DISCONTINUED OPERATIONS

Sale of Diamond of California

On November 28, 2016, we entered into a definitive agreement to sell our culinary nuts business (comprised primarily of the Diamond of California^® brand and the Stockton, California facility; collectively "Diamond of California"). The sale of Diamond of California represented a strategic shift in our business that will have a significant impact on our operations and financial results, and aligns with our strategy to focus more resources on the growth opportunities for our snack food brands. On December 31, 2016, we completed the sale for estimated net proceeds of $128.6 million, consisting of $118.6 million of cash and $10.0 million in a promissory note. As of December 31, 2016, we had a receivable due from the purchaser of $118.6 million recorded in receivable from the sale of Diamond of California on our Condensed Consolidated Balance Sheet. On January 3, 2017, we received $121.7 million cash proceeds from the sale of Diamond of California. The difference represents adjustments that were made to preliminary working capital and estimated walnut pricing liability. The purchase price is still subject to normal working capital adjustments as well as a post-closing adjustment to working capital based on the final California Department of Food and Agriculture Walnut/Raisin/Prune Report State Summary - 2016 Crop Year, which is expected to be completed in the fourth quarter of 2017. During the second quarter of 2017, we revised the estimated walnut pricing liability to $3.1 million, which resulted in $0.5 million of additional loss on the sale of Diamond of California within discontinued operations during the quarter. This estimate may change throughout 2017 until the final walnut price is determined in the fourth quarter.

The promissory note is due on June 30, 2025. Interest on the principal balance of this promissory note is payable annually and accrues at a rate per annum equal to the 30-day LIBOR rate, plus 3.00%, provided that in no event shall the applicable rate exceed 6.00% per annum. The note is recorded within other noncurrent assets on our Condensed Consolidated Balance Sheets.

As a result of the sale of Diamond of California, revenues and expenses that no longer continued after the sale of Diamond of California, and where we had no substantial continuing involvement, were reclassified to discontinued operations in the Condensed Consolidated Statements of Income/(Loss).

For the second quarters and first six months of 2017 and 2016, income statement amounts associated with discontinued operations were as follows:



	Quarter Ended						Six Months Ended
(in thousands)	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Net revenue	$	—		$	48,208		$	—		$	63,104
Cost of sales	—			41,481			—			57,313
Gross profit	—			6,727			—			5,791
Selling, general and administrative expenses	—			7,397			—			10,031
Transaction and integration related expenses	—			689			—			1,017
Loss on sale of Diamond of California	540			—			540			—
Loss from discontinued operations before income taxes	(540		)	(1,359		)	(540		)	(5,257		)
Income tax benefit	(199		)	(576		)	(199		)	(1,928		)
Loss from discontinued operations, net of income tax	$	(341	)	$	(783	)	$	(341	)	$	(3,329	)

The pretax loss from discontinued operations for the second quarter and first six months of 2017 was primarily the result of adjusting the estimated walnut pricing liability in the second quarter of 2017. This liability is subject to further adjustment and is expected to be settled in the fourth quarter of 2017. This loss generated an income tax benefit of $0.2 million, with an effective tax rate of 36.9%, during both the second quarter and first six months of 2017.

The discontinued operations pretax loss activity for the second quarter of 2016 generated an income tax benefit of $0.6 million, with an effective tax rate of 42.4%. The discontinued operations pretax loss activity for the first six months of 2016 generated an income tax benefit of $1.9 million, with an effective tax rate of 36.7%.

The following table provides depreciation, amortization, capital expenditures, and significant operating noncash items of discontinued operations for the first six months of 2017 and 2016.



	Six Months Ended
(in thousands)	July 1, 2017		July 2, 2016
Cash flows from discontinued operating activities:
Depreciation and amortization	$	—	$	1,987
Stock-based compensation expense	—		293
Loss on sale of Diamond of California	540		—
Payable to growers ⁽¹⁾	—		(29,385		)

Cash flows from discontinued investing activities:
Purchases of fixed assets	$	—	$	33

⁽¹⁾ The operating cash outflow generated by the decrease in payable to growers from $38.3 million acquired on February 29, 2016 to the balance of $8.9 million on July 2, 2016.

In connection with the sale of Diamond of California, we entered into a Supply Agreement ("Walnut Supply Agreement") to procure walnuts from the purchaser for an initial term of five years subsequent to the sale transaction, which will be used in the manufacture of Emerald^® branded products. Under the Walnut Supply Agreement, the purchaser has the right to match third party offers for sale of such walnuts to us.

Additionally, we entered into a Transition Services Agreement ("Stockton TSA") and a Facility Use Agreement ("Stockton FUA"), both effective immediately subsequent to the sale transaction, to facilitate the orderly transfer of Emerald^® and Pop Secret^® business operations to our Company-owned facilities. The Stockton TSA stipulates certain finance, accounting, sales, marketing, human resources, information technology, supply chain, manufacturing and other general services to be provided between us and the purchaser, during an initial term of 120 days, with extension provisions if necessitated. The Stockton FUA had an initial term of six months, with extension provisions if necessitated, and provides us with the right to access Diamond of California's Stockton, California manufacturing facility, for the purpose of manufacturing certain Emerald^® branded products. Permitted uses under the Stockton FUA include use of certain equipment and storage of inventories related to the Emerald^® production process. Although use of the Stockton TSA and the Stockton FUA has continued through the end of the second quarter of 2017, the services are completed at this time. We have also entered into a contract manufacturing agreement with the purchaser to manufacture certain products for us through September 2017.