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 has had 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. During the third quarter of 2017, we finalized the calculation of working capital in accordance with the sale agreement which had an immaterial impact to discontinued operations. Also during the third quarter, we adjusted our walnut price liability to reflect the final prices contained within the California Department of Food and Agriculture Walnut/Raisin/Prune Report State Summary - 2016 Crop Year. In addition, in the third quarter of 2017, we identified and recorded a pretax out-of-period correction of $2.6 million ($1.7 million after tax) to reduce the walnut price liability which related to an error recorded in the fourth quarter of 2016. We concluded that the correction of the error was not material to these or our previously issued financial statements.

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 (Loss)/Income.

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



	Quarter Ended					Nine Months Ended
(in thousands)	September 30, 2017			October 1, 2016		September 30, 2017			October 1, 2016
Net revenue	$	—		$	44,898	$	—		$	108,002
Cost of sales	—			30,922		—			88,235
Gross profit	—			13,976		—			19,767
Selling, general and administrative expenses	—			8,127		—			18,158
Transaction and integration related expenses	—			387		—			1,404
Gain on sale of Diamond of California	(2,335		)	—		(1,795		)	—
Income from discontinued operations before income taxes	2,335			5,462		1,795			205
Income tax expense/(benefit)	862			1,807		663			(121		)
Income from discontinued operations, net of income taxes	$	1,473		$	3,655	$	1,132		$	326

The pretax income from discontinued operations for the third quarter and first nine months of 2017 was primarily the result of the pretax $2.6 million out-of-period adjustment for the estimated walnut pricing liability during the period. This was offset partially by the adjustments made to reflect the liability at the finalized walnut pricing. This gain generated income tax expense with an effective tax rate for the third quarter and first nine months of 2017 of 36.9%.

The discontinued operations pretax income activity for the third quarter of 2016 generated income tax expense of $1.8 million, with an effective tax rate of 33.1%. The discontinued operations pretax income activity for the first nine months of 2016 generated income tax benefit of $0.1 million, for an effective tax rate of (59.0)%. The tax benefit was due to a Section 199 deduction generated on forecasted incremental income for the full year.

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



	Nine Months Ended
(in thousands)	September 30, 2017			October 1, 2016
Cash flows from discontinued operating activities:
Depreciation and amortization	$	—		$	3,280
Stock-based compensation expense	—			513
Gain on sale of Diamond of California	(1,795		)	—
Payable to growers ⁽¹⁾	—			1,156

Cash flows from discontinued investing activities:
Purchases of fixed assets	$	—		$	182

⁽¹⁾ The operating cash inflow generated by the increase in payable to growers from $38.3 million acquired on February 29, 2016 to the balance of $39.5 million on October 1, 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 stipulated 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 provided 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 included use of certain equipment and storage of inventories related to the Emerald^® production process. Services under the Stockton TSA and the Stockton FUA are completed at this time. We have also entered into a contract manufacturing agreement with the purchaser to manufacture certain products for us. We expect this arrangement to continue through the end of the year.