoritative guidance for equity-based compensation requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Expense Information
The following table summarizes equity-based compensation expense which was allocated as follows:

 
 
Three months ended
 
 
March 26, 2017
 
March 27, 2016
Cost of products sold
 
$
515

 
$
693

Marketing and selling expenses
 
1,167

 
1,181

Administrative expenses
 
2,307

 
1,934

Research and development expenses
 
120

 
102

Pre-tax equity-based compensation expense
 
4,109

 
3,910

Income tax benefit
 
(1,561
)
 
(1,477
)
Net equity-based compensation expense
 
$
2,548

 
$
2,433


Amended and Restated 2013 Omnibus Incentive Plan

The Incentive Plan provides for the issuance of up to 11,300,000 shares of the Company's common stock under (1) equity awards granted as a result of the conversion of unvested performance interest units ("PIU's") into restricted common stock of the Company, (2) stock options and other equity awards granted in connection with the completion of the IPO, and (3) awards granted by the Company under the Incentive Plan following the completion of the IPO. Awards granted subsequent to the IPO include nonqualified stock options, non-vested shares and restricted stock units ("RSU's"), the majority of which vest in full three years from the date of grant. The Company also granted non-vested performance shares ("PS's") and grants performance share units ("PSU's"), both of which vest based on achievement of relative total shareholder return performance goals over a three-year performance period.

Earnings Per Share

Basic earnings per common share is computed by dividing net earnings or loss for common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are calculated by dividing net earnings by weighted-average common shares outstanding during the period plus dilutive potential common shares, which are determined as follows:

10

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


 
Three months ended
 
March 26, 2017
 
March 27, 2016
Weighted-average common shares
117,623,753

 
116,117,476

Effect of dilutive securities:
1,707,795


1,495,398

Dilutive potential common shares
119,331,548

 
117,612,874


Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options are used to repurchase common stock at market value. The amount of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities. For the three months ended March 26, 2017, and March 27, 2016 conversion of securities totaling 20,904 and 354,423, respectively, into common share equivalents were excluded from this calculation as their effect would have been anti-dilutive.

7. Accumulated Other Comprehensive Loss

The components of Accumulated other comprehensive loss consist of the following:
 
Currency translation adjustments
 
Gains (Losses) on cash flow hedges
 
Change in pensions
 
Total
Balance, December 25, 2016
$
(3,989
)
 
$
(8,234
)
 
$
(39,346
)
 
$
(51,569
)
Other comprehensive (loss)/income before reclassification
1,113

 
303

 

 
1,416

Amounts reclassified from accumulated other comprehensive loss

 
13,524

 
167

 
13,691

Net current period other comprehensive (loss)/income
1,113

 
13,827

 
167

 
15,107

Balance, March 26, 2017
$
(2,876
)
 
$
5,593

 
$
(39,179
)
 
$
(36,462
)

 
Currency translation adjustments
 
Gains (Losses) on cash flow hedges
 
Change in pensions
 
Total
Balance, December 27, 2015
$
(6,418
)
 
$
(9,232
)
 
$
(43,738
)
 
$
(59,388
)
Other comprehensive loss before reclassification
5,443

 
(6,847
)
 

 
(1,404
)
Amounts reclassified from accumulated other comprehensive loss

 
837

 
191

 
1,028

Net current period other comprehensive (loss)/income
5,443

 
(6,010
)
 
191

 
(376
)
Balance, March 27, 2016
$
(975
)
 
$
(15,242
)
 
$
(43,547
)
 
$
(59,764
)

The following table presents amounts reclassified out of Accumulated Other Comprehensive Loss ("AOCL") and into Net earnings for the three months ended March 26, 2017 and March 27, 2016, respectively.

11

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


 
 
Amounts Reclassified from AOCL
 
 
 
 
Three months ended
 
 
Details about Accumulated Other Comprehensive Loss Components
 
March 26, 2017
 
March 27, 2016
 
Reclassified from AOCL to:
Gains and (losses) on financial instrument contracts
 
 
 
 
 
 
Interest rate contracts
 
$
(21,774
)
 
$
(1,465
)
 
Interest expense
Foreign exchange contracts
 
(101
)
 
79

 
Cost of products sold
Total pre-tax
 
(21,875
)
 
(1,386
)
 
 
Tax benefit
 
8,351

 
549

 
Provision for income taxes
Net of tax
 
(13,524
)
 
(837
)
 
 
 
 
 
 
 
 
 
Pension actuarial assumption adjustments
 
 
 
 
 
 
Amortization of actuarial loss
 
(269
)
 
(308
)
(a)
Cost of products sold
Tax benefit
 
102

 
117

 
Provision for income taxes
Net of tax
 
(167
)
 
(191
)
 
 
Net reclassifications into net earnings
 
$
(13,691
)
 
$
(1,028
)
 
 

(a) This is included in the computation of net periodic pension cost (see Note 11 for additional details).

8. Balance Sheet Information

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

 
March 26,
2017
 
December 25, 2016
Customers
$
304,061

 
$
292,029

Allowances for cash discounts, bad debts and returns
(12,469
)
 
(12,335
)
Subtotal
291,592

 
279,694

Other receivables
9,674

 
9,888

Total
$
301,266

 
$
289,582


Inventories. Inventories are as follows:
 
 
March 26,
2017
 
December 25,
2016
Raw materials
$
89,535

 
$
81,660

Work in progress (1)
31,848

 
55,068

Finished product
333,012

 
308,763

Total
$
454,395

 
$
445,491

(1) Work in progress is primarily agricultural inventory.

The Company has various purchase commitments for raw materials and certain finished products within the ordinary course of business. Such commitments are not at prices in excess of current market prices.

12

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



Other Current Assets. Other Current Assets are as follows:
 
March 26, 2017
 
December 25, 2016
Prepaid expenses and other
$
13,397

 
$
9,911

Prepaid income taxes
1,758

 
776

Total
$
15,155

 
$
10,687


Plant Assets. Plant assets are as follows:
 
March 26, 2017
 
December 25, 2016
Land
$
15,720

 
$
15,720

Buildings
292,093

 
272,510

Machinery and equipment
865,423

 
826,344

Projects in progress
61,235

 
100,168

Subtotal
1,234,471

 
1,214,742

Accumulated depreciation
(513,406
)
 
(491,397
)
Total
$
721,065

 
$
723,345


Depreciation was $22.5 million and $20.9 million during the three months ended March 26, 2017, and March 27, 2016, respectively. As of March 26, 2017 and December 25, 2016, Plant Assets included assets under capital lease with a book value of $41.9 million and $38.1 million (net of accumulated depreciation of $15.1 million and $14.3 million), respectively.

Accrued Liabilities. Accrued liabilities are as follows:
 
March 26,
2017

December 25,
2016
Employee compensation and benefits
$
49,936

 
$
65,402

Interest payable
16,375

 
23,854

Consumer coupons
5,901

 
5,048

Accrued restructuring charges (Note 3)
1,713

 
7,587

Accrued financial instrument contracts (Note 12)

 
4,940

Accrued broker commissions
7,649

 
7,982

Accrued income taxes
30,612

 
29,173

Other
22,294

 
22,755

Total
$
134,480

 
$
166,741

Other Long-Term Liabilities. Other long-term liabilities are as follows:
 
March 26,
2017
 
December 25,
2016
 Employee compensation and benefits
$
12,466

 
$
12,630

 Long-term rent liability and deferred rent allowances
6,539

 
6,794

 Liability for uncertain tax positions
9,166

 
9,786

 Accrued financial instrument contracts (Note 12)
34

 
12,239

 Other
5,639

 
6,080

Total
$
33,844

 
$
47,529



13

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


9. Goodwill, Tradenames and Other Assets
Goodwill
Goodwill by segment is as follows:
 
Frozen
 
Grocery
 
Boulder
 
Specialty
 
Total
Balance, December 25, 2016
$
750,019

 
$
860,972

 
$
364,883

 
$
187,282

 
$
2,163,156

Foreign currency adjustment
695

 

 


 

 
695

Balance, March 26, 2017
$
750,714


$
860,972

 
$
364,883

 
$
187,282

 
$
2,163,851

 
 
 
 
 
 
 
 
 
 

The authoritative guidance for business combinations requires that all business combinations be accounted for at fair value under the acquisition method of accounting. The authoritative guidance for goodwill provides that goodwill will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate. The Company completed its annual testing in the third quarter of 2016, which indicated no impairment.
Tradenames
Tradenames by segment are as follows:
 
Frozen
 
Grocery
 
Boulder
 
Specialty
 
Total
Balance, December 25, 2016
$
790,738

 
$
1,260,912

 
$
442,808

 
$
35,100

 
$
2,529,558

Foreign currency adjustment
52

 

 

 

 
52

Balance, March 26, 2017
$
790,790


$
1,260,912


$
442,808


$
35,100

 
$
2,529,610

 
 
 
 
 
 
 
 
 
 

The authoritative guidance for indefinite-lived assets provides that indefinite-lived assets will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate. Upon completion of the annual testing in the third quarter of 2016, the Company recorded tradename impairments of $7.3 million on Celeste, $3.0 million on Aunt Jemima and $0.9 million on Snyder of Berlin. Celeste and Aunt Jemima are reported in our Frozen segment and Snyder of Berlin is reported in the Specialty segment. These charges were the result of the Company's reassessment of the long-term sales projections for the brands during our annual planning cycle which occurs during the third quarter each year. The total carrying value of the three tradenames as of March 26, 2017 is $66.4 million.



14

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


Other Assets
 
 
March 26, 2017
 
Weighted
Avg Life
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortizable intangibles
 
 
 
 
 
 
 
Recipes
10

 
$
60,109

 
$
(54,639
)
 
$
5,470

Customer relationships - Distributors
34

 
182,733

 
(56,579
)
 
126,154

Customer relationships - Food Service
10

 
11,400

 
(2,602
)
 
8,798

Customer relationships - Private Label
7

 
1,290

 
(1,290
)
 

Total amortizable intangibles
 
 
$
255,532

 
$
(115,110
)
 
$
140,422

Financial instruments (see Note 12)
 
 
3,017

 

 
3,017

Other (1)
 
 
30,917

 
(4,894
)
 
26,023

Total other assets, net
 
 
 
 
 
 
$
169,462

 
Amortizable intangibles by segment
 
 
 
Frozen
 
 
 
$
44,760

 
Grocery
 
 
 
49,100

 
Boulder
 
 
 
43,846

 
Specialty
 
 
 
2,716

 
 
 
 
 
 
 
$
140,422

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

 
$
60,109

 
$
(53,130
)
 
$
6,979

Customer relationships - Distributors
34

 
182,733

 
(54,678
)
 
128,055

Customer relationships - Food Service
10

 
11,400

 
(2,155
)
 
9,245

Customer relationships - Private Label
7

 
1,290

 
(611
)
 
679

License
7

 
6,175

 
(6,175
)
 

Total amortizable intangibles
 
 
$
261,707

 
$
(116,749
)
 
$
144,958

Financial instruments (see note 12)
 
 
2,288

 

 
2,288

Other (1)
 
 
30,646

 
(4,821
)
 
25,825

Total other assets, net
 
 
 
 
 
 
$
173,071

 
Amortizable intangibles by segment
 
 
 
Frozen
 
 
 
$
46,158

 
Grocery
 
 
 
50,405

 
Boulder
 
 
 
44,955

 
Specialty
 
 
 
3,440

 
 
 
 
 
 
 
$
144,958


(1) As of March 26, 2017 and December 25, 2016, Other primarily consists of cost basis investments in companies in the natural and organic food and beverage industries acquired through the Boulder Brands acquisition as well as security deposits, supplemental savings plan investments and debt acquisition costs associated with the Company's revolving credit facility.


15

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


Amortization of intangible assets was $4.5 million and $4.0 million for the three months ended March 26, 2017 and March 27, 2016, respectively. Estimated amortization expense for each of the next five years and thereafter is as follows: remainder of 2017 - $7.7 million; 2018 - $9.5 million; 2019 - $8.7 million; 2020 - $8.1 million; 2021 - $6.7 million and thereafter - $99.6 million.


10. Debt and Interest Expense

March 26,
2017
 
December 25,
2016
Short-term borrowings

 

- Notes payable
$
2,954

 
$
2,389

Total short-term borrowings
$
2,954

 
$
2,389

Long-term debt
 
 
 
- Tranche B Term Loans due 2024
$
2,262,000

 
$

- Tranche G Term Loans due 2020

 
1,409,625

- Tranche H Term Loans due 2020

 
509,250

- Tranche I Term Loans due 2023

 
545,875

- 4.875% Senior Notes due 2021
350,000

 
350,000

- 5.875% Senior Notes due 2024
350,000

 
350,000

- 3.0% Note payable to Gilster Mary Lee Corporation
4,199

 
5,176

- Unamortized discount on long term debt and deferred financing costs
(24,764
)
 
(41,954
)
- Capital lease obligations
38,948

 
36,325


2,980,383

 
3,164,297

Less: current portion of long-term obligations
36,204

 
23,801

Total long-term debt
$
2,944,179

 
$
3,140,496


 
Interest expense
Three months ended
 
March 26,
2017
 
March 27,
2016
Interest expense
$
28,883

 
$
27,929

Amortization of debt acquisition costs and original issue discounts
1,580

 
2,246

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

 

Settlement of hedges related to refinancing
20,722

 

Interest rate swap losses
1,052

 
1,465

Total interest expense
$
80,731

 
$
31,640




Third Amended and Restated Credit Agreement

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

16

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



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

In connection with the Refinancing, Pinnacle Foods Finance LLC incurred $12.8 million of debt acquisition costs and original issue discounts, which were recorded as a reduction of the carrying value of debt and are detailed below. Pinnacle Foods Finance LLC also incurred a non-cash charge of $28.5 million related to existing debt acquisition costs and original issue discounts.
The Tranche B Term Loans bear interest at a floating rate and are maintained as base rate loans or as eurocurrency rate loans. Base rate loans bear interest at the base rate plus the applicable base rate margin, as described in the Third Amended and Restated Credit Agreement. The base rate is defined as the highest of (i) the administrative agent's prime rate, (ii) the federal funds effective rate plus 1/2 of 1.00% and (iii) the eurocurrency rate that would be payable on such day for a eurocurrency rate loan with a one-month interest period plus 1.00%. Eurocurrency rate loans bear interest at the adjusted eurocurrency rate plus the applicable eurocurrency rate margin, as described in the Third Amended and Restated Credit Agreement. The eurocurrency rate is determined by reference to the British Bankers Association "BBA" LIBOR rate for the interest period relevant to such borrowing. With respect to Tranche B Term Loans , the eurocurrency rate shall be no less than 0.00% per annum and the base rate shall be no less than 1.00% per annum. The interest rate margin for Tranche B Term Loans under the Third Amended and Restated Credit Agreement is 1.00%, in the case of the base rate loans and 2.00%, in the case of Eurocurrency rate loans.
The obligations under the Third Amended and Restated Credit Agreement are unconditionally and irrevocably guaranteed by Peak Finance Holdings LLC, any subsidiary of Peak Finance Holdings LLC that directly or indirectly owns 100% of the issued and outstanding equity interests of Pinnacle Foods Finance LLC, subject to certain exceptions, each of Pinnacle Foods Finance LLC's direct or indirect material wholly-owned domestic subsidiaries (collectively, the "Guarantors") and by the Company effective with the 2013 Refinancing. In addition, subject to certain exceptions and qualifications, borrowings under the Third Amended and Restated Credit Agreement are secured by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, each direct or indirect domestic material subsidiary of Pinnacle Foods Finance LLC and 65% of the capital stock of, or other equity interests in, each direct material "first tier" foreign subsidiary of Pinnacle Foods Finance LLC and (ii) certain tangible and intangible assets of Pinnacle Foods Finance LLC and those of the Guarantors (subject to certain exceptions and qualifications).
 
A commitment fee of 0.30% per annum is applied to the unused portion of the revolving credit facility.

Pinnacle Foods Finance LLC pays a fee for all outstanding letters of credit drawn against the revolving credit facility at an annual rate equivalent to the applicable eurocurrency rate margin then in effect under the revolving credit facility, plus the fronting fee payable in respect of the applicable letter of credit. The fronting fee is equal to 0.125% per annum of the daily maximum amount then available to be drawn under such letter of credit. The fronting fees are computed on a quarterly basis in arrears. Total letters of credit issued under the revolving credit facility cannot exceed $50.0 million.

Under the terms of the Third Amended and Restated Credit Agreement, Pinnacle Foods Finance LLC is required to use 50% of its "Excess Cash Flow" to prepay the term loans under the Senior Secured Credit Facility (which percentage will be reduced to 25% at a total net leverage ratio of between 4.50 and 5.49 and to 0% at a total net leverage ratio below 4.50). Excess Cash Flow is defined as consolidated net income (as defined), as adjusted for certain items, including (1) all non-cash charges and credits included in arriving at consolidated net income, (2) changes in working capital, (3) capital expenditures (to the extent they were not financed with debt), (4) the aggregate amount of principal payments on indebtedness and (5) certain other items defined in the Senior Secured Credit Facility.
 
The term loans under the Senior Secured Credit Facility amortize in quarterly installments of 0.25% of their aggregate funded total principal amount. The scheduled principal payments of the Tranche B Term Loans outstanding as of March 26, 2017 are $17.0 million in 2017, $22.6 million in 2018, $22.6 million in 2019, $22.6 million in 2020, $22.6 million in 2021, $22.6 million in 2022, $22.6 million in 2023 and $2,109.4 million thereafter.

Pursuant to the terms of the Senior Secured Credit Facility, Pinnacle Foods Finance LLC is required to maintain a ratio of Net First Lien Secured Debt to Adjusted EBITDA of no greater than 5.75 to 1.00. Net First Lien Secured Debt is defined as aggregate consolidated secured indebtedness, less the aggregate amount of all unrestricted cash and cash equivalents. In addition, under the Senior Secured Credit Facility and the indenture governing the Senior Notes, Pinnacle Foods Finance LLC's ability to engage in

17

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


activities such as incurring additional indebtedness, making investments and paying dividends is tied to the Senior Secured Leverage Ratio (which is currently the same as the ratio of Net First Lien Secured Debt to Adjusted EBITDA described above), in the case of the Senior Secured Credit Facility, or to the ratio of Adjusted EBITDA to fixed charges for the most recently concluded four consecutive fiscal quarters, in the case of the Senior Notes. The Senior Secured Credit Facility also permits restricted payments up to an aggregate amount of (together with certain other amounts) the greater of $75 million and 2% of Pinnacle Foods Finance LLC's consolidated total assets, so long as no default has occurred and is continuing and its pro forma Senior Secured Leverage Ratio would be no greater than 4.25 to 1.00. As of March 26, 2017 the Company is in compliance with all covenants and other obligations under the Senior Secured Credit Facility and the indenture governing the Senior Notes.
Senior Notes

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

The Company's 4.875% Senior Notes due 2021 (the "4.875% Senior Notes") and 5.875% Senior Notes (together the "Senior Notes") are general senior unsecured obligations of Pinnacle Foods Finance LLC, effectively subordinated to all existing and future senior secured indebtedness of Pinnacle Foods Finance LLC to the extent of the value of the assets securing that indebtedness and guaranteed on a full, unconditional, joint and several basis by Pinnacle Foods Finance LLC’s wholly-owned domestic subsidiaries that guarantee other indebtedness of Pinnacle Foods Finance LLC and by the Company. See Note 17 for Guarantor and Nonguarantor Financial Statements.
Pinnacle Foods Finance LLC may redeem some or all of the 5.875% Senior Notes at any time prior to January 15, 2019 at a price equal to 100% of the principal amount of the 5.875% Notes redeemed plus the Applicable Premium as of, and accrued and unpaid interest to, the redemption date, subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date. The “Applicable Premium” is defined as the greater of (1) 1.0% of the principal amount of such 5.875% Senior Notes and (2) the excess, if any, of (a) the present value at such redemption date of (i) the redemption price of such 5.875% Senior Notes at January 15, 2019, plus (ii) all required interest payments due on such 5.875% Senior Notes through January 15, 2019 (excluding accrued but unpaid interest to the redemption date), computed using a discount rate equal to the treasury rate plus 50 basis points over (b) the principal amount of such 5.875% Senior Notes.
Pinnacle Foods Finance LLC may redeem the 4.875% Senior Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on May 1st of each of the years indicated below:

Year
Percentage
2017
102.438%
2018
101.219%
2019 and thereafter
100.000%

Pinnacle Foods Finance LLC may redeem the 5.875% Senior Notes at the redemption prices listed below, if redeemed during the twelve-month period beginning on January 15th of each of the years indicated below:

Year
Percentage
2019
104.406%
2020
102.938%
2021
101.469%
2022 and thereafter
100.000%

In addition, until January 15, 2019 for the 5.875% Senior Notes, Pinnacle Foods Finance LLC may redeem up to 35% of the aggregate principal amount of the 5.875% Senior Notes at a redemption price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, subject to the right of holders of the 5.875% Senior Notes of record on the relevant record date to receive interest due on the relevant interest payment date, with the net cash proceeds

18

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


received by Pinnacle Foods Finance LLC from one or more equity offerings; provided that (i) at least 50% of the aggregate principal amount of the 5.875% Senior Notes originally issued under the indenture remains outstanding immediately after the occurrence of each such redemption and (ii) each such redemption occurs within 120 days of the date of closing of each such equity offering.

Debt acquisition costs and original issue discounts
As part of the Refinancing, debt acquisition costs and original issue discounts of $12.8 million were incurred and recorded as a reduction of the carrying value of debt during the three months ended March 26, 2017 while non-cash charges of $28.5 million related to existing debt acquisition costs and original issue discounts were recognized in the period.
All debt acquisition costs and original issue discounts are amortized into interest expense over the life of the related debt using the effective interest method. Amortization of these costs were $1.5 million during the three months ended March 26, 2017. Amortization of these costs were $2.1 million during the three months ended March 27, 2016.
The following summarizes debt acquisition cost and original issue discount activity during the three months ended March 26, 2017:
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Balance, December 25, 2016
$
82,750

 
$
(40,796
)
 
$
41,954

Additions
12,810

 

 
12,810

Amortization

 
(1,506
)
 
(1,506
)
Recognition of deferred costs related to the Refinancing
(65,998
)
 
37,504

 
(28,494
)
Balance, March 26, 2017
$
29,562

 
$
(4,798
)
 
$
24,764


Estimated fair value
The estimated fair value of the Company’s long-term debt, including the current portion, as of March 26, 2017, is as follows:
 
 
 
March 26, 2017
Issue
 
Face Value
 
Fair Value
Tranche B Term Loans
 
2,262,000

 
2,270,596

3.0% Note payable to Gilster Mary Lee Corporation
 
4,199

 
4,199

4.875% Senior Notes
 
350,000

 
354,813

5.875% Senior Notes
 
350,000

 
360,938

 
 
$
2,966,199

 
$
2,990,546


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

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

 
$
1,423,721

Tranche H Term Loans
 
509,250

 
514,343

Tranche I Term Loans
 
545,875

 
554,745

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

 
5,176

4.875% Senior Notes
 
350,000

 
359,625

5.875% Senior Notes
 
350,000

 
369,250

 
 
$
3,169,926

 
$
3,226,860



19

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


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

20

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


11. Pension and Retirement Plans
The Company accounts for pension and retirement plans in accordance with the authoritative guidance for retirement benefit compensation. This guidance requires recognition of the funded status of a benefit plan in the statement of financial position. The guidance also requires recognition in accumulated other comprehensive earnings of certain gains and losses that arise during the period but are deferred under pension accounting rules.
The Company maintains a defined benefit plan, the Pinnacle Foods Group LLC Pension Plan (the "Plan"), which is frozen for future benefit accruals. The Company also has three 401(k) plans, three non-qualified supplemental savings plans and the Company participates in a multi-employer defined benefit plan.

Pinnacle Foods Group LLC Pension Plan
The Plan covers eligible employees and provides benefits generally based on years of service and employees’ compensation. The Plan is frozen for future benefits and is funded in conformity with the funding requirements of applicable government regulations. The Plan assets consist principally of cash equivalents, equity and fixed income common collective trusts. The Plan assets do not include any of the Company’s equity or debt securities.
The following represents the components of net periodic (benefit) cost:
 
 
Three months ended
Pension Benefits
March 26,
2017
 
March 27,
2016
Interest cost
$
1,993

 
$
2,628

Expected return on assets
(2,753
)
 
(2,838
)
Amortization of actuarial loss
269

 
309

Net periodic (benefit)/cost
$
(491
)
 
$
99



Cash Flows
Contributions. In fiscal 2017, the Company does not expect to make any significant contributions to the Plan. The Company made contributions to the Plan totaling $0.3 million in fiscal 2016.
Multi-employer Plans
 
The Company contributes to the United Food and Commercial Workers International Union Industry Pension Fund (EIN 51-6055922) (the "UFCW Plan") under the terms of the collective-bargaining agreement with its Fort Madison employees.

For the three months ended March 26, 2017 and March 27, 2016, contributions to the UFCW Plan were $0.2 million and $0.2 million, respectively. The contributions to this UFCW Plan are paid monthly based upon the number of employees. They represent less than 5% of the total contributions received by this UFCW Plan using available information during the most recent plan year.

The risks of participating in multi-employer plans are different from single-employer plans in the following aspects: (a) assets contributed to a multi-employer plan by one employer may be used to provide benefits to employees of other participating employers, (b) if a participating employer stops contributing to the multi-employer plan, the unfunded obligations of the plan may be borne by the remaining participating employers and (c) if the Company chooses to stop participating in the plan, the Company may be required to pay a withdrawal liability based on the underfunded status of the plan.
 
The UFCW Plan received a Pension Protection Act “green” zone status for the plan year ending June 30, 2016. The zone status is based on information the Company received from the UFCW Plan and is certified by the UFCW Plan's actuary. Among other factors, plans in the "green" zone are at least 80 percent funded. The UFCW Plan did not utilize any extended amortization provisions that affect its placement in the "green" zone. The UFCW Plan has never been required to implement a funding improvement plan nor is one pending at this time.


21

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


12. Financial Instruments

Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, foreign exchange rates or commodity prices.
The Company manages interest rate risk based on the varying circumstances of anticipated borrowings and existing variable and fixed rate debt, including the Company’s revolving credit facility. Examples of interest rate management strategies include capping interest rates using targeted interest cost benchmarks, hedging portions of the total amount of debt, or hedging a period of months and not always hedging to maturity, and at other times locking in rates to fix interests costs.
Certain parts of the Company’s foreign operations in Canada expose the Company to fluctuations in foreign exchange rates. The Company’s goal is to reduce its exposure to such foreign exchange risks on its foreign currency cash flows and fair value fluctuations on recognized foreign currency denominated assets, liabilities and unrecognized firm commitments to acceptable levels primarily through the use of foreign exchange-related derivative financial instruments. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency. The Company does not enter into these transactions for non-hedging purposes.
The Company purchases raw materials in quantities expected to be used in a reasonable period of time in the normal course of business. The Company generally enters into agreements for either spot market delivery or forward delivery. The prices paid in the forward delivery contracts are generally fixed, but may also be variable within a capped or collared price range. Forward derivative contracts on certain commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the Company’s manufacturing processes.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During the three months ended March 26, 2017 and March 27, 2016, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
The Refinancing (Note 10) resulted in significant changes to the Company's debt obligations. For the interest rate swaps in place at the time that were scheduled to mature between April 2017 and April 2020, it became probable that the associated original forecasted transactions would not occur. As such, the Company discontinued hedge accounting, accelerated the reclassification of amounts in Accumulated other comprehensive loss ("AOCL") and settled the interest rate swaps with the various counter parties. In the first quarter of 2017, these accelerated amounts resulted in a $20.7 million charge to interest expense ($13.2 million, net of tax benefits). Subsequent to the Refinancing, the Company entered into new interest rate swap agreements with various financial institutions. As a result, $1.5 billion of debt is hedged in 2017 at a rate of 0.96%, $1.0 billion in 2018 at a rate of 1.48% and $750 million in 2019 at a rate of 1.81%.
As of March 26, 2017, the Company had the following interest rate swaps that were designated as cash flow hedges of interest rate risk:
 

22

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


Product
 
Number of
Instruments
 
Current
Notional
Amount
 
Fixed Rate Range
 
Index
 
Trade Dates
 
Maturity
Dates
Interest Rate Swaps
 
9
 
$
1,500,000

 
0.96% - 01.81%
 
USD-LIBOR-BBA
 
Feb 2017
 
Jan 2018 - Feb 2020

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCL in the Consolidated Balance Sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts reported in AOCL related to derivatives will be reclassified to Interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $2.1 million will be reclassified as an increase to Interest expense.

Cash Flow Hedges of Foreign Exchange Risk
The Company’s operations in Canada expose the Company to changes in the U.S. Dollar – Canadian Dollar ("USD-CAD") foreign exchange rate. From time to time, the Company’s Canadian subsidiary purchases inventory denominated in U.S. Dollars ("USD"), a currency other than its functional currency. The subsidiary sells that inventory in Canadian dollars ("CAD"). The subsidiary uses currency forward and collar agreements to manage its exposure to fluctuations in the USD-CAD exchange rate. Currency forward agreements involve fixing the USD-CAD exchange rate for delivery of a specified amount of foreign currency on a specified date. Currency collar agreements involve the sale of CAD currency in exchange for receiving USD if exchange rates rise above an agreed upon rate and purchase of USD currency in exchange for paying CAD currency if exchange rates fall below an agreed upon rate at specified dates.
As of March 26, 2017, the Company had the following foreign currency exchange contracts (in aggregate) that were designated as cash flow hedges of foreign exchange risk:
 
Product
 
Number of
Instruments
 
Notional Sold in
Aggregate in CAD
 
Notional
Purchased in
Aggregate in USD
 
USD to CAD
Exchange
Rates
 
Trade Date
 
Maturity
Dates
CAD $ Contracts
 
12
 
$
27,000

 
$
20,687

 
1.299 - 1.339
 
Nov 2016 - Jan 2017
 
Apr 2017 - Dec 2017

The effective portion of changes in the fair value of derivatives designated that qualify as cash flow hedges of foreign exchange risk is recorded in AOCL in the Consolidated Balance Sheets and subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portions of the change in fair value of the derivative, as well as amounts excluded from the assessment of hedge effectiveness, are recognized directly in Cost of products sold in the Consolidated Statements of Operations. During the next twelve months, the Company estimates that an additional $0.4 million will be reclassified as an increase to Cost of Products Sold expense.
Non-designated Hedges of Commodity Risk
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to commodity price risk but do not meet the authoritative guidance for hedge accounting. From time to time, the Company enters into commodity forward contracts to fix the price of diesel fuel, heating oil, natural gas and soybean oil purchases and other commodities at a future delivery date. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in Cost of products sold in the Consolidated Statements of Operations.

As of March 26, 2017, the Company had the following derivative instruments that were not designated in qualifying hedging relationships:


23

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


Commodity Contracts
 
Number of
Instruments
 
Notional Purchased in Aggregate
 
Price/Index
 
Trade Dates
 
Maturity
Dates
Fuel Contracts
 
29
 
12,608,472 Gallons
 
1.25 - 1.75 per Gallon
 
Feb 2016 - Mar 2017
 
Apr 2017 - Dec 2018
Natural Gas Contracts
 
43
 
2,648,355 MMBTU's
 
2.81 - 3.49 per MMBTU
 
July 2016 - Mar 2017
 
Apr 2017 - Dec 2018


24

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



The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the Consolidated Balance Sheets as of March 26, 2017 and December 25, 2016.
 
 
Tabular Disclosure of Fair Values of Derivative Instruments
 
 
Asset Derivatives
 
Liability Derivatives
 
 
Balance Sheet Location
 
Fair Value
as of
March 26, 2017
 
Balance Sheet Location
 
Fair Value
as of
March 26, 2017
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest Rate Contracts
 
Other current assets
 
$
2,193

 
 
 


 
 
Other assets, net
 
2,968

 
 
 


 
 
 
 
 
 
 
 
 
Foreign Exchange Contracts
 
Other current assets
 
449

 
 
 


Total derivatives designated as hedging instruments
 
 
 
$
5,610

 
 
 
$

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Commodity Contracts
 
Other current assets
 
$
490

 
 
 


 
 
Other assets, net
 
49

 
Other long-term liabilities
 
$
34

Total derivatives not designated as hedging instruments
 
 
 
$
539

 
 
 
$
34

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Location
 
Fair Value
as of
December 25, 2016
 
Balance Sheet Location
 
Fair Value
as of
December 25, 2016
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest Rate Contracts
 
 
 


 
Accrued liabilities
 
$
4,613

 
 
 
 
 
 
Other long-term liabilities
 
12,239

Foreign Exchange Contracts
 
Other current assets
 
$
86

 
 
 


Total derivatives designated as hedging instruments
 
 
 
$
86

 
 
 
$
16,852

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Commodity Contracts
 
Other current assets
 
$
545

 
Accrued liabilities
 
$
327

 
 
Other assets, net
 
2,288

 
 
 


Total derivatives not designated as hedging instruments
 
 
 
$
2,833

 
 
 
$
327

The Company has elected not to offset the fair values of derivative assets and liabilities executed with the same counterparty that are generally subject to enforceable netting agreements. However, if the Company were to offset and record the asset and liability balances of derivatives on a net basis, the amounts presented in the Consolidated Balance Sheets as of March 26, 2017 and December 25, 2016 would be adjusted as detailed in the following table:
 
 
March 26, 2017
 
December 25, 2016
Derivative Instrument
 
Gross Amounts Presented in the Consolidated Balance Sheet
 
Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements
 
Net Amount
 
Gross Amounts Presented in the Consolidated Balance Sheet
 
Gross Amounts Not Offset in the Consolidated Balance Sheet Subject to Netting Agreements
 
Net Amount
Total asset derivatives
 
$
6,149

 
235

 
$
6,384

 
$
2,919

 
(1,770
)
 
$
1,149

 
 
 
 
 
 
 
 
 
 
 
 
 
Total liability derivatives
 
$
34

 
235

 
$
269

 
$
17,179

 
(1,770
)
 
$
15,409



25

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


The table below presents the effect of the Company’s derivative financial instruments in the Consolidated Statements of Operations and AOCL for the three months ended March 26, 2017 and March 27, 2016.

Tabular Disclosure of the Effect of Derivative Instruments
Gain/(Loss)
 
 
 
 
 
 
 
 
 
 
Derivatives in Cash Flow Hedging
Relationships
 
Recognized in
AOCL on
Derivative
(Effective
Portion)
 
Effective portion
reclassified from AOCL to:
 
Reclassified
from AOCL
into Earnings
(Effective
Portion)
 
Ineffective portion
recognized in Earnings in:
 
Recognized in
Earnings
(Ineffective
Portion)
Interest Rate Contracts
 
$
239

 
Interest expense
 
$
(21,774
)
(a)
Interest expense
 
$

Foreign Exchange Contracts
 
256

 
Cost of products sold
 
(101
)
 
Cost of products sold
 
6

Three months ended March 26, 2017
 
$
495

 
 
 
$
(21,875
)
 
 
 
$
6

 
 
 
 
 
 
 
 
 
 
 
Interest Rate Contracts
 
$
(10,691
)
 
Interest expense
 
$
(1,465
)
 
Interest expense
 
$

Foreign Exchange Contracts
 
(430
)
 
Cost of products sold
 
79

 
Cost of products sold
 
(7
)
Three months ended March 27, 2016
 
$
(11,121
)
 
 
 
$
(1,386
)
 
 
 
$
(7
)
Derivatives Not Designated as Hedging Instruments
 
Recognized in Earnings in:
 
Recognized in
Earnings
 
 
 
 
Commodity Contracts
 
 
 
Cost of products sold
 
$
(1,969
)
 
 
 
 
Three months ended March 26, 2017
 
 
 
$
(1,969
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity Contracts
 
 
 
Cost of products sold
 
$
683

 
 
 
 
Three months ended March 27, 2016
 
 
 
$
683

 
 
 
 

(a) Includes $20.7 million of accelerated reclassifications out of AOCL.

26

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



Credit risk-related contingent features
The Company has agreements with certain counterparties that contain a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. As of March 26, 2017, the Company has not posted any collateral related to these agreements. If the Company had breached this provision at March 26, 2017, it could have been required to settle its obligations under the agreements at their termination value, which differs from the recorded fair value. The table below summarizes the aggregate fair values of those derivatives that contain credit risk-related contingent features as of March 26, 2017 and December 25, 2016.
March 26, 2017
 
Asset/(Liability)
 
 
 
 
 
 
 
 
 
 
Counterparty
 
Contract
Type
 
Termination
Value
 
Performance
Risk
Adjustment
 
Accrued
Interest
 
Fair Value
(excluding
interest)
Barclays
 
Interest Rate Contracts
 
$
1,660

 
$
8

 
$
(50
)
 
$
1,718

 
 
Foreign Exchange Contracts
 
(5
)
 

 

 
(5
)
 
 
Commodity Contracts
 
462

 
(2
)
 

 
460

Bank of America
 
Foreign Exchange Contracts
 
453

 
1

 

 
454

 
 
Commodity Contracts
 
286

 
28

 

 
314

Credit Suisse
 
Interest Rate Contracts
 
1,681

 
22

 
(50
)
 
1,753

Macquarie
 
Commodity Contracts
 
(277
)
 
8

 

 
(269
)
Goldman Sachs
 
Interest Rate Contracts
 
1,610

 
27

 
(53
)
 
1,690

Total
 
 
 
$
5,871

 
$
92

 
$
(153
)
 
$
6,115

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

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

 

 

 
86

 
 
Commodity Contracts
 
569

 
(2
)
 

 
567

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

 

 
(6,992
)
 
 
Commodity Contracts
 
790

 

 

 
790

Credit Suisse
 
Interest Rate Contracts
 
(1,141
)
 
7

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

 

 

 
1,149

Total
 
 
 
$
(16,113
)
 
$
909

 
$
(943
)
 
$
(14,260
)
 

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

No single item individually is, nor are all of them in the aggregate, material.


27

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


14. Segments

The Company is a leading manufacturer, marketer and distributor of high quality, branded food products in North America. In the fourth quarter of fiscal 2016 during which the integration of the Boulder Brands acquisition was substantially complete, the Company reorganized its reporting structure, resulting in a change to its reportable segments. The new segments, which mirror the manner in which the businesses will be managed, are Frozen, Grocery, Boulder and Specialty. The Boulder Brands acquisition added the Udi's, Glutino, Smart Balance, Earth Balance and EVOL brands to the Company's portfolio, as well as complementary foodservice, private label and Canadian businesses. The new segment structure aligns each of these businesses with related Pinnacle businesses into four new reportable segments, the composition of which is provided below.

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

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

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

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

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

28

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


 
Three months ended
SEGMENT INFORMATION
March 26,
2017
 
March 27,
2016
Net sales
 
 
 
Frozen
$
320,942

 
$
330,488

Grocery
259,350

 
250,913

Boulder
97,292

 
80,161

Specialty
88,490

 
92,693

Total
$
766,074

 
$
754,255

Earnings before interest and taxes
 
 
 
Frozen
$
50,922

 
$
51,339

Grocery
51,807

 
39,724

Boulder
6,672

 
(4,524
)
Specialty
8,888

 
7,001

Unallocated corporate expenses
(7,081
)
 
(13,259
)
Total
$
111,208

 
$
80,281

Depreciation and amortization
 
 
 
Frozen
$
10,569

 
$
10,622

Grocery
8,076

 
7,766

Boulder
3,761

 
2,435

Specialty
4,682

 
4,094

Total
$
27,088

 
$
24,917

Capital expenditures (1)
 
 
 
Frozen
$
13,318

 
$
19,251

Grocery
7,530

 
10,509

Boulder
7,745

 
2,451

Specialty
5,472

 
1,720

Total
$
34,065

 
$
33,931

 
 
 
 
NET SALES BY PRODUCT TYPE
 
 
 
Net sales
 
 
 
Frozen
$
407,860

 
$
415,146

Shelf stable and meal enhancers
247,406

 
238,242

Desserts
77,246

 
68,784

Snacks
33,562

 
32,083

Total
$
766,074

 
$
754,255

 
 
 
 
GEOGRAPHIC INFORMATION
 
 
 
Net sales
 
 
 
United States
$
754,587

 
$
745,063

Canada
36,694

 
36,109

United Kingdom

 
2,472

Intercompany
(25,207
)
 
(29,389
)
Total
$
766,074

 
$
754,255




29

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


(1)
Includes new capital leases.

SEGMENT INFORMATION
March 26,
2017
 
December 25,
2016
Total assets
 
 
 
Frozen
$
2,364,383

 
$
2,430,782

Grocery
2,742,520

 
2,833,186

Boulder
1,007,627

 
1,022,304

Specialty
369,703

 
391,276

Corporate
12,025

 
10,418

Total
$
6,496,258

 
$
6,687,966

GEOGRAPHIC INFORMATION
 
 
 
Plant assets
 
 
 
United States
$
689,133

 
$
690,515

Canada
31,181

 
31,399

United Kingdom
751

 
1,431

Total
$
721,065

 
$
723,345


15. Provision for Income Taxes

The provision for income taxes and related effective tax rates for the three months ended March 26, 2017 and March 27, 2016, respectively, were as follows:
 
Three months ended
Provision for Income Taxes
March 26,
2017
 
March 27,
2016
Current
$
2,285

 
$
11,330

Deferred
5,058

 
12,551

Total
$
7,343

 
$
23,881

 
 
 
 
Effective tax rate
24.1
%
 
49.0
%

Income taxes are accounted for in accordance with the authoritative guidance for accounting for income taxes under which deferred tax assets and liabilities are determined based on the difference between their financial statement basis and tax basis, using enacted tax rates in effect for the year in which the differences are expected to reverse. In the three months ended March 26, 2017, we retrospectively adopted the guidance of ASU 2015-17, “Balance Sheet Classification of Deferred Taxes” and in connection, are presenting all deferred tax asset and liability balances as non-current on our consolidated balance sheet for the three months ended March 26, 2017 and the year ended December 25, 2016 in this filing.

Our effective income tax rate for the three months ended March 26, 2017 decreased by 12.4% due to excess tax benefits from share based payment transactions being recorded as an item of continuing operations in accordance with ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” effective for our 2017 fiscal year (Note 16). Our rate also reflects a benefit of 1.6% from the domestic production activities deduction.

In connection with the Boulder Brands acquisition, our income tax rate for the three months ended March 27, 2016 includes the tax effect associated with incurring certain non-deductible acquisition costs and compensation payments of 0.7%, a charge for an increase in our non-current state deferred income tax liability balance of approximately 8.0% and a charge related to the tax effect of foreign operations of 3.3%, principally attributable to a valuation allowance on our foreign tax credit carryforward. The rate also reflects a benefit of 1.8% from the domestic production activities deduction.


30

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


The Company regularly evaluates its deferred tax assets for future realization.  A valuation allowance is established when the Company believes that it is more likely than not that some portion of its deferred tax assets will not be realized.  Changes in valuation allowances from period to period are included in the Company's tax provision in the period of change and as noted above, for the three months ended March 27, 2016, a valuation allowance was recorded on our foreign tax credit carryforward in connection with the Boulder Brands acquisition. There was no significant movement in our valuation allowances on state attribute carryforwards during the three months ended March 26, 2017 and for the three months ended March 27, 2016.

The Company is a loss corporation as defined by Internal Revenue Code (“the Code”) Section 382. Section 382 places an annual limitation on our ability to use our federal net operating loss (“NOL”) carryovers and other attributes to reduce future taxable income. As of March 26, 2017, we have federal NOL carryovers of $425.5 million subject to an annual limitation of $17.1 million. As a result, $237.2 million of the carryovers exceed the estimated available Section 382 limitation. The Company has reduced its deferred tax assets for this limitation.

On January 15, 2016 we acquired Boulder which is a loss corporation. As of the Boulder Brands acquisition, Boulder had approximately $53.8 million of federal NOL carryovers subject to the Section 382 provisions. The annual limitation is approximately $26.5 million subject to increase for recognized built in gains during the recognition period. Based on our analysis, we anticipate we will be able to utilize the acquired NOL balance on our 2016 federal income tax return without limitation.

In connection with the Boulder Brands acquisition we also recorded, in purchase accounting, reserves for uncertain positions of approximately $5.4 million for matters related to their foreign operations.


16. Recently Issued Accounting Pronouncements

Accounting Pronouncement Adopted in 2017

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

We recognized discrete tax benefits of $3.8 million in the income taxes line item of our consolidated income statement for the three months ended March 26, 2017 related to excess tax benefits upon vesting or settlement in that period.
We elected to adopt the cash flow presentation of the excess tax benefits prospectively, commencing with our cash flow statement for the three months ended March 26, 2017, where these benefits are classified along with other income tax cash flows as an operating activity.
We have elected to continue to estimate the number of stock-based awards expected to vest, rather than electing to account for forfeitures as they occur to determine the amount of compensation cost to be recognized in each period.
At this time, we have not changed our policy on statutory withholding requirements and will continue to allow an employee to withhold at the minimum statutory withholding requirements. Amounts paid by us to taxing authorities when directly withholding shares associated with employees' income tax withholding obligations are classified as a financing activity in our cash flow statement.
We excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of our diluted earnings per share for the three months ended March 26, 2017.

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

31

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



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

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued guidance based on the principle that revenue is recognized in an amount expected to be collected
and to which the entity expects to be entitled in exchange for the transfer of goods or services. In August 2015, the FASB deferred the effective date by one year while providing the option to early adopt the standard on the original effective date. Accordingly, the Company will adopt the standard in fiscal year 2018. The guidance can be adopted either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact that the new guidance will have on the consolidated financial statements, as well as which transition method it will use.

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

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












32

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


17. Guarantor and Nonguarantor Statements
The Senior Notes are general senior unsecured obligations of Pinnacle Foods Finance LLC, effectively subordinated in right of payment to all existing and future senior secured indebtedness of Pinnacle Foods Finance LLC and guaranteed on a full, unconditional, joint and several basis by the Company and Pinnacle Foods Finance LLC's 100% owned domestic subsidiaries that guarantee other indebtedness of the Pinnacle Foods Finance LLC. The indenture governing the Senior Notes contains customary exceptions under which a guarantee of a guarantor subsidiary will terminate, including (1) the sale, exchange or transfer (by merger or otherwise) of the capital stock or all or substantially all of the assets of such guarantor subsidiary, (2) the release or discharge of the guarantee by such guarantor subsidiary of the Third Amended and Restated Credit Agreement or other guarantee that resulted in the creation of the guarantee, (3) the designation of such guarantor subsidiary as an “unrestricted subsidiary” in accordance with the indentures governing the Senior Notes and (4) upon the legal defeasance or covenant defeasance or discharge of the indentures governing the Senior Notes.
The following condensed consolidating financial information presents:
(1)
(a) Condensed consolidating balance sheets as of March 26, 2017 and December 25, 2016.
(b) The related condensed consolidating statements of operations and comprehensive earnings for the Company, Pinnacle Foods Finance LLC, all guarantor subsidiaries and the non-guarantor subsidiaries for the following:
i. Three months ended March 26, 2017; and
ii. Three months ended March 27, 2016.

(c) The related condensed consolidating statements of cash flows for the Company, Pinnacle Foods Finance LLC, all guarantor subsidiaries and the non-guarantor subsidiaries for the following:
i. Three months ended ended March 26, 2017; and
ii. Three months ended ended March 27, 2016.

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



33

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


Pinnacle Foods Inc.
Condensed Consolidating Balance Sheet
March 26, 2017
  
Pinnacle
Foods
Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
and
Reclassifications
 
Consolidated
Total
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
134,320

 
$
7,134

 
$

 
$
141,454

Accounts receivable, net

 

 
291,894

 
9,372

 

 
301,266

Intercompany accounts receivable
97,514

 

 
1,064,835

 

 
(1,162,349
)
 

Inventories, net

 

 
437,857

 
16,538

 

 
454,395

Other current assets

 
3,132

 
9,763

 
2,260

 

 
15,155

Total current assets
97,514

 
3,132

 
1,938,669

 
35,304

 
(1,162,349
)
 
912,270

Plant assets, net

 

 
689,133

 
31,932

 

 
721,065

Investment in subsidiaries
1,900,257

 
2,625,261

 
31,070

 

 
(4,556,588
)
 

Intercompany note receivable

 
2,998,614

 
45,007

 
9,800

 
(3,053,421
)
 

Tradenames

 

 
2,525,200

 
4,410

 

 
2,529,610

Other assets, net

 
3,768

 
154,578

 
11,116

 

 
169,462

Deferred tax assets

 
349,147

 

 
339

 
(349,486
)
 

Goodwill

 

 
2,104,647

 
59,204

 

 
2,163,851

Total assets
$
1,997,771

 
$
5,979,922

 
$
7,488,304

 
$
152,105

 
$
(9,121,844
)
 
$
6,496,258

Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
$

 
$

 
$
2,954

 
$

 
$

 
$
2,954

Current portion of long-term obligations

 
22,620

 
13,565

 
19

 

 
36,204

Accounts payable

 

 
300,601

 
7,417

 

 
308,018

Intercompany accounts payable

 
1,126,283

 

 
36,066

 
(1,162,349
)
 

Accrued trade marketing expense

 

 
43,247

 
2,561

 

 
45,808

Accrued liabilities
178

 
15,995

 
115,301

 
3,006

 

 
134,480

Dividends payable
35,600

 

 

 

 

 
35,600

Total current liabilities
35,778

 
1,164,898

 
475,668

 
49,069

 
(1,162,349
)
 
563,064

Long-term debt

 
2,914,733

 
29,160

 
286

 

 
2,944,179

Intercompany note payable

 

 
2,988,878

 
64,543

 
(3,053,421
)
 

Pension and other postretirement benefits

 

 
55,421

 

 

 
55,421

Other long-term liabilities

 
34

 
30,535

 
3,275

 

 
33,844

Deferred tax liabilities

 

 
1,283,381

 
2,705

 
(349,486
)
 
936,600

Total liabilities
35,778

 
4,079,665

 
4,863,043

 
119,878

 
(4,565,256
)
 
4,533,108

Commitments and contingencies (Note 13)

 


 


 


 


 


Shareholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Pinnacle common stock
1,194

 

 

 

 

 
1,194

Additional paid-in-capital
1,439,145

 
1,440,339

 
1,362,269

 
32,771

 
(2,835,379
)
 
1,439,145

Retained earnings
590,226

 
496,380

 
1,297,143

 
2,804

 
(1,796,327
)
 
590,226

Accumulated other comprehensive loss
(36,462
)
 
(36,462
)
 
(34,151
)
 
(4,505
)
 
75,118

 
(36,462
)
Capital stock in treasury, at cost
(32,110
)
 

 

 

 

 
(32,110
)
Total Pinnacle Foods Inc. and Subsidiaries stockholders' equity
1,961,993

 
1,900,257

 
2,625,261

 
31,070

 
(4,556,588
)
 
1,961,993

Non-controlling interest

 

 

 
1,157

 

 
1,157

Total Equity
1,961,993


1,900,257


2,625,261


32,227


(4,556,588
)

1,963,150

Total liabilities and equity
$
1,997,771

 
$
5,979,922

 
$
7,488,304

 
$
152,105

 
$
(9,121,844
)
 
$
6,496,258


34

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


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

 
$

 
$
341,238

 
$
11,838

 
$

 
$
353,076

Accounts receivable, net

 

 
281,189

 
8,393

 

 
289,582

Intercompany accounts receivable
96,923

 

 
804,203

 

 
(901,126
)
 

Inventories, net

 

 
429,009

 
16,482

 

 
445,491

Other current assets

 
631

 
8,402

 
1,654

 

 
10,687

Total current assets
96,923

 
631

 
1,864,041

 
38,367

 
(901,126
)
 
1,098,836

Plant assets, net

 

 
690,515

 
32,830

 

 
723,345

Investment in subsidiaries
1,886,496

 
2,589,850

 
30,600

 

 
(4,506,946
)
 

Intercompany note receivable

 
2,984,974

 
44,928

 
9,800

 
(3,039,702
)
 

Tradenames

 

 
2,525,200

 
4,358

 

 
2,529,558

Other assets, net

 
2,963

 
158,934

 
11,174

 

 
173,071

Deferred tax assets

 
335,178

 

 

 
(335,178
)
 

Goodwill

 

 
2,104,648

 
58,508

 

 
2,163,156

Total assets
$
1,983,419

 
$
5,913,596

 
$
7,418,866

 
$
155,037

 
$
(8,782,952
)
 
$
6,687,966

Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
$

 
$

 
$
2,389

 
$

 
$

 
$
2,389

Current portion of long-term obligations

 
10,750

 
13,028

 
23

 

 
23,801

Accounts payable

 

 
283,999

 
8,479

 

 
292,478

Intercompany accounts payable

 
863,358

 

 
37,766

 
(901,124
)
 

Accrued trade marketing expense

 

 
48,850

 
2,204

 

 
51,054

Accrued liabilities
178

 
28,557

 
133,316

 
4,690

 

 
166,741

Dividends payable
35,233

 

 

 

 

 
35,233

Total current liabilities
35,411

 
902,665

 
481,582

 
53,162

 
(901,124
)
 
571,696

Long-term debt

 
3,112,196

 
28,024

 
276

 

 
3,140,496

Intercompany note payable

 

 
2,975,471

 
64,233

 
(3,039,704
)
 

Pension and other postretirement benefits

 

 
56,323

 

 

 
56,323

Other long-term liabilities

 
12,239

 
31,994

 
3,296

 

 
47,529

Deferred tax liabilities

 

 
1,255,622

 
2,536

 
(335,178
)
 
922,980

Total liabilities
35,411

 
4,027,100

 
4,829,016

 
123,503

 
(4,276,006
)
 
4,739,024

Commitments and contingencies (Note 13)

 


 


 


 


 


Shareholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Pinnacle common stock
1,191

 

 

 

 

 
1,191

Additional paid-in-capital
1,429,447

 
1,430,639

 
1,352,568

 
32,770

 
(2,815,977
)
 
1,429,447

Retained earnings
601,049

 
507,426

 
1,272,939

 
3,936

 
(1,784,301
)
 
601,049

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

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

 

 

 

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

 
1,886,496

 
2,589,850

 
30,600

 
(4,506,946
)
 
1,948,008

Non-controlling interest

 

 

 
934

 

 
934

Total Equity
1,948,008

 
1,886,496

 
2,589,850

 
31,534

 
(4,506,946
)
 
1,948,942

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

 
$
5,913,596

 
$
7,418,866

 
$
155,037

 
$
(8,782,952
)
 
$
6,687,966


35

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



Pinnacle Foods Inc.
Condensed Consolidating Statement of Operations and Comprehensive Earnings
For the three months ended March 26, 2017
  
Pinnacle
Foods
Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net sales
$

 
$

 
$
754,587

 
$
36,694

 
$
(25,207
)
 
$
766,074

Cost of products sold

 

 
545,721

 
33,856

 
(24,567
)
 
555,010

Gross profit

 

 
208,866

 
2,838

 
(640
)
 
211,064

 
 
 
 
 
 
 
 
 
 
 
 
Marketing and selling expenses

 

 
54,703

 
891

 

 
55,594

Administrative expenses

 

 
34,385

 
1,626

 

 
36,011

Research and development expenses

 

 
3,837

 
184

 

 
4,021

Intercompany royalties

 

 
(188
)
 
188

 

 

Intercompany management fees

 

 

 
391

 
(391
)
 

Intercompany technical service fees

 

 

 
249

 
(249
)
 

Other expense (income), net

 
(233
)
 
4,020

 
443

 

 
4,230

Equity in (earnings) loss of investees
(22,926
)
 
(58,177
)
 
1,352

 

 
79,751

 

 
(22,926
)
 
(58,410
)
 
98,109

 
3,972

 
79,111

 
99,856

Earnings before interest and taxes
22,926

 
58,410

 
110,757

 
(1,134
)
 
(79,751
)
 
111,208

Intercompany interest (income) expense

 
(22,305
)
 
22,087

 
218

 

 

Interest expense

 
80,170

 
551

 
10

 

 
80,731

Interest income

 

 
10

 
5

 

 
15

Earnings before income taxes
22,926

 
545

 
88,129

 
(1,357
)
 
(79,751
)
 
30,492

Provision (benefit) for income taxes

 
(22,381
)
 
29,952

 
(228
)
 

 
7,343

Net earnings
22,926

 
22,926

 
58,177

 
(1,129
)
 
(79,751
)
 
23,149

Less: Net loss attributable to non-controlling interest

 

 

 
223

 

 
223

Net earnings attributable to Pinnacle Foods, Inc. and Subsidiaries common stockholders
$
22,926


$
22,926


$
58,177


$
(1,352
)

$
(79,751
)

$
22,926

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive earnings
38,033

 
38,033

 
59,681

 
246

 
(97,737
)
 
38,256

Less: Comprehensive earnings attributable to non-controlling interest

 

 

 
223

 

 
223

Comprehensive earnings attributable to Pinnacle Foods, Inc. and Subsidiaries
$
38,033


$
38,033


$
59,681


$
23


$
(97,737
)

$
38,033

 


36

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


Pinnacle Foods Inc.
Condensed Consolidating Statement of Operations and Comprehensive Earnings
For the three months ended March 27, 2016
  
Pinnacle
Foods
Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Total
Net sales
$

 
$

 
$
745,063

 
$
38,581

 
$
(29,389
)
 
$
754,255

Cost of products sold

 


 
548,415

 
35,909

 
(28,636
)
 
555,688

Gross profit

 

 
196,648

 
2,672

 
(753
)
 
198,567

 
 
 
 
 
 
 
 
 
 
 
 
Marketing and selling expenses

 

 
57,537

 
1,361

 

 
58,898

Administrative expenses

 

 
43,792

 
2,096

 

 
45,888

Research and development expenses

 

 
3,936

 
249

 

 
4,185

Intercompany royalties

 

 
(256
)
 
328

 
(72
)
 

Intercompany technical service fees

 

 

 
431

 
(431
)
 

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


 

 

 
250

 
(250
)
 

Other expense (income), net


 
(784
)
 
10,068

 
31

 

 
9,315

Equity in (earnings) loss of investees
(24,836
)
 
(26,118
)
 
2,348

 

 
48,606

 

 
(24,836
)
 
(26,902
)
 
117,425

 
4,746

 
47,853

 
118,286

Earnings before interest and taxes
24,836

 
26,902

 
79,223

 
(2,074
)
 
(48,606
)
 
80,281

Intercompany interest (income) expense

 
(28,258
)
 
27,932

 
326

 

 

Interest expense

 
31,140

 
488

 
12

 

 
31,640

Interest income

 

 
58

 
19

 

 
77

Earnings before income taxes
24,836

 
24,020

 
50,861

 
(2,393
)
 
(48,606
)
 
48,718

Provision (benefit) for income taxes

 
(816
)
 
24,743

 
(46
)
 

 
23,881

Net earnings
24,836

 
24,836

 
26,118

 
(2,347
)
 
(48,606
)
 
24,837

Less: Net earnings attributable to non-controlling interest

 

 

 
1

 

 
1

Net earnings attributable to Pinnacle Foods, Inc. and Subsidiaries common stockholders
$
24,836

 
$
24,836

 
$
26,118

 
$
(2,348
)
 
$
(48,606
)
 
$
24,836

 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive earnings (loss)
24,460

 
24,460

 
31,386

 
2,731

 
(58,576
)
 
24,461

Less: Comprehensive earnings (loss) attributable to non-controlling interest

 

 

 
1

 

 
1

Comprehensive earnings (loss) attributable to Pinnacle Foods, Inc. and Subsidiaries
$
24,460

 
$
24,460

 
$
31,386

 
$
2,730

 
$
(58,576
)
 
$
24,460


 


 



37

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


Pinnacle Foods Inc.
Condensed Consolidating Statement of Cash Flows
For the three months ended March 26, 2017
  
Pinnacle
Foods
Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
and
Reclassifications
 
Consolidated
Total
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$

 
$
(16,463
)
 
$
76,870

 
$
2,586

 
$

 
$
62,993

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
 
Intercompany accounts receivable/payable

 
235,763

 
7,580

 

 
(243,343
)
 

Investment in Subsidiary
28,011

 
24,271

 

 

 
(52,282
)
 

Capital expenditures

 

 
(28,744
)
 
(499
)
 

 
(29,243
)
Sale of plant assets

 

 

 
679

 

 
679

Net cash (used in) provided by investing activities
28,011

 
260,034

 
(21,164
)
 
180

 
(295,625
)
 
(28,564
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
 
Net proceeds from issuance of common stock
5,894

 

 

 

 

 
5,894

Taxes paid related to net share settlement of equity awards
(303
)
 

 

 

 

 
(303
)
Dividends paid
(33,602
)
 

 

 

 

 
(33,602
)
Proceeds from bank term loans

 
2,262,000

 

 

 

 
2,262,000

Repayments of long-term obligations

 
(2,464,750
)
 
(950
)
 

 

 
(2,465,700
)
Proceeds from short-term borrowing

 

 
1,634

 

 

 
1,634

Repayments of short-term borrowing

 

 
(1,068
)
 

 

 
(1,068
)
Intercompany accounts receivable/payable

 

 
(235,763
)
 
(7,580
)
 
243,343

 

Return of capital

 
(28,011
)
 
(24,271
)
 

 
52,282

 

Repayment of capital lease obligations

 

 
(2,206
)
 
(18
)
 

 
(2,224
)
Debt acquisition costs

 
(12,810
)
 

 

 

 
(12,810
)
Net cash (used in) provided by financing activities
(28,011
)
 
(243,571
)
 
(262,624
)
 
(7,598
)
 
295,625

 
(246,179
)
Effect of exchange rate changes on cash

 

 

 
128

 

 
128

Net change in cash and cash equivalents

 

 
(206,918
)
 
(4,704
)
 

 
(211,622
)
Cash and cash equivalents - beginning of period

 

 
341,238

 
11,838

 

 
353,076

Cash and cash equivalents - end of period
$

 
$

 
$
134,320

 
$
7,134

 
$

 
$
141,454

 
 
 
 
 
 
 
 
 
 
 
 

38

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



Pinnacle Foods Inc.
Condensed Consolidating Statement of Cash Flows
For the three months ended March 27, 2016
  
Pinnacle
Foods
Inc.
 
Pinnacle
Foods
Finance LLC
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
and
Reclassifications
 
Consolidated
Total
Cash flows from operating activities
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$

 
$
11,146

 
$
40,440

 
$
25,172

 
$

 
$
76,758

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
 
 
Payments for business acquisitions




(985,365
)




 
(985,365
)
Intercompany accounts receivable/payable

 
23,444

 
23,102

 

 
(46,546
)
 

Intercompany loans

 
(880,122
)
 

 

 
880,122

 

Investment in subsidiaries
29,143

 

 

 

 
(29,143
)
 

Capital expenditures

 

 
(32,530
)
 
(1,401
)
 

 
(33,931
)
Net cash (used in) provided by investing activities
29,143

 
(856,678
)
 
(994,793
)
 
(1,401
)
 
804,433

 
(1,019,296
)
Cash flows from financing activities
 
 
 
 
 
 
 
 
 
 
 
Net proceeds from the issuance of common stock
395

 

 

 

 

 
395

Excess tax benefits on stock-based compensation
137









 
137

Dividends paid
(29,675
)
 

 

 

 

 
(29,675
)
Proceeds from bond offering

 
350,000

 

 

 

 
350,000

Proceeds from bank term loan

 
547,250

 

 

 

 
547,250

Repayments of long-term obligations

 
(1,313
)
 
(921
)
 

 

 
(2,234
)
Proceeds from short-term borrowing

 

 
1,023

 

 

 
1,023

Repayments of short-term borrowing

 

 
(1,017
)
 

 

 
(1,017
)
Intercompany accounts receivable/payable

 

 
(23,444
)
 
(23,102
)
 
46,546

 

Return of capital

 
(29,143
)
 

 

 
29,143

 

Intercompany loans

 

 
880,122

 

 
(880,122
)
 

Repayment of capital lease obligations

 

 
(1,311
)
 
(2
)
 

 
(1,313
)
Debt acquisition costs

 
(21,262
)
 

 

 

 
(21,262
)
Net cash (used in) provided by financing activities
(29,143
)
 
845,532

 
854,452

 
(23,104
)
 
(804,433
)

843,304

Effect of exchange rate changes on cash

 

 

 
124

 

 
124

Net change in cash and cash equivalents

 

 
(99,901
)
 
791

 

 
(99,110
)
Cash and cash equivalents - beginning of period

 

 
177,669

 
2,880

 

 
180,549

Cash and cash equivalents - end of period
$

 
$

 
$
77,768

 
$
3,671

 
$

 
$
81,439

 
 
 
 
 
 
 
 
 
 
 
 


39


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking statements.” These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than our financial statements, including the Notes thereto, and statements of historical facts included elsewhere in this Report on Form 10-Q, including statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, financing needs, plans or intentions relating to acquisitions, business trends and other information referred to under “Management's Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. When used in this report, the words “estimates,” “expects,” “contemplates”, “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “may,” “should” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.
There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this report. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth in our Form 10-K filed with the SEC on February 23, 2017 under the section entitled “Risk Factors,” the section entitled “Management's Discussion and Analysis of Financial Condition and Results of Operations” in this report and the following risks, uncertainties and factors:

competition;
our ability to predict, identify, interpret and respond to changes in consumer preferences;
the loss of any of our major customers;
our reliance on a single source provider for the manufacturing, co-packing and distribution of many of our products;
fluctuations in the price and supply of food ingredients, packaging materials and freight;
volatility in commodity prices and our failure to mitigate the risks related to commodity price fluctuation and foreign exchange risk through the use of derivative instruments;
costs and timeliness of integrating future acquisitions or our failure to realize anticipated cost savings, revenue enhancements or other synergies therefrom;
litigation or claims regarding our intellectual property rights or termination of our material licenses;
our ability to drive revenue growth in our key product categories or to add products that are in faster growing and more profitable categories;
potential product liability claims;
seasonality;
the funding of our defined benefit pension plan;
changes in our collective bargaining agreements or shifts in union policy;
changes in the cost of compliance with laws and regulations, including environmental, worker health and workplace safety laws and regulations;
our failure to comply with U.S Food & Drug Administration, U.S. Department of Agriculture or Federal Trade Commission regulations and the impact of governmental budget cuts;
disruptions in our information technology systems;
future impairments of our goodwill and intangible assets;
difficulty in the hiring or the retention of key management personnel; and
changes in tax statutes, tax rates, or case laws which impact tax positions we have taken.
You should evaluate all forward-looking statements made in this report in the context of these risks and uncertainties.
We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this report apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances.

40




ITEM 2:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except where noted)

You should read the following discussion of our results of operations and financial condition together with the audited consolidated financial statements appearing in our annual report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on February 23, 2017 and the unaudited Consolidated Financial Statements and the notes thereto included in this quarterly report. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” section of our Form 10-K, and the section entitled “Special Note Regarding Forward-Looking Statements” in this report. Actual results may differ materially from those contained in any forward-looking statements.


Overview

The Company is a leading manufacturer, marketer and distributor of high quality, branded food products in North America. In the fourth quarter of fiscal 2016 during which the integration of the Boulder Brands acquisition was substantially complete, the Company reorganized its reporting structure, resulting in a change to its reportable segments. The new segments, which mirror the manner in which the businesses are managed, are Frozen, Grocery, Boulder and Specialty. The Boulder Brands acquisition added the Udi's, Glutino, Smart Balance, Earth Balance and EVOL brands to the Company's portfolio, as well as complementary foodservice, private label and Canadian businesses. The new segment structure aligns each of these businesses with related Pinnacle businesses into four new reportable segments, the composition of which is provided below.

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

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

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

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

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

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

41


products.  As a result, industry volumes have come under pressure, hampering the ability of the industry to pass along higher input costs.
Industry Trends
Growth in our industry is driven primarily by population growth, changes in product selling prices and changes in consumption between out-of-home and in-home eating. In the current economic environment, consumers are looking for value alternatives, which have caused an increase in the percentage of products sold on promotion and a shift from traditional retail grocery to mass merchandisers, club stores and dollar store channels. We believe we are well positioned in grocery and non-traditional channels, maintaining strong customer relationships across key retailers in each segment.
In order to maintain and grow our business, we must successfully react to, and offer products that respond to, evolving consumer needs, such as changing health trends, the focus on convenience and the growth of smaller households. Incremental growth in the industry is principally driven by product and packaging innovation.

Revenue Factors

Our net sales are driven principally by the following factors:
Gross sales, which change as a function of changes in volume and list price; and
the costs that we deduct from gross sales to arrive at net sales, which consist of:
Cash discounts, returns and other allowances.
Trade marketing expenses, which include the cost of temporary price reductions (“on sale” prices), promotional displays and advertising space in store circulars.
New product introductory (slotting) expenses, which are the costs of having certain retailers stock a new product, including amounts retailers charge for updating their warehousing systems, allocating shelf space and in-store systems set-up, among other things.
Consumer coupon redemption expenses, which are costs from the redemption of coupons we circulate as part of our marketing efforts.
Cost Factors

Costs recorded in Cost of products sold in the consolidated statement of operations include:
Raw materials, such as vegetables and fruits, proteins, grains and oils, sugars, seafood and other agricultural products, among others, are available from numerous independent suppliers but are subject to price fluctuations due to a number of factors, including changes in crop size, federal and state agricultural programs, export demand, weather conditions and insects, among others.
Packaging costs. Our broad array of products entails significant costs for packaging and is subject to fluctuations in the price of steel, aluminum, glass jars, plastic bottles, corrugated fiberboard, and various poly-films.
Conversion costs, which include all costs necessary to convert raw materials into finished product. Key components of this cost include direct labor, and plant overhead such as salaries, benefits, utilities and depreciation.
Freight and distribution. We use a combination of common carriers and inter-modal rail to transport our products from our manufacturing facilities to distribution centers and to deliver products to our customers from both those centers and directly from our manufacturing plants. Our freight and distribution costs are influenced by fuel costs as well as capacity within the industry.

Costs recorded in marketing and selling expenses in the consolidated statement of operations include:
Advertising and other marketing expenses. These expenses represent advertising and other consumer and trade-oriented marketing programs.
Brokerage commissions and other overhead expenses.

Costs recorded in administrative and research and development expenses in the consolidated statement of operations include:
Administrative expenses. These expenses consist of personnel and facility charges and also include third party professional and other services. Our lean, nimble structure and efficient internal processes have enabled us to consistently hold our overhead costs (i.e., selling, general and administrative expenses, excluding one-time items affecting comparability) to approximately 9% of net sales on an annual basis.
Research and Development. These expenses consist of personnel and facility charges and include expenditures on new products and the improvement and maintenance of existing products and processes.

42



Working Capital
Our working capital is primarily driven by accounts receivable, accounts payable and inventories, which fluctuate throughout the year due to seasonality in both sales and production. See “Seasonality” below. We will continue to focus on reducing our working capital requirements while simultaneously maintaining our customer service levels and fulfilling our production requirements. We have historically relied on internally generated cash flows and temporary borrowings under our revolving credit facility to satisfy our working capital requirements.
Other Factors
Other factors that have influenced our results of operations and may do so in the future include:

Interest Expense. As a result of our previous acquisitions and the recent Boulder Brands acquisition, we have significant indebtedness. However, our February 3, 2017 Refinancing and principle pay-down has significantly reduced our expected future interest expense. See Note 10 to the Consolidated Financial Statements for further details. Although we expect to continue to reduce our leverage over time, we expect interest expense to continue to be a significant component of our expenses.
Cash Taxes. We have significant tax-deductible intangible asset amortization and federal and state NOLs, which resulted in federal and state cash tax savings through 2016. We expect continued amortization and utilization of our NOLs will generate additional cash tax savings in 2017 and thereafter.
In October 2016, we voluntarily ceased production at our private label gluten-free bakery operation, which is based in the United Kingdom. For the three months ended March 27, 2016, net sales were $2.5 million and the business incurred a loss before interest, taxes, depreciation and amortization of $1.0 million. There was no impact to earnings for the three months ended March 26, 2017.
In the first quarter of 2017, the Company exited the gardein Private Label business resulting in $0.7 million of accelerated amortization of a customer relationships intangible asset. For the three months ended March 26, 2017, and March 27, 2016, net sales were $0.4 million and $2.5 million, respectively.


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

Inflation

To the extent possible, we strive to offset the effects of inflation with cost reduction and productivity programs. We spend approximately $2.2 billion annually on Cost of products sold, therefore each 1% change in our weighted average cost of inputs would increase our Cost of products sold by approximately $22 million. If we experience significant inflation, price increases may be necessary in order to preserve our margins and returns. However, over the past several years, significant macroeconomic weakness and ongoing pressures on the consumer have resulted in shifting consumer buying patterns for grocery products.  As a result, industry volumes have come under pressure, hampering our ability to pass along higher input costs. Severe increases in inflation could have an adverse impact on our business, financial condition and results of operations.

43


Results of Operations:
Consolidated Statements of Operations
The following tables set forth our statement of operations data expressed in dollars and as a percentage of net sales.
 
Three months ended
 
March 26,
2017
 
March 27,
2016
Net sales
$
766.1

 
100.0
%
 
$
754.3

 
100.0
%
Cost of products sold
555.0

 
72.4
%
 
555.7

 
73.7
%
Gross profit
211.1

 
27.6
%
 
198.6

 
26.3
%
 
 
 

 
 
 

Marketing and selling expenses
$
55.6

 
7.3
%
 
$
58.9

 
7.8
%
Administrative expenses
36.0

 
4.7
%
 
45.9

 
6.1
%
Research and development expenses
4.0

 
0.5
%
 
4.2

 
0.6
%
Other expense (income), net
4.2

 
0.5
%
 
9.3

 
1.2
%
 
$
99.9

 
13.0
%
 
$
118.3

 
15.7
%
Earnings before interest and taxes
$
111.2

 
14.5
%
 
$
80.3

 
10.6
%
 
 
Three months ended
 
March 26,
2017
 
March 27,
2016
Net sales
 
 
 
Frozen
$
320.9

 
$
330.5

Grocery
259.4

 
250.9

Boulder
97.3

 
80.2

Specialty
88.5

 
92.7

Total
$
766.1

 
$
754.3

 
 
 
 
Earnings (loss) before interest and taxes
 
 
 
Frozen
$
50.9

 
$
51.3

Grocery
51.8

 
39.7

Boulder
6.7

 
(4.5
)
Specialty
8.9

 
7.0

Unallocated corporate expense
(7.1
)
 
(13.3
)
Total
$
111.2

 
$
80.3

 
 
 
 
Depreciation and amortization
 
 
 
Frozen
$
10.6

 
$
10.6

Grocery
8.1

 
7.8

Boulder
3.8

 
2.4

Specialty
4.7

 
4.1

Total
$
27.1

 
$
24.9



44


Three months ended March 26, 2017 compared to the three months ended March 27, 2016
Net sales
Net sales for the three months ended March 26, 2017 increased $11.8 million, or 1.6%, versus year-ago to $766.1 million, reflecting a $22.0 million, or 2.9%, increase from the additional three weeks of consolidated results of the Boulder Brands acquisition in the current year quarter compared to the prior year quarter. The period also benefited from higher net price realization of 0.4%, which included the benefit of lower new product introductory expenses and a 0.1% increase from foreign exchange. This was partially offset by a 1.8% decrease from volume/mix primarily due to the unfavorable impact of Easter occurring in the second quarter of 2017 compared to first quarter of 2016. In an industry generally marked by low growth and a challenging environment to fully pass on price increases, we continue to outpace the performance of our composite categories, with market share growth of 0.8 percentage points in the first quarter of 2017.
Frozen Segment:
Net sales in the three months ended March 26, 2017 decreased $9.5 million, or 2.9%, versus year-ago to $320.9 million, reflecting a 4.3% decrease from volume/mix partially offset by higher net price realization of 0.8%, a 0.4% increase from the benefit of the Boulder Brands acquisition and a 0.2% benefit from foreign exchange. The volume decline is primarily attributable to the timing of Easter, particularly related to the Birds-Eye franchise, as well as our frozen seafood products. These decreases were partially offset by higher sales of our Celeste pizza and Hungry-Man frozen entrées.
Grocery Segment:
Net sales in the three months ended March 26, 2017 were $259.4 million, an increase of $8.4 million, or 3.4% versus year-ago, reflecting a 2.1% increase from volume/mix and a 1.9% benefit from the Boulder Brands acquisition, partially offset by lower net price realization of 0.6%, which included the benefit of lower new product introductory expenses as compared to the prior year. The growth in the quarter was driven by higher sales of Duncan Hines baking products, which included the launch of eighteen varieties of our innovative new Perfect Size for 1, and Armour canned meat. Partially offsetting these increases were lower sales of Vlasic pickles driven by a highly competitive environment.
Boulder Segment:
Net sales in the three months ended March 26, 2017 increased $17.1 million, or 21.4%, versus year-ago to $97.3 million reflecting a 19.0% benefit from the Boulder Brands acquisition, higher net price realization of 3.8% and a 1.7% increase from volume/mix. Partially offsetting these gains was a 3.1% decline resulting from the wind down of the Boulder Brands United Kingdom operations. During the period we realized double digit growth from our gardein and Evol products resulting from strong distribution gains.
Specialty Segment:
Net sales in the three months ended March 26, 2017 were $88.5 million, a decline of $4.2 million, or 4.5% versus year-ago, reflecting a 0.9% benefit from the Boulder Brands acquisition, more than offset by a 4.4% decrease from volume/mix and lower net price realization of 1.0%. This decrease was primarily driven by anticipated lower sales of private label canned meat and the Company's decision in the first quarter of 2017 to exit the gardein private label business.
Gross profit
Gross profit for the three months ended March 26, 2017 was $211.1 million, or 27.6% of net sales, compared to $198.6 million, or 26.3% of net sales, in the comparable prior year period. Excluding items affecting comparability, Adjusted Gross Profit advanced 6.2% to $218.3 million and Adjusted Gross Profit as a Percentage of Sales increased approximately 120 basis points to 28.5%. See Adjusted Gross Profit reconciliation later in the document for further details.
The following table outlines the factors resulting in the year-on-year change in gross profit and gross margin percentage in the three months ended March 26, 2017.

45


 
$ (in millions)
 
% of net sales
Productivity
$
22.0

 
3.0
 %
Higher net price realization, including slotting
4.8

 
0.5

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

 
1.4

Inflation
(15.0
)
 
(2.0
)
Higher mark to market losses on financial instruments
(5.9
)
 
(0.8
)
Higher acquisition integration charges
(4.4
)
 
(0.6
)
Higher depreciation expense
(1.7
)
 
(0.2
)
Unfavorable product mix
(1.3
)
 

Other
(0.3
)
 

Subtotal
$
8.6

 
1.3
 %
Higher sales volume
3.9

 
 
Total
$
12.5

 
 

(a) Represents expense recorded in 2016 related to the write-up to fair market value of inventories acquired as a result of the Boulder Brands acquisition.

Marketing and selling expenses
Marketing and selling expenses decreased 5.6% to $55.6 million, or 7.3% of net sales, for the three months ended March 26, 2017, compared to $58.9 million, or 7.8% of net sales for the prior year period. The decrease was primarily driven by synergies realized as part of the Boulder Brands acquisition integration and lower marketing expense in the first quarter of 2017 as compared to the prior year period which included significant new product introductions.
Administrative expenses
Administrative expenses were $36.0 million, or 4.7% of net sales, for the three months ended March 26, 2017, compared to $45.9 million, or 6.1% of net sales, for the comparable prior year period. The decrease was primarily driven by synergies realized as part of the Boulder Brands acquisition integration.

Research and development expenses
Research and development expenses were $4.0 million, or 0.5% of net sales, for the three months ended March 26, 2017 compared to $4.2 million, or 0.6% of net sales, for the prior year period.

Other income and expense
 
Three months ended
 
March 26, 2017
 
March 27, 2016
Other expense, net consists of:
 
 
 
Amortization of intangibles/other assets
$
4.5

 
$
4.0

Foreign exchange gains
(0.2
)
 
(0.8
)
Boulder Brands acquisition costs

 
6.8

Royalty income and other
(0.1
)
 
(0.7
)
Total other expense, net
$
4.2

 
$
9.3


Foreign exchange gains. Represents foreign exchange gains from intra-entity loans resulting from the November 2014 Garden Protein acquisition that are anticipated to be settled in the foreseeable future.



46


Earnings before interest and taxes

Earnings before interest and taxes increased $30.9 million, or 38.5%, to $111.2 million, reflecting the growth in gross profit and lower administrative expenses. Also impacting the comparison are items affecting comparability, which totaled $9.2 million and $26.5 million in the three months ended March 26, 2017 and March 27, 2016, respectively. The variance in these items primarily resulted from lower costs associated with the Boulder Brands acquisition and integration partially offset by higher unrealized mark-to-market losses on financial instruments. Excluding items affecting comparability, Adjusted Earnings Before Interest and Taxes increased $13.7 million, or 12.8%, to $120.5 million.

Frozen Segment:
Earnings before interest and taxes for the three months ended March 26, 2017 were $50.9 million, a decrease of 0.8%, or $0.4 million, as compared with the year-ago period largely reflecting the impacts of input cost inflation, lower net sales driven by the shift in Easter timing and the unfavorable impact of items affecting comparability, primarily higher unrealized mark-to-market losses on financial instruments. Partially offsetting these items was strong productivity. Excluding items affecting comparability, Adjusted Earnings Before Interest and Taxes advanced 3.9% to $51.9 million.

Grocery Segment:
Earnings before interest and taxes for the three months ended March 26, 2017 were $51.8 million, an increase of 30.4%, or $12.1 million, as compared to the year-ago period, reflecting higher sales, productivity savings and the favorable impact of items affecting comparability, which primarily consisted of lower costs associated with the Boulder Brands acquisition and integration. These positive drivers were partially offset by input cost inflation. Excluding items affecting comparability, Adjusted Earnings Before Interest and Taxes increased 14.4% to $52.8 million.

Boulder Segment:
Earnings before interest and taxes for the three months ended March 26, 2017 were $6.7 million, an increase of $11.2 million, as compared to a loss of $4.5 million in the year-ago period, reflecting the favorable impact of items affecting comparability, largely related to the Boulder Brands acquisition, as well as net sales growth and synergies. Partially offsetting these factors was input cost inflation. Excluding items affecting comparability, Adjusted Earnings Before Interest and Taxes increased 43.5% to $13.2 million.
Specialty Segment:
Earnings before interest and taxes for the three months ended March 26, 2017 were $8.9 million, an increase of 27.0%, or $1.9 million, as compared to the year-ago period, reflecting productivity savings partially offset by the decline in net sales, input cost inflation and higher amortization expense resulting from the exit of the gardein private label business. Excluding items affecting comparability, Adjusted Earnings Before Interest and Taxes increased 21.2%, to $9.7 million.

Unallocated corporate expense:
Unallocated corporate expense for the three months ended March 26, 2017 was $7.1 million, a decrease of $6.2 million, as compared to the year-ago period primarily reflecting the impact of $6.8 million of Boulder Brands acquisition costs in the prior year period.

Interest expense, net

Net interest expense increased 155.7%, or $49.2 million, to $80.7 million in the three months ended March 26, 2017, compared to $31.6 million in the three months ended March 27, 2016. Included in net interest expense in the first quarter of 2017 is $49.5 million of charges related to the Refinancing (Note 10). These charges consisted of a $28.5 million non-cash charge from deferred financing costs and original issue discount and a $20.7 million cash charge resulting from the de-designation and early settlement of interest rate swaps. Excluding these charges, net interest expense in the first quarter decreased 0.9% to $31.3 million, compared to $31.6 million in the year-ago period.

We utilize interest rate swap agreements to reduce the potential exposure to interest rate movements and to achieve a desired proportion of variable versus fixed-rate debt. Any gains or losses realized on the interest rate swap agreements, excluding the

47


AOCL portion, are recorded as an adjustment to interest expense. Included in net interest expense was $1.1 million and $1.5 million for the first quarter of 2017 and 2016, respectively, recorded from losses on interest rate swap agreements.
 
Provision for income taxes

The effective tax rate was 24.1% for the three months ended March 26, 2017 compared to 49.0% for the three months ended March 27, 2016.
For the three months ended March 26, 2017 our rate was decreased by 12.4% due to excess tax benefits from share-based payment transactions being recorded as an item of continuing operations in accordance with ASU 2016-09, “Improvements to Employee Share Based Payment Accounting” effective for our 2017 fiscal year. Our rate also reflects a benefit of 1.6% from the domestic production activities deduction.

In connection with our acquisition of Boulder Brands, our income tax rate for the three months ended March 27, 2016 includes the tax effect associated with incurring certain non-deductible acquisition costs and compensation payments of 0.7%, a charge for an increase in our non-current state deferred income tax liability balance of approximately 8.0% and a charge related to the tax effect of foreign operations of 3.3%, principally attributable to a valuation allowance on our foreign tax credit carryforward. Our rate also reflects a benefit of 1.8% from the domestic production activities deduction.

The Company is a loss corporation as defined by Section 382 of the Code. Section 382 places an annual limitation on our ability to use our NOL carryovers and other attributes to reduce future taxable income. As of March 26, 2017, we have federal NOL carryovers of $425.5 million subject to an annual limitation of $17.1 million. As a result, $237.2 million of the carryovers exceed the estimated available Section 382 limitation. The Company has reduced its deferred tax assets for this limitation.
We have significant tax-deductible intangible asset amortization and federal and state NOLs, which resulted in federal and state cash tax savings through 2016. We expect continued amortization and utilization of our NOLs will generate additional cash tax savings in 2017 and thereafter.

Liquidity and Capital Resources

Historical
Our cash flows are seasonal. Typically we are a net user of cash in the third quarter of the calendar year (i.e., the quarter ending in September) and a net generator of cash over the balance of the year.
Our principal liquidity requirements have been, and we expect will be, for working capital and general corporate purposes, including capital expenditures, debt service and our quarterly dividend program. Currently, the quarterly dividend payment is $0.285 per share, or approximately $34.0 million per quarter. Capital expenditures are expected to be approximately $115 to $125 million in 2017. We have historically satisfied our liquidity requirements with internally generated cash flows and availability under our revolving credit facility. We expect that our ability to generate cash from our operations and ability to borrow from our credit facilities should be sufficient to support working capital needs, planned growth, capital expenditures, debt service and dividends for the next 12 months and for the foreseeable future. We have cash in foreign accounts, primarily related to the operations of our Canadian businesses. Tax liabilities related to bringing these funds back into the United States would not be significant and have been accrued.
Statements of cash flows for the three months ended March 26, 2017 compared to the three months ended March 27, 2016
For the three months ended March 26, 2017, net cash flow decreased $211.6 million compared to a decrease in net cash flow of $99.1 million for the three months ended March 27, 2016.

Net cash provided by operating activities was $63.0 million for the three months ended March 26, 2017, and was the result of net earnings, excluding non-cash charges and credits, of $109.9 million and an increase in working capital of $46.9 million. The increase in working capital was primarily the result of a $27.3 million decrease in accrued liabilities, primarily attributable to payments for the 2016 annual incentive plan and restructuring, a $20.7 million payment for the early settlement of interest rate hedges as a result of the Refinancing, a $11.6 million increase in accounts receivable primarily driven by timing in sales, a $8.7 million increase in inventories driven by inventory builds due to innovation and the later Easter, a $5.2 million decrease in accrued trade marketing expense driven by the seasonality of our marketing programs and a $1.9 million increase in other current assets

48


primarily from higher prepaid tax balances. These were partially offset by a $28.7 million increase in accounts payable resulting from seasonality and timing of disbursements.

Net cash provided by operating activities was $76.8 million for the three months ended March 27, 2016, and was the result of net earnings, excluding non-cash charges and credits, of $62.8 million and a decrease in working capital of $13.9 million. The decrease in working capital was primarily the result of a $27.2 million increase in accounts payable resulting from seasonality and timing of disbursements, a $26.5 million decrease in inventories resulting from the sell-down of the seasonal build from December 2015, a $10.8 million decrease in other current assets primarily from lower prepaid tax balances and a $10.1 million increase in accrued trade marketing driven by the seasonality of our marketing programs. These were partially offset by a $47.2 million increase in accounts receivable primarily due to an increase in days sales outstanding. Also impacting working capital was a $13.4 million decrease in accrued liabilities, primarily attributable to a lower bonus accrual resulting from the 2015 bonuses being paid to executives and other employees in March 2016.

Net cash used in investing activities was $28.6 million, for the three months ended March 26, 2017 and included $29.2 million for capital expenditures as well as $0.6 million in proceeds from the sale of plant assets.

Net cash used in investing activities was $1,019.3 million, for the three months ended March 27, 2016 and included $985.4 million for the acquisition of Boulder Brands as well as $33.9 million for capital expenditures which included approximately $1.3 million of costs related to our acquisition integration projects.

Net cash used by financing activities was impacted by our Refinancing, which is explained in greater detail in Note 10 to the Consolidated Financial Statements. Net cash used by financing activities for the three months ended March 26, 2017 was $246.2 million and consisted of $2,465.7 million of Term Loan repayments, $33.6 million of dividends paid, $12.8 million of debt acquisition costs, $1.7 million of net cash outflows for capital leases and notes payable activity partially offset by $2,262.0 million of net proceeds from our new Tranche B Term Loans and $5.6 million of net cash inflows related to our equity based compensation plans.

Net cash provided by financing activities for the three months ended March 27, 2016 was $843.3 million and consisted of $547.3 million of net proceeds from our new Tranche I Term Loans, $350.0 million from our notes offering and $0.5 million of net cash inflows related to our equity based compensation plans which were partially offset by $29.7 million of dividends paid, $21.3 million of debt acquisition costs, $2.2 million of debt repayments, $1.3 million of net capital leases and notes payable activity.

Debt

For more information on our debt, see Note 10 of the Consolidated Financial Statements "Debt and Interest Expense".


Covenant Compliance

The following is a discussion of the financial covenants contained in our debt agreements. See section below for detailed calculation.
Third Amended and Restated Credit Agreement

As discussed in more detail in Note 10 to the Financial Statements, on February 3, 2017, the Company entered into an amendment to its Second Amended and Restated Credit Agreement (the “Amended Credit Agreement”) in order to (1) refinance all of the Company’s outstanding term loans with a new seven-year term loan in an aggregate principal amount of $2,262.0 million (the “New Term Loans”), (2) replace the Company’s existing $150.0 million revolving credit facility with a new five-year $225.0 million revolving credit facility (the “New Revolving Credit Facility and, collectively with the New Term Loans, the “New Credit Facilities”) and (3) amend and restate the Amended Credit Agreement in its entirety to make certain other amendments and modifications (as so amended and restated, the “Third Amended and Restated Credit Agreement”).

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

49


• make investments, loans and advances, including acquisitions; and
• engage in certain transactions with affiliates.

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

5.875% Senior Notes and 4.875% Senior Notes

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

Non-GAAP Financial Measures

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

Adjusted Gross Profit
Adjusted Gross Profit as a % of Sales
Adjusted EBITDA
Adjusted Earnings Before Interest and Taxes (Adjusted EBIT)
Covenant Compliance EBITDA

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

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

Management uses Adjusted EBITDA as a key metric in the evaluation of underlying Company performance, in making financial, operating and planning decisions and, in part, in the determination of cash bonuses for its executive officers and employees. The

50


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

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

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

Covenant Compliance EBITDA
Covenant Compliance EBITDA is defined as earnings before interest expense, taxes, depreciation and amortization, further adjusted to exclude non-cash items, extraordinary, unusual or non-recurring items and other adjustment items permitted in calculating Covenant Compliance EBITDA under the Third Amended and Restated Credit Agreement and the indenture governing the Senior Notes. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Covenant Compliance EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financial covenants.
EBITDA, Adjusted EBITDA and Covenant Compliance EBITDA do not represent net earnings or (loss) or cash flow from operations as those terms are defined by GAAP and do not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definitions of Covenant Compliance EBITDA in the Senior Secured Credit Facility and the indentures allow the Company to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net earnings or loss. However, these are expenses that may recur, vary greatly and are difficult to predict. While EBITDA, Adjusted EBITDA and Covenant Compliance EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, they are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

Pursuant to the terms of the Third Amended and Restated Credit Agreement, Pinnacle Foods Finance LLC is required to maintain a ratio of Net First Lien Secured Debt to Covenant Compliance EBITDA of no greater than 5.75 to 1.00. Net First Lien Secured Debt is defined as Pinnacle Foods Finance LLC's aggregate consolidated secured indebtedness secured on a first lien basis, less the aggregate amount of all unrestricted cash and cash equivalents.
In addition, under the Third Amended and Restated Credit Agreement and the indenture governing the Senior Notes, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to the Senior Secured Leverage Ratio (which is currently the same as the ratio of Net First Lien Secured Debt to Covenant Compliance EBITDA described above), in the case of the Third Amended and Restated Credit Agreement, or to the ratio of Covenant Compliance EBITDA to fixed charges for the most recently concluded four consecutive fiscal quarters, in the case of the Senior Notes. We believe that these covenants are material terms of these agreements and that information about the covenants is material to an investor's understanding our financial performance. As of March 26, 2017, we were in compliance with all covenants and other obligations under the Third Amended and Restated Credit Agreement and the indentures governing the Senior Notes.
Our ability to meet the covenants specified above in future periods will depend on events beyond our control, and we cannot assure you that we will meet those ratios. A breach of any of these covenants in the future could result in a default under, or an inability to undertake certain activities in compliance with, the Third Amended and Restated Credit Agreement and the indentures governing the Senior Notes, at which time the lenders could elect to declare all amounts outstanding under the Third Amended and Restated Credit Agreement to be immediately due and payable. Any such acceleration would also result in a default under the indentures governing the Senior Notes.

51


The following table provides a reconciliation from our net earnings to EBITDA, Adjusted EBITDA and Covenant Compliance EBITDA for the three months ended March 26, 2017 and March 27, 2016, and the fiscal year ended December 25, 2016. The terms and related calculations are defined in the Third Amended and Restated Credit Agreement and the indentures governing the Senior Notes.

(thousands of dollars)
 
Three months ended
 
Fiscal Year Ended
 
 
March 26, 2017
 
March 27, 2016
 
December 25, 2016
Net earnings
 
$
23,149

 
$
24,837

 
$
211,117

Interest expense, net
 
80,716

 
31,563

 
139,098

Income tax expense
 
7,343

 
23,881

 
129,430

Depreciation and amortization expense
 
27,088

 
24,917

 
105,772

EBITDA
 
$
138,296

 
$
105,198

 
$
585,417

Non-cash items (a)
 
1,762

 
5,706

 
12,850

Acquisition, merger and other restructuring charges (b)
 
6,827

 
20,779

 
46,100

Adjusted EBITDA
 
$
146,885

 
$
131,683

 
$
644,367

Wish-Bone, Garden Protein and Boulder Brands acquisition adjustments (1)
 
21,915

 
30,223

 
23,120

Non-cash equity-based compensation charges (2)
 
4,109

 
3,910

 
14,016

Covenant Compliance EBITDA
 
$
172,909

 
$
165,816

 
$
681,503

Last twelve months Covenant Compliance EBITDA
 
$
688,596

 


 
 

(1)
For the three months ended March 26, 2017, represents net cost savings projected to be realized from acquisition synergies from the Boulder Brands and Garden Protein acquisitions, calculated consistent with the definition of Covenant Compliance EBITDA. For the three months ended March 27, 2016 and fiscal 2016, represents proforma additional EBITDA from Boulder Brands for the period prior to the acquisition and net cost savings projected to be realized from acquisition synergies from the Boulder Brands, Garden Protein and Wish-Bone acquisitions, calculated consistent with the definition of Covenant Compliance EBITDA.
(2)
Represents non-cash compensation charges related to the granting of equity awards that occur in the normal course of business.

(a)
Non-cash items are comprised of the following:
(thousands of dollars)
Three months ended
Fiscal Year Ended
 
March 26, 2017
 
March 27, 2016
December 25, 2016
Unrealized losses (gains) resulting from hedging activities (1)
$
1,995

 
$
(3,892
)
$
(12,511
)
Effects of adjustments related to the application of purchase accounting (2)

 
10,382

10,382

Tradename impairment charges (3)

 

11,200

Foreign exchange gains (4)
(233
)
 
(784
)
(486
)
Wind down of Boulder Brands UK operations (5)


 

4,265

Total non-cash items
$
1,762

 
$
5,706

$
12,850

 _________________
(1)
Represents non-cash gains resulting from mark-to-market adjustments of obligations under derivative contracts.
(2)
Represents expense related to the write-up to fair market value of inventories acquired as a result of the Boulder Brands acquisition.
(3)
For fiscal 2016, represents tradename impairment on Celeste ($7.3 million), Aunt Jemima ($3.0 million) and Snyder of Berlin ($0.9 million).

52


(4)
Represents foreign exchange gains resulting from intra-entity loans that are anticipated to be settled in the foreseeable future.
(5)
For fiscal 2016, represents charges resulting from the voluntary wind down of the Boulder Brands private label gluten free bakery operation which is based in the United Kingdom.

(b)
Acquisition, merger and other restructuring charges are comprised of the following:
(thousands of dollars)
Three months ended
Fiscal Year Ended
 
March 26, 2017
 
March 27, 2016
December 25, 2016
Expenses in connection with an acquisition or other non-recurring merger costs (1)
$

 
$
6,781

$
6,781

Restructuring charges, integration costs and other business optimization expenses (2)
5,850

 
13,998

39,079

Employee severance (3)
977

 

240

Total acquisition, merger and other restructuring charges
$
6,827

 
$
20,779

$
46,100

_________________
(1)
Represents Boulder Brands acquisition costs.
(2)
Primarily represents integration costs of the Garden Protein and Boulder Brands acquisitions.
(3)
Represents severance costs for terminated employees not related to business acquisitions.
_________________
Our covenant requirements and actual ratios for the twelve months ended March 26, 2017 are as follows:
 
  
Covenant
Requirement
Actual Ratio
Third Amended and Restated Credit Agreement
 
 
Net First Lien Leverage Ratio (1)
5.75 to 1.00
3.14
Senior Notes (2)
 
 
Minimum Covenant Compliance EBITDA to fixed charges ratio required to incur additional debt pursuant to ratio provisions (3)
2.00 to 1.00
5.33
 _________________
(1)
Pursuant to the terms of the Third Amended and Restated Credit Agreement, Pinnacle Foods Finance LLC is required to maintain a ratio of Net First Lien Secured Debt to Covenant Compliance EBITDA of no greater than 5.75 to 1.00. Net First Lien Secured Debt is defined as Pinnacle Foods Finance LLC's aggregate consolidated secured indebtedness secured on a first lien priority basis, less the aggregate amount of all unrestricted cash and cash equivalents.
(2)
Our ability to incur additional debt and make certain restricted payments under the indentures governing the Senior Notes, subject to specified exceptions, is tied to a Covenant Compliance EBITDA to fixed charges ratio of at least 2.00 to 1.00.
(3)
Fixed charges is defined in the indenture governing the Senior Notes as (i) consolidated interest expense (excluding specified items) plus consolidated capitalized interest less consolidated interest income, plus (ii) cash dividends and distributions paid on preferred stock or disqualified stock.


53



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

 
Three months ended
Fiscal Year Ended
 
March 26, 2017
 
March 27, 2016
December 25, 2016
Gross profit
$
211,064

 
$
198,567

$
916,074

Non-cash items (a)
1,995

 
6,490

(2,129
)
Acquisition, merger and other restructuring charges (b)
5,286

 
637

7,121

Adjusted Gross Profit
$
218,345

 
$
205,694

$
921,066

 
 
 
 
 
Adjusted Gross Profit as a % of sales
28.5
%

27.3
%
29.4
%

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

(thousands of dollars)
Three months ended
Fiscal Year Ended
 
March 26, 2017
 
March 27, 2016
December 25, 2016
Unrealized losses (gains) resulting from hedging activities (1)
$
1,995

 
$
(3,892
)
$
(12,511
)
Effects of adjustments related to the application of purchase accounting (2)

 
10,382

10,382

Non-cash items
$
1,995

 
$
6,490

$
(2,129
)
 
 
 
 
 
 _________________

(1)
Represents non-cash gains and losses resulting from mark-to-market obligations under derivative contracts.
(2)
Represents expense related to the write-up to fair market value of inventories acquired as a result of the Boulder Brands acquisition.

(b)
Acquisition, merger and other restructuring charges are comprised of the following:
(thousands of dollars)
Three months ended
 
Fiscal Year Ended
 
March 26, 2017
 
March 27, 2016
 
December 25, 2016
Restructuring charges, integration costs and other business optimization expenses (1)
5,016

 
637

 
7,121

Employee severance and recruiting (2)
270

 

 

Total acquisition, merger and other restructuring charges
$
5,286

 
$
637

 
$
7,121

 
 
 
 
 
 
 _________________
(1)
Primarily represents integration costs of the Garden Protein and Boulder Brands acquisitions.
(2)
Represents severance costs for terminated employees not related to business acquisitions.

54


Pinnacle Foods Inc. and Subsidiaries
Reconciliation of Non-GAAP measures (Unaudited)
Adjusted EBIT (1)
(thousands)
 
 
Three months ended
 
 
March 26, 2017
 
March 27, 2016
Net earnings (as reported)
 
$
23,149

 
$
24,837

  Interest expense, net
 
80,716

 
31,563

  Provision for income taxes
 
7,343

 
23,881

Earnings before interest and taxes (as reported)
 
111,208

 
80,281

Non-cash items
 
 
 
 
Accelerated amortization expense (2)
 
656

 

Unrealized losses/(gains) resulting from hedging (3)
 
1,995

 
(3,892
)
Purchase accounting adjustments (4)
 

 
10,382

Foreign exchange gains (5)
 
(233
)
 
(784
)
Acquisition, merger and other restructuring charges
 
 
 
 
Acquisition or other non recurring expenses (6)
 

 
6,781

Restructuring and integration costs (7)
 
5,850

 
13,998

Employee severance (8)
 
977

 

Adjusted EBIT
 
$
120,453

 
$
106,766


(1)
Excludes Boulder Brands, Wish-Bone and Garden Protein anticipated synergies which are included in calculating Covenant compliance.
(2)
Reflects accelerated amortization of customer relationships intangible asset related to the exit of the gardein Private Label business.
(3)
Represents non-cash gains and losses resulting from mark-to-market obligations under derivative contracts.
(4)
Represents expense related to the write-up to fair value of inventories acquired as a result of the Boulder Brands acquisition.
(5)
Represents foreign exchange gains resulting from intra-entity loans that are anticipated to be settled in the foreseeable future.
(6)
Represents Boulder Brands acquisition costs.
(7)
Primarily represents integration costs of the Garden Protein and Boulder Brands acquisitions.
(8)
Represents severance costs for terminated employees not related to business acquisitions.



55


Pinnacle Foods Inc.
Reconciliation from Reported to Adjusted Segment EBIT Amounts (unaudited)
For the three months ended March 26, 2017 and March 27, 2016
(thousands)
 
 
Three months ended
 
 
March 26, 2017
 
March 27, 2016
 
 
 
 
 
Earnings before interest & taxes - Reported
 
 
 
 
Frozen
 
$
50,922

 
$
51,339

Grocery
 
51,807

 
39,724

Boulder
 
6,672

 
(4,524
)
Specialty
 
8,888

 
7,001

Unallocated corporate expenses
 
(7,081
)
 
(13,259
)
Total
 
$
111,208

 
$
80,281

 
 
 
 
 
 
 
 
 
 
Adjustments (Non GAAP - See separate table)
 
 
 
 
Frozen
 
$
944

 
$
(1,418
)
Grocery
 
958

 
6,394

Boulder
 
6,506

 
13,707

Specialty
 
837

 
1,020

Unallocated corporate expenses
 

 
6,782

Total
 
$
9,245

 
$
26,485

 
 
 
 
 
 
 
 
 
 
Earnings before interest & taxes - Adjusted (Non GAAP - See separate discussion and tables)
 
 
 
 
Frozen
 
$
51,866

 
$
49,921

Grocery
 
52,765

 
46,118

Boulder
 
13,178

 
9,183

Specialty
 
9,725

 
8,021

Unallocated corporate expenses
 
(7,081
)
 
(6,477
)
Total
 
$
120,453

 
$
106,766



56


Pinnacle Foods Inc.
Reconciliation from Reported to Adjusted Segment Amounts
Supplemental Schedule of Adjustments Detail (unaudited)
For the three months ended March 26, 2017 and March 27, 2016
(millions)
 
 
Adjustments to Earnings Before Interest and Taxes
 
 
Three months ended
 
 
March 26, 2017
 
March 27, 2016
Frozen
 
 
 
 
Restructuring and acquisition integration charges
 
$

 
$
0.2

Employee severance
 
0.1

 

Unrealized mark-to-market loss/(gain)
 
0.8

 
(1.9
)
Expenses related to the write-up to fair value of inventories acquired
 

 
0.3

Total Frozen
 
$
0.9

 
$
(1.4
)
 
 
 
 
 
Grocery
 
 
 
 
Restructuring and acquisition integration charges
 
$

 
$
4.5

Employee severance
 
0.1

 

Unrealized mark-to-market loss/(gain)
 
0.9

 
(1.6
)
Expenses related to the write-up to fair value of inventories acquired
 

 
3.5

Total Grocery
 
$
1.0

 
$
6.4

 
 
 
 
 
Boulder
 
 
 
 
Restructuring and acquisition integration charges
 
$
5.6

 
$
7.8

Employee severance
 
0.7

 

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

 
6.0

Unrealized mark-to-market loss/(gain)
 
0.2

 
(0.1
)
Total Boulder
 
$
6.5

 
$
13.7

 
 
 
 
 
Specialty
 
 
 
 
Restructuring charges
 
$

 
$
0.7

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

 
(0.3
)
Accelerated amortization due to the exit of the gardein Private Label business
 
0.7

 

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

 
0.6

Total Specialty
 
$
0.8

 
$
1.0

 
 
 
 
 
Unallocated Corporate Expenses
 
 
 
 
Boulder Brands acquisition related charges
 
$

 
$
6.8

Total Unallocated Corporate Expenses
 
$

 
$
6.8




57



Contractual Commitments

Our contractual commitments consist mainly of payments related to long-term debt and related interest, operating and capital lease payments, certain take-or-pay arrangements entered into as part of the normal course of business and pension obligations. Refer to the “Contractual Commitments” section of the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K filed with the SEC on February 23, 2017 for details on our contractual obligations and commitments.

Off-Balance Sheet Arrangements

As of March 26, 2017, we did not have any off-balance sheet obligations.

Critical Accounting Policies and Estimates

We have disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Form 10-K filed with the SEC on February 23, 2017, those accounting policies that we consider to be significant in determining our results of operations and financial condition. Other than the below disclosure, there have been no material changes to those policies that we consider to be significant since the filing of the 10-K. We believe that the accounting principles utilized in preparing our unaudited consolidated financial statements conform in all material respects to GAAP.


ITEM 3:     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL INSTRUMENTS
Risk Management Strategy
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, foreign exchange rates or commodity prices. Please refer to Note 12 of the Consolidated Financial Statements "Financial Instruments" for additional details regarding our derivatives and refer to Note 10 of the Consolidated Financial Statements "Debt and Interest Expense" for additional details regarding our debt instruments. There were no significant changes in our exposures to market risk since December 25, 2016.
See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” included in our Form 10-K filed with the SEC on February 23, 2017.


58


ITEM 4.    CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in our reports that we file or submit under the Exchange Act (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, with the participation of our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 26, 2017. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective at a level of reasonable assurance.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter ended March 26, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


59


PART II
 
ITEM 1:    LEGAL PROCEEDINGS
    
No material legal proceedings are currently pending.

ITEM 1A:    RISK FACTORS

Our risk factors are summarized under the “Risk Factors” section of our Form 10-K filed on February 23, 2017. There have been no material changes to our risk factors since the filing of the Form 10-K.

ITEM 2:    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None

ITEM 3:    DEFAULTS UPON SENIOR SECURITIES
None

ITEM 4:    MINE SAFETY DISCLOSURES
None

ITEM 5:    OTHER INFORMATION
    
Rule 10b5-1 Plans
Our policy governing transactions in our securities by our directors, officers and employees permits such persons to adopt stock trading plans pursuant to Rule 10b5-1 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. Certain members of management have and may from time to time establish such stock trading plans. We do not undertake any obligation to disclose, or to update or revise any disclosure regarding, any such plans and specifically do not undertake to disclose the adoption, amendment, termination or explanation of any such plans.



60


ITEM 6:     EXHIBITS

See the Exhibit Index immediately following the signature page hereto, which Exhibit Index is incorporated by reference as if fully set forth herein.



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

PINNACLE FOODS INC.

By:
/s/ Craig Steeneck
Name:
Craig Steeneck
Title:
Executive Vice President and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer and Authorized Officer)
Date:
April 27, 2017



61


PINNACLE FOODS INC.
Exhibit Index


Exhibit Number
Exhibit Description
Filed Herewith
Incorporated by Reference from Form
Exhibit
Filing Date
3.1
Amended and Restated Certificate of Incorporation of Pinnacle Foods Inc.
 
8-K
3.1
4/3/2013
3.2
Second Amended and Restated Bylaws of Pinnacle Foods Inc.
 
8-K
3.1
2/16/2016
4.1
Form of Stock Certificate for Common Stock
 
S-1/A
4.1
3/7/2013
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
X
 
 
 
31.2
Rule 13a-14(a)/15d-14(a) Certification of Executive Vice President and Chief Financial Officer
X
 
 
 
32.1**
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
X
 
 
 
32.2**
Certification of Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (A)
X
 
 
 
101.1
The following materials are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Earnings, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Shareholders' Equity, (vi) Notes to Consolidated Financial Statements, and (vii) document and entity information.
X
 
 
 


**This certification will not be deemed “filed” for purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

62