NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2013, 2012 and 2011
(In thousands, except share and per
share information unless otherwise noted)
(1) Organization and Basis of Presentation
Business
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 March 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
Diamonds 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.
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, 2010, 2011, 2012 and 2013, as fiscal 2010, fiscal 2011, fiscal 2012 and fiscal 2013, respectively.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP). Certain prior period amounts in Note 13 to the Notes
to the Consolidated Financial Statements have been reclassified to conform to the current period presentation. There was no impact to the totals for each prior period reclassification made.
Use of Estimates
The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from
these estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition and
accounts receivables, inventories, useful lives of property, plant and equipment, valuation of long-lived assets, intangible assets and goodwill, employee benefits, among others. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable, the results of which form the basis for managements judgments about the carrying values of assets and liabilities.
Certain Risks and Concentrations
The Companys revenues are
principally derived from the sale of snack products and culinary, in-shell and ingredient nuts. Significant changes in customer buying behavior could adversely affect the Companys operating results. Sales to the Companys largest customer
accounted for approximately 16%, 18% and 15% of net sales in fiscal 2013, 2012 and 2011, respectively. Sales to the second largest customer accounted for approximately 9%, 12% and 11% of net sales in fiscal 2013, 2012 and 2011, respectively. No
other single customer accounted for more than 10% of our net sales for fiscal 2013, 2012 or 2011.
48
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Foreign Currency Translation
The functional currency of the Companys foreign operations is the applicable local currency, the British pound. The functional
currency is translated into U.S. dollars for balance sheet accounts using currency exchange rates in effect as of the balance sheet date and for revenue and expense accounts using an average exchange in effect during the applicable period. The
translation adjustments are deferred as a separate component of Stockholders equity in Accumulated other comprehensive income. Translation adjustments recognized in accumulated other comprehensive income were $4.6 million and $10.3 million as
of July 31, 2013 and July 31, 2012, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include investment of surplus cash in securities (primarily money market funds) with maturities at date of
purchase of three months or less. At July 31, 2013, we had a total of $5.9 million in cash and cash equivalents. Of this balance, $2.6 million was held in the United Kingdom in foreign currencies. It is our intention to indefinitely reinvest
all current and future foreign earnings at these locations in order to ensure sufficient working capital and expand operations.
Inventories
All
inventories are accounted for at the lower of cost (first-in, first-out or weighted average) or market. The Company has entered into walnut purchase agreements with growers, under which they deliver their walnut crop to us during the fall harvest
season, and pursuant to the walnut purchase agreements, the Company determines the price for this inventory after delivery and by the end of the fiscal year. This purchase price is determined by us based on our discretion 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, the Company estimates 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.
Property, Plant and
Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of assets ranging from 30 to 39 years for buildings and ranging from 3 to 15 years for machinery, equipment and software.
Slotting and Other Contractual Arrangements
In certain situations,
the Company pays slotting fees to retail customers to acquire access to shelf space. These payments are recognized as a reduction of sales. In addition, the Company makes payments pursuant to contracts that stipulate the term of the agreement, the
quantity and type of products to be sold and other requirements. Payments pursuant to these agreements are capitalized and included in other current and long-term assets, and are amortized on a straight-line basis over the term of the contract. If
no arrangement exists, the Company records payments as a reduction to gross sales to arrive at net sales.
49
Impairment of Long-Lived and Intangible Assets and Goodwill
Management reviews long-lived assets and certain identifiable intangible assets with finite lives for impairment in accordance with
Accounting Standards Codification (ASC) 360,
Property, Plant, and
Equipment
. Goodwill and intangible assets not subject to amortization are reviewed annually for impairment in accordance with ASC 350,
Intangibles Goodwill and Other,
or more often if there are indications of possible impairment.
The
analysis to determine whether or not an asset is impaired requires significant judgments that are dependent on internal forecasts, including estimated future cash flows, estimates of long-term growth rates for our business, the expected life over
which cash flows will be realized and assumed royalty and discount rates. Changes in these estimates and assumptions could materially affect the determination of fair value and any impairment charge. While the fair value of these assets exceeds
their carrying value based on managements current estimates and assumptions, materially different estimates and assumptions in the future in response to changing economic conditions, changes in the business, increased competition or loss of
market share, product innovation or obsolescence, product claims that result in a significant loss of sales or profitability over the product life or for other reasons could result in the recognition of impairment losses.
For assets to be held and used, including acquired intangible assets and long-lived assets subject to amortization, the Company initiates
a review whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows
that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Significant management judgment is required in this process.
The Company tests its brand intangible assets not subject to amortization for impairment annually, or whenever events or changes in
circumstances indicate that their carrying value may not be recoverable. In testing brand intangibles for impairment, Diamond compares the fair value with the carrying value. The determination of fair value is based on the relief from royalty
method, which models the cash flows from the brand intangibles assuming royalties were received under a licensing arrangement. This discounted cash flow analysis, using inputs such as forecasted future revenues attributable to the brand, assumed
royalty rates and a risk-adjusted discount rate that approximates our estimated cost of capital. If the carrying value exceeds the estimated fair value, the brand intangible asset is considered impaired and an impairment loss will be recognized in
an amount equal to the excess of the carrying value over the fair value of the brand intangible asset. The Company performed the annual intangible asset impairment analysis as of June 30, 2013 and determined that there was a $36.0 million
impairment charge related to the Kettle U.S. trade name.
The Company performs its annual goodwill impairment test required by
ASC 350 as of June 30th of each year. As a result of the segment reporting changes for the period ended January 31, 2013, goodwill impairment will now be tested at the reporting units, which are the same as the operating segments. In
fiscal 2012, the Company performed its goodwill impairment test at the single reporting unit. The fair value of each reporting unit will be calculated using a blend of the income and market approach. Goodwill impairment is indicated if the book
value of the reporting unit exceeds its fair value, in which case the goodwill is written down to its estimated fair value. Major assumptions applied in an income approach, using a discounted cash flow analysis, include (i) forecasted growth
rates and (ii) forecasted profitability, both of which are estimated based on consideration of historical performance and managements estimate of future performance, and (iii) discount rates that are used to calculate the present
value of future cash flows, which rates are derived based on our estimated weighted average cost of capital. Our weighted average cost of capital included a review and assessment of market and capital structure assumptions. The major assumptions in
the market approach include the selected multiples applied to certain operating statistics, such as revenues and income, as well as an estimated control premium. Considerable management judgment is necessary to evaluate the impact of operating
changes and business initiatives in order to estimate future growth rates and profitability which is used to estimate future cash flows and multiples. For example, a significant change in promotional strategy or a shortfall in contracted walnut
supply would have a
50
direct impact on revenue growth and operating costs, which would have a direct impact on the profitability of the reporting units. Future business results could significantly impact the
evaluation of our goodwill which could have a material impact on the determination of whether a potential impairment existed, and the size of any such impairment.
Employee Benefits
The Company incurs various employment-related
benefit costs with respect to qualified and nonqualified pension and deferred compensation plans. Assumptions are made related to discount rates used to value certain liabilities, assumed rates of return on assets in the plans, compensation
increases, employee turnover and mortality rates. Different assumptions could result in the recognition of differing amounts of expense over different periods of time.
Revenue Recognition
The Company recognizes revenue when persuasive
evidence of an arrangement exists, title and risk of loss has transferred to the buyer, price is fixed, delivery occurs and collection is reasonably assured. Revenues are recorded net of rebates, introductory or slotting payments, coupons, promotion
and marketing allowances. The amount the Company accrues for promotion is based on an estimate of the level of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations
regarding customer and consumer participation and sales and payment trends with similar previously offered programs. Customers have the right to return certain products. Product returns are estimated based upon historical results and are reflected
as a reduction in sales.
Promotion and Advertising Costs
Promotional allowances, customer rebates, coupons and marketing allowances are recorded at the time the related revenue is recognized and
are reflected as reductions of sales. Annual volume rebates, promotion and marketing allowances are recorded based upon the terms of the arrangements. Coupon incentives are recorded at the time of distribution in amounts based on estimated
redemption rates. The Company expenses advertising costs as incurred. Payments to reimburse customers for cooperative advertising programs are recorded in accordance with ASC 605-50,
Revenue Recognition Customer Payments and
Incentives
. Advertising expenses were $41.5 million in fiscal 2013, $37.9 million in fiscal 2012 and $45.0 million in fiscal 2011. Cooperative advertising expenses recorded within advertising expenses were $3.5 million, $5.8 million, and
$6.2 million for fiscal 2013, 2012 and 2011, respectively.
Shipping and Handling Costs
Amounts billed to customers for shipping and handling costs are included in net sales. Shipping and handling costs are charged to cost of
sales as incurred.
Acquisition and Integration Related Expenses
Acquisition and integration related expenses are costs incurred to effect a business combination and subsequently to integrate the
acquired business into the Company. These expenses are shown as a separate line within operating expenses and are expensed as incurred. These expenses may include transaction related bank, legal, human resource, purchase price valuation and
business strategy consulting fees, as well as business and systems integration costs.
Income Taxes
Diamond accounts for income taxes in accordance with ASC 740,
Income Taxe
s. which requires that deferred tax assets and
liabilities be recognized for the tax effect of temporary differences between the consolidated
51
financial statement and tax basis of recorded assets and liabilities at current tax rates. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The recoverability of deferred tax assets is based on both the historical and anticipated earnings levels and is reviewed periodically to determine if any
additional valuation allowance is necessary when it is more likely than not that amounts will not be recovered.
There are
inherent uncertainties related to the interpretations of tax regulations in the jurisdictions in which the Company operates. Diamond may take tax positions that management believes are supportable, but are potentially subject to successful challenge
by the applicable taxing authority. Tax positions are evaluated and liabilities are established in accordance with the guidance on uncertainty in income taxes. Diamond reviews these tax uncertainties in light of changing facts and circumstances,
such as the progress of tax audits, and adjusts them accordingly.
Derivative Financial Instruments
Diamond accounts for the warrant issued as part of the Oaktree transaction as a freestanding derivative financial instrument. Diamond
records derivative financial instruments at fair value in the Companys consolidated balance sheet at the point the transaction is entered into and at the end of all subsequent reporting periods. On a quarterly basis, changes in the fair value
of a derivative financial instrument are recorded in current period earnings.
Fair Value of Financial Instruments
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 Diamond with respect to current interest rates and terms for similar financial instruments, except for the Oaktree investment.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements, including stock option grants and restricted stock awards, in accordance with ASC 718,
Compensation Stock
Compensation
. Under this guidance, compensation cost is recognized based on the fair value of equity awards on the date of grant. The compensation cost is then amortized on a straight-line basis over the vesting period. The Black-Scholes
option pricing model is used to determine the fair value of stock options at the date of grant. This model requires the Company to make assumptions such as expected term, dividends, volatility and forfeiture rates that determine the stock options
fair value. These key assumptions are based on historical information and judgment regarding market factors and trends. If actual results are not consistent with the Companys assumptions and judgments used in estimating these factors, the
Company may be required to increase or decrease compensation expense, which could be material to its results of operations.
Related
Party Transactions
In fiscal 2013 and fiscal 2012, three and two members, respectively, of the Diamond Board of
Directors were growers or affiliates of growers from whom Diamond purchased walnuts from in the ordinary course of business. In fiscal 2013, fiscal 2012 and fiscal 2011, costs associated with the acquisition of walnuts from these related
parties were approximately $15.5 million for the 2012 crop, $4.7 million for the 2011 crop and $4.2 million for the 2010 crop respectively, of which $4.4 million and $1.2 million were included in payables as of July 31, 2013 and 2012,
respectively.
52
Recent Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04,
Fair Value Measurement (Topic 820): Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.
This guidance changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value
measurements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The Company has adopted this guidance and it did not have a material impact on its consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive
Income
. This guidance requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income (OCI) in either a single continuous statement of comprehensive income or in
two separate consecutive statements. The guidance does not change the components of OCI or when an item of OCI must be reclassified to net income, or the earnings per share calculation. The guidance is effective for fiscal years and interim periods
within those years, beginning after December 15, 2011. Early adoption is permitted. The Company has adopted this guidance and it did not have a material impact on its consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08,
Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for
Impairment.
The new guidance provides the option to perform a qualitative assessment by applying a more likely than not scenario to determine whether the fair value of a reporting unit is less than its carrying amount, which may then allow
a company to skip the annual two-step quantitative goodwill impairment test depending on the determination. This guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after
December 15, 2011. Early adoption is permitted. The Company has adopted this guidance, but has elected to continue to perform a quantitative impairment analysis rather than a qualitative analysis.
In July 2012, the FASB issued ASU No. 2012-02,
Testing Indefinite-Lived Intangible Assets for Impairment.
The new
guidance provides the option to perform a qualitative assessment by applying a more likely than not scenario to determine whether the indefinite-lived intangible asset is impaired. This guidance is effective for indefinite-lived intangible asset
impairment tests performed in interim and annual periods for fiscal years beginning after September 15, 2012. The Company has adopted this guidance, but has elected to continue to perform a quantitative impairment analysis rather than a
qualitative analysis.
In January 2013, the FASB issued ASU No. 2013-01,
Balance Sheet (Topic 210): Clarifying
the Scope of Disclosures about Offsetting Assets and Liabilities.
The new guidance clarifies the scope of the offsetting disclosures and addresses any unintended consequences as a result of ASU No. 2011-11,
Balance
Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.
This guidance is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should
provide the required disclosures retrospectively for all comparative periods presented. The Company will adopt this guidance during fiscal 2014 and does not believe that the adoption will have a material impact on its consolidated financial
statements.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income
(Topic 220): Reporting of
Amounts Reclassified Out of Accumulated Other Comprehensive Income.
The new guidance requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net
income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to
cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This guidance is effective for fiscal years beginning on or after December 15, 2012, and interim periods within those annual periods. The
Company will adopt this guidance during fiscal 2014 and does not believe that the adoption will have a material impact on its consolidated financial statements.
53
In July 2013, the FASB issued ASU No. 2013-011
, Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists..
This 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. 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.
(2) Financial Instruments
In July 2010, the Company entered into three interest rate swap agreements in accordance with Company policy to
mitigate the impact of London Interbank Offered Rate (LIBOR) based interest expense fluctuations on Company profitability. These swap agreements, with a total hedged notional amount of $100 million, were entered into to hedge future cash
interest payments associated with a portion of the Companys variable rate bank debt. The Company has designated these swaps as cash flow hedges of future cash flows associated with its variable rate debt. All effective changes in the fair
value of the designated swaps are recorded in other comprehensive income (loss) and are released to interest income or expense on a monthly basis as the hedged debt payments are accrued. Ineffective changes, if any, are recognized in interest income
or expense immediately. For fiscal 2012, the Company recognized other comprehensive income of $0.6 million based on the change in fair value of the swap agreements and no hedge ineffectiveness for these swap agreements was recognized in interest
income or expense over the same period. As of July 31, 2012, all swaps had matured.
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 and a warrant to purchase approximately
4.4 million shares of Diamond common stock. Oaktrees warrant became exercisable at $10 per share on March 1, 2013. The warrant is accounted for as a derivative liability and is remeasured at fair value each reporting period with
gains and losses recorded in net income.
In July 2012, the Company entered into an interest rate cap agreement in accordance
with Company policy to mitigate the impact of LIBOR-based interest expense fluctuations on Company profitability. This swap agreement had a total notional amount of $100 million and was entered into to mitigate the interest rate impact of the
Companys variable rate bank debt. The Company accounts for the interest rate cap as a non-hedging derivative.
In
February 2013, the Company purchased 164 corn call option commodity derivatives. This purchase is in accordance with Company policy to mitigate the market price risk associated with the anticipated raw material purchase requirements of the
Company. This agreement had a total notional amount of approximately $0.3 million and was entered into to mitigate the market price risk of future corn purchases expected to be made by the Company. The Company accounts for commodity derivatives as
non-hedging derivatives.
For the quarterly period ended July 31, 2013, the Company sold 42 corn call options commodity
derivatives. The amount of loss recognized in income associated with this sale was $0.1 million. As of July 31, 2013, the Company has 122 corn call option commodity derivatives.
54
The fair values of the Companys derivative instruments as of July 31, 2013, and
July 31, 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Derivatives designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
Accounts payable and accrued liabilities
|
|
$
|
|
|
|
$
|
|
|
Interest rate contracts
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments under ASC 815
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Prepaid and other current assets
|
|
$
|
29
|
|
|
$
|
483
|
|
Interest rate contracts
|
|
Other long-term assets
|
|
|
|
|
|
|
10
|
|
Foreign currency contracts
|
|
Accounts payable and accrued liabilities
|
|
|
|
|
|
|
|
|
Warrants
|
|
Warrant liability
|
|
|
(58,147
|
)
|
|
|
(46,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instrument under ASC 815
|
|
|
|
$
|
(58,118
|
)
|
|
$
|
(46,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
|
|
$
|
(58,118
|
)
|
|
$
|
(46,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The effects of the Companys derivative instruments on the Consolidated Statements of Operations for
fiscal 2013 and 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in ASC 815 Cash Flow
Hedging Relationships
|
|
Amount of Loss
Recognized in OCI on
Derivative
(Effective
Portion)
|
|
|
Location of Loss
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
|
|
Amount of Loss
Reclassified from
Accumulated OCI into
Income
(Effective
Portion)
|
|
|
Location of Loss
Recognized in
Income on
Derivative
(Ineffective
Portion)
|
|
Amount of Loss
Recognized in
Income
on
Derivative
(Ineffective
Portion)
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
2013
|
|
|
2012
|
|
Interest rate contracts
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
Interest expense
|
|
$
|
|
|
|
$
|
(585
|
)
|
|
Interest expense
|
|
$
|
|
|
|
$
|
(148
|
)
|
Foreign currency contracts
|
|
$
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
|
|
$
|
|
|
|
$
|
(585
|
)
|
|
|
|
$
|
|
|
|
$
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as
Hedging Instruments under ASC
815
|
|
Location of Loss Recognized
in Income on
Derivative
|
|
Amount of Income (Loss)
Recognized in Income on
Derivative
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Commodity contracts
|
|
Selling, general and administrative
|
|
$
|
(235
|
)
|
|
$
|
192
|
|
Interest rate contracts
|
|
Interest expense
|
|
|
(9
|
)
|
|
|
(43
|
)
|
Foreign currency contracts
|
|
Interest expense
|
|
|
|
|
|
|
(10
|
)
|
Warrants
|
|
Loss on warrant liability
|
|
|
(11,326
|
)
|
|
|
(10,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(11,570
|
)
|
|
$
|
(10,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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
The Companys cash equivalents measured at fair value on a recurring basis were nil as of July 31, 2013.
There were cash equivalents of $1.5 million as of July 31, 2012. These investments were classified as Level 1 based on quoted prices in active markets for identical assets, to value the cash equivalents.
55
The Companys derivative assets (liabilities) measured at fair value on a recurring
basis were $0 million and $0.5 million as of July 31, 2013 and 2012, respectively. The Company has elected to use the income approach to value the derivative liabilities, using observable Level 2 market expectations at the measurement date and
standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets or
liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates). Mid-market pricing is used
as a practical expedient for fair value measurements. Under Accounting Standards Codification (ASC) 820,
Fair Value Measurements and Disclosures,
the fair value measurement of an asset or liability must reflect the
nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterpartys creditworthiness when in an asset position and the Companys creditworthiness when in a liability position has also been factored into the
fair value measurement of the derivative instruments.
The Companys warrant liability measured at fair value on a
recurring basis was $58.1 million and $46.8 million as of July 31, 2013 and 2012, respectively. The Company has elected to use the income approach to value the warrant liability and uses the Black-Scholes option valuation model. This valuation
is 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 used in the valuation are shown below:
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
Expected volatility
|
|
|
45.60
|
%
|
|
54.75%
|
Probability of Special Redemption
|
|
|
0.00
|
%
|
|
0.00%
|
In applying the valuation model, small increases or decreases in the expected volatility could result in
a significantly higher or lower fair value measurement. Based on the Companys operating results for the six months ended January 31, 2013, the Special Redemption did not occur. The Company recognized a loss for fiscal 2013, related to the
warrant liability due to changes in the fair value of the warrant.
The following is a reconciliation of activity for fiscal
2013 liabilities measured at fair value based on Level 3 inputs:
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
|
2013
|
|
|
2012
|
|
Beginning Balance
|
|
$
|
(46,821
|
)
|
|
$
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(11,326
|
)
|
|
|
(10,360
|
)
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
|
|
|
|
(36,461
|
)
|
Sales
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
(58,147
|
)
|
|
$
|
(46,821
|
)
|
|
|
|
|
|
|
|
|
|
Total amount of gains or losses for the period included in earnings attributable to the change in unrealized gains or losses
relating to assets still held at the reporting date
|
|
$
|
|
|
|
$
|
|
|
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
56
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 Diamond with respect to current interest rates and terms for similar financial instruments, except for the Oaktree debt.
The following table presents the carrying value and fair value of our outstanding Oaktree debt as of July 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
Year Ended July 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Senior Note
|
|
|
121,266
|
|
|
|
150,295
|
|
|
|
103,295
|
|
|
|
103,203
|
|
Redeemable Note
|
|
|
89,660
|
|
|
|
75,147
|
|
|
|
81,686
|
|
|
|
51,601
|
|
The fair value of the notes was estimated using a discounted cash flow approach. The discounted cash flow
approach uses a risk adjusted yield to present value the contractual cash flows of the notes. The fair value of the notes would be classified as Level 3 within the fair value measurement hierarchy. The Company applies a fair value method for
accounting for the paid-in-kind interest on the Oaktree debt. Under this method, the Company adjusts the interest expense based on fair value of the Oaktree debt. Accordingly, while interest expense recognition on Oaktree debt would be at the
contractual rate, the Company will account for the related interest expense based on the fair value of the Oaktree debt at every interest payment date and reporting period end.
(3) Equity Offering and Stock-Based Compensation
The Company uses a broad based equity incentive plan to help align employee and director incentives with
stockholders interests. The 2005 Equity Incentive Plan (the Plan) was approved in March 2005 and provides for the awarding of options, restricted stock, stock bonuses, restricted stock units, and stock appreciation rights. The
Compensation Committee of the Board of Directors administers the Plan. A total of 2,500,000 shares of common stock were initially reserved for issuance under the Plan, and the number of shares available for issuance under the Plan is increased by an
amount equal to 2% of the Companys total outstanding shares as of July 31 each year.
In 2005, the Company began
granting shares of restricted stock and stock options under the Plan. The shares of restricted stock vest over three, four or five-year periods. The stock options expire in ten years and vest over three, four or five years. As of July 31, 2013,
options to purchase 1,457,076 shares of common stock were outstanding, of which 672,074 were exercisable. At July 31, 2013, the Company had 1,331,295 shares available for future grant under the Plan.
ASC 718,
Compensation Stock Compensation,
requires the recognition of compensation expense in an amount equal
to the fair value of share-based awards. Beginning with the Companys adoption of ASC 718 in August 2005, the fair value of all stock options granted subsequent to August 1, 2005 is recognized as an expense in the Companys statement
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, generally three, four or five years from date of grant or award. The Company recorded total stock-based compensation expense of $4.1 million, $9.2 million, and $7.7 million for fiscal 2013, 2012 and
2011, 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 Companys implied historical volatility. The expected term of options granted is based on the simplified method due to the lack
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.
57
Assumptions used in the Black-Scholes model are presented below (for the year ended
July 31):
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
|
2011
|
|
Average expected life, in years
|
|
5.50-6.06
|
|
|
6
|
|
|
|
6
|
|
Expected volatility
|
|
52.99%-55.48%
|
|
|
49.59
|
%
|
|
|
41.63
|
%
|
Risk-free interest rate
|
|
0.83%- 1.69%
|
|
|
1.13
|
%
|
|
|
2.10
|
%
|
Dividend rate
|
|
0.00%
|
|
|
0.20
|
%
|
|
|
0.34
|
%
|
The following table summarizes option activity during fiscal 2013, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Exercise
Price Per Share
|
|
|
Weighted
Average Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
(In thousands)
|
|
|
|
|
|
(In years)
|
|
|
(In thousands)
|
|
Outstanding at July 31, 2010
|
|
|
1,452
|
|
|
|
21.11
|
|
|
|
6.4
|
|
|
$
|
34,027
|
|
Granted
|
|
|
442
|
|
|
|
46.59
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(97
|
)
|
|
|
18.61
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(26
|
)
|
|
|
38.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2011
|
|
|
1,771
|
|
|
|
27.34
|
|
|
|
6.3
|
|
|
$
|
78,551
|
|
Granted
|
|
|
371
|
|
|
|
68.73
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2
|
)
|
|
|
27.94
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(61
|
)
|
|
|
57.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2012
|
|
|
2,079
|
|
|
|
33.85
|
|
|
|
5.8
|
|
|
$
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
738
|
|
|
|
15.10
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(125
|
)
|
|
|
16.20
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,235
|
)
|
|
|
33.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2013
|
|
|
1,457
|
|
|
|
26.06
|
|
|
|
6.9
|
|
|
$
|
4,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at July 31, 2011
|
|
|
1,235
|
|
|
|
19.98
|
|
|
|
5.1
|
|
|
$
|
63,756
|
|
Exercisable at July 31, 2012
|
|
|
1,448
|
|
|
|
24.36
|
|
|
|
4.5
|
|
|
$
|
123
|
|
Exercisable at July 31, 2013
|
|
|
672
|
|
|
|
30.43
|
|
|
|
4.9
|
|
|
$
|
1,220
|
|
The weighted average fair value of options granted during fiscal 2013, 2012 and 2011 was $7.81, $28.50
and $18.95, respectively. The total intrinsic value of options exercised during fiscal 2013, 2012 and 2011 was $0.3 million, $0.1 million and $3.0 million, respectively. The total fair value of options vested during fiscal 2013, 2012 and 2011 was
$5.4 million, $4.8 million and $2.1 million, respectively.
Changes in the Companys nonvested options during fiscal 2013
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
Per Share
|
|
|
|
(In thousands)
|
|
|
|
|
Nonvested at July 31, 2012
|
|
|
631
|
|
|
$
|
23.00
|
|
Granted
|
|
|
678
|
|
|
$
|
7.81
|
|
Vested
|
|
|
(284
|
)
|
|
$
|
19.05
|
|
Cancelled
|
|
|
(240
|
)
|
|
$
|
25.61
|
|
|
|
|
|
|
|
|
|
|
Nonvested at July 31, 2013
|
|
|
785
|
|
|
$
|
10.51
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2013, there was $7.1 million of total unrecognized compensation cost net of
forfeitures related to nonvested stock options, which is expected to be recognized over a weighted average period of 2.9 years. Cash received from option exercises was $2.0 million, $0 million and $1.8 million for fiscal 2013, 2012 and 2011,
respectively.
58
Restricted Stock Awards:
Restricted stock activity during fiscal 2013, 2012
and 2011 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
Restricted Stock Units
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
Per Share
|
|
|
Number of
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
Per Share
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2010
|
|
|
408
|
|
|
|
26.78
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
115
|
|
|
|
47.04
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(115
|
)
|
|
|
24.51
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(15
|
)
|
|
|
38.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2011
|
|
|
393
|
|
|
|
32.96
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
138
|
|
|
|
46.93
|
|
|
|
16
|
|
|
|
74.62
|
|
Vested
|
|
|
(125
|
)
|
|
|
28.54
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(26
|
)
|
|
|
52.22
|
|
|
|
(3
|
)
|
|
|
74.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2012
|
|
|
380
|
|
|
|
38.18
|
|
|
|
13
|
|
|
|
74.62
|
|
Granted
|
|
|
356
|
|
|
|
14.81
|
|
|
|
233
|
|
|
|
14.78
|
|
Vested
|
|
|
(179
|
)
|
|
|
27.30
|
|
|
|
(2
|
)
|
|
|
74.62
|
|
Cancelled
|
|
|
(150
|
)
|
|
|
38.83
|
|
|
|
(26
|
)
|
|
|
22.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2013
|
|
|
407
|
|
|
|
22.25
|
|
|
|
218
|
|
|
|
16.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of restricted stock vested in fiscal 2013, 2012 and 2011 was $3.0 million, $7.6
million and $5.5 million, respectively.
As of July 31, 2013, there was $6.6 million of unrecognized compensation cost
net of forfeitures related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of 2.9 years. As of July 31, 2013, there was $2.6 million of unrecognized compensation cost net of forfeitures
related to nonvested restricted stock units, which is expected to be recognized over a weighted average period of 3.4 years. Cash used to settle stock awards were $0 million for fiscal 2013, 2012, and 2011.
(4) 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 7 to the Notes to the Consolidated Financial Statements. Including these participating securities and changes
in warrant liability in the Companys earnings per share calculation has the effect of reducing earnings and increasing losses on both basic and diluted earnings (loss) per share.
59
The computations for basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(163,232
|
)
|
|
$
|
(86,336
|
)
|
|
$
|
26,567
|
|
Less: income allocated to participating securities
|
|
|
|
|
|
|
|
|
|
|
(482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common shareholders basic
|
|
|
(163,232
|
)
|
|
|
(86,336
|
)
|
|
|
26,085
|
|
Add: undistributed income attributable to participating securities
|
|
|
|
|
|
|
|
|
|
|
412
|
|
Less: undistributed income reallocated to participating securities
|
|
|
|
|
|
|
|
|
|
|
(400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common shareholders diluted
|
|
$
|
(163,232
|
)
|
|
$
|
(86,336
|
)
|
|
$
|
26,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
21,813
|
|
|
|
21,692
|
|
|
|
21,577
|
|
Dilutive shares stock options and warrant
|
|
|
|
|
|
|
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted
|
|
|
21,813
|
|
|
|
21,692
|
|
|
|
22,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share attributable to common shareholders (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(7.48
|
)
|
|
$
|
(3.98
|
)
|
|
$
|
1.21
|
|
Diluted
|
|
$
|
(7.48
|
)
|
|
$
|
(3.98
|
)
|
|
$
|
1.17
|
|
(1)
|
Computations may reflect rounding adjustments.
|
Options to purchase 1,457,076, 2,079,535 and 1,771,253 shares of common stock were outstanding at July 31, 2013, 2012 and 2011, respectively. Because the Company was in a loss position for fiscal
2013 and fiscal 2012 stock options and restricted stock units outstanding were excluded in the computation of diluted earnings (loss) per share because their effect would be antidilutive. Additionally, as the Company was in a loss position and the
change in the fair value of the warrant liability resulted in a loss for fiscal 2013 and fiscal 2012, a numerator adjustment was not made to the diluted earnings (loss) per share calculation.
Options to purchase 978,024, 776,184, and 87,500 shares of common stock were not included in the computation of diluted earnings per
share for fiscal 2013, 2012, and 2011, respectively, because their exercise prices were greater than the average market price of Diamonds common stock and therefore their effect would be antidilutive.
(5) Acquisitions
Proposed Pringles Merger Terminated
On April 5, 2011, Diamond entered into a definitive agreement with The Procter & Gamble Company (P&G) to merge P&Gs Pringles business into the Company. On
February 15, 2012, Diamond and P&G mutually agreed to terminate the Companys proposed merger of the Pringles business. No break-up fee or other fees were paid to P&G in connection with the termination, which included a
mutual release.
60
(6) Intangible Assets and Goodwill
The changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Snacks
|
|
|
Nuts
|
|
|
Total
|
|
Balance as of August 1, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
409,735
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
409,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
(6,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
403,158
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
403,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of August 1, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
403,158
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
(2,033
|
)
|
|
|
|
|
|
|
(2,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
328,490
|
|
|
|
72,635
|
|
|
|
401,125
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
328,490
|
|
|
$
|
72,635
|
|
|
$
|
401,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets consisted of the following at July 31:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Brand intangibles (not subject to amortization):
|
|
$
|
297,577
|
|
|
$
|
298,952
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Customer contracts and related relationships
|
|
|
157,838
|
|
|
|
159,882
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets, gross
|
|
|
455,415
|
|
|
|
458,834
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization on intangible assets:
|
|
|
|
|
|
|
|
|
Customer contracts and related relationships
|
|
|
(29,771
|
)
|
|
|
(21,813
|
)
|
Less asset impairments:
|
|
|
|
|
|
|
|
|
Brand intangibles
|
|
|
(36,000
|
)
|
|
|
|
|
Customer contracts and related relationships
|
|
|
(1,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets, net
|
|
$
|
388,084
|
|
|
$
|
437,021
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible asset amortization expense in each of the five succeeding years will amount to
approximately $7.7 million. For fiscal 2013, 2012 and 2011, the amortization period for identifiable intangible assets was approximately 20 years with amortization expense of approximately $8.0 million, $8.0 million and $8.1 million recognized,
respectively.
61
The Company also performed its 2013 annual impairment test of goodwill and non-amortizing
intangible assets required by ASC 350 as of June 30, 2013. There was no goodwill impaired during fiscal 2013, 2012 and 2011. There were no non-amortizing assets impaired during fiscal 2012 and 2011. In fiscal 2013, the Company determined that
the Kettle U.S. trade name within the Snacks segment was impaired based on a decrease in forecasted future revenues. The Company recorded a $36.0 million impairment charge within the asset impairment line on the consolidated statement of operations.
The inputs used to measure the fair value of the Kettle U.S. trade name were largely unobservable, and accordingly, this measure was classified as Level 3. The fair value of the Kettle U.S. trade name was estimated based on the relief from royalty
method, which models the cash flows from the brand intangibles assuming royalties were received under a licensing arrangement. This discounted cash flow analysis, uses inputs such as forecasted future revenues attributable to the brand, assumed
royalty rates and a risk-adjusted discount rate that approximates the estimated cost of capital. The unobservable inputs used in this valuation included projected revenue growth rates, royalty rates, and the discount rate. The Company used a
discount rate of 11%.
In fiscal 2013, the Company also recorded an intangible asset impairment charge of $1.6 million, within
asset impairments, associated with customer contacts and related relationships. This impairment charge represents a write down of the total net book value of the intangible asset as of April 30, 2013, and is included within the Nuts reportable
segment. This impairment charge was recognized as a result of managements decision to cease production and shipment of products with the brand associated with these customer contracts and related relationships.
(7) Notes Payable and Long-Term Obligations
Long term debt outstanding as of July 31:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Secured Credit Facility
|
|
$
|
371,678
|
|
|
$
|
403,204
|
|
Oaktree Debt
|
|
|
210,926
|
|
|
|
184,981
|
|
Guaranteed Loan
|
|
|
8,333
|
|
|
|
16,862
|
|
|
|
|
|
|
|
|
|
|
Total outstanding debt
|
|
|
590,937
|
|
|
|
605,047
|
|
Less: current portion
|
|
|
(5,860
|
)
|
|
|
(5,449
|
)
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
585,077
|
|
|
$
|
599,598
|
|
|
|
|
|
|
|
|
|
|
Net interest expense as of July 31 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Secured Credit Facility
|
|
$
|
29,811
|
|
|
$
|
27,857
|
|
|
$
|
23,771
|
|
Oaktree Debt
|
|
|
26,375
|
|
|
|
6,163
|
|
|
|
|
|
Guaranteed Loan
|
|
|
721
|
|
|
|
971
|
|
|
|
549
|
|
Interest income
|
|
|
(11
|
)
|
|
|
(46
|
)
|
|
|
(38
|
)
|
Capitalized interest
|
|
|
(423
|
)
|
|
|
(1,673
|
)
|
|
|
(583
|
)
|
Other
|
|
|
1,452
|
|
|
|
704
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,925
|
|
|
$
|
33,976
|
|
|
$
|
23,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2010, Diamond entered into an agreement (the Secured Credit Agreement) with a
syndicate of lenders for a five-year $600 million secured credit facility (the Secured Credit Facility). Diamonds Secured Credit Facility initially consisted of a $200 million revolving credit facility and a $400 million term loan.
In March 2011, the syndicate of lenders approved Diamonds request for a $35 million increase in our revolving credit facility to $235 million, under the same terms. In August 2011, the syndicate of lenders approved Diamonds request for a
$50 million increase in our revolving credit facility to $285 million, under the same terms. As a part of the Waiver and Third Amendment to its Secured Credit Facility (Third Amendment), the revolving credit facility was reduced from
$285 million to $255 million in May 2012 and to $230 million in July 2013. As of July 31, 2013, the
62
revolving credit facility had $230 million in capacity, of which $154 million was outstanding. The capacity under the revolving credit facility was decreased to $230 million effective
July 31, 2013 and will decrease to $180 million effective January 31, 2014. In May 2012, Diamond made a $100 million pre-payment on the term loan facility as part of the Third Amendment. As of July 31, 2013, the term loan facility had
$215 million in capacity, of which $215 million was outstanding. In addition, scheduled principal payments on the term loan facility were $0.9 million (due quarterly), with the remaining principal balance and any outstanding loans under the
revolving credit facility to be repaid on May 25, 2015. For fiscal 2013, the blended interest rate for the Companys consolidated borrowings, excluding the Oaktree debt, was 6.7%. Substantially all of the Companys tangible and
intangible assets are considered collateral security under the Secured Credit Facility.
The Secured Credit Facility provides
for customary affirmative and negative covenants and cross default provisions that may be triggered if Diamond fails to comply with obligations under their other credit facilities or indebtedness. Beginning on October 31, 2013, the
Companys senior debt to consolidated EBITDA ratio (Consolidated Senior Leverage Ratio), as defined in the Third Amendment, will be limited to no more than 4.70 to 1.00 and the fixed charge coverage ratio to no less than 2.00 to
1.00. The Consolidated Senior Leverage Ratio covenant will decline each quarter, ultimately to 3.25 to 1.00 in the quarter ending July 31, 2014.
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 $10.6 million was
outstanding as of July 31, 2013. Principal and interest payments are due monthly throughout the term of the loan. The Guaranteed Loan was being used to purchase equipment for the Beloit, Wisconsin plant expansion. Borrowed funds have been
placed in an interest-bearing escrow account and will be made available as expenditures are approved for reimbursement. As the cash will be used to purchase non-current assets, such restricted cash has been 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.
The Guaranteed Loan provides for customary affirmative and negative covenants, which are
similar to the covenants under the Secured Credit Facility. The financial covenants within the Guaranteed Loan were reset to match those in the Third Amendment.
In March 2012, Diamond reached an agreement with its lenders to forbear from seeking any remedies under the Secured Credit Facility with respect to specified existing and anticipated non-compliance with
the credit agreement and to amend its credit agreement. Under the amended credit agreement, Diamond had continued access to its existing revolving credit facility through a forbearance period (initially through June 18, 2012) subject to
Diamonds compliance with the terms and conditions of the amended credit agreement. During the forbearance period, the interest rate on borrowings increased. The amended credit agreement required Diamond to suspend dividend payments to
stockholders. In addition, Diamond paid a forbearance fee of 25 basis points to its lenders. The forbearance period concluded on May 29, 2012, when Diamond closed agreements to recapitalize its balance sheet with an investment by Oaktree
Capital Management, L.P. (Oaktree).
The Oaktree investment initially consists of $225 million of newly-issued
senior notes and a warrant to purchase approximately 4.4 million shares of Diamond common stock. The senior notes will mature in 2020 and bear interest at 12% per year that may be paid-in-kind at Diamonds option for the first two
years. Oaktrees warrant became exercisable at $10 per share starting on March 1, 2013. The Oaktree agreements do not impose any covenants incremental to those under the Secured Credit Facility.
The Oaktree agreements provided that if Diamond secured a specified minimum supply of walnuts from the 2012 crop and achieved
profitability targets for its nut businesses for the six-month period ended January 31, 2013, the warrant would be cancelled and Oaktree would have had the ability to exchange $75 million of the senior notes for convertible preferred stock of
Diamond (the Special Redemption). The convertible preferred stock would have had an initial conversion price of $20.75, which represented a 3.5% discount to the closing price of Diamond common stock on April 25, 2012, the date that
the Company entered into its commitment with
63
Oaktree. The convertible preferred stock would have paid a 10% dividend that would be paid in-kind for the first two years. The warrant is accounted for as a derivative liability with gains
or losses included in (gain) loss on warrant liability in the Companys Statements of Operations. Based on the Companys operating results for the six months ended January 31, 2013, the Special Redemption did not occur.
Pursuant to the Oaktree agreements, Diamond was permitted to prepay all (but not part) of the principal on the Oaktree notes at a 1%
premium prior to May 29, 2013. Beginning on May 29, 2013, the applicable premium increased to 12% and would be applied to any prepayments of principal (including partial prepayments). This premium will reduce to 6% on
May 29, 2016, 3% on May 29, 2017, and nil on May 29, 2018.
On May 22, 2012, Diamond entered into the
Waiver and Third Amendment to its Secured Credit Facility (Third Amendment) which provided for a lower level of total bank debt, initially at $475 million, along with substantial covenant relief until October 31, 2013. At that time,
these covenants will become applicable at revised levels set forth in the amendment (initially 4.70 to 1.00 for the Consolidated Senior Leverage Ratio declining each quarter, ultimately to 3.25 to 1.00 in the quarter ending July 31, 2014, and
thereafter, and 2.00 to 1.00 for the fixed charge coverage ratio). The Third Amendment included a new covenant requiring that Diamond have at least $20 million of cash, cash equivalents and revolving credit availability at all times beginning
February 1, 2013. In addition, the Third Amendment required a $100 million pre-payment of the term loan facility, while reducing the remaining scheduled principal payments from $10 million to $0.9 million. The Third Amendment also amends the
definition of Applicable Rate under the Secured Credit Agreement (which sets the margin over the London Interbank Offered Rate (LIBOR) and the base rate at which loans under the Secured Credit Agreement bear interest). Under
the Third Amendment, initially, Eurodollar rate loans bore interest at 5.50% plus the LIBOR for the applicable loan period, and base rate loans bore interest at 450 basis points plus the highest of (i) the Federal Funds Rate plus 50 basis
points, (ii) the Prime Rate, (iii) Eurodollar Rates plus 100 basis points. The LIBOR rate is subject to a LIBOR floor, initially 125 basis points (the LIBOR Floor). The applicable rate will decline if and when Diamond achieves
reductions in its ratio of senior debt to EBITDA. The Third Amendment also eliminated the requirement that proceeds of future equity issuances be applied to repay outstanding loans, and waived certain covenants in connection with Diamonds
restatement of its consolidated financial statements. As of July 31, 2013, the Company was compliant with financial and reporting covenants.
(8) Balance Sheet Items
Inventories consisted of the following at July 31:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Raw materials and supplies
|
|
$
|
29,825
|
|
|
$
|
63,684
|
|
Work in process
|
|
|
28,058
|
|
|
|
33,495
|
|
Finished goods
|
|
|
57,573
|
|
|
|
68,529
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
115,456
|
|
|
$
|
165,708
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities consisted of the following at July 31:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Accounts payable
|
|
$
|
75,833
|
|
|
$
|
84,324
|
|
Securities litigation settlement
|
|
|
96,129
|
|
|
|
|
|
Accrued salaries and benefits
|
|
|
16,087
|
|
|
|
13,872
|
|
Accrued promotion
|
|
|
18,883
|
|
|
|
21,927
|
|
Accrued taxes
|
|
|
9,160
|
|
|
|
4,952
|
|
Other
|
|
|
4,450
|
|
|
|
5,548
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
220,542
|
|
|
$
|
130,623
|
|
|
|
|
|
|
|
|
|
|
64
(9) Property, Plant and Equipment
Property, plant and equipment consisted of the following at July 31:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Land and improvements
|
|
$
|
9,823
|
|
|
$
|
9,638
|
|
Buildings and improvements
|
|
|
56,745
|
|
|
|
51,556
|
|
Machinery, equipment and software
|
|
|
214,294
|
|
|
|
169,211
|
|
Construction in progress
|
|
|
2,024
|
|
|
|
26,236
|
|
Capital leases
|
|
|
14,420
|
|
|
|
11,790
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
297,306
|
|
|
|
268,431
|
|
Less accumulated depreciation
|
|
|
(163,145
|
)
|
|
|
(119,830
|
)
|
Less accumulated amortization
|
|
|
(1,936
|
)
|
|
|
(1,657
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
132,225
|
|
|
$
|
146,944
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2013, 2012 and 2011, depreciation expense was $25.6 million, $20.3 million and $20.0 million,
respectively.
During the fiscal 2012, Diamond recorded asset impairment charges of $10.1 million associated with equipment
that either is not currently being utilized or will not be utilized for its remaining useful life. The fair value of the equipment was determined utilizing third party quotes and a discounted cash flow analysis.
During fiscal 2013, the Company accelerated the remaining useful lives of leasehold and building improvement assets at the Fishers
facility. Refer to Note 10 to the Notes to the Consolidated Financial Statements for further discussion on the Fishers facility closure.
(10) Fishers Facility Closure
On October 25, 2012, Diamond announced a plan to consolidate its manufacturing operations within the Nuts
reportable segment, and to close its facility in Fishers, Indiana. Certain manufacturing equipment at Fishers has been relocated to Diamonds facility in Stockton, California. During fiscal 2012, Diamond recorded asset impairment charges of
$10.1 million associated with Fishers equipment that was not moved to the Stockton facility. The fair value of the equipment was determined by management utilizing a combination of price quotes and a discounted cash flow analysis. Within selling,
general and administrative expenses, the Company recorded severance expense for the twelve months ended July 31, 2013, of $1.2 million related to Fishers employees. The Company has made payments of $1.0 million related to severance expense in
the twelve months ended July 31, 2013.
In fiscal 2013, the Company accelerated the remaining useful lives of leasehold
and building improvement assets at the Fishers facility to correspond with the estimated cease use date, and recorded additional depreciation expense of $0.9 million, respectively, within selling, general and administrative expenses. In fiscal 2013,
the Company also classified approximately $0.7 million of assets as held for sale. The Company sold these assets in fiscal 2013 for a gain of $0.3 million.
The Company recorded an additional charge of $4.9 million associated with the Fishers facility future lease obligations in the third quarter of fiscal 2013 when the cease-use date occurred, within
selling, general and administrative expenses. This charge included an estimate of sublease rental income. The future cash lease and maintenance related payments made by the Company will reduce this liability. As of July 31, 2013 the Company has
outstanding $4.6 million associated with the Fishers facility future lease obligation. As of July 31, 2013, the exit of the Fishers facility is complete.
65
(11) Income Taxes
The components of income (loss) before income taxes, by tax jurisdiction, are as follows for the fiscal years ended
July 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
(152,337
|
)
|
|
$
|
(65,182
|
)
|
|
$
|
42,269
|
|
Foreign
|
|
|
(23,852
|
)
|
|
|
(19,431
|
)
|
|
|
(12,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(176,189
|
)
|
|
$
|
(84,613
|
)
|
|
$
|
29,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense consisted of the following for the fiscal years ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,379
|
)
|
|
$
|
(2,388
|
)
|
|
$
|
7,250
|
|
State
|
|
|
(4
|
)
|
|
|
813
|
|
|
|
785
|
|
Foreign
|
|
|
(162
|
)
|
|
|
(5,363
|
)
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(1,545
|
)
|
|
|
(6,938
|
)
|
|
|
13,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(9,231
|
)
|
|
|
(768
|
)
|
|
|
(3,389
|
)
|
State
|
|
|
(740
|
)
|
|
|
13,624
|
|
|
|
(2,719
|
)
|
Foreign
|
|
|
(1,441
|
)
|
|
|
(4,195
|
)
|
|
|
(4,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(11,412
|
)
|
|
|
8,661
|
|
|
|
(10,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax provision
|
|
$
|
(12,957
|
)
|
|
$
|
1,723
|
|
|
$
|
3,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the statutory federal income tax rate of 35% to Diamonds effective income tax
rate is as follows for the fiscal years ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Federal tax at statutory rate
|
|
$
|
(61,666
|
)
|
|
$
|
(29,615
|
)
|
|
$
|
10,385
|
|
State tax, net of federal benefit
|
|
|
(530
|
)
|
|
|
9,580
|
|
|
|
(255
|
)
|
Net tax benefit of earnings at lower rates
|
|
|
(9,106
|
)
|
|
|
(9,727
|
)
|
|
|
(10,489
|
)
|
Accrual for uncertain tax positions
|
|
|
(1,458
|
)
|
|
|
(6,382
|
)
|
|
|
7,507
|
|
Compensation
|
|
|
(428
|
)
|
|
|
258
|
|
|
|
897
|
|
Financing related
|
|
|
7,610
|
|
|
|
7,582
|
|
|
|
|
|
Domestic production activities deduction
|
|
|
|
|
|
|
|
|
|
|
(600
|
)
|
Impact of tax law changes
|
|
|
|
|
|
|
(2,453
|
)
|
|
|
(3,972
|
)
|
Impact of valuation allowance
|
|
|
52,124
|
|
|
|
31,937
|
|
|
|
|
|
Changes in estimates
|
|
|
191
|
|
|
|
315
|
|
|
|
300
|
|
Other
|
|
|
306
|
|
|
|
228
|
|
|
|
(670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (benefit)
|
|
$
|
(12,957
|
)
|
|
$
|
1,723
|
|
|
$
|
3,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable U.S. income taxes have not been provided on approximately $61.1 million of undistributed
earnings of certain foreign subsidiaries at July 31, 2013, because these earnings are considered indefinitely reinvested. The net federal income tax liability that would arise if these earnings were not indefinitely reinvested is approximately
$21.4 million. Applicable U.S. income taxes are provided on these earnings in the periods in which they are no longer considered indefinitely reinvested.
66
With respect to the Companys stock option plans, realized tax benefits in excess of
tax benefits recognized in net earnings are recorded as increases to additional paid-in capital. Excess tax benefits realized and recorded to additional paid-in capital were nil for fiscal 2013 and 2012 and $1.4 million for fiscal 2011. The Company
had unrecorded excess stock option tax benefits of $1.5 million as of July 31, 2013, which will be credited to additional paid-in-capital when such amounts reduce cash taxes payable.
The tax effect of temporary differences and net operating losses which give rise to deferred tax assets and liabilities consist of the
following as of July 31:
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
536
|
|
|
$
|
1,528
|
|
Receivables
|
|
|
131
|
|
|
|
149
|
|
Accruals
|
|
|
1,952
|
|
|
|
4,208
|
|
Compensation
|
|
|
2,085
|
|
|
|
2,583
|
|
State tax
|
|
|
113
|
|
|
|
99
|
|
Litigation Settlement
|
|
|
4,194
|
|
|
|
|
|
Other
|
|
|
87
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
9,098
|
|
|
|
8,556
|
|
Valuation Allowance
|
|
|
(8,416
|
)
|
|
|
(4,900
|
)
|
|
|
|
|
|
|
|
|
|
Total current
|
|
$
|
682
|
|
|
$
|
3,656
|
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
|
Litigation Settlement
|
|
|
32,460
|
|
|
|
|
|
State tax credits
|
|
|
8,346
|
|
|
|
7,883
|
|
Retirement benefits
|
|
|
2,224
|
|
|
|
4,092
|
|
Other comprehensive income
|
|
|
572
|
|
|
|
2,866
|
|
Net Operating Loss
|
|
|
75,880
|
|
|
|
38,191
|
|
Employee stock compensation benefits
|
|
|
5,253
|
|
|
|
5,790
|
|
Other
|
|
|
1,071
|
|
|
|
1,953
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
125,806
|
|
|
|
60,775
|
|
Valuation Allowance
|
|
|
(90,890
|
)
|
|
|
(39,732
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current
|
|
$
|
34,916
|
|
|
$
|
21,043
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Litigation Settlement
|
|
$
|
3,813
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
$
|
3,813
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
12,365
|
|
|
|
10,783
|
|
Intangibles
|
|
|
114,968
|
|
|
|
127,104
|
|
Unremitted Earnings
|
|
|
7,602
|
|
|
|
7,883
|
|
Other
|
|
|
6,748
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
Total non-current
|
|
|
141,683
|
|
|
|
146,920
|
|
|
|
|
|
|
|
|
|
|
Total deferred taxes, net
|
|
$
|
(109,898
|
)
|
|
$
|
(122,221
|
)
|
|
|
|
|
|
|
|
|
|
Composed of:
|
|
|
|
|
|
|
|
|
Net current deferred taxes
|
|
$
|
(3,131
|
)
|
|
$
|
3,656
|
|
Net non-current deferred taxes
|
|
|
(106,767
|
)
|
|
|
(125,877
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred taxes, net
|
|
$
|
(109,898
|
)
|
|
$
|
(122,221
|
)
|
|
|
|
|
|
|
|
|
|
67
Valuation allowances have been provided to reduce deferred tax assets to amounts considered
recoverable. The Companys valuation allowance was $99.3 million as of July 31, 2013 and $44.6 million as of July 31, 2012. In the three months ended April 30, 2012 as a result of cumulative losses, the Company concluded that a
valuation allowance was required on certain US and state deferred tax assets (principally NOLs and California EZ credits) because it was managements assessment that it was no longer more likely than not that those assets could be
realized. The valuation allowances may be reversed in a future period when facts and circumstances indicate that it is more likely than not that the particular deferred tax asset can be realized.
As of July 31, 2013, the Company had $185.0 million of cumulative federal tax loss carryforwards and $162.6 million of cumulative
state tax loss carryforwards. The federal loss carry forward will expire in fiscal 2032 if not used prior to that time. The state tax loss carryforwards will expire beginning fiscal 2017 through fiscal 2032. As a result of certain realization
requirements of ASC 718, the table of deferred tax asset and deferred tax liabilities shown above does not include certain deferred tax assets as of July 31, 2013 and 2012 that arose directly from tax deductions related to equity compensation
in excess of compensation recognized for financial reporting. Equity will be increased by $1.5 million if and when such deferred tax assets are ultimately realized. The Company uses tax ordering rules for purposes of determining when excess tax
benefits have been realized.
The state tax credits of $14.0 million are California Enterprise Zone Credits which begin to
expire in fiscal 2023, and $0.2 million of California Research and Development Credits, which have no expiration date.
A
reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Balance, beginning of year
|
|
$
|
3,927
|
|
|
$
|
14,260
|
|
|
$
|
5,454
|
|
Tax position related to current year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
884
|
|
|
|
359
|
|
|
|
7,977
|
|
Tax positions related to prior years:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
1,125
|
|
|
|
518
|
|
|
|
840
|
|
Reductions
|
|
|
(2,392
|
)
|
|
|
(11,210
|
)
|
|
|
(11
|
)
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
Statute of limitations closures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
3,544
|
|
|
$
|
3,927
|
|
|
$
|
14,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the balance of unrecognized tax benefits at July 31, 2013, July 31, 2012 and
July 31, 2011, respectively, are potential benefits of $0.7 million, $0.6 million, and $9.1 million respectively, which if recognized, would affect the effective tax rate on earnings.
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company
accrued $0.1 million, $0.2 million and $0.1 million, net of federal benefit, in interest and $0 million, $0 million, and $0.1 million in penalties associated with uncertain tax positions for each fiscal 2013, 2012 and 2011.
In the twelve months following July 31, 2013, audit resolutions, lapse of statute of limitations, and filing the amended returns
could potentially reduce total unrecognized tax benefits by up to $1.4 million.
The Company files income tax returns in the
U.S. federal and various states, local and foreign jurisdictions, primarily in the United Kingdom. The Companys U.S. federal and state income tax returns for fiscal 2006 through fiscal 2012 and the Companys United Kingdom tax returns for
fiscal 2011 and 2012 remain open to examination.
68
(12) Commitments and Contingencies
In November 2011 and December 2011, various putative shareholder class action and derivative complaints were filed in
federal and state court against Diamond and certain current and former Diamond directors and officers.
In re Diamond
Foods, Inc., Securities Litigation
Beginning on November 7, 2011, the first of a number of putative securities class
action suits was filed in the United States District Court for the Northern District of California against Diamond and certain of its former executive officers (defendants). These suits allege that defendants made materially false and
misleading statements, or failed to disclose material facts, regarding Diamonds financial results, operations and prospects, including its accounting for payments to walnut growers and the anticipated closing of Diamonds proposed merger
of the Pringles business from P&G. On January 24, 2012, these class actions were consolidated by the court as
In re Diamond Foods Inc., Securities Litigation
. On March 20, 2012, the court appointed a lead plaintiff, and on
June 13, 2012, the court appointed lead counsel for the plaintiff. On July 30, 2012, an amended complaint was filed in the consolidated action naming Diamond, certain of its former executive officers and its former independent auditor as
defendants. The amended complaint purports to allege claims covering the period from October 5, 2010 through February 8, 2012, and seeks compensatory damages, interest thereon, costs and expenses incurred in the action and other relief. On
September 28, 2012, Diamond moved to dismiss the action. On November 30, 2012, the court denied Diamonds motion allowing the matter to proceed with respect to Diamond and the former executive officers, and dismissed claims against
Diamonds former independent auditor with leave to amend. On December 21, 2012, Diamond and the former executive officers filed answers to the amended complaint. On May 6, 2013, the court certified a class in the consolidated action.
Thereafter, the parties reached a proposed agreement subject to final court approval, to settle the action. On August 21, 2013, a motion for preliminary approval of the settlement was filed which was granted on September 26, 2013. A final
approval hearing is currently scheduled for January 9, 2014. Pursuant to the terms of the preliminarily approved settlement, Diamond would pay a total of $11.0 million in cash and issue 4.45 million shares of common stock to a settlement
fund to resolve all claims asserted on behalf of investors who purchased or otherwise acquired Diamond stock between October 5, 2010 and February 8, 2012, inclusive. A portion of the $11.0 million in cash would be funded by Diamonds
insurers. The total amount of director and officer liability coverage available under Diamonds insurance policies is $30 million. As of July 31, 2013, insurers had paid approximately $12.9 million in insurable expenses. As of July 31, 2013,
Diamond had recorded a $15.5 million receivable, $12.1 million which will be used for the settlement and other legal expenses and $3.4 million for the shareholder derivative settlement. In addition, Diamond expects to receive $1.6 million related to
the shareholder derivative settlement in the first quarter of fiscal 2014 which will be recorded as a gain. Pursuant to the preliminary approval motion, the estimated value of the 4.45 million shares of Diamonds common stock was valued at
$85.1 million based on the closing market price of Diamonds common stock on the day before the preliminary approval motion was filed, August 20, 2013. The value of the 4.45 million shares of common stock at July 31, 2013 was $90.7
million. With respect to the 4.45 million shares, Diamond would have the ability to privately place, or conduct a public offering of, the shares with the consent of the lead plaintiff and its counsel, prior to distribution of the settlement
fund. In that event, the settlement fund would include the proceeds of the offering in lieu of the settlement shares. Refer to Note 17 to the Notes to the Consolidated Financial Statements.
In re Diamond Foods Inc., Shareholder Derivative Litigation
Beginning on November 14, 2011, three putative shareholder derivative lawsuits were filed in the Superior Court for the State of
California, San Francisco County, purportedly on behalf of Diamond Foods and naming certain executive officers and the members of Diamonds board of directors as individual defendants. On January 17, 2012, the court consolidated these
actions as
In re Diamond Foods, Inc., Shareholder Derivative Litigation
and appointed co-lead counsel. On February 16, 2012 plaintiffs filed their consolidated complaint, naming certain current and former executive officers and members
of Diamonds board, and Diamonds former independent auditor, as individual defendants. The consolidated complaint arises from the same or similar alleged facts as alleged in the federal securities action and the federal derivative
litigation (discussed in the next
69
paragraph below), and purported to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement, and against the former independent auditor for
professional negligence and breach of contract. The suit seeks the recovery of unspecified damages allegedly sustained by Diamond, which is named as a nominal defendant, corporate reforms, disgorgement, restitution, the recovery of plaintiffs
attorneys fees and other relief. On August 20, 2012, Diamond filed a demurrer seeking to dismiss the action. On October 23, 2012, the court sustained Diamonds demurrer with leave to amend the complaint excluding the gross
mismanagement claim, which the court sustained with prejudice. Following mediation efforts, an agreement in principle to settle all derivative claims on behalf of Diamond was reached by plaintiffs and the current and former executive officers and
members of Diamonds board. The agreement also sought to resolve certain litigation demands by various shareholders of Diamond Foods, as well as the
Astor BK Realty Trust v.
Diamond Foods, Inc.
action pending in the Court of
Chancery for the State of Delaware pursuant to 8 Del. C. §220. On May 29, 2013, plaintiffs filed a motion for preliminary approval of the settlement. On June 14, 2013, the court preliminarily approved the settlement. On
August 19, 2013, the court entered an order granting final approval of the settlement and judgment was entered the same day. As part of the settlement, Diamonds insurers were required to pay Diamond $5.0 million, of which $3.4 million was
reimbursement of fees to be paid by Diamond to plaintiffs attorneys. These fees were recorded as a liability as of July 31, 2013 with a corresponding receivable from the insurers. $1.6 million of the $5.0 million settlement will be
recorded as a gain in the first quarter of fiscal 2014. On September 23, 2013 a Notice of Appeal was filed by one of the plaintiffs in the dismissed federal derivative case,
In re Diamond Foods, Inc., Derivative Litigation.
In re Diamond Foods, Inc., Derivative Litigation
Beginning on November 28, 2011, two putative shareholder derivative lawsuits were filed in the United States District Court for the Northern District of California, purportedly on behalf of Diamond
Foods and naming certain current and former executive officers and members of Diamonds board of directors as individual defendants. On February 16, 2012, the court consolidated these actions as
In re Diamond Foods, Inc., Derivative
Litigation
. Plaintiffs filed their consolidated complaint on March 1, 2012, again naming certain current and former executive officers and members of Diamonds board of directors as individual defendants, and also adding Diamonds
former independent auditor as a defendant. The suit was based on essentially the same allegations as those in the federal securities action and the state derivative litigation, and purported to set forth claims under Section 14 (a) of the
Securities Exchange Act of 1934 alleging that defendants made materially false or misleading statements or omissions in proxy statements issued on or about November 26, 2010 and on or about September 26, 2011, and for breach of fiduciary
duty, unjust enrichment, contribution and indemnification, gross mismanagement and, against Diamonds former independent auditor, for professional negligence, accounting malpractice and aiding and abetting the breach of fiduciary duties of the
other individual defendants. The suit sought to recover unspecified damages allegedly sustained by Diamond, which was named as a nominal defendant, corporate reforms, restitution, equitable and/or injunctive relief, to recover plaintiffs
attorneys fees and other relief. On April 16, 2012, Diamond moved to dismiss the action. On May 29, 2012, the court granted Diamonds motion and dismissed the action with prejudice, based on lack of subject matter jurisdiction
related to deficiencies in plaintiffs Section 14(a) claims. The court entered judgment in favor of Diamond the same day. On June 4, 2012, one of the plaintiffs in the consolidated matter filed a Notice of Appeal with the United
States Court of Appeals for the Ninth Circuit, seeking to appeal the May 29, 2012 order granting Diamonds motion to dismiss. On October 12, 2012, the appellant filed its opening brief. Diamond filed his answering brief on
November 27, 2012 and appellant filed his reply brief on December 28, 2012.
Astor BK Realty Trust v. Diamond
Foods, Inc.
On February 22, 2012
,
an action was filed in Delaware Chancery Court by a shareholder seeking to
enforce a demand to inspect certain of Diamonds records pursuant to Section 220 of the Delaware General Corporation Law, as a possible prelude to the shareholder bringing a derivative action. On August 26, 2013, in connection with
the settlement of the shareholder derivative claims in
In re Diamond Foods Inc., Shareholder Derivative Litigation,
the action was dismissed with prejudice.
70
Governmental Proceedings
On December 14, 2011, Diamond received a formal order of investigation from the staff of the United States Securities and Exchange
Commission (SEC). Diamond also has had contact with the U.S. Attorneys office for the Northern District of California (DOJ). We have cooperated with the government and expect to continue to do so.
Other
The Company is involved in other various legal actions in the ordinary course of our business. Such matters are subject to many
uncertainties that make their outcomes, and any potential liability we may incur, unpredictable.
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 the Company or settlements that could require substantial payments by the Company, which could have a material impact on Diamonds
financial position, results of operations and cash flows.
At July 31, 2013, the Company had $4.8 million of letters of
credit outstanding related to normal business transactions and commitments of $1.2 million to purchase new equipment.
Operating lease expense for the fiscal 2013, 2012 and 2011 were $5.3 million, $5.5 million and $4.7 million, respectively.
At July 31, 2013, future minimum payments under non-cancelable operating leases (primarily for real property) were as follows:
|
|
|
|
|
Operating Leases
|
|
|
|
2014
|
|
$
|
4,910
|
|
2015
|
|
|
4,101
|
|
2016
|
|
|
2,991
|
|
2017
|
|
|
2,577
|
|
2018
|
|
|
2,511
|
|
Thereafter
|
|
|
7,059
|
|
|
|
|
|
|
Total
|
|
$
|
24,149
|
|
|
|
|
|
|
At July 31, 2013, future minimum payments under non-cancelable capital leases (primarily for real
property) were as follows:
|
|
|
|
|
Capital Leases
|
|
|
|
2014
|
|
$
|
3,156
|
|
2015
|
|
|
3,156
|
|
2016
|
|
|
3,156
|
|
2017
|
|
|
3,083
|
|
2018
|
|
|
1,503
|
|
Thereafter
|
|
|
1,465
|
|
|
|
|
|
|
Total minimum payments
|
|
|
15,519
|
|
Less amount representing interest
|
|
|
(2,334
|
)
|
|
|
|
|
|
Present value of capital lease obligations
|
|
$
|
13,185
|
|
|
|
|
|
|
(13) Segment Reporting
The Companys chief operating decision maker (CODM) changed during the fourth quarter of fiscal 2012,
and in the second quarter of fiscal 2013 there was a change in the information used by the CODM to make
71
decisions about the allocation of resources and the assessment of performance. As a result, during the second quarter of fiscal 2013, the Company changed its operating and reportable segments.
The Company previously had one operating segment and one reportable segment; it now aggregates its five operating segments 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 Companys 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 Companys 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 Companys segments are the same as those described in the summary of critical accounting policies set forth in Managements Discussion and
Analysis of Results of Operations.
The Companys net sales and gross profit by segment for the fiscal 2013, 2012
and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Snacks
|
|
$
|
437,955
|
|
|
$
|
425,175
|
|
|
$
|
403,701
|
|
Nuts
|
|
|
426,057
|
|
|
|
556,243
|
|
|
|
562,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
864,012
|
|
|
$
|
981,418
|
|
|
$
|
966,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Snacks
|
|
$
|
152,133
|
|
|
$
|
128,122
|
|
|
$
|
131,807
|
|
Nuts
|
|
|
53,390
|
|
|
|
51,599
|
|
|
|
84,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
205,523
|
|
|
$
|
179,721
|
|
|
$
|
216,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales by channel/product were as follows for fiscal 2013, 2012, and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended July 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Snacks
|
|
$
|
437,955
|
|
|
$
|
425,175
|
|
|
$
|
403,701
|
|
Retail Nuts
|
|
|
365,178
|
|
|
|
473,402
|
|
|
|
413,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail
|
|
|
803,133
|
|
|
|
898,577
|
|
|
|
816,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Retail International Nuts
|
|
|
37,993
|
|
|
|
51,208
|
|
|
|
119,017
|
|
North American Ingredient Nuts/Food Service Nuts Other
|
|
|
22,886
|
|
|
|
31,633
|
|
|
|
30,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Retail
|
|
$
|
60,879
|
|
|
$
|
82,841
|
|
|
$
|
149,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales
|
|
$
|
864,012
|
|
|
$
|
981,418
|
|
|
$
|
966,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The geographic distributions of the Companys net sales for the fiscal years ended July 31 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
659,110
|
|
|
$
|
754,966
|
|
|
$
|
676,829
|
|
Europe
|
|
|
134,557
|
|
|
|
141,670
|
|
|
|
161,365
|
|
Other
|
|
|
70,345
|
|
|
|
84,782
|
|
|
|
128,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
864,012
|
|
|
$
|
981,418
|
|
|
$
|
966,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
The geographic distributions of the Companys long-lived assets as of July 31 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
United States
|
|
$
|
103,364
|
|
|
$
|
116,273
|
|
United Kingdom
|
|
|
28,861
|
|
|
|
30,671
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
132,225
|
|
|
$
|
146,944
|
|
|
|
|
|
|
|
|
|
|
(14) Valuation Reserves and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of Period
|
|
|
Additions
charged to
Costs and
Expenses
|
|
|
Deductions
from
Reserves (1)
|
|
|
End of
Period
|
|
Allowance for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31, 2011
|
|
$
|
606
|
|
|
$
|
55
|
|
|
$
|
(19
|
)
|
|
$
|
642
|
|
Year ended July 31, 2012
|
|
|
642
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
477
|
|
Year ended July 31, 2013
|
|
|
477
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
429
|
|
Deferred Tax Asset Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended July 31, 2011
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Year ended July 31, 2012
|
|
|
|
|
|
|
44,632
|
|
|
|
|
|
|
|
44,632
|
|
Year ended July 31, 2013
|
|
|
44,632
|
|
|
|
54,674
|
|
|
|
|
|
|
|
99,306
|
|
(1)
|
Deductions from reserves include asset write-offs and/or recoveries.
|
(15) Retirement Plans
Diamond provides retiree medical benefits and sponsors one defined benefit pension plan. 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. Any employee who joined the Company after
January 15, 1999 is not entitled to retiree medical benefits. The nonqualified plan was terminated in fiscal 2013 and all benefits were distributed in December 2012. There are no obligations as of July 31, 2013.
In March 2010, the Company determined that the defined benefit pension plan for the bargaining unit employees would be frozen at
July 31, 2010 in conjunction with the execution of a new union contract. This amendment was accounted for in accordance with ASC 715,
CompensationRetirement Benefits
.
Obligations and funded status of the remaining benefit plans at July 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
Change in Benefit Obligation
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Benefit obligation at beginning of year
|
|
$
|
30,637
|
|
|
$
|
26,868
|
|
|
$
|
1,996
|
|
|
$
|
2,269
|
|
Service cost
|
|
|
|
|
|
|
97
|
|
|
|
63
|
|
|
|
62
|
|
Interest cost
|
|
|
908
|
|
|
|
1,323
|
|
|
|
62
|
|
|
|
104
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
19
|
|
Plan amendments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
|
|
(4,366
|
)
|
|
|
2,838
|
|
|
|
(296
|
)
|
|
|
(371
|
)
|
Benefits paid
|
|
|
(5,976
|
)
|
|
|
(489
|
)
|
|
|
(80
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
21,203
|
|
|
$
|
30,637
|
|
|
$
|
1,758
|
|
|
$
|
1,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
Change in Plan Assets
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Fair value of plan assets at beginning of year
|
|
$
|
14,671
|
|
|
$
|
14,451
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
1,652
|
|
|
|
709
|
|
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
5,440
|
|
|
|
|
|
|
|
67
|
|
|
|
68
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
19
|
|
Benefits paid
|
|
|
(5,976
|
)
|
|
|
(489
|
)
|
|
|
(80
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
15,787
|
|
|
$
|
14,671
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(5,416
|
)
|
|
$
|
(15,966
|
)
|
|
$
|
(1,758
|
)
|
|
$
|
(1,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (liabilities) recognized in the consolidated balance sheet at July 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Current liabilities
|
|
$
|
|
|
|
|
(5,865
|
)
|
|
$
|
(146
|
)
|
|
$
|
(106
|
)
|
Noncurrent liabilities
|
|
|
(5,416
|
)
|
|
|
(10,101
|
)
|
|
|
(1,612
|
)
|
|
|
(1,890
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,416
|
)
|
|
$
|
(15,966
|
)
|
|
$
|
(1,758
|
)
|
|
$
|
(1,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income (pre-tax) as of July 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Net loss (gain)
|
|
$
|
5,771
|
|
|
$
|
12,026
|
|
|
$
|
(4,270
|
)
|
|
$
|
(4,686
|
)
|
Prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,771
|
|
|
$
|
12,026
|
|
|
$
|
(4,270
|
)
|
|
$
|
(4,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit pension plans was $21.2 million and $30.6
million at July 31, 2013 and 2012.
Information for pension plans with an accumulated benefit obligation in excess of
plan assets as of July 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Projected benefit obligation
|
|
$
|
21,203
|
|
|
$
|
30,637
|
|
Accumulated benefit obligation
|
|
|
21,203
|
|
|
|
30,637
|
|
Fair value of plan assets
|
|
|
15,787
|
|
|
|
14,671
|
|
Components of net periodic benefit cost (income) for the fiscal years ended July 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Service cost
|
|
$
|
|
|
|
$
|
97
|
|
|
$
|
79
|
|
|
$
|
63
|
|
|
$
|
62
|
|
|
$
|
65
|
|
Interest cost
|
|
|
908
|
|
|
|
1,323
|
|
|
|
1,258
|
|
|
|
62
|
|
|
|
104
|
|
|
|
107
|
|
Expected return on plan assets
|
|
|
(1,006
|
)
|
|
|
(1,134
|
)
|
|
|
(1,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
16
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net (gain) loss
|
|
|
723
|
|
|
|
782
|
|
|
|
643
|
|
|
|
(712
|
)
|
|
|
(771
|
)
|
|
|
(795
|
)
|
Settlement cost
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Curtailment cost
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost / (income)
|
|
$
|
1,145
|
|
|
$
|
1,155
|
|
|
$
|
965
|
|
|
$
|
(587
|
)
|
|
$
|
(605
|
)
|
|
$
|
(623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
The estimated net loss and prior service cost for the defined benefit pension plans that
will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0 million and nil, respectively. The estimated net gain and prior service cost for the other defined benefit post-retirement
plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0 million and nil, respectively.
For calculation of retiree medical benefit cost, prior service cost is amortized on a straight-line basis over the average remaining years of service to full eligibility for benefits of the active plan
participants. For calculation of net periodic pension cost, prior service cost is amortized on a straight-line basis over the average remaining years of service of the active plan participants.
Assumptions
Weighted-average assumptions used to determine benefit obligations at July 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Discount rate
|
|
|
4.70
|
%
|
|
|
3.09
|
%
|
|
|
5.00
|
%
|
|
|
4.00
|
%
|
|
|
3.20
|
%
|
|
|
4.70
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
5.50
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted-average assumptions used to determine net periodic benefit cost for the fiscal years ended
July 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Discount rate
|
|
|
3.09
|
%
|
|
|
5.00
|
%
|
|
|
5.28
|
%
|
|
|
3.20
|
%
|
|
|
4.70
|
%
|
|
|
5.00
|
%
|
Expected long-term return on plan assets
|
|
|
7.00
|
|
|
|
8.00
|
|
|
|
8.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
5.50
|
|
|
|
5.50
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The expected long-term rate of return on plan assets is based on the established asset allocation.
Assumed trend rates for medical plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Health care cost trend rate assumed for next year
|
|
|
8.50
|
%
|
|
|
8.75
|
%
|
|
|
9.00
|
%
|
Rate to which the cost trend rate assumed to decline (the ultimate trend rate)
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year the rate reaches ultimate trend rate
|
|
|
2028
|
|
|
|
2028
|
|
|
|
2028
|
|
Assumed health care cost trend rates have a significant effect on the amounts reported for health care
plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
|
One
Percentage
Point
Increase
|
|
|
One
Percentage
Point
Decrease
|
|
Effect on total of service and interest cost
|
|
$
|
18
|
|
|
$
|
(15
|
)
|
Effect on post-retirement benefit obligation
|
|
|
165
|
|
|
|
(144
|
)
|
75
Plan Assets
Effective July 31, 2010, Diamond adopted the provisions of ASU No. 2010-06 on employers disclosures about plan assets of a defined benefit pension or other post-retirement plan. The fair
values of the Companys pension plan assets by asset category were as follows (refer to Note 2 to the Notes to the Consolidated Financial Statements for description of levels):
The fair value of pension plan assets by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at July 31, 2013
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
281
|
|
|
$
|
|
|
|
$
|
281
|
|
|
$
|
|
|
Mutual funds equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
5,793
|
|
|
|
5,793
|
|
|
|
|
|
|
|
|
|
International
|
|
|
2,185
|
|
|
|
2,185
|
|
|
|
|
|
|
|
|
|
Mutual funds debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
1,626
|
|
|
|
1,626
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
5,402
|
|
|
|
5,402
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
500
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,787
|
|
|
$
|
15,506
|
|
|
$
|
281
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at July 31, 2012
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
317
|
|
|
$
|
|
|
|
$
|
317
|
|
|
$
|
|
|
Mutual funds equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
5,602
|
|
|
|
5,602
|
|
|
|
|
|
|
|
|
|
International
|
|
|
1,978
|
|
|
|
1,978
|
|
|
|
|
|
|
|
|
|
Mutual funds debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
|
2,078
|
|
|
|
2,078
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
4,039
|
|
|
|
4,039
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
657
|
|
|
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,671
|
|
|
$
|
14,354
|
|
|
$
|
317
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension obligations and expenses are most sensitive to the expected return on pension plan assets and
discount rate assumptions. Other post-retirement benefit obligations and expenses are most sensitive to discount rate assumptions and health care cost trend rate. Diamond determines the expected return on pension plan assets based on an expectation
of the average annual returns over an extended period of time. This expectation is based, in part, on the actual returns achieved by the Companys pension plan in prior periods. The Company also considers the weighted average historical rates
of return on securities with similar characteristics to those in which the Companys pension assets are invested.
The
investment objectives for the Diamond plans are to maximize total returns within reasonable and prudent levels of risk. The plan asset allocation is a key element in achieving the expected investment returns on plan assets. The current asset
allocation strategy targets an allocation of 60% for equity securities and 40% for debt securities with adequate liquidity to meet expected cash flow needs. Actual asset allocation may fluctuate within acceptable ranges due to market value
variability. If fluctuations cause an asset class to fall outside its strategic asset allocation range, the portfolio will be rebalanced as appropriate.
76
Cash Flows
Estimated future benefit payments, which reflect expected future service, as appropriate, expected to be paid are as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
2014
|
|
|
650
|
|
|
|
146
|
|
2015
|
|
|
727
|
|
|
|
136
|
|
2016
|
|
|
745
|
|
|
|
127
|
|
2017
|
|
|
769
|
|
|
|
101
|
|
2018
|
|
|
807
|
|
|
|
121
|
|
2019 2023
|
|
|
5,026
|
|
|
|
707
|
|
On November 19, 2012, Michael Mendes, our former chief executive officer, formally resigned from the
Company. The Company and Mr. Mendes entered into a Separation and Clawback Agreement, pursuant to which Mr. Mendes agreed to deliver to the Company a cash payment of $2.7 million (Cash Clawback), representing the total value of
his fiscal 2010 and fiscal 2011 bonuses, and 6,665 shares of Diamond common stock, representing the vested shares awarded to Mr. Mendes after fiscal 2010. The Cash Clawback was deducted from the amount Diamond owed to Mr. Mendes pursuant
to the Diamond Foods Retirement Restoration Plan (SERP). Mr. Mendes and Diamond have determined that prior to giving effect to the Cash Clawback, the retirement benefit due to Mr. Mendes in a lump sum under the SERP was
approximately $5.4 million. The SERP amount, subject to applicable withholding taxes and after giving effect to the Cash Clawback, was paid in early December 2012. Expenses associated with the payout are included in selling, general and
administrative expenses, the returned shares were classified as treasury stock, and a credit to stock compensation expense was recorded.
Defined Contribution Plan
The Company also recognized defined contribution plan expenses of $1.8 million, $1.8 million and $1.4 million for the fiscal 2013, 2012 and 2011, respectively.
(16) Quarterly Financial Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Year ended July 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
258,462
|
|
|
$
|
220,844
|
|
|
$
|
184,905
|
|
|
$
|
199,801
|
|
Gross profit (1)
|
|
|
58,546
|
|
|
|
50,569
|
|
|
|
43,350
|
|
|
|
53,058
|
|
Operating expenses (2)
|
|
|
54,742
|
|
|
|
25,935
|
|
|
|
45,230
|
|
|
|
197,880
|
|
Net income (loss)
|
|
|
(10,729
|
)
|
|
|
10,141
|
|
|
|
(15,582
|
)
|
|
|
(147,062
|
)
|
Basic earnings (loss) per share
|
|
|
(0.49
|
)
|
|
|
0.46
|
|
|
|
(0.71
|
)
|
|
|
(6.71
|
)
|
Basic shares (in thousands)
|
|
|
21,753
|
|
|
|
21,781
|
|
|
|
21,819
|
|
|
|
21,905
|
|
Diluted earnings (loss) per share
|
|
|
(0.49
|
)
|
|
|
(0.37
|
)
|
|
|
(0.71
|
)
|
|
|
(6.71
|
)
|
Diluted shares (in thousands)
|
|
|
21,753
|
|
|
|
23,215
|
|
|
|
21,819
|
|
|
|
21,905
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Year ended July 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
287,393
|
|
|
$
|
262,351
|
|
|
$
|
207,685
|
|
|
$
|
223,989
|
|
Gross profit
|
|
|
61,307
|
|
|
|
41,922
|
|
|
|
34,228
|
|
|
|
42,264
|
|
Operating expenses (3)
|
|
|
59,385
|
|
|
|
58,033
|
|
|
|
51,796
|
|
|
|
61,144
|
|
Net income (loss)
|
|
|
10,801
|
|
|
|
(20,184
|
)
|
|
|
(44,017
|
)
|
|
|
(32,936
|
)
|
Basic earnings (loss) per share
|
|
|
0.49
|
|
|
|
(0.93
|
)
|
|
|
(2.02
|
)
|
|
|
(1.52
|
)
|
Basic shares (in thousands)
|
|
|
21,668
|
|
|
|
21,724
|
|
|
|
21,752
|
|
|
|
21,733
|
|
Diluted earnings (loss) per share
|
|
|
0.47
|
|
|
|
(0.93
|
)
|
|
|
(2.02
|
)
|
|
|
(1.52
|
)
|
Diluted shares (in thousands)
|
|
|
22,567
|
|
|
|
21,724
|
|
|
|
21,752
|
|
|
|
21,733
|
|
(1)
|
A change in the cost of inventories sold during the previous quarters in the fiscal year results in a pre-tax increase or decrease in cost of sales. Diamond routinely
revises its estimate for expected walnut costs to reflect changes in market conditions and other factors. In the quarter ended July 31, 2013, the prior period cost of sales adjustment for changes in walnut prices was $0.4 million. This was
the result of a reduction in walnut prices in the fourth quarter of fiscal 2013 due to a credit from the Walnut Marketing Board. There were no such changes in estimates in the quarters ended January 31, 2013 and April 30, 2013.
|
(2)
|
In the fourth quarter of fiscal 2013, the Company recorded settlement costs associated with the private securities class action in the aggregate amount of $96.1
million. Refer to Note 17 to the Notes to the Consolidated Financial Statements for further detail. Additionally, the Company recorded asset impairment charges of $37.6 million related to brand intangibles and customer contracts and related
relationships. Refer to Note 6 to the Notes to the Consolidated Financial Statements.
|
(3)
|
Includes acquisition and integration related expenses of $0.7 million, $11.3 million, $12.1 million and $17.2 million for the quarters ended July 31,
2012, April 30, 2012, January 31, 2012 and October 31, 2011, respectively.
|
(17) Subsequent Events
On August 21, 2013, the Company reached a proposed agreement, preliminary approval of which was granted on
September 26, 2013, to settle the private securities class action that is pending against the Company and two of its former officers. A final approval hearing is currently scheduled for January 9, 2014. Under the terms of the preliminarily
approved settlement, Diamond would pay a total of $11.0 million in cash and issue 4.45 million shares of common stock to a settlement fund to resolve all claims asserted on behalf of investors who purchased or otherwise acquired Diamond stock
between October 5, 2010 and February 8, 2012. The shares will be included within the Companys earnings per share calculation in the first fiscal quarter of 2014. A portion of the $11.0 million in cash would be funded by
Diamonds insurers. Pursuant to the preliminary approval motion, the estimated value of the 4.45 million shares of Diamonds common stock was valued at $85.1 million based on the closing market price of Diamonds common stock on
the day before the preliminary approval motion, August 20, 2013. The value of the 4.45 million shares of common stock at July 31, 2013 was $90.7 million. With respect to the 4.45 million shares, Diamond would have the ability to privately
place, or conduct a public offering of, the shares with the consent of the lead plaintiff and its counsel, prior to distribution of the settlement fund. In that event, the settlement fund would include the proceeds of the offering in lieu of the
settlement shares. Until the settlement shares are distributed, the liability associated with the agreement to issue the settlement shares will be adjusted from period to period based on changes in the Companys stock price, with the effect of
the change included in the Companys statement of operations.
The aggregate settlement liability of $96.1 million was
recognized by the Company in the fourth fiscal quarter and included a cash settlement of $11.0 million and a stock settlement valued at $85.1 million at the close of the stock market on August 20, 2013 as set forth in the settlement preliminary
approval motion. The total amount of director and officer liability coverage available under Diamonds insurance policies is $30 million. As of July 31, 2013, insurers had paid approximately $12.9 million in insurable expenses. As of July 31,
2013, Diamond had recorded a $15.5 million receivable, $12.1 million which will be used for the settlement and other
78
legal expenses and $3.4 million for the shareholder derivative settlement. In addition, Diamond expects to receive $1.6 million related to the shareholder derivative settlement in the first
quarter of fiscal 2014 which will be recorded as a gain. The provision for settlement costs will be adjusted to reflect changes in the fair value of the securities until they are issued following final court approval of the Amended Stipulation of
Settlement. A portion of the cash piece of the settlement will be paid by insurance. The additional shares of common stock would be antidilutive to the earnings per share calculation as of August 20, 2013.