Quarterly Report (10-q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________________

FORM 10-Q

_____________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, 2014



¨	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: 000-51439

_____________________________

DIAMOND FOODS, INC.

(Exact name of registrant as specified in its charter)

_____________________________



Delaware		20-2556965
(State of Incorporation)		(IRS Employer Identification No.)

600 Montgomery Street, 13th Floor San Francisco, California		94111-2702
(Address of Principal Executive Offices)		(Zip Code)

415-445-7444

(Telephone No.)

_____________________________

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 x 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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

Number of shares of common stock outstanding as of November 30, 2014: 31,416,024

Table of Contents

TABLE OF CONTENTS



	Page
Cautionary Statement Regarding Forward-Looking Statements	3

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	29

Part II. OTHER INFORMATION

Item 1. Legal Proceedings	30
Item 1A. Risk Factors	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3. Defaults Upon Senior Securities	41
Item 4. Mine Safety Disclosures	41
Item 5. Other Information	41
Item 6. Exhibits	42
SIGNATURES

Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements, including statements about our future operating performance and results, business strategy, commodity prices, liquidity position and sufficiency, brand portfolio and performance, availability of raw materials, our position in the walnut industry, the effectiveness of internal controls and remediating material weaknesses. These forward-looking statements are based on our assumptions, expectations and projections about future events only as of the date of this report. Many of our forward-looking statements include discussions of trends and anticipated developments under the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the periodic reports that we file with the U.S. Securities and Exchange Commission (the "SEC"). We use the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “may” and other similar expressions to identify forward-looking statements that discuss our future expectations, contain projections of our results of operations or financial condition or state other “forward-looking” information. You also should carefully consider other cautionary statements elsewhere in this report and in other documents we file from time to time with the SEC. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report. Actual results may differ materially from what we currently expect because of many risks and uncertainties such as: availability and cost of walnuts and other raw materials; ongoing litigation between the SEC and our former Chief Financial Officer; inability to increase prices for our products if commodity prices rise; unexpected delays or increased costs in implementing our business strategies; changes in consumer preferences for snack and nut products; risks relating to our indebtedness, including the cost of our debt and its effect on our ability to respond to changes in our business, markets and industry; the dilutive impact of equity issuances; risks relating to litigation and regulatory factors including changes in food safety, advertising and labeling laws and regulations; uncertainties relating to our relations with growers; increasing competition and possible loss of key customers; and general economic and capital markets conditions.

As used in this Quarterly Report, the terms “Diamond Foods,” “Diamond,” “Company,” “registrant,” “we,” “us,” and “our” mean Diamond Foods, Inc. and its direct and indirect subsidiaries unless the context indicates otherwise.

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

DIAMOND FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share information)

(Unaudited)



	October 31, 2014			July 31, 2014			October 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	11,068		$	5,318		$	10,157
Trade receivables, net	119,326			95,505			132,212
Inventories, net	259,171			124,273			208,023
Deferred income taxes	2,962			4,154			—
Prepaid income taxes	—			5,196			14
Prepaid expenses and other current assets	10,796			9,425			11,772
Total current assets	403,323			243,871			362,178
Property, plant and equipment, net	132,997			131,891			128,490
Goodwill	405,113			410,720			405,809
Other intangible assets, net	383,874			392,358			392,181
Other long-term assets	13,104			13,994			18,560
Total assets	$	1,338,411		$	1,192,834		$	1,307,218
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt, net	$	12,116		$	10,088		$	5,888
Warrant liability	—			—			75,123
Accounts payable and accrued liabilities	132,461			117,677			261,492
Payable to growers	142,522			5,784			109,060
Total current liabilities	287,099			133,549			451,563
Long-term obligations, net	636,289			637,327			587,265
Deferred income taxes	112,871			115,902			106,005
Other liabilities	21,563			22,256			22,374
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares; no shares issued or outstanding	—			—			—
Common stock, $0.001 par value; Authorized: 100,000,000 shares; 31,854,719, 31,824,701 and 22,875,396 shares issued and 31,382,026, 31,380,758 and 22,475,274 shares outstanding at October 31, 2014, July 31, 2014, and October 31, 2013, respectively	31			31			23
Treasury stock, at cost: 472,693, 443,943 and 400,122 shares held at October 31, 2014, July 31, 2014, and October 31, 2013, respectively	(13,226		)	(12,418		)	(11,221		)
Additional paid-in capital	596,712			594,608			336,436
Accumulated other comprehensive income	11,431			23,633			14,282
Retained deficit	(314,359		)	(322,054		)	(199,509		)
Total stockholders’ equity	280,589			283,800			140,011
Total liabilities and stockholders’ equity	$	1,338,411		$	1,192,834		$	1,307,218

See notes to condensed consolidated financial statements.

Table of Contents

DIAMOND FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share information)

(Unaudited)



	Three Months Ended October 31,
	2014		2013
Net sales	$	246,621	$	234,668
Cost of sales	187,231		176,735
Gross profit	59,390		57,933
Operating expenses:
Selling, general and administrative	28,582		56,556
Advertising	11,816		10,658
Loss on warrant liability	—		16,976
Total operating expenses	40,398		84,190
Income (loss) from operations	18,992		(26,257		)
Interest expense, net	10,236		14,848
Income (loss) before income taxes	8,756		(41,105		)
Income taxes	1,062		1,048
Net income (loss)	$	7,694	$	(42,153	)
Income (loss) per share:
Basic	$	0.25	$	(1.92	)
Diluted	$	0.24	$	(1.92	)
Shares used to compute income (loss) per share:
Basic	31,042		21,954
Diluted	31,468		21,954

See notes to condensed consolidated financial statements.

Table of Contents

DIAMOND FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)



	Three Months Ended October 31,
	2014			2013
Net income (loss)	$	7,694		$	(42,153	)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax¹	(12,196		)	10,366
Change in pension liabilities, net of tax²
Prior service cost arising during period	—			—
Net gain/(loss) arising during period	—			—
Less: amortization of prior gain/(loss) included in net periodic pension cost	(6		)	(91		)
Less: amortization of prior service cost included in net periodic pension cost	—			—
Gains and losses on derivatives, net of tax
Realized gains or loss arising during the period	—			—
Less: reclassification adjustments for gains	—			—
Other comprehensive income (loss):	(12,202		)	10,275
Comprehensive income (loss)	$	(4,508	)	$	(31,878	)


¹	Net of tax benefit of $0.7 million and tax expense of nil for the three months ended October 31, 2014, and October 31, 2013, respectively.


²	Net of tax expense and benefit of nil for the three months ended October 31, 2014 and October 31, 2013, respectively.

See notes to condensed consolidated financial statements.

Table of Contents

DIAMOND FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Three Months Ended October 31,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	7,694		$	(42,153	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	7,277			8,335
Deferred income taxes	669			692
Stock-based compensation	1,981			1,477
Loss on warrant liability	—			16,976
Loss on securities settlement	—			23,496
Gain on shareholder derivative case	—			(1,600		)
Original issue discount amortization, Term Loan Facility	403			—
Debt issuance cost amortization	1,049			833
Payment-in-kind interest on debt	—			6,996
Other, net	268			849
Changes in assets and liabilities:
Trade receivables, net	(25,675		)	(28,287		)
Inventories, net	(135,276		)	(92,303		)
Prepaid expenses and other current assets and income taxes	3,787			(2,543		)
Other assets	18			208
Accounts payable and accrued liabilities	15,648			17,102
Payable to growers	136,738			102,964
Other liabilities	3			(205		)
Net cash provided by operating activities	14,584			12,837
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(7,633		)	(1,274		)
Net cash (used in) investing activities	(7,633		)	(1,274		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of revolving line of credit under the ABL Facility, net	2,000			—
Repayments of revolving line of credit under the Secured Credit Facility, net	—			(4,000		)
Payments of long-term debt and notes payable	(2,259		)	(1,983		)
Purchase of treasury stock	(807		)	(202		)
Other, net	121			649
Net cash used in financing activities	(945		)	(5,536		)
Effect of exchange rate changes on cash	(256		)	(1,755		)
Net increase in cash and cash equivalents	5,750			4,272
Cash and cash equivalents:
Beginning of period	5,318			5,885
End of period	$	11,068		$	10,157
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest	$	14,054		$	6,125
Income taxes	(5,034		)	9
Non-cash investing activity:
Accrued capital expenditures	2,124			436
Capital lease	142			—

See notes to condensed consolidated financial statements.

Table of Contents

DIAMOND FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended October 31, 2014 and 2013

(In thousands, except share and per share information unless otherwise noted)

(Unaudited)

(1) Organization and Basis of Presentation

Diamond Foods, Inc. (the “Company” or “Diamond”) is an innovative packaged food company focused on building and energizing brands. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, Diamond complemented its strong heritage in the culinary nut market under the Diamond of California® brand by launching a line of snack nuts under the Emerald® brand. In 2008, Diamond acquired the Pop Secret® brand of microwave popcorn products, which provided the Company with increased scale in the snack market, significant supply chain economies of scale and cross promotional opportunities with its existing brands. In 2010, Diamond acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and the United Kingdom, which added the complementary premium Kettle Brand® to Diamond’s existing portfolio of leading brands in the snack industry. Diamond sells its products to global, national, regional and independent grocery, drug, and convenience store chains, as well as to mass merchandisers, club stores, other retail channels and non-retail channels. Sales to the Company’s largest customer accounted for approximately 16.5% and 13.5% of total net sales for the three months ended October 31, 2014 and 2013, respectively. No other customer accounted for 10% or more of the Company’s total net sales for the three months ended October 31, 2014 and October 31, 2013.

The accompanying unaudited condensed consolidated financial statements of Diamond have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required for annual financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements at and for the fiscal year ended July 31, 2014, and in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s Condensed Consolidated Financial Statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2014 Annual Report on Form 10-K. Operating results for the three months ended October 31, 2014, are not necessarily indicative of the results that may be expected for any future periods.

Certain prior period amounts have been reclassified to conform to the current period presentation. There was no impact to net income or stockholders' equity for each prior period reclassification made.

Diamond reports its operating results on the basis of a fiscal year that starts August 1 and ends July 31. Diamond refers to the fiscal years ended July 31, 2015, 2014, 2013, 2012, as “fiscal 2015,” “fiscal 2014,” “fiscal 2013” and “fiscal 2012”, respectively.

(2) Recent Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The new guidance provides specific financial statement presentation requirements of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit in those circumstances should be presented as a reduction to the deferred tax asset. This guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2013. The Company has adopted this guidance and it did not have a material impact on its consolidated financial statements.

In January 2014, the FASB issued ASU 2014-8, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an entity.” The new guidance provides new criteria for reporting discontinued operations and specifically indicates a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on the Company’s operations and financial results. The new guidance also requires expanded disclosures for discontinued operations. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2014. Early adoption is permitted. The Company does not expect to

Table of Contents

early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers (Topic 606).” The new guidance provides new criteria for recognizing revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance requires expanded disclosures to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. Quantitative and qualitative information will be provided about the significant judgments and changes in those judgments that management made to determine the revenue that is recorded. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company is currently assessing the provisions of the guidance and has not determined the impact of the adoption of this guidance on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718).” The new guidance provides new criteria for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40).” The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

(3) Financial Instruments

In May 2012, Diamond closed an agreement to recapitalize its balance sheet with an investment by Oaktree Capital Management, L.P. (“Oaktree”). The Oaktree investment initially consisted of $225 million of newly-issued senior notes (“Oaktree Senior Notes”) and a warrant to purchase 4,420,859 shares of Diamond common stock (the “Warrant Shares”). The warrant was issued to Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (“Securities Purchase Agreement”), under which Diamond issued the Oaktree Senior Notes. The warrant was accounted for as a derivative liability and was remeasured at fair value each reporting period with gains and losses recorded in net income. On February 9, 2014, Diamond entered into a warrant exercise agreement with Oaktree (the “Warrant Exercise Agreement”), which closed on February 19, 2014, pursuant to which Oaktree agreed to exercise the warrant to purchase the Warrant Shares, by paying, in cash, the exercise price of approximately $44.2 million, less a cash exercise and contractual modification inducement fee of $15 million (the “Warrant Exercise Transaction”).

In January 2014, the Company purchased 164 corn call option commodity derivatives. This purchase was in accordance with Company policy to mitigate the market price risk associated with the anticipated raw material purchase requirements, specifically to mitigate the market price risk of future corn purchases expected to be made by the Company. This agreement had a total notional amount of approximately $0.3 million. The Company accounts for commodity derivatives as non-hedging derivatives. During the first quarter of fiscal 2015, the Company sold 28 corn call option commodity derivatives resulting in an immaterial loss. As of October 31, 2014, the Company had 72 corn call option commodity derivatives.

Table of Contents

The fair values of the Company’s derivative instruments as of October 31, 2014, July 31, 2014 and October 31, 2013, were as follows:



Liability Derivatives	Balance Sheet Location	Fair Value
		10/31/2014		7/31/2014		10/31/2013
Derivatives not designated as hedging instruments:
Commodity contracts	Prepaid and other current assets	$	1	$	11	$	—
Warrants	Warrant liability	—		—		(75,123		)
Total		$	1	$	11	$	(75,123	)

The effect of the Company’s derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended October 31, 2014 and 2013 is summarized below:



Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		Three Months Ended October 31, 2014			Three Months Ended October 31, 2013
Commodity contracts	Cost of goods sold	$	(10	)	$	(29	)
Warrant	Loss on warrant liability	—			(16,976		)
Total		$	(10	)	$	(17,005	)

Accounting Standards Codification (“ASC”) 820 requires that assets and liabilities carried at fair value be measured using the following three levels of inputs:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of October 31, 2014, there were no cash equivalents. The Company values the commodity derivatives using Level 2 inputs. The value of the commodity contracts is calculated utilizing the number of contracts, as measured in bushels, multiplied by the price of corn per bushel obtained from the Chicago Mercantile Exchange.

In August 2013, the Company obtained preliminary approval to settle the action In re Diamond Foods Inc., Securities Litigation (“Securities Settlement”). Pursuant to the terms of the Securities Settlement, the Company agreed to pay a total of $11.0 million in cash and issue 4.45 million shares of common stock to resolve all claims asserted on behalf of investors who purchased the Company’s stock between October 5, 2010 and February 2012. The stock portion of the Securities Settlement was recorded within Accounts payable and accrued liabilities, and was accounted for as a liability and remeasured at fair value each reporting period with gains and losses recorded in net income until the settlement became effective. The stock portion of the Securities Settlement was measured at fair value on a recurring basis. The Company had elected to use the market approach to value the stock portion of the Securities Settlement. The valuation was considered Level 1 due to the use of quoted prices in an active market for identical assets at the measurement date. The court issued an order granting final approval of the Securities Settlement on January 21, 2014, and the appeal period expired on February 20, 2014, at which time the Securities Settlement became effective. The value of the 4.45 million shares of common stock was $123.3 million as of February 20, 2014, nil as of October 31, 2014, nil as of July 31, 2014, and $108.6 million as of October 31, 2013 and was recorded in Accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets. In the first quarter of fiscal 2014, the Company recorded a $23.5 million loss as a result of the change in the fair value of the stock settlement. In the third quarter of fiscal 2014 the Company derecognized the liability and insurance receivable associated with the Securities Settlement, and on February 21, 2014, issued the 4.45 million shares to a settlement fund.

The Company performed a final re-measurement of its warrant liability on February 18, 2014 as a result of the Warrant Exercise Transaction. The warrant liability measured at fair value on a recurring basis was $84.1 million as of February 18, 2014, nil as of October 31, 2014, nil as of July 31, 2014 and $75.1 million as of October 31, 2013. The Company had elected to

Table of Contents

use the income approach to value the warrant liability and used the Black-Scholes option valuation model. This valuation was considered Level 3 due to the use of certain unobservable inputs. Inputs into the Black-Scholes model include: remaining term, stock price, strike price, maturity date, risk-free rate, and expected volatility. The significant Level 3 unobservable inputs previously used in the valuation were expected volatility and the probability to exchange $75 million of the senior notes for convertible preferred stock upon achievement of certain profitability targets (the “Special Redemption”). The expected volatility used to measure the warrant liability at fair value was 45.0% as of February 18, 2014 and 47.5% as of October 31, 2013. As provided by in the Oaktree agreements, based on the Company’s operating results for the six months ended January 31, 2013, the Special Redemption did not occur. As such, the probability of Special Redemption was not applicable for the warrant liability valuation performed as of February 18, 2014 and October 31, 2013.

The warrant liability was settled in fiscal 2014. For the three months ended October 31, 2013, the Company recorded a $17.0 million loss in earnings associated with the change in the warrant liability measured at fair value based on Level 3 inputs.

Assets and Liabilities Disclosed at Fair Value

The fair value of certain financial instruments, including cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate the amounts recorded in the balance sheet because of the relatively short term nature of these financial instruments. The fair value of notes payable and long-term obligations at the end of each fiscal period approximates the amounts recorded in the balance sheet based on information available to the Company with respect to current interest rates and terms for similar financial instruments, except for the 7.000% Senior Notes (the "Notes") issued during the third quarter of fiscal 2014. The Company measured the $230.0 million Notes based on level 3 inputs, and determined the fair value was $231.6 million as of October 31, 2014. The fair value was estimated using a discounted cash flow methodology with unobservable inputs including the market yield and redemption rate. The discounted cash flow used a risk adjusted yield to present value the contractual cash flows. Refer to Note 9 to the Notes to the Condensed Consolidated Financial Statements for further discussion on the Notes.As a result of the fiscal 2014 debt refinancing, the total indebtedness outstanding under the Oaktree Senior Notes was paid in full in the third quarter of fiscal 2014. See Note 9 to the Notes to the Condensed Consolidated Financial Statements for further information regarding the refinancing transaction. The following table presents the carrying value and fair value of the Senior Notes and the Redeemable Note as of October 31, 2014, July 31, 2014, and October 31, 2013:

October 31, 2014

July 31, 2014

October 31, 2013

Carrying Value

Fair Value

Carrying Value

Fair Value

Carrying Value

Fair Value

Senior Notes

N/A

126,650

160,983

Redeemable Note

N/A

91,946

80,492

The fair value of the Oaktree Senior Notes as of October 31, 2013 were estimated using a discounted cash flow approach. The discounted cash flow approach used a risk adjusted yield to present value the contractual cash flows of the notes. The fair value of these notes were classified as Level 3 within the fair value measurement hierarchy.

(4) Stock-Based Compensation

The Company uses a broad-based equity incentive plan and accounts for stock-based compensation in accordance with ASC 718, “Compensation — Stock Compensation.” The fair value of all stock options granted is recognized as an expense in the Company’s Statements of Operations, typically over the related vesting period of the options. The guidance requires use of fair value computed at the date of grant to measure share-based awards. The fair value of restricted stock awards is recognized as stock-based compensation expense over the vesting period. Stock options may be granted to officers, other employees, consultants and directors. The Company recorded total stock-based compensation expense of $2.0 million and $1.5 million for the three months ended October 31, 2014 and October 31, 2013, respectively.

Stock Option Awards: The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities were estimated based on the Company’s implied historical volatility. The expected term of options granted was based on the simplified method due to the limited amount of historical Company information. Forfeiture rates were based on assumptions and historical data to the extent it is available. The risk-free rates were based on U.S. Treasury yields in effect at the time of the grant. For purposes of this valuation model, dividends are based on the historical rate. For the three months ended October 31, 2014, there were no stock options awards granted.

Table of Contents

For the three months ended October 31, 2013, assumptions used in the Black-Scholes model are presented below:



	Three Months Ended October 31,
	2014	2013
Average expected life, in years	N/A	6
Expected volatility	N/A	55.84%
Risk-free interest rate	N/A	1.7%
Dividend rate	N/A	0.00%

The following table summarizes option activity during the three months ended October 31, 2014:



	Number of Shares (in thousands)		Weighted average exercise price per share		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Outstanding at July 31, 2014	1,496		$	24.79
Granted	—		—
Exercised	(9	)	13.34
Cancelled/Forfeited	(34	)	29.96
Outstanding at October 31, 2014	1,453		24.75		6.8	$	14,511
Exercisable at October 31, 2014	918		26.85		5.8	$	8,574

There were no stock options granted during the three months ended October 31, 2014, and 179,601 stock options were granted during the three months ended October 31, 2013. The weighted average grant date fair value per share of stock options granted was $11.14 during the three months ended October 31, 2013. The fair value per share of stock options vested was $11.21 during the three months ended October 31, 2014 and $15.65 for the three months ended October 31, 2013. There were 9,194 stock options exercised during the three months ended October 31, 2014 and 40,000 stock options exercised in the three months ended October 31, 2013. The total intrinsic value of stock options exercised was $0.1 million during the three ended October 31, 2014, and $0.2 million for the three months ended October 31, 2013.

The following table summarizes nonvested stock option activity during the three ended October 31, 2014:



	Number of shares (in thousands)		Weighted average grant date fair value per share
Nonvested at July 31, 2014	660		$	10.81
Granted	—		—
Vested	(93	)	11.21
Cancelled/Forfeited	(32	)	13.24
Nonvested at October 31, 2014	535		10.59

As of October 31, 2014, approximately $4.7 million of total unrecognized compensation expense related to nonvested stock options is expected to be recognized over a weighted average period of 1.9 years. As of October 31, 2013, approximately $7.5 million of total unrecognized compensation expense related to nonvested stock options was expected to be recognized over a weighted average period of 2.9 years.

Cash received from option exercises was $0.1 million, $1.3 million and $0.6 million for the three months ended October 31, 2014, fiscal 2014, and the three months ended October 31, 2013, respectively.

Table of Contents

Restricted Stock and Restricted Stock Unit Awards: Restricted stock and restricted stock unit activity during the three months ended October 31, 2014:



	Restricted Stock				Restricted Stock Units
	Number of shares (in thousands)		Weighted average grant date fair value per share		Number of shares (in thousands)		Weighted average grant date fair value per share
Outstanding at July 31, 2014	366		$	20.47	310		$	19.72
Granted	—		—		201		28.77
Vested	(36	)	33.05		(41	)	23.15
Cancelled/Forfeited	(20	)	20.38		(22	)	20.26
Outstanding at October 31, 2014	310		19.01		448		23.44

There were no restricted stock awards granted during the three months ended October 31, 2014, and 95,735 restricted stock awards granted during the three months ended October 31, 2013. The weighted average fair value per share of restricted stock granted during the three months ended October 31, 2013 was $20.89. The weighted average fair value per share at the grant date of restricted stock vested was $33.05 for the three months ended October 31, 2014 and was $41.55 for the three months ended October 31, 2013. The total intrinsic value of restricted stock vested was $1.0 million in the three months ended October 31, 2014 and was $0.6 million for the three months ended October 31, 2013. The total intrinsic value of restricted stock units vested in the three months ended October 31, 2014 was $1.2 million and was $40 thousand for the three months ended October 31, 2013.

As of October 31, 2014, there was $4.4 million of unrecognized compensation expense related to nonvested restricted stock expected to be recognized over a weighted average period of 2.2 years. As of October 31, 2014, there was $9.2 million of unrecognized compensation expense related to nonvested restricted stock units expected to be recognized over a weighted average period of 3.2 years. As of October 31, 2013, $7.3 million of unrecognized compensation expense related to nonvested restricted stock was expected to be recognized over a weighted average period of 3 years, and $5.4 million of unrecognized compensation expense related to nonvested restricted stock units was expected to be recognized over a weighted average period of 3.5 years.

Performance Share Units: In the first quarter of fiscal 2015, the Company began granting performance share units under the 2005 Equity Incentive Plan. Each performance share unit represents one equivalent share of the Company's common stock. The performance share units cliff vest after three years based on the achievement of a performance based market condition, except that 40% of the October 2014 awards will vest after two years if the performance based market condition is achieved. The number of shares of common stock ultimately issued in connection with these performance share units is based on a measurement of the comparative performance of the Company's common stock against the total shareholder return of a selected group of peer companies. The number of shares of common stock ultimately issued will range from zero to two hundred percent of the granted performance share units.

Compensation expense related to these performance stock unit awards that are classified as market condition awards under GAAP is determined based on the grant-date fair value, the number of shares issuable pursuant to the award and is recognized over the vesting period. The fair value at the grant date is measured using the Monte-Carlo model. For the three months ended October 31, 2014, the Monte Carlo fair value per performance share unit was $32.44. The Monte-Carlo option-pricing model uses similar input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination the possibility that the performance based market condition may not be satisfied. Compensation costs related to awards with a market-based condition are recognized regardless of whether the market condition is satisfied. Compensation cost is not reversed if the achievement of the market condition does not occur.

Table of Contents

Assumptions used in the Monte-Carlo model are presented below:



	Three Months Ended October 31,
	2014	2013
Expected term, in years	2.81	N/A
Expected volatility	52.76%	N/A
Risk-free interest rate	0.89%	N/A
Dividend rate	0.00%	N/A

Performance share award activity during the three months ended October 31, 2014:



	Number of Shares (in thousands)		Weighted average grant date fair value		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Outstanding at July 31, 2014	—		$	—
Granted	123		32.44
Vested	—		—
Cancelled/Forfeited	(3	)	32.44
Outstanding at October 31, 2014	120		32.44		2.9	$	3,623

There were 122,787 performance share units granted during the three months ended October 31, 2014. The weighted average fair value per share of performance share units granted during the three months ended October 31, 2014 was $32.44. As of October 31, 2014, there was $3.5 million of unrecognized compensation expense related to nonvested performance share units expected to be recognized over a weighted average period of 2.9 years.

(5) Earnings Per Share

ASC 260, “Earnings Per Share,” impacts the determination and reporting of earnings (loss) per share by requiring the inclusion of participating securities, which have the right to share in dividends, if declared, equally with common shareholders. Participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (“the two-class method”). ASC 260 also impacts the determination and reporting of earnings (loss) per share by requiring inclusion of the impact of changes in fair value of warrant liabilities, such as the Oaktree warrant liability described in Note 9 of the Notes to Condensed Consolidated Financial Statements. Including these participating securities and changes in warrant liability in the Company’s earnings per share calculation has the effect of reducing earnings and increasing losses on both basic and diluted earnings (loss) per share.

Table of Contents

The computations for basic and diluted earnings (loss) per share are as follows:



	Three Months Ended October 31,
	2014			2013
Numerator:
Net income (loss)	$	7,694		$	(42,153	)
Less: income allocated to participating securities	(83		)	—
Income (loss) attributable to common shareholders - basic	7,611			(42,153		)
Add: undistributed income attributable to participating securities	83			—
Less: undistributed income reallocated to participating securities	(82		)	—
Income (loss) attributable to common shareholders - diluted	$	7,612		$	(42,153	)
Denominator:
Weighted average shares outstanding - basic	31,042			21,954
Dilutive shares - stock options, RSU's, PSU's	426			—
Weighted average shares outstanding - diluted	31,468			21,954
Income (loss) per share attributable to common shareholders ⁽¹⁾:
Basic	$	0.25		$	(1.92	)
Diluted	$	0.24		$	(1.92	)


⁽¹⁾	Computations may reflect rounding adjustments.

The Company was in an income position for the three months ended October 31, 2014 and included stock options, restricted stock units, and performance share units in the diluted earnings per share calculation to the extent their effect was dilutive. Options to purchase 228,037 shares of common stock were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of Diamond’s common stock of $27.70 for the three months ended October 31, 2014, and therefore their effect would be antidilutive. For the three months ended October 31, 2013, the Company was in a loss position and, therefore, potential shares related to stock options and restricted stock units were excluded in the computation of diluted loss per share because their effect was antidilutive.

On January 21, 2014, the court issued an order granting final approval of the Securities Settlement and the appeal period expired on February 20, 2014, at which time the Securities Settlement became effective. On February 21, 2014 the Company issued the 4.45 million shares of common stock to a settlement fund pursuant to the terms of the approved Securities Settlement. Accordingly, the 4.45 million shares were included in the calculation of basic and diluted loss per share beginning in the third quarter of fiscal 2014.

On February 19, 2014, the Company closed the Warrant Exercise Agreement, pursuant to which Oaktree agreed to exercise in full its warrant to purchase an aggregate of 4,420,859 shares of Diamond common stock, by paying in cash the exercise price of approximately $44.2 million; less a cash exercise and contractual modification inducement fee of $15.0 million. Accordingly, the 4,420,859 shares were included in the calculation of basic and diluted loss per share beginning in the third quarter of fiscal 2014.

(6) Balance Sheet Items

Inventories consisted of the following:



	October 31, 2014		July 31, 2014		October 31, 2013
Raw materials and supplies	$	162,419	$	39,726	$	128,762
Work in process	32,094		24,946		22,294
Finished goods	64,658		59,601		56,967
Total	$	259,171	$	124,273	$	208,023

All inventories are accounted for on a lower of cost or market basis, with cost historically determined using a combination of first-in first-out ("FIFO") and weighted average cost. Beginning in the first fiscal quarter of 2015, the Company

Table of Contents

changed the inventory valuation method from FIFO to weighted average cost for certain inventories. The effect of this change was not material to condensed consolidated financial statements for the interim period ended October 31, 2014.

Accounts payable and accrued liabilities consisted of the following:



	October 31, 2014			July 31, 2014			October 31, 2013
Accounts payable	$	83,178		$	64,673		$	88,703
Securities settlement	—		—			119,625
Accrued promotions	25,934			22,638			28,881
Accrued salaries and benefits	10,615			13,364			10,512
Accrued taxes	4,942			4,706			8,043
Accrued interest	2,222			7,336			883
Accrued current lease obligations ⁽¹⁾	2,661			2,620			2,406
Other	2,909			2,340			2,439
Total	$	132,461		$	117,677		$	261,492


⁽¹⁾	Long term portion of capital leases are reflected in Other liabilities within the Condensed Consolidated Balance Sheets.

In fiscal 2014, the court issued an order granting final approval of the Securities Settlement on January 21, 2014 and the appeal period expired on February 20, 2014, at which time the Securities Settlement became effective. On February 21, 2014 the Company issued the 4.45 million shares to a settlement fund pursuant to the terms of the approved Securities Settlement. As of October 31, 2014, the Company no longer had a liability associated with the Securities Settlement.

During fiscal 2013, the Company announced a plan to consolidate its manufacturing operations within the Nuts reportable segment and to close its facility in Fishers, Indiana. In fiscal 2013, the Company also recorded a liability within Other liabilities associated with the Fishers facility future lease obligation. As of October 31, 2014, the Company has outstanding $3.6 million associated with the Fishers facility future lease obligation. In the first quarter of fiscal 2015, the Company revised the Fishers facility future lease obligation based on updated assumptions associated with utility contractual payments and increased the liability by $0.2 million with the corresponding expense recorded within Selling, general and administrative expenses. The liability extends through the lease term and will expire in 2019. As of July 31, 2013, the exit of the Fishers facility was complete.

(7) Property, Plant and Equipment

Property, plant and equipment consisted of the following:



	October 31, 2014			July 31, 2014			October 31, 2013
Land and improvements	$	11,185		$	11,622		$	10,166
Buildings and improvements	59,659			59,260			57,348
Machinery, equipment and software	215,155			217,159			214,150
Construction in progress	21,955			16,368			2,838
Capital leases ⁽¹⁾	16,539			16,678			16,343
Total	324,493			321,087			300,845
Less: accumulated depreciation	(186,423		)	(184,088		)	(169,389		)
Less: accumulated amortization	(5,073		)	(5,108		)	(2,966		)
Property, plant and equipment, net	$	132,997		$	131,891		$	128,490

⁽¹⁾ Gross amounts of assets recorded under capital leases represent machinery, equipment and software as of October 31, 2014, July 31, 2014, and October 31, 2013.

For the three months ended October 31, 2014, depreciation expense was $5.3 million. For the three months ended October 31, 2013, depreciation expense was $6.4 million.

(8) Intangible Assets and Goodwill

The changes in the carrying amount of goodwill are as follows:



	Snacks			Nuts		Total
Balance as of July 31, 2013
Goodwill	$	328,490		$	72,635	$	401,125
Accumulated impairment losses	—			—		—
	328,490			72,635		401,125
Goodwill acquired during the year	—			—		—
Translation adjustments	4,684			—		4,684
Balance as of October 31, 2013
Goodwill	333,174			72,635		405,809
	$	333,174		$	72,635	$	405,809
Balance as of July 31, 2014
Goodwill	$	338,085		$	72,635	$	410,720
Accumulated impairment losses	—			—		—
	338,085			72,635		410,720
Goodwill acquired during the year	—			—		—
Translation adjustments	(5,607		)	—		(5,607		)
Balance as of October 31, 2014
Goodwill	332,478			72,635		405,113
	$	332,478		$	72,635	$	405,113

Table of Contents

Other intangible assets consisted of the following:



	October 31, 2014			July 31, 2014			October 31, 2013
Brand intangibles (not subject to amortization)	$	263,889		$	266,603		$	264,031
Intangible assets subject to amortization:
Customer contracts and related relationships	159,845			163,600			159,900
Total other intangible assets, gross	423,734			430,203			423,931
Less accumulated amortization on intangible assets:
Customer contracts and related relationships	(39,860		)	(37,845		)	(31,750		)
Less asset impairments:
Brand intangibles	—			—			—
Customer contracts and related relationships	—			—			—
Total other intangible assets, net	$	383,874		$	392,358		$	392,181

Identifiable intangible asset amortization expense was $2.0 million for the three months ended October 31, 2014 and was approximately $2.0 million for the three months ended October 31, 2013. Identifiable intangible asset amortization expense will amount to approximately $6.0 million for the remainder of fiscal 2015 and approximately $8.0 million for each of the next five fiscal years.

(9) Notes Payable and Long-Term Obligations

Long-term debt outstanding:



	October 31,			July 31,			October 31,
	2014			2014			2013
Secured Credit Facility	$	—		$	—		$	366,797
Oaktree Senior Notes	—			—			218,595
Guaranteed Loan	7,760			8,333			7,761
ABL Facility	8,000			6,000			—
Notes	230,000			230,000			—
Term Loan Facility, net	402,645			403,082			—
Total outstanding debt	648,405			647,415			593,153
Less: current portion	(12,116		)	(10,088		)	(5,888		)
Total long-term debt	$	636,289		$	637,327		$	587,265

As of October 31, 2014, the current portion of long-term debt is presented net of an unamortized discount of $0.5 million related to the Term Loan Facility’s stated original issue discount of $2.0 million. The non-current portion of long-term debt is presented net of an unamortized discount of $1.3 million.

Additionally, in accordance with ASC 470-50-40-2 – Debt – "Modifications and Extinguishments," as a result of certain lenders that participated in the Company’s debt structure both prior to and after the refinancing, it was determined that a portion of the debt refinancing was considered to be a debt modification. Accordingly, the Company recorded approximately $3.6 million, of the Oaktree call premium that is associated with the modified debt (Term Loan Facility) as a contra-debt liability. As of October 31, 2014, the current portion of long-term debt is presented net of these unamortized creditor fees of $0.8 million and the non-current portion of long-term debt is presented net of these unamortized creditor fees of $2.3 million.

In accordance with the guidance, approximately $5.2 million related to the Company’s previous original issue discount on the Oaktree Notes was also determined to be associated with the modified debt (Term Loan Facility) as a contra-debt liability. As of October 31, 2014, the current portion of long-term debt is presented net of this unamortized discount of $1.2 million and the non-current portion of long-term debt is presented net of $3.3 million.

Table of Contents

These balances are presented on the Company’s Condensed Consolidated Balance Sheets as a contra-debt liability and will be amortized within Interest expense, net on the Company’s Condensed Consolidated Statement of Operations over the term of the Term Loan Facility.

Net interest expense for the three months ended October 31, is as follows:



	Three Months Ended October 31,
	2014			2013
Secured Credit Facility	$	—		$	5,818
Oaktree Senior Notes	—			6,953
Guaranteed Loan	101			128
ABL Facility	150			—
Notes	3,976			—
Term Loan Facility	4,527			—
Capitalized interest	(190		)	(14		)
Other	220			239
Amortization of deferred financing costs and debt discounts⁽¹⁾	1,452			1,724
Interest expense, net	$	10,236		$	14,848

⁽¹⁾ Represents non-cash amortization of deferred charges incurred as a result of debt refinancings.

Description of Refinancing

On February 19, 2014, the Company refinanced its debt capital structure. The Company entered into a 4.5 year senior secured term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $415 million, a 4.5 year senior secured asset-based revolving credit facility (the “ABL Facility”) in an aggregate principal amount of $125 million and issued $230 million in 7.000% Senior Notes due March 2019 (the “Notes”). Pursuant to the Warrant Exercise Agreement, OCM PF/FF Adamantine Holdings, Ltd. (a subsidiary of Oaktree) exercised its warrant to purchase 4,420,859 shares of Diamond’s common stock at the $10 exercise price per share for $44.2 million, less a warrant cash exercise and contractual modification inducement fee of $15 million. The Warrant Exercise Transaction closed on February 19, 2014, concurrent with the refinancing transactions and the Company derecognized the warrant liability of approximately $84.1 million on that date.

Diamond used the net proceeds of the Term Loan Facility, the Notes and the Warrant Exercise Transaction to (1) prepay approximately $348 million of indebtedness outstanding under, and terminate, the Secured Credit Facility, (2) prepay approximately $276 million of indebtedness outstanding under, and terminate, the Oaktree Senior Notes, (3) pay approximately $32.3 million of prepayment premiums to the holders of the Oaktree Senior Notes, and (4) pay fees related to the preparation, negotiation, execution and delivery of the definitive documentation for the Term Loan Facility, the Notes and the ABL Facility. In accordance with ASC 835-30-45-3 "Imputation of Interest - Other Presentation Matters," the Company incurred $16.6 million of new debt issuance costs associated with the February 2014 debt refinancing. $2.1 million of these debt issuance costs were expensed to Loss on debt extinguishment based on the portion of the refinancing that was considered a debt modification for those lenders that had continued participation in the Company’s refinanced debt structure. The remaining $14.5 million debt issuance costs were recorded as deferred financing charges and will be amortized over the life of the respective new debt agreements into Interest expense, net. Debt issuance costs largely included arrangement fees paid to underwriters, legal fees, accounting fees, consulting fees, and printing fees. The Company recorded the current portion of these costs in Prepaid expenses and other current assets and the non-current portion was recorded in Other long-term assets in the Company’s Condensed Consolidated Balance Sheets.

In accordance with ASC 470-50-40-2 – "Debt – Modifications and Extinguishments," the Company recorded a Loss on debt extinguishment of $83.0 million in the Consolidated Statement of Operations in fiscal 2014. Of the $83.0 million, approximately $70.3 million related to the extinguishment of the Oaktree Senior Notes, $10.6 million related to non-cash charges resulting from the write-off of unamortized transaction costs and fees, and $2.1 million related to new third-party debt issuance costs.

Debt After Refinancing

In December 2010, Kettle Foods obtained, and Diamond guaranteed, a 10-year fixed rate loan (the “Guaranteed Loan”) in the principal amount of $21.2 million, of which $7.8 million was outstanding as of October 31, 2014. Principal and interest payments were due monthly throughout the term of the loan. The Guaranteed Loan was being used to purchase equipment for

Table of Contents

the Beloit, Wisconsin plant expansion. Borrowed funds were placed in an interest-bearing escrow account and made available as expenditures were approved for reimbursement. As the cash was used to purchase non-current assets, such restricted cash was classified as non-current on the balance sheet. In December 2012, the remaining balance within the escrow account was released back to the lender and was used to pay down the outstanding loan balance. Also, as part of the paydown, the Company paid a 4% prepayment penalty, which was recorded in Interest expense, net.

The Guaranteed Loan provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility, as defined below. The financial covenants within the Guaranteed Loan were reset to match those in the Waiver and Third Amendment to the Company's Secured Credit Facility, as described in more detail below.

Additionally, on February 19, 2014, Diamond closed the Warrant Exercise Agreement, pursuant to which Oaktree agreed to exercise in full its warrant to purchase an aggregate of 4,420,859 shares of Diamond common stock, by paying in cash the exercise price of approximately $44.2 million; less a cash exercise and contractual modification inducement fee of $15.0 million. The warrant was issued to Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (“Securities Purchase Agreement”), under which Diamond issued the Oaktree Senior Notes. The $15.0 million inducement fee was included within Warrant exercise fee on the Company’s Consolidated Statement of Operations in the 2014 Annual Report on Form 10-K.

The Warrant Exercise Agreement provided that so long as Oaktree and/or its affiliates hold at least 10% of Diamond’s outstanding common stock, Oaktree will have the right to nominate one member of Diamond’s Board of Directors. In addition, until the later of (a) twelve months after Oaktree no longer has the right to nominate a member of Diamond’s Board of Directors or (b) twelve months after any director nominated by Oaktree under the Warrant Exercise Agreement or the Securities Purchase Agreement no longer serves as a director, Oaktree and its affiliates agree not to: acquire or beneficially own more than 30% of the outstanding common stock of Diamond; commence or support any tender offer for Diamond common stock; make or participate in any solicitation of proxies to vote or seek to influence any person with respect to voting its Diamond common stock; publicly announce a proposal or offer concerning any extraordinary transaction with Diamond; form, join or participate in a group for the purpose of acquiring, holding, voting or disposing of any Diamond securities; take any actions that could reasonably be expected to require Diamond to make a public announcement regarding the possibility of such an acquisition, tender offer or proxy solicitation; enter into any agreements with a third party regarding any such prohibited actions; or request Diamond to amend or waive such provisions. Upon the closing of the transactions contemplated by the Warrant Exercise Agreement, the Securities Purchase Agreement, and Diamond’s obligations thereunder, terminated. The common stock issued upon exercise of the warrant was issued in a private placement pursuant to exemptions from the registration requirements of the Securities Act of 1933 and are covered by a Registration Rights Agreement entered into on May 29, 2012 in connection with the Securities Purchase Agreement.

The Term Loan Facility will mature in 4.5 years and will amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loan Facility with the balance payable on the maturity date of the Term Loan Facility. The Term Loan Facility permits the Company to increase the term loans, or add a separate tranche of term loans, by an amount not to exceed $100 million plus the maximum amount of additional term loans that the Company could incur without its senior secured leverage ratio exceeding 4.50 to 1.00 on a pro forma basis after giving effect to such increase or addition. Amounts outstanding bear interest at a rate per annum equal to: (i) the Eurodollar Rate (as defined in the Term Loan Facility and subject to a “floor” of 1.00%) plus the applicable margin or (ii) the Base Rate (as defined in the Term Loan Facility), which is the greatest of (a) Credit Suisse’s prime rate, (b) the federal funds effective rate plus 0.50% and (c) the Eurodollar Rate for an interest period of one month plus 1.00%, plus, in each case, the applicable margin to be agreed with the lenders party thereto.

Under the ABL Facility, Diamond may elect that the loans bear interest at a rate per annum equal to: (i) the LIBOR Rate plus the applicable margin; or (ii) the Base rate plus applicable margin. “LIBOR Rate” means the rate per annum equal to (i) the Intercontinental Exchange Benchmark Administration Ltd. LIBOR Rate (“ICE LIBOR”), at approximately 11:00 a.m., London time, two Business Days prior to the commencement of the requested Interest Period. “Base Rate” means the greatest of (a) the Federal Funds Rate plus 0.5%, (b) the LIBOR Rate (which rate shall be calculated based upon an interest period of 1

Table of Contents

month and shall be determined on a daily basis), plus 1.00%, and (c) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its “prime rate”. The LIBOR Rate shall be available for interest periods of one week or, one, two, three or six months and, if all lenders agree, twelve months. “Applicable Margin” means, as of any date of determination and with respect to Base Rate Loans or LIBOR Rate Loans, as applicable, the applicable margin set forth in the following table that corresponds to the Average Daily Net Availability of Borrower for the most recently completed fiscal quarter period.

The Term Loan Facility and ABL Facility provide for customary affirmative and negative covenants. The Term Loan Facility has customary cross-default provisions and the ABL Facility contains cross-acceleration provisions, in each case that may be triggered if Diamond fails to comply with obligations under its other credit facilities or indebtedness. The Term Loan Facility has a first priority perfected lien on substantially all property, plant and equipment, capital stock, intangibles and second priority lien on the ABL Priority Collateral, subject to customary exceptions. The ABL Facility requires Diamond to maintain a minimum fixed charge coverage ratio of 1.1:1.0 if at any time excess availability is less than 10% of maximum availability; and requires Diamond to apply substantially all cash collections to reduce outstanding borrowings under the ABL Facility if excess availability falls below 12.5% of maximum availability for a period of 5 consecutive business days. The ABL Facility is secured by a first-priority lien on accounts receivable, inventory, cash and deposit accounts and a second-priority lien on all real estate, equipment and equity interests of the Company under, and guarantors of, the ABL Facility.

The Notes, which will mature on March 15, 2019, were offered only to (i) qualified institutional buyers in reliance on Rule 144A of the Securities Act of 1933, as amended (“Securities Act”), and (ii) to certain non-U.S. persons in offshore transactions in reliance on Regulation S of the Securities Act. The initial issuance and sale of the Notes were not registered under the Securities Act, and the Notes may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and the registration or qualification requirements of other applicable securities laws. The terms of the Notes do not provide for registration rights. Interest on the Notes is payable on March 15 and September 15 of each year, commencing September 15, 2014. On or after March 15, 2016, Diamond may redeem all or a part of the Notes at a price equal to 103.50% of the principal amount of the Notes, plus accrued and unpaid interest, with such optional redemption prices decreasing to 101.75% on and after March 15, 2017 and 100.00% on and after March 15, 2018. Before March 15, 2016, Diamond may redeem some or all of the Notes at a price equal to 100.00% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the redemption date and the make-whole premium. Before March 15, 2016, Diamond may redeem up to 35% of the Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.00% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of redemption. If Diamond experiences a change of control, Diamond must offer to purchase for cash all or any part of each holder’s Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any. The indenture pursuant to which the Notes were issued contains customary covenants that, among other things, limit Diamond’s ability and Diamond’s restricted subsidiaries’ ability to incur additional indebtedness, make restricted payments, enter into transactions with affiliates, create liens, pay dividends on or repurchase stock, make specified types of investments, and sell all or substantially all of their assets or merge with other companies. Each of the covenants is subject to a number of important exceptions and qualifications.

For the three months ended October 31, 2014 and October 31, 2013, the blended interest rate for the Company’s consolidated borrowings, and excluding the Oaktree Senior Notes, was 5.28% and 6.33%, respectively. For the three months ended October 31, 2014 and October 31, 2013, the blended interest rate for the Company’s consolidated short-term borrowings, excluding the Oaktree Senior Notes, was 1.67% and 6.26%, respectively. As of October 31, 2014, the Company was compliant with financial and reporting covenants under the new refinanced debt structure.

(10) Retirement Plans

Diamond provides retiree medical benefits and sponsors one defined benefit pension plan. Any employee who joined the Company after January 15, 1999 is not entitled to retiree medical benefits. The defined benefit plan is a qualified plan covering all bargaining unit employees. Diamond uses a July 31 measurement date for its plans. Plan assets are held in trust and primarily include mutual funds and money market accounts. Diamond previously sponsored a nonqualified plan that was terminated in fiscal 2013 and all benefits were distributed in December 2012. There are no obligations under the nonqualified plan as of October 31, 2014.

Table of Contents

Components of net periodic benefit cost (income) were as follows:



	Pension Benefits						Other Benefits
	Three Months Ended October 31,						Three Months Ended October 31,
	2014			2013			2014			2013
Service cost	$	—		$	—		$	11		$	9
Interest cost	256			245			17			17
Expected return on plan assets	(292		)	(270		)	—			—
Amortization of net loss / (gain)	126			85			(132		)	(176		)
Net periodic benefit cost / (income)	$	90		$	60		$	(104	)	$	(150	)

The Company recognized defined contribution plan expenses of $0.4 million for the three months ended October 31, 2014 and $0.3 million for the three months ended October 31, 2013. The Company expects to contribute a total of approximately $1.5 million to the defined contribution plan during fiscal 2015.

(11) Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) attributable to the Company are foreign currency translation adjustments and changes in pension liabilities.

Changes in accumulated other comprehensive income for the three months ended October 31, 2013 by component were as follows:



	Pension Liability Adjustment			Foreign Currency Translation Adjustment		Total
Balance as of August 1, 2013	$	522		$	3,485	$	4,007
Other comprehensive income (loss) before reclassifications	—			10,366		10,366
Amounts reclassified from accumulated other comprehensive income:
Amortization of prior gain/(loss) included in net periodic pension cost	(91		)	—		(91		)
Net other comprehensive income (loss)	(91		)	10,366		10,275
Balance as of October 31, 2013	$	431		$	13,851	$	14,282

Changes in accumulated other comprehensive income for the three months ended October 31, 2014 by component were as follows:



	Pension Liability Adjustment			Foreign Currency Translation Adjustment			Total
Balance as of August 1, 2014	$	(1,968	)	$	25,601		$	23,633
Other comprehensive income (loss) before reclassifications	—			(12,196		)	(12,196		)
Amounts reclassified from accumulated other comprehensive income:
Amortization of prior gain/(loss) included in net periodic pension cost	(6		)	—			(6		)
Net other comprehensive income (loss)	(6		)	(12,196		)	(12,202		)
Balance as of October 31, 2014	$	(1,974	)	$	13,405		$	11,431

(12) Commitments and Contingencies

In re Diamond Foods Inc., Shareholder Derivative Litigation

In fiscal 2012, putative shareholder derivative lawsuits were in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond and naming certain executive officers and the members of Diamond’s board of directors as individual defendants. These lawsuits, which related principally to the Company’s accounting for certain payments to walnut growers in fiscal 2010 and 2011, were subsequently consolidated as In re Diamond Foods Inc., Shareholder Derivative Litigation which purports to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of

Table of Contents

control and gross mismanagement. Following mediation efforts, the parties agreed to terms of a proposed settlement and the court entered an order granting final approval of the settlement on August 19, 2013. On September 23, 2013, a Notice of Appeal from the order granting final approval was filed by a single stockholder. No date for this hearing on this appeal has been scheduled. The Company will continue to incur costs associated with this action, and, depending on the ultimate outcome, could continue to do so, and management’s attention may be diverted to this matter. This could have a material adverse effect on the Company’s business, financial condition and results of operations.

Labeling Class Action Cases

On January 3, 2014, Deena Klacko first filed a putative class action against Diamond in the Southern District of Florida, alleging that certain ingredients contained in the Company’s TIAS tortilla chip product were not natural and seeking damages and injunctive relief. The lawsuit alleged five causes of actions alleging violations of Florida’s Deceptive and Unfair Trade Practices Act, negligent misrepresentation, breach of implied warranty for particular purpose, breach of express warranty and the Magnuson-Warranty Act. The complaint seeks to certify a class of Florida consumers who purchased TIAS tortilla chips since January 3, 2010. On January 9, 2014, Dominika Surzyn brought a similar class action against Diamond relating to our TIAS tortilla chips in federal court for the Northern District of California. Surzyn purports to represent a class of California consumers who purchased said Kettle TIAS products since January 9, 2010.

On April 2, 2014, Richard Hall filed a putative class action against the Company in San Francisco Superior Court, alleging that certain ingredients contained in the Company’s Kettle Brand chips and TIAS Tortilla Chips are not natural and seeking damages and injunctive relief. The complaint purports to assert seven causes of action for alleged violations of California’s Business and Profession’s Code, California’s Consumer Legal Remedies Act and for restitution based on quasi-contract/unjust enrichment. Plaintiff purports to bring this action on his own behalf, as well as on behalf of all consumers in the United States, or alternatively, California, who purchased certain of Diamond’s Kettle Brand Chips or Kettle Brand TIAS tortilla chips within 4 years of the filing of the complaint.

The Company denies all allegations in these cases. Following mediation and settlement discussions among plaintiffs’ counsel in Klacko, Surzyn and Hall, the parties entered into a settlement agreement, and it is expected that they will resolve all claims on a nationwide basis and include: Diamond to take certain injunctive relief measures to confirm labeling compliance matters; establishment of a $3.0 million common fund for claims made available to the class and for the payment of class administration and attorneys’ fees; and any funds unclaimed by the class to be provided cy pres to a charity as a food donation. The Company recognized the related settlement charges within the consolidated financial statements for fiscal 2014. On October 30, 2014, the court granted preliminary approval of the settlement. The settlement is subject to final court approval. The Company cannot predict with certainty the ultimate resolution of these lawsuits, and an unfavorable outcome in excess of amounts recognized as of July 31, 2014, with respect to one or more of these proceedings could have a material adverse effect on the Company’s results of operations for the periods in which a loss is recognized.

Other

Diamond is involved in various legal actions in the ordinary course of our business. The Company does not believe it is feasible to predict or determine the outcome or resolution of the above litigation proceedings, or to estimate the amounts of, or potential range of, loss with respect to those proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or settlements that could require substantial payments by us, which could have a material impact on Diamond’s financial position, results of operations and cash flows.

(13) Segment Reporting

The Company has five operating segments that it aggregates into two reportable segments based on similarities between: economic characteristics, nature of the products, production process, type of customer, methods of distribution, and regulatory environment. The Company’s two reportable segments are Snacks and Nuts. The Snacks reportable segment predominately includes products sold under Kettle U.S., Kettle U.K. and Pop Secret. The Nuts reportable segment predominantly includes products sold under Emerald and Diamond of California.

The Company evaluates the performance of its segments based on net sales and gross profit. Gross profit is calculated as net sales less all cost of sales. The Company’s CODM does not receive or utilize asset information to evaluate performance of operating segments, so asset-related information has not been presented. The accounting policies of the Company’s segments are the same as those described in the summary of critical accounting policies set forth in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”

Table of Contents

The Company’s net sales and gross profit by segment were as follows:



	Three Months Ended October 31,
	2014		2013
Net sales
Snacks	$	116,590	$	112,589
Nuts	130,031		122,079
Total	$	246,621	$	234,668
Gross profit
Snacks	$	42,956	$	39,424
Nuts	16,434		18,509
Total	$	59,390	$	57,933

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are an innovative packaged food company focused on building and energizing brands. We specialize in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, we complemented our strong heritage in the culinary nut market under the Diamond of California® brand by launching a line of snack nuts under the Emerald® brand. In 2008, we acquired the Pop Secret® brand of microwave popcorn products, which provided us with increased scale in the snack market. In 2010, we acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and the United Kingdom, adding the complementary premium Kettle Brand® to our existing portfolio.

Our business is seasonal. In sourcing walnuts, we contract directly with growers for their walnut crop. We typically receive walnuts during the period from September to November, and we pay for the crop throughout the year in accordance with our walnut purchase agreements with the growers. We typically receive in-shell pecans during the period from October to March, and shelled pecans throughout the fiscal year, and pay for them over those periods upon receipt. As a result of this seasonality, our personnel, working capital requirements and walnut inventories peak during the last four months of each calendar year. We experience seasonality in capacity utilization at our Stockton, California facility associated with the annual walnut harvest and seasonal in-shell and culinary product demand. Generally, we receive and pay for approximately 50% of the corn for popcorn in November and approximately 50% in April. We contract for potatoes and oil annually and at times throughout the year and receive and pay for this supply throughout the year.

We report our operating results on the basis of a fiscal year that starts August 1 and ends July 31. We refer to the fiscal years ended July 31, 2015, 2014, 2013, 2012, as “fiscal 2015,” “fiscal 2014,” “fiscal 2013” and “fiscal 2012” respectively.

Results of Operations

We aggregate our operating segments into two reportable segments, which are Snacks and Nuts. The Snacks reportable segment predominately includes products sold under the Kettle Brand®, Kettle Chips®, and Pop Secret® trade names. The Nuts reportable segment predominantly includes products sold under the Emerald® and Diamond of California® trade names. The Company evaluates the performance of its segments based on net sales and gross margin for each segment. Gross profit is calculated as net sales less all cost of sales.

Table of Contents

Our net sales and gross profit by segment for the periods identified below were as follows (in thousands):



	Three Months Ended October 31,				% Change from
	2014		2013		2013 to 2014
Net sales
Snacks	$	116,590	$	112,589	4%
Nuts	130,031		122,079		7%
Total	$	246,621	$	234,668	5%
Gross profit
Snacks	$	42,956	$	39,424	9%
Nuts	16,434		18,509		-11%
Total	$	59,390	$	57,933	3%

For the three months ended October 31, 2014, Snacks segment net sales increased to $116.6 million from $112.6 million primarily due to increases in volume of 4.3%. This increase in volume is a result of higher Kettle U.S. sales, partially offset by lower sales in the U.K which was impacted by the loss of a private label contract.

For the three months ended October 31, 2014, Nuts segment net sales increased to $130.0 million from $122.1 million primarily driven by increases in pricing in our Diamond of California and Emerald brands, partially offset by decreases in volume of 1.9%.

Sales to our largest customer, Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), represented approximately 16.5% of total net sales for the three months ended October 31, 2014, and 13.5% of total net sales for the three months ended October 31, 2013. No other customer accounted for 10% or more of our total net sales for those periods.

Gross profit and margin. Snacks segment gross profit as a percentage of net sales was 36.8% for the three months ended October 31, 2014 and 35.0% for the three months ended October 31, 2013. Gross margin increased due to improved productivity and lower input costs for the three months ended October 31, 2014.

Nuts segment gross profit as a percentage of net sales was 12.6% for the three months ended October 31, 2014 and 15.2% for the three months ended October 31, 2013. Gross margin decreased principally due to higher tree nut costs and unfavorable channel and product mix. As discussed in Item 1A. Risk Factors, our commodity costs are subject to fluctuations in availability and price that could adversely impact our business and financial results.

Selling, general and administrative. Selling, general and administrative expenses consist principally of salaries and benefits for sales and administrative personnel, brokerage, professional services, travel, non-manufacturing depreciation and facility costs. Selling, general and administrative expenses were $28.6 million and 11.6% of net sales for the three months ended October 31, 2014, and were $56.6 million and 24.1% of net sales for the three months ended October 31, 2013. Selling, general and administrative expenses decreased because in August 2013, we obtained preliminary approval to settle the action In re Diamond Foods Inc., Securities Litigation (the "Securities Settlement"), primarily due to the Settlement of the Securities Litigation. For the three months ended October 31, 2013, we recorded a $23.5 million loss associated with the change in fair value of the Securities Settlement. Additionally in the first quarter of fiscal 2014, we recorded a $5.0 million liability associated with an investigation by the Securities and Exchange Commission.

Advertising. Advertising costs were $11.8 million for the three months ended October 31, 2014, and $10.7 million for the three months ended October 31, 2013. Advertising expenses as a percentage of net sales was 4.8% for the three months ended October 31, 2014, and 4.5% for the three months ended October 31, 2013. The increase in advertising spending was related to the continued support of the Kettle U.S. brand.

Loss on warrant liability. Loss on warrant liability was nil for the three months ended October 31, 2014 and was $17.0 million and 7.2% of net sales for the three months ended October 31, 2013. The loss on warrant liability for the three months ended October 31, 2013 was due to the change in the fair value of the warrant liability associated with a warrant issued to a subsidiary of Oaktree Capital Management, L.P. in May 2012. The warrant was exercised in February 2014 in connection with a subsequent refinancing, and accordingly we no longer have a liability associated with the warrant as of October 31, 2014.

Table of Contents

Interest expense, net. Interest expense, net was $10.2 million, and 4.2% of net sales, for the three months ended October 31, 2014 and was $14.8 million and 6.3% of net sales for the three months ended October 31, 2013. Interest expense, net decreased for the three months ended October 31, 2014 primarily due to our refinanced debt structure which yields lower interest rates than our previously held debt obligations which included the payment-in-kind interest on the Oaktree Senior Notes and Redeemable Note (the "Oaktree Senior Notes").

Income taxes. Our effective tax rate was approximately 12.1% for the three months ended October 31, 2014 compared with approximately (2.5%) for the three months ended October 31, 2013. The difference between the effective tax rate and the federal statutory rate of 35% in these periods was primarily due to valuation allowances related to deferred tax assets not considered to be realizable, deferred tax liabilities resulting from indefinite life assets, and lower tax rates in non U.S. jurisdictions.

The tax provision for the three months ended October 31, 2014 was determined using an estimated annual effective tax rate adjusted for discrete items that occurred in the quarter. Our effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business.

The tax provision for the three months ended October 31, 2013 was determined by estimating the U.S. tax provision using the discrete method provided in ASC 740 and using an estimated annual effective tax rate for the U.K. tax provision. The discrete method was used in the U.S. because of unpredictable trends in the Company’s U.S. net income or loss position due to the loss on debt extinguishment and expenses associated with the shareholder derivative litigation, which we do not expect to be recurring.

We recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and tax basis of assets and liabilities as well as net operating loss and tax credit carryovers. We record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce the valuation allowance against our deferred tax assets, our provision for income taxes will increase or decrease respectively in the period such determination is made.

Liquidity and Capital Resources

Our liquidity is dependent upon funds generated from operations and external sources of financing, including our ABL Facility discussed below.

Cash provided by operating activities was $14.6 million during the three months ended October 31, 2014 , compared to $12.8 million cash provided by operating activities for the three months ended October 31, 2013. The increase in cash provided by operating activities was primarily due to improved operating results and the positive cash flow impact of changes in certain working capital items; primarily an increase in grower payables and accounts payables and accrued liabilities, offset by an increase in inventories, net. Cash used in investing activities was $7.6 million during the three months ended October 31, 2014, compared to cash used in investing activities of $1.3 million for the three months ended October 31, 2013. The change in cash used for investing activities primarily related to machinery and equipment additions associated with our standard business operations in the U.S. and U.K. and capitalizable costs associated with our financial system upgrade implementation. In addition, cash used in financing activities was $0.9 million during the three months ended October 31, 2014, compared to $5.5 million of cash used in financing activities during the three months ended October 31, 2013. The decrease in cash used by financing activities is primarily due to net borrowings under the revolving line of credit for the three months ended October 31, 2014 versus repayments being made under the revolving line of credit for the three months ended October 31, 2013.

Working capital and stockholders’ equity were $116.2 million and $280.6 million at October 31, 2014, compared to $110.3 million and $283.8 million at July 31, 2014, and ($89.4) million and $140.0 million at October 31, 2013. The increase in working capital between October 31, 2013 and October 31, 2014 was primarily due to the extinguishment of the warrant liability and Securities Settlement liability in the third quarter of fiscal 2014, an increase in inventories, offset by an increase in grower payables as of the balance sheet date. Capitalized expenditures were $7.6 million for the three months ended October 31, 2014 and $1.3 million for the three months ended October 31, 2013.

Description of Refinancing

On February 19, 2014, we refinanced our debt capital structure. We entered into a 4.5 year senior secured term loan facility, (the "Term Loan Facility") in an aggregate principal amount of $415 million, a 4.5 year senior secured asset-based revolving credit facility (the “ABL Facility”) in an aggregate principal amount of $125 million and issued $230 million in 7.000% Senior Notes due March 2019 (the “Notes”). Pursuant to an agreement dated February 9, 2014 (the “Warrant Exercise

Table of Contents

Agreement”), OCM PF/FF Adamantine Holdings, Ltd. (a subsidiary of Oaktree) exercised its warrant to purchase 4,420,859 shares of our common stock at the $10 exercise price per share for $44.2 million, less a warrant cash exercise and contractual modification inducement fee of $15 million (the “Warrant Exercise Transaction”). The Warrant Exercise Transaction closed on February 19, 2014, concurrent with the refinancing transactions and we derecognized the warrant liability of approximately $84.1 million on that date.

We used the net proceeds of the Term Loan Facility, the Notes and the Warrant Exercise Transaction to (1) prepay approximately $348 million of indebtedness outstanding under, and terminate, the Secured Credit Facility, (2) prepay approximately $276 million of indebtedness outstanding under, and terminate, the Oaktree Senior Notes, (3) pay approximately $32.3 million of prepayment premiums to the holders of the Oaktree Senior Notes, and (4) pay fees related to the preparation, negotiation, execution and delivery of the definitive documentation for the Term Loan Facility, the Notes and the ABL Facility. In accordance with ASC 835-30-45-3 Imputation of Interest - Other Presentation Matters, we recorded $14.5 million of new debt issuance costs associated with the February 2014 debt refinancing as deferred financing charges. Certain debt issuance costs incurred were expensed to Loss on debt extinguishment based on the portion of the refinancing that was considered a debt modification that arose from certain lenders continued participation in our refinanced debt structure. Debt issuance costs largely included arrangement fees paid to underwriters, legal fees, accounting fees, consulting fees, and printing fees. We recorded the current portion of these costs in Prepaid expenses and other current assets and the non-current portion was recorded in Other long-term assets in our Condensed Consolidated Balance Sheets. These amounts will be amortized over the life of the respective new debt agreements.

We recorded a loss on debt extinguishment of $83.0 million in fiscal 2014. Of the $83.0 million, we recorded approximately $70.3 million associated with the Oaktree Senior Notes, non-cash charges of $10.6 million resulting from the write-off of unamortized Oaktree and Secured Credit Facility transaction costs and fees and $2.1 million in new third party debt issuance costs associated with certain lenders that continued participation in the debt arrangements both prior to and subsequent to the refinancing transaction.

The $70.3 million included $28.7 million, which was a portion of the $32.3 million call premium we paid to the holders of the Oaktree Senior Notes and approximately $41.6 million related to the excess payout of the Oaktree Senior Notes to account for the difference in the carrying value and actual payout, which was based on the Oaktree Senior Notes fair value as of the date of refinancing. Of the $32.3 million call premium, the remaining $3.6 million related to the portion of the refinancing that was considered a debt modification and was recorded as a contra-debt liability on our Consolidated Balance Sheets.

Debt After Refinancing

In December 2010, Kettle Foods obtained, and we guaranteed, a 10-year fixed rate loan (the “Guaranteed Loan”) in the principal amount of $21.2 million, of which $7.8 million was outstanding as of October 31, 2014. Principal and interest payments were due monthly throughout the term of the loan. The Guaranteed Loan was being used to purchase equipment for our Beloit, Wisconsin plant expansion. Borrowed funds were placed in an interest-bearing escrow account and made available as expenditures were approved for reimbursement. As the cash was used to purchase non-current assets, such restricted cash was classified as non-current on the balance sheet. In December 2012, the remaining balance within the escrow account was released back to the lender and was used to pay down the outstanding loan balance. Also, as part of the paydown, we paid a 4% prepayment penalty, which was recorded in Interest expense, net.

The Guaranteed Loan provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility, as defined below. The financial covenants within the Guaranteed Loan were reset to match those in the Waiver and Third Amendment to its Secured Credit Facility, as described in more detail below.

Additionally, on February 9, 2014, we entered into, and on February 19, 2014, we closed, a warrant exercise agreement with Oaktree (the “Warrant Exercise Agreement”), pursuant to which Oaktree agreed to exercise in full its warrant to purchase an aggregate of 4,420,859 shares of our common stock, by paying in cash the exercise price of approximately $44.2 million; less a cash exercise and contractual modification inducement fee of $15.0 million. The warrant was issued to Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (“Securities Purchase Agreement”), under which we issued the Oaktree Senior Notes.

The Warrant Exercise Agreement provided that so long as Oaktree and/or its affiliates hold at least 10% of our outstanding common stock, Oaktree will have the right to nominate one member of our Board of Directors. In addition, until the later of (a) twelve months after Oaktree no longer has the right to nominate a member of our Board of Directors or (b) twelve months after any director nominated by Oaktree under the Warrant Exercise Agreement or the Securities Purchase Agreement no longer serves as a director, Oaktree and its affiliates agree not to: acquire or beneficially own more than 30% of the outstanding common stock of Diamond; commence or support any tender offer for our common stock; make or participate

Table of Contents

in any solicitation of proxies to vote or seek to influence any person with respect to voting its Diamond common stock; publicly announce a proposal or offer concerning any extraordinary transaction with us; form, join or participate in a group for the purpose of acquiring, holding, voting or disposing of any our securities; take any actions that could reasonably be expected to require us to make a public announcement regarding the possibility of such an acquisition, tender offer or proxy solicitation; enter into any agreements with a third party regarding any such prohibited actions; or request us to amend or waive such provisions. Upon the closing of the transactions contemplated by the Warrant Exercise Agreement, the Securities Purchase Agreement, and our obligations thereunder, terminated. The common stock issued upon exercise of the warrant were issued in a private placement pursuant to exemptions from the registration requirements of the Securities Act of 1933 and are covered by a Registration Rights Agreement entered into on May 29, 2012 in connection with the Securities Purchase Agreement.

The Term Loan Facility will mature in 4.5 years and will amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loan Facility with the balance payable on the maturity date of the Term Loan Facility. The Term Loan Facility permits us to increase the term loans, or add a separate tranche of term loans, by an amount not to exceed $100 million plus the maximum amount of additional term loans that we could incur without our senior secured leverage ratio exceeding 4.50 to 1.00 on a pro forma basis after giving effect to such increase or addition. Amounts outstanding bear interest at a rate per annum equal to: (i) the Eurodollar Rate (as defined in the Term Loan Facility and subject to a “floor” of 1.00%) plus the applicable margin or (ii) the Base Rate (as defined in the Term Loan Facility), which is the greatest of (a) Credit Suisse’s prime rate, (b) the federal funds effective rate plus 0.50% and (c) the Eurodollar Rate for an interest period of one month plus 1.00%, plus, in each case, the applicable margin to be agreed with the lenders party thereto.

Loans under the ABL facility are available up to a maximum amount outstanding at any one time equal to the lesser of (a) $125 million and (b) the amount of the Borrowing Base, in each case, less customary reserves. Under the ABL Facility, we have a $20 million sub-limit for the issuance of letters of credit, and a Swing Line Facility of up to $12.5 million for same day borrowings. Borrowing Base is defined as (a) 85% of the amount of our eligible accounts receivable; plus (b) the lesser of (i) 70% of the book value of eligible inventory in the US and (ii) 85% times the net orderly liquidation value of our eligible inventory in the U.S.; less (c) in each case, customary reserves. As of October 31, 2014, there were $8.0 million loans outstanding under the ABL Facility, the amount of letters of credit issued under the ABL Facility was $4.7 million and the net availability under the ABL Facility was $111.8 million. The maximum balance outstanding under the ABL Facility for the three months ended October 31, 2014 was $9.0 million.

Under the ABL Facility, we may elect that the loans bear interest at a rate per annum equal to: (i) the Base Rate plus the applicable margin; or (ii) the LIBOR Rate plus the applicable margin. “Base Rate” means the greatest of (a) the Federal Funds Rate plus 0.5%, (b) the LIBOR Rate (which rate shall be calculated based upon an interest period of 1 month and shall be determined on a daily basis), plus 1.00%, and (c) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its “prime rate.” The LIBOR Rate shall be available for interest periods of one week or, one, two, three or six months and, if all lenders agree, twelve months.

The Term Loan Facility and ABL Facility provide for customary affirmative and negative covenants. The Term Loan Facility has customary cross-default provisions and the ABL Facility contains cross-acceleration provisions, in each case that may be triggered if we fail to comply with obligations under our other credit facilities or indebtedness. The Term Loan Facility has a first priority perfected lien on substantially all property, plant and equipment, capital stock, intangibles and second priority lien on the ABL Priority Collateral, subject to customary exceptions. The ABL Facility requires us to maintain a minimum fixed charge coverage ratio of 1.1:1 if at any time excess availability is less than 10% of maximum availability; and requires us to apply substantially all cash collections to reduce outstanding borrowings under the ABL Facility if excess availability falls below 12.5% of maximum availability for a period of 5 consecutive business days. The ABL Facility is secured by a first-priority lien on accounts receivable, inventory, cash and deposit accounts and a second-priority lien on all real estate, equipment and equity interests of the Company under, and guarantors of, the ABL Facility.

Table of Contents

2016, we may redeem up to 35% of the Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.000% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of redemption. If we experience a change of control, we must offer to purchase for cash all or any part of each holder’s Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any. The indenture pursuant to which the Notes were issued contains customary covenants that, among other things, limit our ability and our restricted subsidiaries’ ability to incur additional indebtedness, make restricted payments, enter into transactions with affiliates, create liens, pay dividends on or repurchase stock, make specified types of investments, and sell all or substantially all of their assets or merge with other companies. Each of the covenants is subject to a number of important exceptions and qualifications.

For the three months ended October 31, 2014 and October 31, 2013, the blended interest rate for our consolidated borrowings, including obligations under the our refinanced debt capital structure and excluding the Oaktree Senior Notes, was 5.28% and 6.33%, respectively. For the three months ended October 31, 2014 and October 31, 2013, the blended interest rate for consolidated short-term borrowings, including obligations under the our refinanced debt capital structure and excluding the Oaktree Senior Notes, was 1.67% and 6.26%, respectively. As of October 31, 2014, we were compliant with financial and reporting covenants under the new refinanced debt structure.

Contractual Obligations and Commitments

Contractual obligations and commitments at October 31, 2014, were as follows (in millions):



	Payments Due by Period
	Total		FY2015		FY 2016- FY 2017		FY 2018- FY 2019		Thereafter
ABL Facility	$	8.0	$	8.0	$	—	$	—	$	—
Long-term obligations	649.6		4.9		13.3		631.4		—
Interest on long-term obligations (a)	139.3		25.5		67.9		45.9		—
Capital leases	10.4		2.0		5.7		2.1		0.6
Interest on capital leases	1.4		0.5		0.7		0.2		—
Operating leases	27.2		3.6		8.2		7.1		8.3
Purchase commitments (b)	59.2		56.5		2.7		—		—
Pension liability	9.2		0.6		1.5		1.7		5.4
Long-term deferred tax liabilities (c)	112.9		—		—		—		112.9
Other long-term liabilities (d)	5.1		0.8		1.9		1.6		0.8
Total	$	1,022.3	$	102.4	$	101.9	$	690.0	$	128.0


(a)	Amounts represent the expected cash interest payments on our long-term debt. Interest on our variable rate debt was forecasted using a LIBOR forward curve analysis as of October 31, 2014.


(b)	Commitments to purchase inventory and equipment. Excludes purchase commitments under Walnut Purchase Agreements as the price is not fixed within these contracts.


(c)	Primarily relates to the intangible assets of Kettle Foods.


(d)	Excludes $0.5 million in deferred rent liabilities. Additionally, the liability for uncertain tax positions ($1.5 million at October 31, 2014, excluding associated interest and penalties) has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined.

Effects of Inflation

There has been no material change in our exposure to inflation from that discussed in our 2014 Annual Report on Form 10-K.

Critical Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to

Table of Contents

make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

There have been no material changes to our critical accounting policies from those discussed in our 2014 Annual Report on Form 10-K except as described below:

Inventories. All inventories are accounted for on a lower of cost or market basis, with cost historically determined using a combination of first-in first-out ("FIFO") and weighted average cost. Beginning in the first fiscal quarter of 2015, we have changed our inventory valuation method from FIFO to weighted average cost for certain of our inventories. The effect of this change was not material to condensed consolidated financial statements for the interim period ended October 31, 2014.

We have entered into walnut purchase agreements with growers, under which they deliver their walnut crop to us during the fall harvest season, and we determine the price for this inventory after receipt and by the end of the fiscal year. This purchase price is determined by us based on our discretion as provided in the agreements, taking into account market conditions, crop size and quality and nut varieties, among other relevant factors. Since the ultimate purchase price to be paid will be determined subsequent to receiving the walnut crop, we estimate the final purchase price for our interim financial statements. Those interim estimates may subsequently change due to changes in the factors described above and the effect of the change could be significant. Any such changes in estimates are accounted for in the period of change by adjusting inventory on hand or cost of goods sold if the inventory is sold through.

Recent Accounting Pronouncements

See Note 2 to the Notes to Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in our exposure to market risk from that discussed in our 2014 Annual Report on Form 10-K.

Table of Contents

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to management, including our principal officers as appropriate to allow timely decisions regarding required disclosure. The President and Chief

Executive Officer and Executive Vice President and Chief Financial Officer concluded that, due to the following material weakness in our internal control over financial reporting described below, the Company’s disclosure controls and procedures were not effective as of October 31, 2014.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended October 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Material Weakness Previously Identified

We previously identified and disclosed in our Annual Report on Form 10-K for the period ended July 31, 2014, a material weakness in our internal control over financial reporting over complex and non-routine transactions that still existed as of October 31, 2014. As a result, our management concluded that the Company's internal control over financial reporting was not effective as of October 31, 2014. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness in our internal control over financial reporting as of October 31, 2014 was:


•	Complex and Non-routine Transactions — We did not maintain effective controls over the accounting for complex and non-routine transactions. Specifically, we did not utilize sufficient technical accounting capabilities related to complex and non-routine transactions.

This material weakness resulted in audit adjustments in prior periods related to currency translation associated with the allocation of goodwill to reporting units resulting from a change in segments, impairment of a long-lived intangible asset resulting from facility closure, classification of restricted cash on the consolidated statement of cash flows and the restatement of the Company’s condensed consolidated financial statements for the three and six months ended January 31, 2013 to correct diluted earnings (loss) per share. Additionally, this material weakness could result in misstatements of the consolidated financial statements that would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation Efforts

We developed certain remediation steps to address the previously disclosed material weaknesses discussed above and to improve our internal control over financial reporting. The Company and the Board take the control and integrity of the Company’s financial statements seriously and believe that the remediation steps described below are essential to maintaining a strong internal control environment. The following remediation steps are among the measures that are being implemented by the Company:

Complex and Non-routine Transactions


•	Continued evaluation and enhancement of internal technical accounting capabilities augmented by the use of third-party advisors and consultants to assist with areas requiring specialized technical accounting expertise and reviewed by management.


•	Develop and implement technical accounting training, led by appropriate technical accounting experts, to enhance awareness and understanding of standards and principles related to relevant complex technical accounting topics.

We are committed to maintaining a strong internal control environment, and believe that these remediation actions will represent significant improvements in our controls. However, the identified material weakness in internal control over financial reporting will not be considered remediated until controls have been designed and/or controls are in operation for a sufficient period of time for our management to conclude that the material weaknesses have been remediated. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In re Diamond Foods Inc., Shareholder Derivative Litigation

In fiscal 2012, putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San

Table of Contents

Francisco County, purportedly on behalf of Diamond and naming certain executive officers and the members of our board of directors as individual defendants. These lawsuits, which related principally to our accounting for certain payments to walnut growers in fiscal 2010 and 2011, were subsequently consolidated as In re Diamond Foods Inc., Shareholder Derivative Litigation which purports to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement. Following mediation efforts, the parties agreed to terms of a proposed settlement and the court entered an order granting final approval of the settlement on August 19, 2013. On September 23, 2013, a Notice of Appeal from the order granting final approval was filed by a single stockholder. No date for this hearing on this appeal has been scheduled. The Company will continue to incur costs associated with this action, and, depending on the ultimate outcome, could continue to do so, and management’s attention may be diverted to this matter. This could have a material adverse effect on our business, financial condition and results of operations.

Labeling Class Action Cases

On January 3, 2014, Deena Klacko first filed a putative class action against Diamond in the Southern District of Florida, alleging that certain ingredients contained in our TIAS tortilla chip product were not natural and seeking damages and injunctive relief. The lawsuit alleged five causes of actions alleging violations of Florida’s Deceptive and Unfair Trade Practices Act, negligent misrepresentation, breach of implied warranty for particular purpose, breach of express warranty and the Magnuson-Warranty Act. The complaint seeks to certify a class of Florida consumers who purchased TIAS tortilla chips since January 3, 2010. On January 9, 2014, Dominika Surzyn brought a similar class action against Diamond relating to our TIAS tortilla chips in federal court for the Northern District of California. Surzyn purports to represent a class of California consumers who purchased said Kettle TIAS products since January 9, 2010.

On April 2, 2014, Richard Hall filed a putative class action against the Company in San Francisco Superior Court, alleging that certain ingredients contained in our Kettle Brand chips and TIAS Tortilla Chips are not natural and seeking damages and injunctive relief. Plaintiff purports to bring this action on his own behalf, as well as on behalf of all consumers in the United States, or alternatively, California, who purchased certain of Diamond’s Kettle Brand Chips or Kettle Brand TIAS tortilla chips within four years of the filing of the complaint.

The Company denies all allegations in these cases. Following mediation and settlement discussions among plaintiffs’ counsel in Klacko, Surzyn and Hall, the parties entered into a settlement agreement, and it is expected to resolve all claims on a nationwide basis and include: Diamond to take certain injunctive relief measures to confirm labeling compliance matters; establishment of a $3.0 million common fund for claims made available to the class and for the payment of class administration and attorneys’ fees; and any funds unclaimed by the class to be provided cy pres to a charity as a food donation. The Company recognized the related settlement charges within the consolidated financial statements for fiscal 2014. On October 30, 2014, the court granted preliminary approval of the settlement. The settlement is subject to final court approval. We cannot predict with certainty the ultimate resolution of these lawsuits, and an unfavorable outcome in excess of amounts recognized as of July 31, 2014, with respect to one or more of these proceedings could have a material adverse effect on our results of operations for the periods in which a loss is recognized.

Other

We are involved in various legal actions in the ordinary course of our business. We do not believe it is feasible to predict or determine the outcome or resolution of the above litigation proceedings, or to estimate the amounts of, or potential range of, loss with respect to those proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or settlements that could require substantial payments by us, which could have a material impact on our financial position, results of operations and cash flows.

Item 1A. Risk Factors

You should consider carefully each of the risks described below, together with all of the information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended July 31, 2014, before deciding to invest in our common stock. If any of the risks outlined herein occurs, our business, financial condition, or results of operations may suffer.

Risks Related to Our Business

Raw materials that are key ingredients to our products are subject to fluctuations in availability and price that could adversely impact our business and financial results.

The availability, size, quality and cost of raw materials for the production and packaging of our products, including nuts, potatoes, corn and corn products, cooking and vegetable oils, corrugate, resins and other commodities, are subject to price

Table of Contents

volatility and fluctuations in availability caused by changes in global supply and demand, weather conditions, governmental agricultural and energy programs, exchange rates for foreign currencies and consumer demand. In particular, the availability and cost of walnuts and other nuts are subject to supply contract renewals, crop size, quality, yield fluctuations, and changes in governmental regulation as well as other factors. Additionally, we rely on raw materials that come from regions that suffer from severe water scarcity or yearly fluctuations, such as California, and such conditions may affect the availability of raw materials not only in a particular season but also over time.

We source walnuts primarily from growers with whom we have entered into walnut purchase agreements. To the extent contracted growers deliver less supply than we expected or we are unable to renew enough walnut purchase agreements or enter into such agreements with new growers in any particular year, we may not have sufficient walnut supply under contract to satisfy our business requirements, which could have an adverse effect on our sales and our results of operations. To obtain sufficient walnut supply, which represents a significant portion of our cost of goods sold, we may be required to purchase walnuts from third parties at substantially higher prices or forgo sales to some market segments, which would reduce our profitability. If we forgo sales to such market segments, we may lose customers and may not be able to replace them later. Given our fixed costs from our manufacturing facilities, if we have a lower supply of walnuts or other raw materials, our unit costs will increase and our gross margin will decline.

We make estimates of the price we will pay for walnuts to growers under contract starting in the first quarter of our fiscal year and, pursuant to our accounting policies, finalize the price to be paid to growers by the end of the fiscal year. The selling price to customers for walnuts fluctuates throughout the year depending on market forces. To the extent that we underestimate the price to be paid for walnuts and enter into contracts with our customers for products including walnuts at prices prevailing at the market at that time and based on walnut cost estimates that ultimately prove to be below the final price we determine to pay to growers, our business and results of operations could be harmed. Each year some of our walnut supply agreements are up for renewal, and competition among walnut handlers makes renewal with us uncertain. Disruption in our walnut supply and inability to secure walnuts cost effectively may adversely impact our business and our financial results.

Our potato chip products are dependent on suppliers providing us with an adequate supply of quality potatoes on a timely basis. The failure of our suppliers to meet our specifications, quality standards or delivery schedules could have an adverse effect on our potato chip operations. In particular, a sudden scarcity, substantial price increase, quality issues or unavailability of ingredients could adversely affect our operating results. There can be no assurance that alternative ingredients would be available when needed on commercially attractive terms, if at all. In addition, high commodity prices could lead to unexpected costs and price increases of our products which might dampen growth of consumer demand for our products. If we are unable to increase productivity to offset these increased costs or increase our prices, this could substantially harm our business and results of operations.

Continuing litigation between the SEC and our former CFO may require significant management time and attention, resulting in significant legal expenses, and could cause our business, financial condition, results of operations and cash flows to suffer. The unfavorable resolution of one or more matters could adversely impact Diamond.

On December 14, 2011, we received a formal order of investigation from the Division of Enforcement of the United States Securities and Exchange Commission (the “SEC”) regarding matters associated with the accounting for payments to walnut growers that resulted in the restatement of fiscal 2010 and 2011 financial results. On January 9, 2014, the SEC authorized a settlement, pursuant to which, and without admitting or denying the allegations in the SEC’s complaint, we agreed to pay $5 million to resolve the matter. The U.S. District Court for the Northern District of California approved the settlement on January 10, 2014 and entered judgment on January 21, 2014. The SEC also entered into a settlement with our former CEO, but remains in litigation with our former CFO. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees, including our former CFO, in connection with the ongoing SEC litigation and any future government inquiries, investigations or actions. These matters have required us to expend significant management time, incur legal and other expenses and will require us to continue to do so. We have exhausted available coverage under applicable insurance policies, and therefore we will need to pay for future expenses related to these matters ourselves, including in connection with the pending litigation between the SEC and our former CFO. Additionally, an adverse judgment against our former CFO could result in claims by our insurance carriers to recover sums previously paid in defense of various related lawsuits and investigative matters. Such claims, if asserted and successful, may have a material effect on our financial condition, business, results of operations and cash flow.

If we are unable to compete effectively in the markets in which we operate, our sales and profitability would be negatively affected.

In general our markets are highly competitive and are based on product quality, price, brand recognition and loyalty. As a result, there are ongoing competitive product and pricing pressures in the markets in which we operate, as well as challenges in

Table of Contents

establishing and maintaining profit margins. Our products compete against food and snack products sold by many regional and national companies, some of which are substantially larger and have greater resources than we have. The greater scale and resources that may be available to our competitors could provide them with the ability to lower prices or increase their promotional or marketing spending to compete more effectively. To address these challenges, we must be able to successfully respond to competitive factors, including pricing, promotional incentives and trade terms. We may need to reduce our prices or increase promotional incentives in response to competition or to grow or maintain our market share. If we decide to reduce or eliminate promotional incentives to improve our profitability, we may not be able to compete effectively and we may lose distribution and market share, which could also lead to a decline in revenue.

Competition and customer pressures may restrict our ability to increase prices in response to commodity or other cost increases. We may also need to increase spending on marketing, advertising and new product innovation to maintain or increase our market share. If we are unable to compete effectively, we could be unable to increase the breadth of the distribution of our products or lose customers or distribution of products, which could have an adverse impact on our sales and profitability. In addition, if we are required to maintain high levels of promotional incentives or trade terms with respect to particular product lines, our margins and profitability would be adversely effected.

If the parties we depend upon for raw material supplies do not perform adequately, our ability to manufacture our products may be impaired, which could harm our business and results of operations.

We rely on third-party suppliers for the raw materials we use to manufacture our products, and our ability to manufacture our products depends on receiving adequate supplies on a timely basis, which may be difficult or uneconomical to procure. If we do not maintain good relationships with suppliers that are important to us or are unable to identify a replacement supplier or develop our own sourcing capabilities, our ability to manufacture our products may be harmed, which would result in interruptions in our business. In addition, even if we are able to find replacement suppliers when needed, we may not be able to enter into agreements with them on favorable terms and conditions, which could increase our costs of production. The occurrence of any of these risks could adversely affect our business and results of operations.

We may be required to conduct product recalls, potentially triggering concerns with the safety and quality of our products, which could cause consumers to avoid our products and reduce our sales and net income.

The sale of food products for human consumption involves risk of injury to consumers. We face risks associated with product recalls and liability claims if our products become adulterated, mislabeled or misbranded, or cause injury, illness, or death. Our products may be subject to product tampering and to contamination and spoilage risks, such as mold, bacteria, insects and other pests, shell fragments, cross-contamination and off-flavor contamination. If any of our products were to be tampered with, or otherwise tainted and we were unable to detect it prior to shipment, our products could be subject to a recall. Recalls might also be required due to usage of raw materials provided by third-party ingredient suppliers. Such suppliers are required to supply material free of contamination, but may, on occasion, identify issues after selling material to Diamond manufacturing locations. Our ability to sell products could be reduced if governmental agencies conclude that our products have been tampered with, or that certain pesticides, herbicides or other chemicals used by growers have left harmful residues on portions of the crop or that the crop has been contaminated by aflatoxin or other agents. A significant product recall could cause our products to be unavailable for a period of time and reduce our sales. Adverse publicity could result in a loss of consumer confidence in our products, damage to our reputation and also reduce our sales for an extended period. Product recalls and product liability claims could increase our expenses and have an adverse effect on demand for our products and, consequently, reduce our sales, net income and liquidity.

Material weaknesses can exist in our system of internal control over financial reporting, which could have a material impact on our business.

Our ability to implement our business plan and comply with regulations requires an effective planning and management process. We expect that we will need to improve existing operational and financial systems, procedures and controls, and implement new ones, to manage our future business effectively. Any implementation delays, or disruption in the transition to new or enhanced systems, procedures or controls, could harm our ability to forecast sales, manage our supply chain, and record and report financial and management information on a timely and accurate basis.

Furthermore, we are required to maintain internal control over financial reporting adequate to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with generally accepted accounting principles. In connection with the restatement of our Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2013, we determined that we had a material weakness as of July 31, 2013, namely that our controls over the evaluation and review of complex and non-routine transactions were not effective. In addition, we had determined that we had a material weakness as of July 31, 2013 relating to our controls over journal entries.

Table of Contents

As of July 31, 2014, the material weakness related to our controls over journal entries had been remediated. The material weakness related to the evaluation and review of complex and non-routine transactions, however, has not been remediated.

Because the material weakness over the evaluation and review of complex and non-routine transactions has not been remediated, we have concluded that as of October 31, 2014, our internal controls over financial reporting were not effective. Until the evaluation and review of complex and non-routine transactions material weakness is fully remediated, it may be difficult for us to manage our business, our results of operations could be harmed, our ability to report results accurately and on time could be impaired, investors may lose faith in the reliability of our statements, and the price of our securities may be materially impacted. We cannot assure you whether, or when, the remaining control deficiency that has been identified as a material weakness will be fully remediated.

We do not expect that our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. A material weakness means a deficiency, or combination of deficiencies, in internal control over financial reporting exists such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.

Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our consolidated financial statements. Any such failure could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting, cause us to incur unforeseen costs, negatively impact our results of operations, or cause the market price of our common stock and/or the notes to decline.

Diamond and some of our current and former officers and directors remain parties to lawsuits arising out of or related to Diamond’s restatement of its fiscal 2010 and fiscal 2011 consolidated financial statements, primarily resulting from our accounting for payments to walnut growers related to fiscal 2010 and fiscal 2011, and could result in additional legal expenses and damages, and cause our business, financial condition, results of operations and cash flows to suffer.

In fiscal 2012, putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond and naming certain executive officers and the members of our board of directors as individual defendants. These lawsuits, which related principally to our accounting for certain payments to walnut growers in fiscal 2010 and 2011, were subsequently consolidated as In re Diamond Foods, Inc. Shareholder Derivative Litigation which purports to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement. Following mediation efforts, the parties agreed to terms of a proposed settlement and the court entered an order granting final approval of the settlement on August 19, 2013. On September 23, 2013, a Notice of Appeal from the order granting final approval was filed by a single stockholder. No date for this hearing on this appeal has been scheduled. In addition, the SEC currently is in litigation with Diamond’s former CFO with respect to claims arising from the same circumstances. Former executive officers and members of our board of directors as individual defendants have been the subject of government investigations and lawsuits. Under Delaware law, our bylaws and certain indemnification agreements, we may have an obligation to indemnify former officers and directors in relation to these matters. Insurance funds from our director and officer liability policies were used in connection with the settlements of the shareholder derivative litigation and securities class action litigation and as a result, we will be required to fund indemnity obligations from claims relating to these matters. For example, if the litigation between our former CFO and the SEC continues or appeals proceed in the shareholder derivative action, our indemnity obligations could result in significant legal expenses or damages and cause our business, financial condition, results of operations and cash flow to suffer.

Government regulations could increase our costs of production and our business could be adversely affected.

As a food company, we are subject to extensive government regulation, including regulation of the manufacturing, importation, processing, product quality, packaging, storage, distribution and labeling of our products. Furthermore, there may be changes in the legal and regulatory environment, and governmental entities or agencies in jurisdictions where we operate may impose new manufacturing, importation, processing, packaging, storage, distribution, labeling or other restrictions, which could increase our costs and affect our profitability. For example, various regulatory authorities and others have paid increasing

Table of Contents

attention to the effect on humans due to the consumption of acrylamide—a naturally-occurring chemical compound that is formed in the process of cooking many foods, including potato chips, and a potential carcinogen—and have imposed additional regulatory requirements. In the State of California, we are required to warn about the presence of acrylamide and other potential carcinogens in our products. In addition, the U.S. Food and Drug Administration is currently evaluating banning the use of partially hydrogenated oils in food, which some of our products contain. If consumer concerns about acrylamide or partially hydrogenated oils increase or these substances are regulated further or not allowed in food products, demand for affected products could decline or we may be unable to sell certain products and our revenues and business could be harmed. Our manufacturing operations are subject to various national, regional or state and local laws and regulations that require us to obtain licenses relating to customs, health and safety, building and land use and environmental protection. We are also subject to environmental regulations governing the discharge into the air, and the generation, handling, storage, transportation, treatment and disposal of waste materials. New or amended statutes and regulations, increased production at our existing facilities and our expansion into new operations and jurisdictions may require us to obtain new licenses and permits, and could require us to change our methods of operations, which could be costly. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as possible criminal sanctions, all of which could have an adverse effect on our business.

A disruption at any of our production facilities would significantly decrease production, which could increase our cost of sales and reduce our net sales and income from operations.

We process and package our products in several domestic and international facilities and also have co-manufacturing agreements and co-pack arrangements with third parties. A temporary or extended interruption in operations at any of our facilities, whether due to technical or labor difficulties, destruction or damage from fire, flood or earthquake, infrastructure failures such as power or water shortages, raw material shortage or any other reason, whether or not covered by insurance, could interrupt our manufacturing operations, disrupt communications with our customers and suppliers and cause us to lose sales and write off inventory. Any prolonged disruption in the operations of our facilities or our co-packer facilities would have a significant negative impact on our ability to manufacture and package our products on our own or have our products manufactured and packaged and may cause us to seek additional third-party arrangements, thereby increasing production costs. These third parties may not be as efficient as we are and may not have the capabilities to process and package some of our products, which could adversely affect sales or operating income. Further, current and potential customers might not purchase our products if they perceive our lack of alternate manufacturing facilities to be a risk to their continuing source of products.

Changes in the food industry, including changing dietary trends and consumer preferences and adverse publicity about Diamond and the health effects of consuming some products could reduce demand for our products.

Consumer tastes can change rapidly as a result of many factors, including shifting consumer preferences, dietary trends and purchasing patterns. To address consumer preferences, we invest significant resources in research and development of new products. Dietary trends, such as the consumption of food in low carbohydrate content, have in the past, and may in the future, harm our sales. If we fail to anticipate, identify or react to consumer trends, or if new products we develop do not achieve acceptance by retailers or consumers, demand for our products could decline, which would in turn cause our revenue and profitability to be lower.

In addition, some of our products contain sodium, preservatives and other ingredients, the health effects of which are the subject of increasing public scrutiny, including the suggestion that excessive consumption of these ingredients can lead to a variety of adverse health effects. In the United States and other countries, there is increasing consumer awareness of health risks, including obesity, associated with consumption of these ingredients, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food products. A continuing global focus on health and wellness, including weight management, and increasing media attention to the role of food marketing, could adversely affect our sales or lead to stricter regulations and greater scrutiny of food marketing practices. For example, the U.S. Food and Drug Administration is currently evaluating banning the use of partially hydrogenated oils in food, which certain of our products contain. Additionally, we believe consumers are looking increasingly for all natural products. From time to time we have been subject to lawsuits challenging our product labeling practices, including with respect to natural claims, and may be sued for such practices in the future. Moreover, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine consumer confidence or customer relations, and reduce demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.

Increased costs associated with product processing and transportation, such as water, electricity, natural gas and fuel costs, could increase our expenses and reduce our profitability.

We require a substantial amount of energy and water to make our products. Transportation costs, including fuel and labor, also represent a significant portion of the cost of our products, because we use third-party truck and rail companies to collect

Table of Contents

our raw materials and deliver our products to our distributors and customers. These costs fluctuate significantly over time due to factors that may be beyond our control, including increased fuel prices, adverse weather conditions or natural disasters, employee strikes, regulation and increased export and import restrictions. We may not be able to pass on increased costs of production or transportation to our customers. In addition, from time to time, transportation service providers have a backlog of shipping requests, which could impact our ability to ship products in a timely fashion. Increases in the cost of water, electricity, natural gas, fuel or labor and failure to ship products on time, could increase our costs of production and adversely affect our profitability.

The loss of any major customer could decrease sales and adversely impact our net income.

We depend on a few significant customers for a large proportion of our net sales. This concentration has become more pronounced with the trend toward consolidation in the retail grocery store industry. Sales to our largest customer, Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), represented approximately 16%, 16% and 18% of our total net sales in fiscal 2014, 2013, and 2012 respectively. Sales to our second largest customer, Costco Wholesale Corporation, represented approximately 9%, 9%, and 12% of our total net sales in fiscal 2014, 2013, and 2012, respectively. The success of our business is dependent on our ability to successfully manage relationships with these customers, or any other significant customer. Further, there is a continuing trend towards retail trade consolidation, which can create significant cost and margin pressure on our business. The loss of any major customers, or any other significant customer, or a material decrease in their purchases from us, could result in decreased sales and adversely impact our net income.

The consolidation of retail customers could adversely affect us.

Retail customers, such as supermarkets, warehouse clubs and food distributors, continue to consolidate, resulting in fewer customers on which we can rely for business. Consolidation also produces larger, more sophisticated retail customers that can resist price increases and demand lower pricing, increased promotional programs or specifically tailored products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. Further retail consolidation and increasing retail power could materially and adversely affect our product sales, financial condition and results of operations.

If we need to compete with other manufacturers or with retailer brands on the basis of price, our business and results of operations could be negatively impacted.

Our branded products face competition from private label products (retailer brands) that at times may be sold at lower price points. The impact of price gaps between our products and private label products may result in share erosion and harm our business. A number of our competitors have broader product lines, substantially greater financial and other resources and/or lower fixed costs than we have. Our competitors may succeed in developing new or enhanced products that are more attractive to customers or consumers than ours. These competitors may also prove to be more successful in marketing and selling their products than we are; and may be better able to increase prices to reflect cost pressures. We may not compete successfully with these other companies or maintain or grow the distribution of our products. We cannot predict the pricing, commodity costs, or promotional activities of our competitors or whether they will have a negative effect on us. Many of our competitors engage in aggressive pricing and promotional activities. There are competitive pressures and other factors which could cause our products to lose market share, decline in sales, or result in significant price or margin erosion, which would have a material effect on our business, financial condition and results of operations.

Our proprietary brands and packaging designs are essential to the value of our business, and the inability to protect, and costs associated with protecting, our intellectual property could harm the value of our brands and adversely affect our business and results of operations.

Our success depends significantly on our know-how and other intellectual property. We rely on a combination of trademarks, service marks, trade secrets, patents, copyrights and similar rights to protect our intellectual property. Our success also depends in large part on our continued ability to use existing trademarks and service marks in order to maintain and increase brand awareness and further develop our brands.

Our efforts to protect our intellectual property may not be adequate. Third parties may misappropriate or infringe on our intellectual property or develop more efficient and advanced technologies. Our patents expire over time and third parties may use such previously patented technology to compete against us; our third-party manufacturers and partners may also disclose our trade secrets. From time to time, we engage in litigation to protect our intellectual property, which could result in substantial costs as well as diversion of management attention. The occurrence of any of these risks could adversely affect our business and results of operations.

Table of Contents

We depend on our key personnel and if we lose the services of any of these individuals, or fail to attract and retain additional key personnel, we may not be able to implement our business strategy or operate our business effectively.

Our future success largely depends on the contributions of our senior management team. We believe that these individuals’ expertise and knowledge about our industry, their respective fields and their relationships with other individuals in our industry are critical factors to our continued growth and success. We do not carry key person insurance. The loss of the services of any member of our senior management team and the failure to hire and retain qualified management and other key personnel could have an adverse effect on our business and prospects. Our success also depends upon our ability to attract and retain additional qualified sales, marketing and other personnel.

Economic downturns may adversely affect our business, financial condition and results of operations.

Unfavorable economic conditions may negatively affect our business and financial results. Poor economic conditions could negatively impact consumer demand for our products, the mix of our products’ sales, our ability to collect accounts receivable on a timely basis, the ability of suppliers to provide the materials required in our operations, and our ability to obtain financing or to otherwise access the capital markets. The occurrence of any of these risks could adversely affect our business, financial condition and results of operations.

The acquisition or divestiture of product lines or businesses could pose risks to our business and the market price of our common stock.

We may review acquisition prospects that we believe could complement our existing business. There is no assurance that we will be successful in identifying, negotiating or consummating any future acquisitions. Any such future acquisitions could result in accounting charges, potentially dilutive issuances of stock and increased debt and contingent liabilities, any of which could have a material effect on our business and the market price of our common stock. Acquisitions entail many financial, managerial and operational risks, including difficulties integrating the acquired operations, effective and immediate implementation of internal control over financial reporting, diversion of management attention during the negotiation and integration phases, uncertainty entering markets in which we have limited prior experience, and potential loss of key employees of acquired organizations. We may be unable to integrate product lines or businesses that we acquire, which could have a material effect on our business and on the market price of our common stock. We may evaluate the various components of our portfolio of businesses and may, as a result, explore divesting such products or businesses. Divestitures have inherent risks, including possible delays in closing transactions (including potential difficulties in obtaining regulatory approvals), the risk of lower-than-expected sales proceeds for the divested businesses, unexpected costs associated with the separation of the business to be sold from our integrated information technology systems and other operating systems and potential post-closing claims for indemnification. In addition, adverse economic or market conditions may result in fewer potential bidders and unsuccessful divestiture efforts. Transaction costs may be high, and expected cost savings, which are offset by revenue losses from divested businesses, may be difficult to achieve, and we may experience varying success in reducing costs or transferring liabilities previously associated with the divested businesses. In addition, acquisitions or divestitures may result in litigation that can be expensive and divert management’s attention and resources from our core business.

Our business and operations could be negatively impacted if we fail to maintain satisfactory labor relations.

The success of our business depends substantially upon our ability to maintain satisfactory relations with our employees. Our production workforce in one of our facilities is covered by a collective bargaining agreement which expires in March 2015. Strikes or work stoppages and interruptions could occur if we are unable to renew this agreement on satisfactory terms. If a work stoppage or slow down were to occur, it could adversely affect our business and disrupt our operations. The terms and conditions of existing or renegotiated agreements also could increase our costs or otherwise affect our ability to fully implement future operational changes to our business.

Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.

We conduct a substantial amount of business with vendors and customers located outside the United States. During fiscal 2014, fiscal 2013, and fiscal 2012, sales outside the United States, primarily in the United Kingdom, Canada, South Korea, Japan, Germany, Netherlands, Turkey, China and Spain accounted for approximately 25%, 24% and 23% of our net sales, respectively. Many factors relating to our international operations and to particular countries in which we operate could have a material negative impact on our business, financial condition and results of operations. These factors include:


•	negative economic developments in economies around the world and the instability of governments, including the threat of war, terrorist attacks, epidemic or civil unrest;

Table of Contents


•	pandemics, such as the flu, which may adversely affect our workforce as well as our local suppliers and customers;


•	earthquakes, tsunamis, floods or other major disasters that may limit the supply of nuts or other products that we purchase abroad;


•	tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements imposed by governments;


•	foreign currency exchange and transfer restrictions;


•	increased costs, disruptions in shipping or reduced availability of freight transportation;


•	differing labor standards;


•	differing levels of protection of intellectual property;


•	difficulties and costs associated with complying with U.S. laws and regulations applicable to entities with overseas operations;


•	the threat that our operations or property could be subject to nationalization and expropriation;


•	varying regulatory, tax, judicial and administrative practices in the jurisdictions where we operate;


•	difficulties associated with operating under a wide variety of complex foreign laws, treaties and regulations; and


•	potentially burdensome taxation.

Any of these factors could have an adverse effect on our business, financial condition and results of operations.

A material impairment in the carrying value of acquired goodwill, other intangible assets or tangible assets could negatively affect our consolidated operating results and net worth.

A significant portion of our assets are goodwill and other intangible assets, the majority of which are not amortized but are reviewed at least annually for impairment. If the carrying value of these assets exceeds the current fair value, the asset is considered impaired and is reduced to fair value resulting in a non-cash charge to earnings. Events and conditions that could result in impairment include a sustained drop in the market price of our common stock, increased competition or loss of market share, product innovation or obsolescence, or product claims that result in a significant loss of sales or profitability over the product life. To the extent our market capitalization (increased by a reasonable control premium) results in a fair value of our common stock that is below our net book value, or if other indicators of potential impairment are present, then we will be required to take further steps to determine if an impairment of goodwill and other intangible assets has occurred and to calculate an impairment loss. If there are future changes in our stock price, or significant changes in the business climate or operating results of our reporting units, we may incur additional impairment charges related to the Kettle U.S. trade name or our other intangible assets and goodwill which would negatively impact our consolidated operating results and further reduce our stock price. At October 31, 2014, the carrying value of goodwill and other intangible assets totaled approximately $789.0 million, compared to total assets of approximately $1,338.4 million and total shareholders’ equity of approximately $280.6 million. At October 31, 2013, the carrying value of goodwill and other intangible assets totaled approximately $798.0 million, compared to total assets of approximately $1,307.2 million and total shareholders’ equity of approximately $140.0 million.

Unauthorized access to confidential information and data on our information technology systems and security and data breaches could materially adversely affect our business, financial condition and operating results.

As part of our operations, we rely on our computer systems to manage inventory, process transactions, communicate with our suppliers and other third parties, and on continued and unimpeded access to secure network connections to use our computer systems. We have physical, technical and procedural safeguards in place that are designed to protect information and protect against security and data breaches as well as fraudulent transactions and other activities. Despite these safeguards and our other security processes and protections, we cannot be assured that all of our systems and processes are free from vulnerability to security breaches (through cyberattacks, which are evolving and becoming increasingly sophisticated, physical breach or other means) or inadvertent data disclosure by third parties or by us. A significant data security breach, including misappropriation of customer, distributor or employee confidential information, could cause us to incur significant costs, which

Table of Contents

may include potential cost of investigations, legal, forensic and consulting fees and expenses, costs and diversion of management attention required for investigation, remediation and litigation, substantial repair or replacement costs. We could also experience data losses that would impair our ability to manage inventories or process transactions and the negative impact on our reputation and loss of confidence of our customers, distributors, suppliers and others, any of which could have a material adverse impact on our business, financial condition and operating results.

Risks Related to our Indebtedness

We are highly leveraged and have substantial debt service requirements that could adversely affect our ability to fulfill our debt obligations, place us at a competitive disadvantage in our industry and limit our ability to react to changes in the economy or our industry.

We have incurred and will continue to have a substantial amount of indebtedness. Our high debt-service requirements could adversely affect our ability to operate our business, and might limit our ability to take advantage of potential business opportunities. Our ability to make scheduled payments or to refinance our indebtedness depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business and other factors beyond our control. Our business may not generate cash flow in an amount sufficient to enable us to pay the principal of, or interest on, our indebtedness, or to fund our other liquidity needs, including working capital, capital expenditures, product development efforts and other general corporate requirements. We may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. This high degree of leverage could have other important consequences, including: making it more difficult to satisfy obligations with respect to the 7.000% Notes due 2019 (the “Notes”) and our other indebtedness, including restrictive covenants and borrowing conditions, which could result in an event of default under the indenture governing the Notes or the agreements governing our other indebtedness;


•	increasing our vulnerability to adverse economic, industry or competitive developments;


•	exposing us to the risk of increased interest rates because our debt arrangements will be at variable rates of interest;


•	restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;


•	limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and


•	placing us at a competitive disadvantage compared to competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from pursuing.

Our ability to satisfy our debt obligations, including our obligations under the Notes, will depend upon, among other things, our future operating performance and our ability to refinance indebtedness when necessary. Each of these factors is, to a large extent, dependent on economic, financial, competitive and other factors beyond our control. If, in the future, we cannot generate sufficient cash from operations to make scheduled payments on our debt obligations, we will need to refinance our debt, obtain additional financing, issue additional equity or sell assets. We cannot assure you that our business will generate cash flow or that we will be able to obtain funding sufficient to satisfy our debt service requirements.

Despite current indebtedness levels, we may still be able to incur substantially more debt, including secured debt. This could further increase the risks associated with our significant indebtedness.

We may be able to incur additional substantial indebtedness in the future. Although the terms of the agreements governing our existing indebtedness, the terms of our senior secured asset-based revolving credit facility and our senior secured term loan facility and the indenture governing the Notes contain restrictions on the incurrence of additional indebtedness, indebtedness incurred in compliance with these restrictions could be substantial. The incurrence of additional indebtedness could make it more likely that we will experience some or all of the risks associated with substantial indebtedness.

Our other debt agreements contain restrictions that may limit our flexibility in operating our business.

The indenture governing our debt arrangements contain various covenants that may limit our ability or the ability of our domestic subsidiaries to engage in specified types of transactions that may be in our long-term best interests. These covenants limit our ability, among other things to:


•	borrow money or guarantee debt;


•	create liens;


•	pay dividends on or redeem or repurchase stock;


•	make specified types of investments and acquisitions;

Table of Contents


•	enter into or permit to exist contractual limits on the ability of our subsidiaries to pay dividends to us;


•	enter into transactions with affiliates; and


•	sell assets or merge with other companies.

These covenants limit our operational flexibility and could prevent us from taking advantage of business opportunities as they arise. A breach of any of these covenants or other provisions in our debt agreements could result in an event of default that, if not cured or waived, could result in such debt becoming immediately due and payable. This, in turn, could cause our other debt to become due and payable as a result of cross-default or cross-acceleration provisions contained in the agreements governing such other debt. In the event that some or all of our debt is accelerated and becomes immediately due and payable, we may not have the funds to repay, or the ability to refinance, such debt.

Risks Related to Our Common Stock

The market price of our common stock is volatile and may result in investors selling shares of our common stock at a loss.

The trading price of our common stock is volatile and subject to fluctuations in price in response to various factors, many of which are beyond our control, including:


•	our operating performance and the performance of other similar companies;


•	changes in our revenues, earnings, prospects, or recommendations of securities analysts who follow our stock or our industry;


•	publication of research reports about us or our industry by any securities analysts who follow our stock or our industry;


•	speculation in the press or investment community;


•	terrorist acts;


•	general market conditions, including economic factors unrelated to our performance; and


•	the results and outcome of ongoing securities class action litigation and governmental investigations.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation against us could result in substantial costs and divert our management’s attention and resources from our core business.

We issued a substantial number of shares in connection with our securities litigation settlement and pursuant to the exercise of an outstanding warrant issued to Oaktree, and the trading of these shares in the open market could cause the market price of our common stock to decline.

In connection with an agreement that we entered into to settle a private securities class action against us and two of our former officers, in fiscal 2014 we paid a total of $11.0 million in cash and issued approximately 4.45 million shares of our common stock to a settlement fund. In mid-November, the escrow agent began notifying eligible class participants of their portion of the settlement fund. The shares were issued to eligible class participants on November 14, 2014. The volatility in the trading price of our common stock may increase as a result of our shares being sold after distribution. In addition, on February 19, 2014 Oaktree exercised a warrant to purchase 4,420,859 million shares of our common stock. As a result of the warrant exercise, the volatility in the trading price of our common stock may increase if and when Oaktree decides to sell shares.

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our strategy.

The timing and amount of our working capital and capital expenditure requirements may vary significantly as a result of many factors, including:


•	market acceptance of our products;


•	the need to make large capital expenditures to support and expand production capacity;


•	the existence of opportunities for expansion; and

Table of Contents


•	access to and availability of sufficient management, technical, marketing and financial personnel.

If our capital resources are not sufficient to satisfy our liquidity needs, we may seek to sell additional equity or debt securities or obtain other debt financing. The sale of additional equity or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. With the exception of the secured credit facility, we have not made arrangements to obtain additional financing. We may not be able to obtain additional financing, if required, in amounts or on terms acceptable to us, or at all.

Anti-takeover provisions could make it more difficult for a third party to acquire us.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Further, some provisions of our charter documents, including provisions establishing a classified board of directors, eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or our management, which could have an adverse effect on the market price of our stock. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit an “interested stockholder” from engaging in a “business combination” with us for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. All of the foregoing could have the effect of delaying or preventing a change in control or management.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following are details of repurchases of common stock during the three months ended October 31, 2014:



Period	Total number of shares repurchased (1)	Average price paid per share		Total number of shares repurchased as part of publicly announced plans	Approximate Dollar value of shares that may yet be purchased under the plans
Repurchases from August 1 - August 31, 2014	2,102	$	27.26	—	$	—
Repurchases from September 1 - September 30, 2014	1,758	$	27.25	—	$	—
Repurchases from October 1 - October 31, 2014	24,890	$	28.21	—	$	—
Total	28,750	$	28.08	—	$	—

(1)

All of the shares in the table above were originally granted to employees as restricted stock pursuant to our 2005 Equity Incentive Plan (“EIP”). Pursuant to the EIP, all of the shares reflected above were relinquished by employees in exchange for Diamond’s agreement to pay federal and state withholding obligations resulting from the vesting of the restricted stock. The repurchases reflected above were not made pursuant to a publicly announced plan.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Table of Contents

Item 5. Other Information

On December 5, 2014, the Compensation Committee (the "Committee") of our Board of Directors approved an Amendment to Change of Control and Retention Agreement for each of our executive officers, except Brian J. Driscoll, our President and Chief Executive Officer. Each Change of Control and Retention Agreement with these executive officers provided that all outstanding stock options and restricted stock granted by the Company would accelerate and vest in connection with a Terminated Upon Change of Control (as defined therein), subject to the effectiveness of a release. The Amendment of the agreement is intended to align this provision with the Committee's current practice of awarding performance share units and restricted stock units and any future practices that the Committee may adopt. The Committee previously had a practice of awarding stock options and restricted stock to executive officers.

Item 6. Exhibits

The following exhibits are filed as part of this report or are incorporated by reference to exhibits previously filed with the SEC.



		Filed with this 10-Q	Incorporated by reference
Number	Exhibit Title	Filed with this 10-Q		Form	File No.	Date Filed

3.01	Certificate of Elimination of Series A Junior Participating Preferred Stock of Diamond Foods, Inc.			8-K	000-51439	October 29, 2014

3.02	Amended and Restated Bylaws			8-K	000-51439	October 29, 2014

4.01	Amendment No. 4 to Rights Agreement			8-K	000-51439	October 29, 2014

10.01*	Description of Annual Incentive program			10-K	000-51439	October 3, 2014

10.02*	Form of Restricted Stock Unit Agreement	X

10.03*	Form of Performance Share Unit Agreement	X

10.04*	Form of Amendment to Change of Control and Retention Agreement (applicable to executive officers other than the CEO)	X

31.01	Rule 13a-14(a) and 15d-14(a) Certification of Chief Executive Officer	X

31.02	Rule 13a-14(a) and 15d-14(a) Certification of Chief Financial Officer	X

32.01	Section 1350 Certifications	X

101.INS	XBRL Instance Document	X

101.SCH	XBRL Taxonomy Extension Schema Document	X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	X

101.LAB	XBRL Taxonomy Extension Labels Linkbase Document	X

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X

*Indicates management contract or compensatory plan or arrangement.

Table of Contents

SIGNATURES

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



	DIAMOND FOODS, INC.

Date: December 8, 2014	By:	/s/ Raymond P. Silcock
		Raymond P. Silcock
		Executive Vice President and Chief
		Financial Officer

Table of Contents

EXHIBIT INDEX



		Filed with this 10-Q	Incorporated by reference
Number	Exhibit Title	Filed with this 10-Q		Form	File No.	Date Filed

3.01	Certificate of Elimination of Series A Junior Participating Preferred Stock of Diamond Foods, Inc.			8-K	000-51439	October 29, 2014

3.5	Amended and Restated Bylaws			8-K	000-51439	October 29, 2014

10.6	Amendment No. 4 to Rights Agreement			8-K	000-51439	October 29, 2014

10.01*	Description of Annual Incentive program			10-K	000-51439	October 3, 2014

10.02*	Form of Restricted Stock Unit Agreement	X

10.03*	Form of Performance Share Unit Agreement	X

10.04*	Form of Amendment to Change of Control and Retention Agreement (applicable to executive officers other than the CEO)	X

31.01	Rule 13a-14(a) and 15d-14(a) Certification of Chief Executive Officer	X

31.02	Rule 13a-14(a) and 15d-14(a) Certification of Chief Financial Officer	X

32.01	Section 1350 Certifications	X

101.INS	XBRL Instance Document	X

101.SCH	XBRL Taxonomy Extension Schema Document	X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	X

101.LAB	XBRL Taxonomy Extension Labels Linkbase Document	X

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X

*Indicates management contract or compensatory plan or arrangement.

Exhibit 10.02

DIAMOND FOODS, INC.

2005 EQUITY INCENTIVE PLAN

RESTRICTED STOCK UNIT AGREEMENT

THIS RESTRICTED STOCK UNIT AGREEMENT (this “Agreement”) is made by and between Diamond Foods, Inc., a Delaware corporation (the “Company”), and the person (“Participant”) identified on the attached Notice of Grant of Award and Award Agreement (the “Notice”) pursuant to the Company’s 2005 Equity Incentive Plan (the “Plan”). To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Plan. The Notice is incorporated by reference into this Agreement, and all references to the Agreement include the Notice.

1.Settlement. Settlement of vested RSUs shall occur on vesting. Settlement of vested RSUs shall be in Shares.

2. No Stockholder Rights. Unless and until such time as Shares are issued in settlement of vested RSUs, the Participant shall have no ownership of the Shares allocated to the RSUs and shall have no right to vote such Shares, subject to the terms, conditions and restrictions described in the Plan and herein.

3. No Transfer. The RSUs and any interest therein: (i) shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of, and (ii) shall, if the Participant’s continuous employment with the Company or any Parent or Subsidiary shall terminate for any reason (except as otherwise provided in the Plan or herein), be forfeited to the Company forthwith, and all the rights of the Participant to such RSUs shall immediately terminate.

4. Participant’s Termination. If Participant is Terminated, then the Committee shall settle, in Shares, the value of any vested RSUs that have not already been settled. In case of any dispute as to whether Participant has Terminated, the Committee shall have sole discretion to determine Participant’s Termination Date.

5. Tax Withholding. Prior to delivery of Shares of Common Stock upon the vesting of the RSUs, Participant must pay or make adequate arrangements satisfactory to the Company and/or Participant's employer to satisfy all withholding obligations of the Company and/or Participant's employer. In this regard, Participant authorizes the Company and/or Participant's employer, at their discretion and if permissible under local law, to satisfy its withholding obligations by one or a combination of the following:

(i) withholding Shares from the delivery of the Shares, provided that the Company only withholds a number of Shares with a Fair Market Value equal to or below the minimum withholding amount, provided, however, that in order to avoid issuing fractional Shares, the Company may round up to the next nearest number of whole Shares, as long as the Company issues no more than a single whole Share in excess of the minimum withholding obligation. The

Company or Participant’s employer will remit the total amount withhold for Tax Items to the appropriate tax authorities; or

(ii) withholding from Participant’s wages or other base compensation paid to Participant by the Company and/or Participant’s employer; or

(iii) selling or arranging for the sale of Shares.

6. Section 280G Provision. If Participant, upon taking into account the benefit provided under this Award and all other payments that would be deemed to be “parachute payments” within the meaning of Section 280G of the Code (collectively, the “280G Payments”), would be subject to the excise tax under Section 4999 of the Code, notwithstanding any provision of this Award to the contrary, Participant's benefit under this Award shall be reduced to an amount equal to (i) 2.99 times Participant's “base amount” (within the meaning of Section 280G of the Code), (ii) minus the value of all other payments that would be deemed to be “parachute payments” within the meaning of Section 280G of the Code (but not below zero); provided, however, that the reduction provided by this sentence shall not be made if it would result in a smaller aggregate after-tax payment to Participant (taking into account all applicable federal, state and local taxes including the excise tax under Section 4999 of the Code). Unless the Company and Participant otherwise agree in writing, all determinations required to be made under this Section 6, and the assumptions to be used in arriving at such determinations, shall be made in writing in good faith by the accounting firm serving as the Company's independent public accountants immediately prior to the events giving rise to the payment of such benefits (the “Accountants”). For the purposes of making the calculations required under this Section 6, the Accountants may make reasonable assumptions and approximations concerning the application of Sections 280G and 4999 of the Code. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 6.

7. Acknowledgement. By their signatures on the Notice, the Company and the Participant agree that the RSUs are granted under and governed by this Agreement and by the provisions of the Plan (incorporated herein by reference). The Participant: (i) acknowledges receipt of a copy of the Plan and the Plan prospectus, (ii) represents that the Participant has carefully read and is familiar with their provisions, and (iii) hereby accepts the RSUs subject to all of the terms and conditions set forth herein and those set forth in the Plan.

8. Compliance with Laws and Regulations. The issuance of Shares will be subject to and conditioned upon compliance by the Company and Participant with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company's Common Stock may be listed or quoted at the time of such issuance or transfer.

9. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement will be binding upon Participant and Participant's heirs, executors, administrators, legal representatives, successors and assigns.

10. Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California, excluding that body of laws pertaining to conflict of laws. If any provision of this Agreement is determined by a court of law to be illegal or unenforceable, then such provision will be enforced to the maximum extent possible and the other provisions will remain fully effective and enforceable.

11. Notices. Any notice required to be given or delivered to the Company shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Participant shall be in writing and addressed to Participant at the address indicated above or to such other address as Participant may designate in writing from time to time to the Company. All notices shall be deemed effectively given upon personal delivery, (i) three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested), (ii) one (1) business day after its deposit with any return receipt express courier (prepaid), or (iii) one (1) business day after transmission by rapifax or telecopier.

12. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.

13. Headings. The captions and headings of this Agreement are included for ease of reference only and are to be disregarded in interpreting or construing this Agreement.

14. Entire Agreement. The Plan, the Notice of Grant and this RSU Agreement for these RSUs constitute the entire agreement and understanding of the parties with respect to the subject matter herein and supersede all prior understandings and agreements, whether oral or written, between the parties hereto with respect to the specific subject matter hereof.

Exhibit 10.03

DIAMOND FOODS, INC.

2005 EQUITY INCENTIVE PLAN

PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT

PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD AGREEMENT (this “Agreement”) is made by and between Diamond Foods, Inc., a Delaware corporation (the “Company”), and the Participant (“Participant”) identified on the attached Notice of Grant of Award and Award Agreement (the “Notice”) pursuant to the Company’s 2005 Equity Incentive Plan (the “Plan”). To the extent any capitalized terms used in this Agreement (including Appendix A and Appendix B) are not defined, they shall have the meaning ascribed to them in the Plan. The Award (as defined in Appendix A) and the “Award Units” transferrable thereunder are subject to all the terms and conditions set forth herein, in the attached Appendix A and Appendix B, and in the Plan, the provisions of which are incorporated herein by reference and all references to this Agreement include the Notice.

[For Awards Other than the 2014 Awards: The Award and Award Units are intended to qualify as “qualified performance-based compensation” as described in Section 162(m)(4)(C) of the Code.] The principal features of the Award are an Award Date set forth in the Notice (“Award Date”), Target Number of Award Units, and Maximum Number of Award Units, all as set forth in a participant’s Grant Summary.

The actual number of Award Units that vest pursuant to the terms and conditions of this Award will be between 0% and 200% of the Target Number of Award Units. The Maximum Number of Award Units represents 200% of the Target Number of Award Units. Notwithstanding the above or anything else contained in this Agreement, in no event shall the actual number of Award Units be greater than the amount specified in Section 4 of Appendix B.

PERFORMANCE-BASED VESTING SCHEDULE: Subject to the terms and conditions of the Plan, Appendix A, Appendix B and this paragraph, the number of Award Units that vest on the Final Vest Date for the Measurement Period (as defined in Appendix B) shall be based (after certification by the Committee as described below) on the relative total stockholder return percentile ranking (“Percentile Ranking”) of the Company for each Measurement Period, provided Participant is, and has remained continuously employed by or in continuous service with the Company or a Subsidiary since the Award Date through the Final Vest Date. Participant shall not be considered to have terminated employment for purposes of the vesting requirements during a leave of absence that is protected under local law (which may include, but is not limited to, a maternity, paternity, disability, medical, or military leave), provided that such period shall not exceed the maximum leave of absence period protected by local law. Following the completion of the Measurement Period, the Committee shall determine and certify, on or before the applicable vest date, in accordance with the requirements of Section 162(m) of the Code, the Percentile Ranking for the Measurement Period and the number of Award Units that vest according to the performance terms set forth in Appendix B; provided, however, that the Committee retains discretion to reduce, but not increase the number of Award Units that would otherwise vest as a result of the Company’s Percentile Ranking for each Measurement Period.

PLEASE READ ALL OF THE APPENDIX A AND APPENDIX B WHICH CONTAIN THE SPECIFIC TERMS AND CONDITIONS OF THE AWARD.

APPENDIX A

DIAMOND FOODS, INC.
PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD

2. Award. Each Award Unit represents the unsecured right to receive one share of Diamond Foods, Inc. common stock (“Common Stock”), subject to certain restrictions and on the terms and conditions contained in this Performance-Based Restricted Stock Unit Award (“Award” or “RSU”), and the Diamond Foods, Inc. 2005 Equity Incentive Plan, as amended (the “Plan”). In the event of any conflict between the terms of the Plan and this Award, including appendices thereto, the terms of the Plan shall govern. Any terms not defined herein or in Appendix B or the Agreement shall have the meaning set forth in the Plan.

3. Award Date. The Award Date shall be the date on which the Committee makes the determination to grant such Award, unless otherwise specified by the Committee.

4. Forfeiture Upon Termination of Employment.

(a) Except as otherwise provided in Section 3(b) hereof, in the event that Participant’s employment or service is Terminated for any reason, any unvested Award Units that are not yet vested as of Participant’s Termination Date shall be forfeited immediately upon such Termination Date.

(b) In the event of the death or Disability of Participant during the Measurement Period, Participant shall vest in a pro-rata portion of the Award Units on the Final Vest Date, the Two-Year Vest Date or, if applicable, the Change in Control Vest Date (as defined below), with such number of Award Units vesting to be determined (i) on the Final Vest Date, based upon the actual Percentile Ranking for the Measurement Period, as set forth in Appendix B, (ii) on the Two-Year Vest Date based on the number of Award Units that would otherwise vest on such date, and (iii) on the Change in Control Vest Date, based on the Target Number of Award Units, in each case based upon the following pro-ration formula:

Number of Award Units determined to vest on the Final Vest Date, the Two-Year Vest Date or, if applicable, the Change in Control Vest Date multiplied by the number of calendar months worked by Participant from (i) the Award Date through the Termination Date due to the death or Disability (ii) divided by thirty-six (36).

Participant shall be deemed to have worked a full calendar month if Participant has worked any portion of that month. The Committee’s determination of vested Award Units shall be in whole Award Units only and will be binding on Participant. [NTD: The time-based RSU does not have this provision – it can be retained or eliminated.]

5. Forfeiture Upon Termination of Measurement Period. Any Award Units that do not vest on the Final Vest Date shall be forfeited.

6. Change of Control. Upon a Change of Control occurring prior to the expiration of the Performance Period, the Target Number of Award Units shall vest on the date of the Change in

A-1

Control (the “Change in Control Vest Date”); provided that if the Change of Control Vest Date occurs prior to the first anniversary of the Award Date, the number of Award Units that shall vest shall be multiplied by the number of calendar months worked by Participant from (i) the Award Date through the Change of Control Vest Date (ii) divided by thirty six (36). Participant shall be deemed to have worked a full calendar month if Participant has worked any portion of that month. Any Award Units that do not vest on the Change in Control Vest Date shall be forfeited.

7. Section 280G Provision. If Participant, upon taking into account the benefit provided under this Award and all other payments that would be deemed to be “parachute payments” within the meaning of Section 280G of the Code (collectively, the “280G Payments”), would be subject to the excise tax under Section 4999 of the Code, notwithstanding any provision of this Award to the contrary, Participant's benefit under this Award shall be reduced to an amount equal to (i) 2.99 times Participant's “base amount” (within the meaning of Section 280G of the Code), (ii) minus the value of all other payments that would be deemed to be “parachute payments” within the meaning of Section 280G of the Code (but not below zero); provided, however, that the reduction provided by this sentence shall not be made if it would result in a smaller aggregate after-tax payment to Participant (taking into account all applicable federal, state and local taxes including the excise tax under Section 4999 of the Code). Unless the Company and Participant otherwise agree in writing, all determinations required to be made under this Section 6, and the assumptions to be used in arriving at such determinations, shall be made in writing in good faith by the accounting firm serving as the Company's independent public accountants immediately prior to the events giving rise to the payment of such benefits (the “Accountants”). For the purposes of making the calculations required under this Section 6, the Accountants may make reasonable assumptions and approximations concerning the application of Sections 280G and 4999 of the Code. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 6.

8. Tax Withholding. Prior to delivery of Shares of Common Stock upon the vesting of the Award Units (“Award Shares”), Participant must pay or make adequate arrangements satisfactory to the Company and/or Participant's employer to satisfy all withholding obligations of the Company and/or Participant's employer. In this regard, Participant authorizes the Company and/or Participant's employer, at their discretion and if permissible under local law, to satisfy its withholding obligations by one or a combination of the following:

(i) withholding Shares from the delivery of the Award Shares, provided that the Company only withholds a number of Shares with a Fair Market Value equal to or below the minimum withholding amount, provided, however, that in order to avoid issuing fractional Shares, the Company may round up to the next nearest number of whole Shares, as long as the Company issues no more than a single whole Share in excess of the minimum withholding obligation. The Company or Participant’s employer will remit the total amount withhold for Tax Items to the appropriate tax authorities; or

(ii) withholding from Participant’s wages or other base compensation paid to Participant by the Company and/or Participant’s employer; or

(iii) selling or arranging for the sale of Award Shares.

A-2

9. No Deferral of Compensation. Payments made pursuant to this Plan and Award are intended to qualify for the “short-term deferral” exemption from Section 409A of the Code. The Company reserves the right, to the extent the Company deems necessary or advisable in its sole discretion, to unilaterally amend or modify the Plan and/or this Award agreement to ensure that all Awards are made in a manner that qualifies for exemption from or complies with Section 409A of the Code, provided however, that the Company makes no representations that the Award will be exempt from Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to this Award.

10. Settlement. Settlement of vested RSUs shall occur within 30 days of the applicable vest date. Settlement of vested RSUs shall be in Shares.

11. No Stockholder Rights. Unless and until such time as Shares are issued in settlement of vested RSUs, the Participant shall have no ownership of the Shares allocated to the RSUs and shall have no right to vote such Shares, subject to the terms, conditions and restrictions described in the Plan and herein.

12. No Transfer. The RSUs and any interest therein: (i) shall not be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of, and (ii) shall, if the Participant’s continuous employment or service with the Company or any Parent or Subsidiary shall terminate for any reason (except as otherwise provided in the Plan or herein), be forfeited to the Company forthwith, and all the rights of the Participant to such RSUs shall immediately terminate.

13. Acknowledgement. By their signatures on the Agreement, the Company and the Participant agree that the RSUs are granted under and governed by this Agreement and by the provisions of the Plan (incorporated herein by reference). The Participant: (i) acknowledges receipt of a copy of the Plan and the Plan prospectus, (ii) represents that the Participant has carefully read and is familiar with their provisions, and (iii) hereby accepts the Award and any RSUs granted thereunder subject to all of the terms and conditions set forth herein and those set forth in the Plan.

14. Compliance with Laws and Regulations. The issuance of Shares will be subject to and conditioned upon compliance by the Company and Participant with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company's Common Stock may be listed or quoted at the time of such issuance or transfer.

15. Successors and Assigns. The Company may assign any of its rights under this Agreement. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement will be binding upon Participant and Participant's heirs, executors, administrators, legal representatives, successors and assigns.

16. Governing Law; Severability. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within

A-3

California, excluding that body of laws pertaining to conflict of laws. If any provision of this Agreement is determined by a court of law to be illegal or unenforceable, then such provision will be enforced to the maximum extent possible and the other provisions will remain fully effective and enforceable.

17. Notices. Any notice required to be given or delivered to the Company shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Participant shall be in writing and addressed to Participant at the address indicated above or to such other address as Participant may designate in writing from time to time to the Company. All notices shall be deemed effectively given upon personal delivery, (i) three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested), (ii) one (1) business day after its deposit with any return receipt express courier (prepaid), or (iii) one (1) business day after transmission by rapifax or telecopier.

18. Further Instruments. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.

19. Headings. The captions and headings of this Agreement are included for ease of reference only and are to be disregarded in interpreting or construing this Agreement.

20. Entire Agreement. The Plan and this Agreement (including Appendix A and Appendix B) constitute the entire agreement and understanding of the parties with respect to the subject matter herein and supersede all prior understandings and agreements, whether oral or written, between the parties hereto with respect to the specific subject matter hereof.

A-4

APPENDIX B

DIAMOND FOODS, INC.
PERFORMANCE-BASED RESTRICTED STOCK UNIT AWARD

Performance Vesting Terms

1. Performance Period. The performance period for the Award Units shall be August 1, 2014 through July 31, 2017 (the “Performance Period”). During the Performance Period there will be a measurement period of the Company's Relative TSR (a “Measurement Period”). The Measurement Period has a corresponding vest date (the “Final Vest Date”) on which Award Units will vest.

The Start Date, End Date and Final Vest Date are:



	Performance Period
Start Date	August 1, 2014
End Date	July 31, 2017
Final Vest Date	October 7, 2017

2. Target Number of Award Units. The Target Number of Award Units for the Measurement Period is as set forth in the Notice.

3. Performance Measure. The performance measure for the Performance Period is Relative TSR, as defined below. The number of Award Units that may vest for each Measurement Period will be determined by multiplying the Target Number of Award Units by the Maximum Vest Percentage that corresponds to the Company’s Relative TSR Percentile Ranking according to the following schedule and subject to the Maximum Value limitation described below:

Relative TSR Maximum Vest

Percentile Ranking Percentage

>85^th percentile = 200%

75^th to 85^th percentile = 150% plus 5% for each percentile > 75^th

75^th percentile = 150%

50^th to 75^th percentile = 100% plus 2% for each percentile > 50^th

TARGET 50^th percentile = 100%

25^th to 50^th percentile = 100% minus 3% for each percentile > 25^th

25^th percentile = 25%

≤ 25 percentile = 0%

For October 2014 Grant Only: Notwithstanding the foregoing, if the Relative TSR Percentile Ranking for the period ending on the second anniversary of the Start Date is at or above the 50^th percentile, 40% of the Award Units shall vest on the second anniversary of the Award Date (the “Two-Year Vest Date”), with vesting of the remainder of the Award Units to be determined on the

B-1

Final Vest Date after taking account of any prior vesting pursuant to this sentence. For example, if 40% of the Award Units vest on the Two -Year Vest Date pursuant to the preceding sentence, and the Company’s Relative TSR Percentile Ranking is 50^th on the Final Vest Date, the remaining 60% of the Award Units shall vest on the Final Vest Date.

4. Maximum Number of Award Units. The number of Award Units that vest will be between 0% and 200% of the Target Number of Award Units for the Measurement Period; provided that, under no circumstances will the monetary value of the actual number of Award Units that vest exceed four (4) times the monetary value of the Target Number of Award Units on the Award Date (the “Maximum Value”). For purposes of this Award Agreement “monetary value” refers to the value of a share of Company stock as determined on any specified date by the Company's closing stock price for that date. The Maximum Value for the Measurement Period is determined by multiplying the Target Number of Award Units by the closing price of the Company's stock on the Award Date and then multiplying that product by four (4). Accordingly, the maximum number of Award Units that may vest for the Measurement Period shall not exceed the lesser of:

(i) the number of Award Units determined by multiplying the Target Number of Award Units for each Measurement Period by the Maximum Vest Percentage corresponding to the Relative TSR percentile ranking of the Company for that Measurement Period; or

(ii) the number of Award Units determined not to exceed the Maximum Value (with such number of Award Units calculated by dividing the Maximum Value by the closing price of the Company's stock on the End Date of each Measurement Period.)

5. Determination of Relative TSR. “Relative TSR” means the Company's Total Stockholder Return relative to the Total Stockholder Returns of the other companies in the Comparator Group. During the Performance Period, Relative TSR will be determined by ranking the Comparator Group from the highest to lowest according to their respective Total Stockholder Return, then calculating the Relative TSR Percentile Ranking of the Company relative to the other Comparator Group as follows:

Where:

“P” represents the Relative TSR Percentile Ranking rounded to the nearest whole percentile

“R” represents the Company's ranking among the Comparator Group

“N” represents the number of Comparator Group

“Total Stockholder Return” means the number calculated by dividing (i) the Closing Average Share Value minus the Opening Average Share Value (in each case adjusted to take into

B-2

consideration the cumulative amount of dividends per share for the Measurement Period, assuming reinvestment, as of the of applicable ex-dividend date, of all cash dividends and other cash distributions (excluding cash distributions resulting from share repurchases or redemptions by the Company) paid to stockholders) by (ii) the Opening Average Share Value.

“Opening Average Share Value” means the average of the daily closing prices per share of a Comparator Group's stock as reported on the NASDAQ for all Trading Days in the 30 calendar days immediately prior to and including the Start Date.

“Closing Average Share Value” means the average of the daily closing prices per share of a Comparator Group's stock as reported on the NASDAQ for all Trading Days in the Closing Average Period.

“Closing Average Period” means (i) in the absence of a Change of Control of the Company, the 30 trading days immediately prior to and including the End Date; or (ii) in the event of a Change of Control, the 30 trading days immediately prior to and including the effective date of the Change of Control.

“Comparator Group” means those companies listed in the Packaged Food & Meat Companies in the Russell 3000 (currently 41 companies):

(iii) In the event of a merger, acquisition or business combination transaction of a company in the Comparator Group with or by another company in the Comparator Group, the surviving entity shall remain in the Comparator Group;

(iv) In the event of a merger, acquisition, or business combination transaction of a company in the Comparator Group with or by another company that is not in the Comparator Group, or “going private transaction” where the company in the Comparator Group is not the surviving entity or is otherwise no longer publicly traded, the company that was previously in the Comparator Group shall no longer be a Comparator Group; and

(v) In the event of a bankruptcy of a company in the Comparator Group, such company shall remain in the Comparator Group and its stock price will continue to be tracked for purposes of the Relative TSR calculation. If the company liquidates, it will remain in the Comparator Group and its stock price will be reduced to zero for the remaining portion of the Measurement Periods.

6. Award Vesting. The Committee will certify the Relative TSR Percentile Ranking of the Company after the End Date of the Measurement Period and determine the actual number of Award Units that vest for the Measurement Period on or before the Final Vest Date.

7. Adjustment of Award. The Comparator Group, the Relative TSR Percentile Ranking or the Award may be adjusted by the Committee from time to time, in its sole discretion, to the extent necessary in order to reflect a change in corporate capitalization, such as a stock split or dividend, or a corporate transaction, such as any merger, consolidation, separation (including a spinoff or other distribution of stock or property by the Company), reorganization, or any partial

B-3

or complete liquidation by the Company, as provided by Sections 10(b) or 10(c) of the Plan, to take account of events such as mergers, consolidations, dispositions, separations (including any spinoffs or other distributions of stock or property), reorganizations, bankruptcies, any partial or complete liquidations, changes in corporate capitalization (such as stock splits or dividends) and other significant business changes affecting any member of the Comparator Group, or to take account of any other terms described in the Plan[For Awards Other Than the 2014 Awards:; provided, however, that to the extent that any such adjustments affect awards to “covered employees” (as such term is defined in Section 162(m) of the Code), they shall be prescribed in a manner that strives to meet the requirements of Section 162(m) of the Code. Any adjustment to the Relative RSR Percentile Ranking to account for changes in the Comparator Group, including changes in the capitalization of Comparator Group companies (due to stock splits, mergers, spin-offs, etc. of the Comparator Group companies), will be made at the sole discretion of the Committee].

B-4

Exhibit 10.04

AMENDMENT TO

CHANGE OF CONTROL AND RETENTION AGREEMENT

This Amendment (the “Amendment”) to Change of Control and Retention Agreement is made and entered into as of December __, 2014 by and between Diamond Foods, Inc., a Delaware corporation (the “Company”), and _________ (the “Executive”).

RECITALS:

WHEREAS, the Executive and the Company have entered into that certain Change of Control and Retention Agreement dated _______________ (the “Agreement”); and

WHEREAS, Executive is a key employee of the Company who possesses valuable proprietary knowledge of the Company, its business and operations and the markets in which the Company competes; and

WHEREAS, the Company benefits from the knowledge, experience, expertise and advice of the Executive to manage its business for the benefit of the Company’s stockholders; and

WHEREAS, the Company recognizes that it is necessary to attract and retain key employees, and a key element of programs to attract and retain key employees is to provide assurance about their status in the event of any Change of Control, to avoid uncertainty regarding the consequences of such an event that could adversely affect the performance of the Executive; and

WHEREAS, the Company has historically awarded stock options and restricted stock to senior management, but recently begun awarding restricted stock units and, in certain circumstances, performance share units instead;

WHEREAS, the Company desires to amend and restate Section 2.3.1 of the Agreement to align its provisions with the new form of equity awards currently being granted to senior management and to align its provisions with any new form of equity awards that may be granted in the future;

WHEREAS, the Company believes that the existence of the Agreement, as amended by this Amendment, will serve as an incentive to Executive to remain in the employ of the Company, and would enhance the Company’s ability to call on and rely upon Executive if a Change of Control were to occur; and

WHEREAS, the Company and the Executive desire to enter into this Amendment to encourage the Executive to continue to devote the Executive’s full attention and dedication to the success of the Company, and to provide specified compensation and benefits to the Executive in the event of a Termination Upon Change of Control pursuant to the terms of the Agreement, as amended by this Amendment.

NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

1.The title of Section 2.3 of the Agreement is hereby amended and restated in its entirety as follows:

“Equity Acceleration.”

2. Section 2.3.1 of the Agreement is hereby amended and restated in its entirety as follows:

2.3.1. Acceleration of Vesting and Exercisability. All outstanding stock options, shares of restricted stock and other equity awards (including without limitation stock unit or share unit awards) granted to the Executive by the Company (and any successor to the Company) shall have 100% of their vesting and exercisability accelerated upon the later of (i) the date of a Termination Upon Change of Control, or (ii) the effective date of the release executed by the Executive pursuant to Section 5.3 of this Agreement. Notwithstanding the foregoing, in the event a performance share unit award specifically provides for accelerated vesting in whole or in part upon a Change of Control, the terms of such award shall govern in lieu of this Section 2.3.1.

3. Except as explicitly set forth herein, the Agreement shall remain unchanged except to give effect to this Amendment.

IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the day and year first above written.

EXECUTIVE: DIAMOND FOODS, INC.:

By:

Title:

Signature

Name:

Date:

Exhibit 31.01

Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer

I, Brian J. Driscoll, certify that:


1.	I have reviewed this quarterly report on Form 10-Q for the quarter ended October 31, 2014, of Diamond Foods, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 8, 2014



By:	/s/ Brian J. Driscoll
Name:	Brian J. Driscoll
Title:	President and Chief Executive Officer

Exhibit 31.02

Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer

I, Raymond P. Silcock, certify that:


1.	I have reviewed this quarterly report on Form 10-Q for the quarter ended October 31, 2014, of Diamond Foods, Inc.;


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;


4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and


5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 8, 2014



By:	/s/ Raymond P. Silcock
Name:	Raymond P. Silcock
Title:	Executive Vice President and Chief Financial Officer

Exhibit 32.01

Section 1350 Certifications

Pursuant to 18 U. S. C. Section 1350, I, Raymond P. Silcock, hereby certify that, to the best of my knowledge, the Quarterly Report of Diamond Foods, Inc. on Form 10-Q for the quarter ended October 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of Diamond Foods, Inc.

/s/ Raymond P. Silcock

Raymond P. Silcock

Executive Vice President and Chief Financial Officer

Date: December 8, 2014

Pursuant to 18 U. S. C. Section 1350, I, Brian J. Driscoll, hereby certify that, to the best of my knowledge, the Quarterly Report of Diamond Foods, Inc. on Form 10-Q for the quarter ended October 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of Diamond Foods, Inc.

/s/ Brian J. Driscoll

Brian J. Driscoll

President and Chief Executive Officer

Date: December 8, 2014

These certifications accompany this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates them by reference.

(MM) (NASDAQ:DMND)
Historical Stock Chart
From Oct 2024 to Nov 2024