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 July 1, 2018



¨	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 119,185,812 shares of common stock, $0.01 par value, outstanding as of July 30, 2018.

Table of Contents



	TABLE OF CONTENTS FORM 10-Q	Page No.
PART I - FINANCIAL INFORMATION		1
ITEM 1:	FINANCIAL STATEMENTS (UNAUDITED)	1
CONSOLIDATED STATEMENTS OF OPERATIONS		1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS		2
CONSOLIDATED BALANCE SHEETS		3
CONSOLIDATED STATEMENTS OF CASH FLOWS		4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY		5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		6
1.	Summary of Business Activities	6
2.	Interim Financial Statements	6
3.	Revenue Recognition	7
4.	Acquisitions	8
5.	Fair Value Measurements	8
6.	Other Expense (Income), net	10
7.	Equity-Based Compensation and Earnings Per Share	10
8.	Accumulated Other Comprehensive Income (Loss)	12
9.	Balance Sheet Information	13
10.	Goodwill, Tradenames and Other Assets	14
11.	Restructuring Charges	17
12.	Debt and Interest Expense	18
13.	Pension and Retirement Plans	23
14.	Financial Instruments	24
15.	Commitments and Contingencies	29
16.	Segments	29
17.	Provision for Income Taxes	31
18.	Recently Issued Accounting Pronouncements	32
19	Guarantor and Nonguarantor Statements	34
ITEM 2:	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	43
ITEM 3:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	69
ITEM 4:	CONTROLS AND PROCEDURES	70
PART II - OTHER INFORMATION		71
ITEM 1:	LEGAL PROCEEDINGS	71
ITEM 1A:	RISK FACTORS	71
ITEM 2:	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	71
ITEM 3:	DEFAULTS UPON SENIOR SECURITIES	71
ITEM 4:	MINE SAFETY DISCLOSURES	71
ITEM 5:	OTHER INFORMATION	71
ITEM 6:	EXHIBITS	72
SIGNATURES		72

Table of Contents

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						Six months ended
	July 1, 2018			June 25, 2017			July 1, 2018			June 25, 2017
Net sales	$	741,761		$	744,608		$	1,520,593		$	1,510,682
Cost of products sold	530,299			580,681			1,102,701			1,136,182
Gross profit	211,462			163,927			417,892			374,500

Marketing and selling expenses	50,617			49,470			99,844			105,064
Administrative expenses	35,368			33,630			70,042			69,641
Research and development expenses	4,786			4,580			9,550			8,601
Tradename impairment charges	—			27,430			—			27,430
Other expense, net	17,445			5,288			20,310			9,518
	108,216			120,398			199,746			220,254
Operating income	103,246			43,529			218,146			154,246
Non-operating income	802			491			1,603			982
Earnings before interest and taxes	104,048			44,020			219,749			155,228
Interest expense	30,184			28,507			72,078			109,238
Interest income	16			13			228			28
Earnings before income taxes	73,880			15,526			147,899			46,018
Provision (benefit) for income taxes	17,624			(3,092		)	34,729			4,251
Net earnings	56,256			18,618			113,170			41,767
Less: Net (loss) earnings attributable to non-controlling interest	(61		)	(51		)	(61		)	172
Net earnings attributable to Pinnacle Foods, Inc. and subsidiaries common shareholders	$	56,317		$	18,669		$	113,231		$	41,595

Net earnings per share attributable to Pinnacle Foods, Inc. and subsidiaries common shareholders:
Basic	$	0.47		$	0.16		$	0.95		$	0.35
Weighted average shares outstanding - basic	118,774			118,114			118,635			117,869
Diluted	$	0.47		$	0.16		$	0.94		$	0.35
Weighted average shares outstanding - diluted	119,948			119,607			119,881			119,469
Dividends declared	$	0.325		$	0.285		$	0.650		$	0.570

See accompanying Notes to Unaudited Consolidated Financial Statements

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PINNACLE FOODS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (unaudited)

(thousands)



	Three months ended														Six months ended
	July 1, 2018							June 25, 2017							July 1, 2018							June 25, 2017
	Pre-tax amount		Tax (expense) benefit		After-tax amount			Pre-tax amount		Tax (expense) benefit		After-tax amount			Pre-tax amount		Tax (expense) benefit		After-tax amount			Pre-tax amount		Tax (expense) benefit		After-tax amount
Net earnings					$	56,256						$	18,618						$	113,170						$	41,767
Other comprehensive earnings (loss)
Foreign currency translation:
Foreign currency translation adjustments	(1,663	)	—		(1,663		)	652		—		652			(3,841	)	—		(3,841		)	1,765		—		1,765
Cash-flow hedges:
Unrealized gains (losses) arising during the period	8,053		(2,119	)	5,934			(5,147	)	1,973		(3,174		)	21,658		(5,583	)	16,075			(4,652	)	1,781		(2,871		)
Reclassification adjustment for (gains) losses included in net earnings	(1,227	)	314		(913		)	(278	)	106		(172		)	(1,298	)	331		(967		)	21,597		(8,245	)	13,352
Pension:
Reclassification of net actuarial loss included in net earnings	217		(54	)	163			309		(119	)	190			476		(118	)	358			578		(221	)	357
Other comprehensive earnings (loss)	5,380		(1,859	)	3,521			(4,464	)	1,960		(2,504		)	16,995		(5,370	)	11,625			19,288		(6,685	)	12,603
Total comprehensive earnings					59,777							16,114							124,795							54,370
Less: Comprehensive earnings attributable to non-controlling interest					(61		)					(51		)					(61		)					172
Comprehensive earnings attributable to Pinnacle Foods Inc. and Subsidiaries					$	59,838						$	16,165						$	124,856						$	54,198

See accompanying Notes to Unaudited Consolidated Financial Statements

Table of Contents

PINNACLE FOODS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (unaudited)

(thousands, except share and per share amounts)



	July 1, 2018			December 31, 2017
Current assets:
Cash and cash equivalents	$	80,431		$	249,828
Accounts receivable, net of allowances of $9,584 and $10,036, respectively	264,358			281,622
Inventories	507,937			489,806
Other current assets	15,889			11,061
Total current assets	868,615			1,032,317
Plant assets, net of accumulated depreciation of $566,121 and $566,202, respectively	754,114			739,713
Tradenames	2,463,172			2,463,374
Other assets, net	173,971			164,899
Goodwill	2,175,290			2,177,961
Total assets	$	6,435,162		$	6,578,264

Current liabilities:
Short-term borrowings	$	1,842		$	2,739
Current portion of long-term obligations	54,126			33,934
Accounts payable	329,035			323,062
Accrued trade marketing expense	32,113			38,975
Accrued liabilities	119,945			122,131
Dividends payable	40,066			40,470
Total current liabilities	577,127			561,311
Long-term debt	2,703,917			2,925,594
Pension and other postretirement benefits	50,134			53,251
Other long-term liabilities	28,662			34,037
Deferred tax liabilities	643,792			623,833
Total liabilities	4,003,632			4,198,026
Commitments and contingencies (Note 15)
Shareholders' equity:
Pinnacle preferred stock: $.01 per share, 50,000,000 shares authorized, none issued	—			—
Pinnacle common stock: par value $.01 per share, 500,000,000 shares authorized; issued 120,184,208 and 120,018,215, respectively	1,202			1,200
Additional paid-in-capital	1,457,492			1,453,054
Retained earnings	1,027,855			987,238
Accumulated other comprehensive loss	(23,954		)	(30,250		)
Capital stock in treasury, at cost, 1,000,000 common shares	(32,110		)	(32,110		)
Total Pinnacle Foods Inc. and subsidiaries shareholders' equity	2,430,485			2,379,132
Non-controlling interest	1,045			1,106
Total Equity	2,431,530			2,380,238
Total liabilities and equity	$	6,435,162		$	6,578,264

See accompanying Notes to Unaudited Consolidated Financial Statements

Table of Contents

PINNACLE FOODS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(thousands)



	Six months ended
	July 1, 2018			June 25, 2017
Cash flows from operating activities
Net earnings	$	113,170		$	41,767
Non-cash charges (credits) to net earnings
Depreciation and amortization	54,251			80,899
Intangible asset impairment charge	—			27,430
Amortization of debt acquisition costs and discount on term loan	1,612			2,597
Call premium on note redemptions	4,267			—
Recognition of deferred costs related to refinancing	12,681			28,494
Change in value of financial instruments, including amounts reclassified from Accumulated Other Comprehensive Loss from settlement of hedges	1,078			25,043
Equity-based compensation charges	9,979			9,656
Pension expense, net of contributions	(2,641		)	(1,136		)
Other long-term liabilities	(6,331		)	(1,193		)
Foreign exchange losses/(gains)	894			(398		)
Deferred income taxes	12,348			(5,780		)
Changes in working capital
Other liabilities - cash settlement of hedges related to refinancing	—			(20,722		)
Accounts receivable	16,851			11,777
Inventories	(19,056		)	(31,745		)
Accrued trade marketing expense	(6,973		)	(17,748		)
Accounts payable	20,870			35,379
Accrued liabilities	1,091			(53,991		)
Other current assets	659			(9,981		)
Net cash provided by operating activities	214,750			120,348
Cash flows from investing activities
Capital expenditures	(60,333		)	(49,355		)
Proceeds from sale of plant assets	—			1,947
Other investing	608			—
Net cash used in investing activities	(59,725		)	(47,408		)
Cash flows from financing activities
Proceeds from bank term loans	2,289,380			2,262,000
Repayments of long-term obligations	(2,614,629		)	(2,472,320		)
Proceeds from short-term borrowings	—			1,634
Repayments of short-term borrowings	(2,391		)	(2,240		)
Borrowings under revolving credit facility	100,000			—
Repayment of capital lease obligations	(6,188		)	(4,216		)
Dividends paid	(78,171		)	(67,412		)
Net proceeds from issuance of common stock	2,046			9,051
Taxes paid related to net share settlement of equity awards	(7,572		)	(8,926		)
Debt acquisition costs	(6,569		)	(12,937		)
Net cash used in financing activities	(324,094		)	(295,366		)
Effect of exchange rate changes on cash	(328		)	219
Net change in cash and cash equivalents	(169,397		)	(222,207		)
Cash and cash equivalents - beginning of period	249,828			353,076
Cash and cash equivalents - end of period	$	80,431		$	130,869

Supplemental disclosures of cash flow information:
Interest paid	$	60,817		$	62,180
Interest received	1,391			28
Income taxes paid	44,617			47,569
Non-cash investing and financing activities:
New capital leases	17,901			8,951
Dividends payable	40,066			35,244
Accrued additions to plant assets	12,518			10,422

See accompanying Notes to Unaudited Consolidated Financial Statements

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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			Additional Paid In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders' Equity			Non-Controlling Interest			Total Equity
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	658,775	7							9,774								9,781						9,781
Dividends ($0.570 per share) (a)											(68,281		)				(68,281		)				(68,281		)
Non-controlling interest in acquisition																	—			172			172
Comprehensive earnings											41,767			12,603			54,370						54,370
Balance, June 25, 2017	119,786,044	$	1,198	(1,000,000	)	$	(32,110	)	$	1,439,221	$	574,535		$	(38,966	)	$	1,943,878		$	1,106		$	1,944,984

Balance, December 31, 2017	120,018,215	$	1,200	(1,000,000	)	$	(32,110	)	$	1,453,054	$	987,238		$	(30,250	)	$	2,379,132		$	1,106		$	2,380,238
Equity-based compensation plans	165,993	2							4,438								4,440						4,440
Dividends ($0.650 per share) (b)											(77,882		)				(77,882		)				(77,882		)
Reclassification of tax effects relating to U.S. tax reform											5,329			(5,329		)	—						—
Net earnings attributable to non-controlling interest																	—			(61		)	(61		)
Comprehensive earnings											113,170			11,625			124,795						124,795
Balance, July 1, 2018	120,184,208	$	1,202	(1,000,000	)	$	(32,110	)	$	1,457,492	$	1,027,855		$	(23,954	)	$	2,430,485		$	1,045		$	2,431,530

(a) $0.285 per share declared February 2017 and June 2017.

(b) $0.325 per share declared February 2018 and June 2018.

See accompanying Notes to Unaudited Consolidated Financial Statements

Table of Contents

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.

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

Merger Agreement with Conagra Brands, Inc.

On June 26, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Conagra Brands, Inc., a Delaware corporation ("Conagra") and Patriot Merger Sub Inc., a Delaware corporation and a wholly-owned subsidiary of Conagra (“Merger Sub”). The Merger Agreement provides for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Conagra.

At the time of the Merger, each of the Company's shares of common stock will be converted into the right to receive $43.11 in cash and 0.6494 shares of Conagra common stock. This implied a price of $68.00 per share of the Company's common stock on the date of the announcement. The final purchase price is expected to be valued at approximately $10.9 billion, including the Company's outstanding net debt.

The transactions contemplated by the Merger Agreement are subject to the satisfaction of certain customary conditions, including the approval of the Merger Agreement by at least a majority of the Company's shareholders, the receipt of regulatory approvals, the absence of any legal prohibitions, the accuracy of the representations and warranties of the parties, and compliance by the parties with their respective obligations under the Merger Agreement.

Under certain circumstances defined within the Merger Agreement, in the event that the Merger Agreement is terminated, the Company would be required to pay Conagra a termination fee of approximately $264 million.

In the second quarter of 2018, the Company incurred $10.8 million of professional fees associated with this transaction. For the remainder of 2018, approximately $65 million to $70 million of additional charges for professional fees, employee incentives and other costs related to the Merger are expected to be incurred.

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 July 1, 2018, the results of operations for the three and six months ended July 1, 2018 and June 25, 2017, and the cash flows for the six months ended July 1, 2018 and June 25, 2017. The results of operations are not necessarily indicative of the results to be expected for the

Table of Contents

PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

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 31, 2017.

3. Revenue recognition

Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) No. 2014-09, "Revenue from Contracts with Customers," and all the related amendments (Accounting Standards Codification (ASC) 606) using the modified retrospective method of adoption. ASC 606 consists of a comprehensive revenue recognition standard, which requires the recognition of revenue when promised goods are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled.

The Company recognizes revenue when obligations under the terms of a contract with its customer are satisfied; generally, this occurs with the transfer of control of its products. Revenue is measured as the amount of net consideration expected to be received in exchange for transferring products. Revenue from product sales is governed primarily by customer pricing and trade marketing agreements (see further discussion below) and related purchase orders (“contracts”) which specify shipping terms and certain aspects of the transaction price including rebates, discounts and other sales incentives, such as trade marketing programs and product introductory fees. Contracts are at standalone pricing. The performance obligation in these contracts is determined by each of the individual purchase orders and the respective stated quantities, with revenue being recognized at a point in time when obligations under the terms of the agreement are satisfied. This generally occurs with the transfer of control of our products to the customer and the product is shipped. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. The Company's customers have an implicit and explicit right to return non-conforming products. A provision for payment discounts and product return allowances, which is estimated based upon the expected value method, is recorded as a reduction of sales in the same period that the revenue is recognized.

Trade marketing expense, consisting primarily of customer pricing allowances and merchandising funds are offered through various programs to customers and are designed to promote our products. They include the cost of in-store product displays, feature pricing in retailers' advertisements and other temporary price reductions. These programs are offered to our customers both in fixed and variable (rate per case) amounts. The ultimate cost of these programs depends on retailer performance and is the subject of management estimates.

Certain retailers require the payment of product introductory fees in order to obtain space for the Company's products on the retailer's store shelves. This cost is typically a lump sum and is determined using the expected value based on the contract between the two parties.

Both trade marketing expense and product introductory fees are recognized as reductions of revenue at the time the transfer of control of the associated products occurs. Accruals for expected payouts under these programs are included as accrued trade marketing expense in the Consolidated Balance Sheet.

Consumer coupon redemption expenses are costs from the redemption of coupons we circulate as part of our marketing efforts. They are also recognized as reductions of net sales when the coupons are issued. Estimates of coupon redemption costs are based upon programs offered, timing of those offers, estimated redemption/usage rates from historical performance and current economic trends. These obligations are included in accrued liabilities in the Consolidated Balance Sheet.

The Company discloses revenue by reportable segment, geographical region and product type. A reconciliation of these disaggregated revenues is provided in Note 16, Segments.

The adoption of ASC 606 did not have a material impact on Pinnacle's consolidated results of operations for the three and six months ended July 1, 2018.

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

4. Acquisitions

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

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

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



Assets acquired
Land	$	700
Buildings	22,043
Plant assets	4,091
Goodwill	10,653
Total cost of acquisition	$	37,487

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

material.

5. Fair Value Measurements

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


Level 1:	Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.


Level 2:	Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.


Level 3:	Unobservable inputs that reflect the Company’s assumptions.

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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’s financial assets and liabilities subject to recurring fair value measurements and the required disclosures are as follows:



	July 1, 2018		Fair Value Measurements Using Fair Value Hierarchy						December 31, 2017		Fair Value Measurements Using Fair Value Hierarchy
	July 1, 2018		Level 1		Level 2		Level 3		December 31, 2017		Level 1		Level 2		Level 3
Assets
Interest rate derivatives	$	27,505	$	—	$	27,505	$	—	$	8,194	$	—	$	8,194	$	—
Foreign currency derivatives	295		—		295		—		—		—		—		—
Commodity derivatives	1,801		—		1,801		—		2,615		—		2,615		—
Total assets at fair value	$	29,601	$	—	$	29,601	$	—	$	10,809	$	—	$	10,809	$	—

Liabilities
Foreign currency derivatives	$	—	$	—	$	—	$	—	$	750	$	—	$	750	$	—
Commodity derivatives	600		—		600		—		336		—		336		—
Total liabilities at fair value	$	600	$	—	$	600	$	—	$	1,086	$	—	$	1,086	$	—

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. Other than the Tradename discussed below, the Company had no fair value measurements based upon significant unobservable inputs (Level 3) as of July 1, 2018 or December 31, 2017.

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

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

6. Other Expense, net



	Three months ended						Six months ended
	July 1, 2018			June 25, 2017			July 1, 2018			June 25, 2017
Other expense, net consists of:
Amortization of intangibles/other assets	$	2,328		$	6,324		$	4,656		$	10,866
Foreign exchange losses/(gains)	369			(165		)	894			(398		)
Redemption premium on the early extinguishment of debt	4,267			—			4,267			—
Merger Agreement costs (Note 1)	10,836			—			10,836			—
Royalty income and other	(355		)	(871		)	(343		)	(950		)
Total other expense, net	$	17,445		$	5,288		$	20,310		$	9,518

Foreign exchange losses/(gains). These represent foreign exchange losses/(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.

Redemption premium on the early extinguishment of debt. On May 30, 2018, the Company redeemed all $350.0 million of its outstanding 4.875% Senior Notes at a redemption price of 101.2% of the aggregate principle amount resulting in a redemption premium paid of $4.3 million (the "Redemption Premium").

7. 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 fair 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						Six months ended
	July 1, 2018			June 25, 2017			July 1, 2018			June 25, 2017
Cost of products sold	$	806		$	367		$	1,412		$	882
Marketing and selling expenses	1,391			1,746			1,900			2,913
Administrative expenses	3,302			3,247			6,288			5,554
Research and development expenses	201			187			379			307
Pre-tax equity-based compensation expense	5,700			5,547			9,979			9,656
Income tax benefit	(1,195		)	(2,113		)	(2,046		)	(3,674		)
Net equity-based compensation expense	$	4,505		$	3,434		$	7,933		$	5,982

Amended and Restated 2013 Omnibus Incentive Plan

In connection with the IPO, the Company adopted an equity incentive plan (the “2013 Omnibus Incentive Plan”) providing for the issuance of up to 11,300,000 shares of common stock. On May 25, 2016, the Company’ shareholders approved the Company’s Amended and Restated 2013 Omnibus Incentive Plan (the “Amended and Restated Omnibus Incentive Plan”). Awards granted

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

under the Amended and Restated Omnibus Incentive Plan include non-qualified stock options, restricted shares and restricted stock units ("RSU's"), the majority of which vest in full three years from the date of grant. The Company also grants performance shares ("PS's") and performance share units ("PSU's") both of which vest based on achievement of total shareholder return performance goals. Awards of PS's and PSU's will be earned by comparing the Company's total shareholder return during a three-year period to the respective total shareholder returns of companies in the Company's performance peer group. Based upon the Company's ranking in the performance peer group, a recipient of PS's or PSU's may earn a total award ranging from 0% to 200% of the initial grant.

During the first quarter of 2018, as part of our ongoing equity compensation program:


•	We granted 439,110 nonqualified stock options with grant date fair values of $10.06 and exercise prices of $54.10 using the BlackScholes pricing method to value the awards.


•	We granted 141,628 PSU's with grant date fair values of $60.30 using the Monte Carlo simulation model to value the awards.


•	We granted 185,241 RSU's with grant date fair values of $55.29, which was the average closing price of our stock on the dates of grant.

During the second quarter of 2018, as part of our ongoing equity compensation program:


•	We granted 3,066 PSU's with weighted average grant date fair values of $68.06 using the Monte Carlo simulation model to value the awards.


•	We granted 20,478 RSU's with weighted average grant date fair values of $63.64, which was the average closing price of our stock on the dates of grant.

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:



	Three months ended		Six months ended
	July 1, 2018	June 25, 2017	July 1, 2018	June 25, 2017
Weighted-average common shares	118,773,942	118,114,090	118,635,078	117,868,921
Effect of dilutive securities:	1,174,379	1,492,739	1,245,448	1,600,267
Dilutive potential common shares	119,948,321	119,606,829	119,880,526	119,469,188

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 and six months ended July 1, 2018, conversion of securities totaling 760,575 and 503,634, respectively, into common share equivalents were excluded from this calculation as their effect would have been anti-dilutive. For the three and six months ended June 25, 2017, conversion of securities totaling 489,273, and 266,530, respectively, into common share equivalents were excluded from this calculation as their effect would have been anti-dilutive.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

8. 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 31, 2017	$	2,095		$	6,571		$	(38,916	)	$	(30,250	)
Other comprehensive (loss)/income before reclassification	(3,841		)	16,075			—			12,234
Amounts reclassified from accumulated other comprehensive loss	—			(967		)	358			(609		)
Net current period other comprehensive (loss)/income	(3,841		)	15,108			358			11,625
Adoption of ASU 2018-02	—			1,088			(6,417		)	(5,329		)
Balance, July 1, 2018	$	(1,746	)	$	22,767		$	(44,975	)	$	(23,954	)



	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 before reclassification	1,765			(2,871		)	—			(1,106		)
Amounts reclassified from accumulated other comprehensive loss	—			13,352			357			13,709
Net current period other comprehensive (loss)/income	1,765			10,481			357			12,603
Balance, June 25, 2017	$	(2,224	)	$	2,247		$	(38,989	)	$	(38,966	)

The following table presents amounts reclassified out of Accumulated Other Comprehensive Loss ("AOCL") and into Net earnings for the three and six months ended July 1, 2018 and June 25, 2017, respectively.



	Amounts Reclassified from AOCL
	Three months ended						Six months ended
Details about Accumulated Other Comprehensive Loss Components	July 1, 2018			June 25, 2017			July 1, 2018			June 25, 2017				Reclassified from AOCL to:
Gains and (losses) on financial instrument contracts
Interest rate contracts	$	1,166		$	122		$	1,311		$	(21,652	)		Interest expense
Foreign exchange contracts	61			156			(13		)	55				Cost of products sold
Total pre-tax	1,227			278			1,298			(21,597		)
Tax (expense) benefit	(314		)	(106		)	(331		)	8,245				Provision for income taxes
Net of tax	913			172			967			(13,352		)

Pension actuarial assumption adjustments
Amortization of actuarial loss	(217		)	(309		)	(476		)	(578		)	(a)	Cost of products sold
Tax benefit	54			119			118			221				Provision for income taxes
Net of tax	(163		)	(190		)	(358		)	(357		)
Net reclassifications into net earnings	$	750		$	(18	)	$	609		$	(13,709	)

(a) This is included in the computation of net periodic pension cost (see Note 13 for additional details).

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

9. 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:



	July 1, 2018			December 31, 2017
Customers	$	263,631		$	280,086
Allowances for cash discounts, bad debts and returns	(9,584		)	(10,036		)
Subtotal	254,047			270,050
Other receivables	10,311			11,572
Total	$	264,358		$	281,622

Inventories. Inventories are as follows:



	July 1, 2018		December 31, 2017
Raw materials	$	98,547	$	78,567
Work in progress (1)	39,684		65,800
Finished product	369,706		345,439
Total	$	507,937	$	489,806

(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.

Plant Assets. Plant assets are as follows:



	July 1, 2018			December 31, 2017
Land	$	15,648		$	15,648
Buildings	333,519			327,501
Machinery and equipment	897,169			898,728
Projects in progress	73,899			64,038
Subtotal	1,320,235			1,305,915
Accumulated depreciation	(566,121		)	(566,202		)
Total	$	754,114		$	739,713

Depreciation was $25.0 million and $49.6 million during the three and six months ended July 1, 2018, respectively. Depreciation was $47.5 million and $70.0 million during the three and six months ended June 25, 2017, respectively, which included accelerated depreciation charges as described in Note 11. As of July 1, 2018 and December 31, 2017, Plant Assets included assets under capital lease with a book value of $58.8 million and $44.6 million (net of accumulated depreciation of $20.8 million and $18.6 million), respectively.

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

Accrued Liabilities. Accrued liabilities are as follows:



	July 1, 2018		December 31, 2017
Employee compensation and benefits	$	51,963	$	39,699
Interest payable	17,537		19,254
Consumer coupons	3,493		2,400
Accrued restructuring charges (Note 11)	342		1,414
Accrued financial instrument contracts (Note 14)	543		988
Accrued broker commissions	7,070		6,994
Accrued income taxes	6,199		26,805
Other	32,798		24,577
Total	$	119,945	$	122,131

Other Long-Term Liabilities. Other long-term liabilities are as follows:



	July 1, 2018		December 31, 2017
Employee compensation and benefits	$	14,618	$	14,197
Long-term rent liability and deferred rent allowances	5,735		6,217
Liability for uncertain tax positions (a)	6,223		11,140
Accrued financial instrument contracts (Note 14)	57		98
Other	2,029		2,385
Total	$	28,662	$	34,037

(a) The decrease is primarily related to a change in our tax accounting methodology for capitalized inventory.

10. Goodwill, Tradenames and Other Assets

Goodwill

Goodwill by segment is as follows:



	Frozen			Grocery		Boulder		Specialty		Total
Balance, December 31, 2017	$	764,824		$	860,972	$	364,883	$	187,282	$	2,177,961
Foreign currency adjustment	(2,671		)	—		—		—		(2,671		)
Balance, July 1, 2018	$	762,153		$	860,972	$	364,883	$	187,282	$	2,175,290

The authoritative guidance for business combinations requires that all business combinations be accounted for at fair value under the acquisition method of accounting. The authoritative guidance for goodwill provides that goodwill will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate. The Company completed its annual testing in the third quarter of 2017, which indicated no impairment.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

Tradenames

Tradenames by segment are as follows:



	Frozen			Grocery		Boulder		Specialty		Total
Balance, December 31, 2017	$	738,344		$	1,253,622	$	442,808	$	28,600	$	2,463,374
Foreign currency adjustment	(202		)	—		—		—		(202		)
Balance, July 1, 2018	$	738,142		$	1,253,622	$	442,808	$	28,600	$	2,463,172

The authoritative guidance for indefinite-lived assets provides that indefinite-lived assets will not be amortized, but will be tested for impairment on an annual basis or more often when events indicate. Upon completion of the annual testing in the third quarter of 2017, the Company recorded tradename impairments of $24.8 million on Celeste, $6.5 million on Snyder of Berlin, $4.2 million on Nalley, $3.1 million on Bernstein and $0.5 million on Swanson. Celeste and Swanson are reported in the Frozen segment, Nalley and Bernstein are reported in the Grocery segment, and Snyder of Berlin is reported in the Specialty segment. These charges were the result of the Company's reassessment of the long-term sales projections for the brands during our annual planning cycle which occurs during the third quarter each year as well as a 50 basis point increase in the weighted average cost of capital assumed in the calculation. The total carrying value of these five tradenames as of July 1, 2018 is $25.4 million.

As a result of the Exit (as defined in Note 11) in the second quarter of 2017, the Company recorded a tradename impairment charge of $27.4 million on the related tradename, which resulted in a carrying value of $0. The charge is reported in the Frozen segment. See Note 11 for further details.

To estimate the fair value of our Tradenames we use the relief from royalty method, which utilizes forecasted discounted cash flows to estimate the fair value. The utilization of this method requires us to make significant assumptions including sales growth rates, implied royalty rates and discount rates. As of July 1, 2018, we identified an additional three tradenames which do not have a fair value that exceeded their carrying value by at least 15%. The total carrying value of these tradenames as of July 1, 2018 is $359.3 million.

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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



	July 1, 2018
	Weighted Avg Life	Gross Carrying Amount		Accumulated Amortization			Net
Amortizable intangibles
Recipes	10	$	51,487	$	(46,815	)	$	4,672
Customer relationships - Distributors	34	176,369		(63,229		)	113,140
Customer relationships - Food Service	10	11,400		(4,744		)	6,656
Total amortizable intangibles		$	239,256	$	(114,788	)	$	124,468
Financial instruments (see Note 14)		22,949		—			22,949
Other (1)		31,639		(5,085		)	26,554
Total other assets, net							$	173,971
	Amortizable intangibles by segment
	Frozen						$	38,036
	Grocery						45,511
	Boulder						31,774
	Specialty						9,147
							$	124,468



	December 31, 2017
	Weighted Avg Life	Gross Carrying Amount		Accumulated Amortization			Net
Amortizable intangibles
Recipes	10	$	51,514	$	(46,458	)	$	5,056
Customer relationships - Distributors	34	176,376		(59,681		)	116,695
Customer relationships - Food Service	10	11,400		(4,004		)	7,396
Customer relationships - Private Label	7	1,290		(1,290		)	—
Total amortizable intangibles		$	240,580	$	(111,433	)	$	129,147
Financial instruments (see Note 14)		8,160		—			8,160
Other (1)		32,607		(5,015		)	27,592
Total other assets, net							$	164,899
	Amortizable intangibles by segment
	Frozen						$	39,229
	Grocery						46,888
	Boulder						33,057
	Specialty						9,973
							$	129,147

(1) As of July 1, 2018 and December 31, 2017, 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.

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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 $2.3 million and $4.7 million for the three and six months ended July 1, 2018. Amortization of intangible assets was $6.3 million and $10.9 million for the three and six months ended June 25, 2017. Estimated amortization expense for each of the next five years and thereafter is as follows: remainder of 2018 - $4.7 million; 2019 - $8.6 million; 2020 - $7.9 million; 2021 - $6.6 million; 2022 - $6.4 million and thereafter - $90.2 million.

11. Restructuring Charges

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

On May 8, 2017, in connection with the Company's ongoing portfolio strategic assessment and margin roadmap, it exited certain low-margin and non-strategic Aunt Jemima retail and foodservice frozen breakfast products following the Company's voluntary recall discussed in Note 15. This decision resulted in restructuring charges primarily related to accelerated depreciation, asset impairment, charges to adjust inventory to net realizable value, workforce reductions and other charges. These actions and the associated charges detailed below are substantially complete.

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

The following table summarizes charges accrued as of July 1, 2018 related to the Exit. These amounts are recorded in our Consolidated Balance Sheet in Accrued Liabilities.



	Balance							Balance
Description	December 31, 2017		Expense		Payments			July 1, 2018
Accrued restructuring charges	$	1,126	$	—	$	(784	)	$	342

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

12. Debt and Interest Expense



	July 1, 2018			December 31, 2017
Short-term borrowings
- Notes payable	$	1,842		$	2,739
Total short-term borrowings	$	1,842		$	2,739
Long-term debt
- Tranche A Term Loans due 2023	$	780,000		$	—
- New Tranche B Term Loans due 2024	1,489,380			—
- Tranche B Term Loans due 2024	—			2,239,380
- 4.875% Senior Notes due 2021	—			350,000
- 5.875% Senior Notes due 2024	350,000			350,000
- Revolving Credit Facility	100,000			—
- 3.0% Note payable to Gilster Mary Lee Corporation	—			982
- Unamortized discount on long term debt and deferred financing costs	(14,066		)	(21,846		)
- Capital lease obligations	52,729			41,012
	2,758,043			2,959,528
Less: current portion of long-term obligations	54,126			33,934
Total long-term debt	$	2,703,917		$	2,925,594



Interest expense	Three months ended						Six months ended
	July 1, 2018			June 25, 2017			July 1, 2018			June 25, 2017
Interest expense	$	28,841		$	27,612		$	59,096		$	56,495
Amortization of debt acquisition costs	741			1,017			1,612			2,597
Non-cash recognition of deferred costs related to refinancing	1,768			—			12,681			28,494
Settlement of hedges related to refinancing	—			—			—			20,722
Interest rate swap (gains)/losses	(1,166		)	(122		)	(1,311		)	930
Total interest expense	$	30,184		$	28,507		$	72,078		$	109,238

Fourth Amended and Restated Credit Agreement

On March 15, 2018, Pinnacle Foods Finance LLC, (1) entered into the First Amendment to the Third Amended and Restated Credit Agreement, which provided for both a six year term loan facility in the amount of $1,239.4 million (the "New Tranche B Term Loans") and a five year term loan facility in the amount of $800.0 million (the "Tranche A Term Loans") (together, the "Term Loans") (2) replaced the existing revolving credit facility with a new five year $300.0 million revolving credit facility, and (3) amended and restated the existing credit agreement (the "Fourth Amended and Restated Credit Agreement") in its entirety to make certain other amendments and modifications (the "First Quarter 2018 Refinancing").

As a result of the First Quarter 2018 Refinancing, Pinnacle Foods Finance LLC used the proceeds from the New Tranche B Term Loans and Tranche A Term Loans and $202.5 million of cash on hand to repay all existing indebtedness, including all outstanding accrued interest and fees, under the then existing Third Amended and Restated Credit Agreement, consisting of $2,239.4 million of Tranche B Term Loans.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

In connection with the First Quarter 2018 Refinancing, Pinnacle Foods Finance LLC incurred $4.8 million of debt acquisition costs, which were recorded as a reduction of the carrying value of debt. Pinnacle Foods Finance LLC also incurred a non-cash charge of $10.9 million related to existing debt acquisition costs.

On May 30, 2018, Pinnacle Foods Finance LLC, entered into the First Amendment to the Fourth Amended and Restated Credit Agreement, to establish $250.0 million of incremental Term Loans (the "Incremental Term Loans") which have the same terms as the existing New Tranche B Term Loans. The proceeds together with cash on hand and $100.0 million borrowed under our revolving credit facility were used to redeem the entire $350.0 million in aggregate principal amount of Pinnacle Foods Finance LLC's 4.875% Senior Notes at a redemption price of 101.2% (the "Second Quarter 2018 Refinancing").

In connection with the Second Quarter 2018 Refinancing, Pinnacle Foods Finance LLC incurred $1.6 million of debt acquisition costs, which were recorded as a reduction of the carrying value of debt. Pinnacle Foods Finance LLC also incurred a non-cash charge of $1.8 million related to existing debt acquisition costs.

We refer to the First Quarter 2018 Refinancing and the Second Quarter 2018 Refinancing as the "2018 Refinancings".

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 "2017 Refinancing").

As a result of the 2017 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 2017 Refinancing, Pinnacle Foods Finance LLC incurred $12.9 million of debt acquisition costs, which were recorded as a reduction of the carrying value of debt. Pinnacle Foods Finance LLC also incurred a non-cash charge of $28.5 million related to existing debt acquisition costs.

The Company's borrowings under the March 15, 2018 Fourth Amended and Restated Credit Agreement 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. 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%, (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%, and (iv) 1.00% per annum. Eurocurrency rate loans bear interest at the adjusted eurocurrency rate plus the applicable eurocurrency rate margin. The eurocurrency rate is determined by the administrative agent to be the offered rate which appears on the page of the Reuters Screen which displays the London interbank offered rate administered by ICE Benchmark Administration Limited (the "LIBO Rate") for deposits.

With respect to the New Tranche B Term Loans, the base rate shall be no less than 1.0% and the base rate margin is 0.75%. Further, the eurocurrency rate shall be no less than 0.0% and the eurocurrency rate margin is 1.75%.

With respect to the Tranche A Term Loans, the base rate shall be no less than 1.0%. The base rate margin is 0.50% when the Company's Total Leverage Ratio is less than or equal to 3.75:1.00, 0.625% when the Total Leverage Ratio is less than or equal to 5.00:1.00 but greater than 3.75:1.00, and 0.75% when the Total Leverage Ratio is greater than 5.00:1.00. The Total Leverage Ratio is calculated by dividing consolidated total debt less the aggregate amount of all unrestricted cash and cash equivalents by Covenant Compliance EBITDA. The eurocurrency rate shall be no less than 0.0%. The eurocurrency rate margin is 1.50% when the Company's Total Leverage Ratio is less than or equal to 3.75:1.00, 1.625% when the Total Leverage Ratio is less than or equal to 5.00:1.00 but greater than 3.75:1.00 and 1.75% when the Total Leverage Ratio is greater than 5.00:1.00.

The obligations under the Fourth 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").

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

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 Fourth 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.

No scheduled repayments of the New Tranche B Term Loans shall be required prior to the maturity date.

The Tranche A Term Loans amortize in quarterly installments of 1.25% of their aggregate funded total principal amount. The scheduled principal payments of the Tranche A Term Loans outstanding as of July 1, 2018 are $10.0 million in 2018, $40.0 million in 2019, $40.0 million in 2020, $40.0 million in 2021, $40.0 million in 2022, and $610.0 million in 2023.

Pursuant to the terms of the Senior Secured Credit Facility, Pinnacle Foods Finance LLC is required to maintain a ratio of Net First Lien Secured Debt to Adjusted EBITDA of no greater than 5.75 to 1.00. Net First Lien Secured Debt is defined as aggregate consolidated secured indebtedness, less the aggregate amount of all unrestricted cash and cash equivalents. In addition, under the Senior Secured Credit Facility and the indenture governing the Senior Notes, Pinnacle Foods Finance LLC's ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to the Senior Secured Leverage Ratio (which is currently the same as the ratio of Net First Lien Secured Debt to Adjusted EBITDA described above), in the case of the Senior Secured Credit Facility, or to the ratio of Adjusted EBITDA to fixed charges for the most recently concluded four consecutive fiscal quarters, in the case of the Senior Notes. The Senior Secured Credit Facility also permits restricted payments up to an aggregate amount of (together with certain other amounts) the greater of $75 million and 2% of Pinnacle Foods Finance LLC's consolidated total assets, so long as no default has occurred and is continuing and its pro forma Senior Secured Leverage Ratio would be no greater than 4.25 to 1.00. As of July 1, 2018, 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

The Company's 5.875% 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 19 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 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:

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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



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

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

Debt acquisition costs

As part of the 2018 Refinancings, for the six months ended July 1, 2018, debt acquisition costs of $6.4 million were incurred as a reduction of the carrying value of debt and non-cash charges related to existing debt acquisition costs of $12.7 million were recognized in interest expense.

All debt acquisition costs are amortized into interest expense over the life of the related debt using the effective interest method. Amortization of these costs were $0.7 million and $1.5 million during the three and six months ended July 1, 2018, respectively. Amortization of these costs were $1.0 million and $2.5 million during the three and six months ended June 25, 2017, respectively.

The following summarizes debt acquisition cost activity during the six months ended July 1, 2018:



	Gross Carrying Amount			Accumulated Amortization			Net
Balance, December 31, 2017	$	29,689		$	(7,843	)	$	21,846
Additions	6,440			—			6,440
Amortization	—			(1,539		)	(1,539		)
Recognition of deferred costs	(17,638		)	4,957			(12,681		)
Balance, July 1, 2018	$	18,491		$	(4,425	)	$	14,066

Estimated fair value

The estimated fair value of the Company’s long-term debt, including the current portion, as of July 1, 2018, is as follows:



	July 1, 2018
Issue	Face Value		Fair Value
Tranche A Term Loans	780,000		780,000
New Tranche B Term Loans	1,489,380		1,489,380
5.875% Senior Notes	350,000		364,875
	$	2,619,380	$	2,634,255

The estimated fair value of the Company’s long-term debt, including the current portion, as of December 31, 2017, is as follows:

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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



	December 31, 2017
Issue	Face Value		Fair Value
Tranche B Term Loans	$	2,239,380	$	2,259,534
3.0% Note payable to Gilster Mary Lee Corporation	982		982
4.875% Senior Notes	350,000		353,938
5.875% Senior Notes	350,000		370,125
	$	2,940,362	$	2,984,579

The estimated fair 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.

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

13. 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 two 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):



	Three months ended						Six months ended
Pension Benefits	July 1, 2018			June 25, 2017			July 1, 2018			June 25, 2017
Interest cost	1,871			1,993			3,741			3,985
Expected return on assets	(2,931		)	(2,753		)	(5,862		)	(5,507		)
Amortization of actuarial loss	259			269			518			539
Net periodic benefit	$	(802	)	$	(491	)	$	(1,603	)	$	(983	)

As noted in Note 18, Recently Issued Accounting Pronouncements, we adopted guidance on the presentation of net periodic pension and postretirement benefit cost during the first quarter of fiscal year 2018. The amendments require that non-service related costs are presented outside of operating income in "Non-operating income."

Cash Flows

Contributions. The Company made contributions of $0.9 million to the Plan during the second quarter of 2018, and plans to make contributions of approximately $6.0 million for the remainder of fiscal 2018. The Company made contributions to the Plan totaling $0.3 million in fiscal 2017.

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 and six months ended July 1, 2018, contributions to the UFCW Plan were $0.2 million and $0.3 million, respectively. For the three and six months ended June 25, 2017 contributions to the UFCW Plan were $0.1 million and $0.3 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.

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

The UFCW Plan received a Pension Protection Act “green” zone status for the plan year ending June 30, 2017. The zone status is based on information the Company received from the 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.

14. 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 and six months ended July 1, 2018 and June 25, 2017, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

The 2017 Refinancing (Note 12) 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).

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

As of July 1, 2018, the Company had the following interest rate swaps that were designated as cash flow hedges of interest rate risk:



Product	Number of Instruments	Current Notional Amount		Trade Dates	Maturity Dates
Interest Rate Swaps	14	$	1,499,000	Feb 2017 - Jan 2018	Jan 2019 - Feb 2023

The 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. 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 $8.9 million will be reclassified as a decrease to Interest expense.

Cash Flow Hedges of Foreign Exchange Risk

The Company’s operations in Canada expose the Company to changes in the U.S. Dollar – Canadian Dollar ("USD-CAD") foreign exchange rate. From time to time, the Company’s Canadian subsidiary purchases inventory denominated in U.S. Dollars ("USD"), a currency other than its functional currency. The subsidiary sells that inventory in Canadian dollars ("CAD"). The subsidiary uses currency forward and collar agreements to manage its exposure to fluctuations in the USD-CAD exchange rate. Currency forward agreements involve fixing the USD-CAD exchange rate for delivery of a specified amount of foreign currency on a specified date. Currency collar agreements involve the sale of CAD currency in exchange for receiving USD if exchange rates rise above an agreed upon rate and purchase of USD currency in exchange for paying CAD currency if exchange rates fall below an agreed upon rate at specified dates.

As of July 1, 2018, 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 Purchased in Aggregate in USD	Trade Date	Maturity Dates
CAD $ Contracts	6	$14,017	Jul 2017	Aug 2018 - Dec 2018

The 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. 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 $0.3 million will be reclassified as a decrease 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.

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PINNACLE FOODS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

As of July 1, 2018, the Company had the following derivative instruments that were not designated in qualifying hedging relationships:



Commodity Contracts	Number of Instruments	Notional Purchased in Aggregate in USD	Trade Dates	Maturity Dates
Commodity Contracts	68	$12,388	Feb 2017 - May 2018	July 2018 - Dec 2019

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the Consolidated Balance Sheets as of July 1, 2018 and December 31, 2017.



	Tabular Disclosure of Fair Values of Derivative Instruments
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value as of July 1, 2018		Balance Sheet Location	Fair Value as of July 1, 2018
Derivatives designated as hedging instruments
Interest Rate Contracts	Other current assets	$	4,556	Accrued liabilities	$	—
	Other assets, net	22,949		Other long-term liabilities	—

Foreign Exchange Contracts	Other current assets	295		Accrued liabilities	—
	Other assets, net	—		Other long-term liabilities	—
Total derivatives designated as hedging instruments		$	27,800		$	—
Derivatives not designated as hedging instruments
Commodity Contracts	Other current assets	$	1,801	Accrued liabilities	$	543
	Other assets, net	—		Other long-term liabilities	57
Total derivatives not designated as hedging instruments		$	1,801		$	600

	Balance Sheet Location	Fair Value as of December 31, 2017		Balance Sheet Location	Fair Value as of December 31, 2017
Derivatives designated as hedging instruments
Interest Rate Contracts	Other current assets	$	34	Accrued liabilities	$	—
	Other assets, net	8,160		Other long-term liabilities	—
Foreign Exchange Contracts	Other current assets	—		Accrued liabilities	750
Total derivatives designated as hedging instruments		$	8,194		$	750
Derivatives not designated as hedging instruments
Commodity Contracts	Other current assets	$	2,615	Accrued liabilities	$	238
	Other assets, net	—		Other long-term liabilities	98
Total derivatives not designated as hedging instruments		$	2,615		$	336

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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 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 July 1, 2018 and December 31, 2017 would be adjusted as detailed in the following table:



	July 1, 2018						December 31, 2017
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	$	29,601	(283	)	$	29,318	$	10,809	(1,086	)	$	9,723

Total liability derivatives	$	600	(283	)	$	317	$	1,086	(1,086	)	$	—

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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 and six months ended July 1, 2018 and June 25, 2017.

Tabular Disclosure of the Effect of Derivative Instruments



Gain/(Loss)
Derivatives in Cash Flow Hedging Relationships	Recognized in AOCL on Derivative			Portion reclassified from AOCL to:	Reclassified from AOCL into Earnings				Consolidated Statements of Operations Hedged Items impact	Income/(Expense) related to Hedged Items
Interest Rate Contracts	$	7,708		Interest expense	$	1,166			Interest expense	$	(12,610	)
Foreign Exchange Contracts	345			Cost of products sold	61				Cost of products sold	(7,001		)
Three months ended July 1, 2018	$	8,053			$	1,227

Interest Rate Contracts	$	20,623		Interest expense	$	1,311			Interest expense	$	(24,208	)
Foreign Exchange Contracts	1,035			Cost of products sold	(13		)		Cost of products sold	(13,998		)
Six months ended July 1, 2018	$	21,658			$	1,298

Interest Rate Contracts	$	(5,108	)	Interest expense	$	122			Interest expense	$	(11,236	)
Foreign Exchange Contracts	(39		)	Cost of products sold	156				Cost of products sold	(6,846		)
Three months ended June 25, 2017	$	(5,147	)		$	278

Interest Rate Contracts	$	(4,869	)	Interest expense	$	(21,652	)	(a)	Interest expense	$	(22,087	)
Foreign Exchange Contracts	217			Cost of products sold	55				Cost of products sold	(13,564		)
Six months ended June 25, 2017	$	(4,652	)		$	(21,597	)

Derivatives Not Designated as Hedging Instruments				Recognized in Earnings in:	Recognized in Earnings
Commodity Contracts				Cost of products sold	$	598
Three months ended July 1, 2018					$	598

Commodity Contracts				Cost of products sold	$	980
Six months ended July 1, 2018					$	980

Commodity Contracts				Cost of products sold	$	(2,034	)
Interest Rate Contracts				Interest expense	—
Three months ended June 25, 2017					$	(2,034	)

Commodity Contracts				Cost of products sold	$	(4,003	)
Interest Rate Contracts				Interest expense	20,723
Six months ended June 25, 2017					$	16,720

(a) Includes $20.7 million of accelerated reclassifications out of AOCL, related to the 2017 Refinancing.

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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 July 1, 2018, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, was $0.3 million. As of July 1, 2018, the Company has not posted any collateral related to these agreements. If the Company has breached any of these provisions at July 1, 2018, it could have been required to settle its obligations under the agreements at their termination value of $0.3 million.

15. 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.

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

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

16. Segments

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

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

The Grocery segment is comprised of the retail businesses of the Company’s grocery brands, including cake/brownie mixes and frostings (Duncan Hines), shelf-stable pickles (Vlasic), 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.

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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					Six months ended
SEGMENT INFORMATION	July 1, 2018		June 25, 2017			July 1, 2018		June 25, 2017
Net sales
Frozen	$	308,504	$	295,893		$	653,375	$	616,835
Grocery	256,620		276,057			517,627		535,407
Boulder	98,898		94,654			196,654		191,946
Specialty	77,739		78,004			152,937		166,494
Total	$	741,761	$	744,608		$	1,520,593	$	1,510,682
Earnings before interest and taxes
Frozen	$	49,740	$	(12,260	)	$	103,451	$	38,662
Grocery	52,131		61,870			101,879		113,677

PINNACLE FOODS INC. 10-Q