NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended January 31, 2014 and 2013
(In thousands, except share and per share information unless otherwise noted)
(Unaudited)
(1) Organization and Basis of Presentation
Diamond Foods, Inc. (the Company or Diamond) is an innovative packaged food company focused on
building and energizing brands. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, Diamond complemented its strong heritage in the culinary nut market under the Diamond
of California
®
brand by launching a line of snack nuts under the Emerald
®
brand. In 2008, Diamond acquired the Pop Secret
®
brand of microwave popcorn products, which provided the Company with increased scale in the snack market, significant supply chain economies of scale and cross promotional opportunities with its
existing brands. In 2010, Diamond acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and the United Kingdom, which added the complementary premium Kettle Brand
®
to 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. Sales to the Companys largest customer accounted for approximately 17.2% and 15.3%, and 17.3% and 18.4% of total net sales for the three and six
months ended January 31, 2014 and 2013, respectively. No other customer accounted for 10% or more of the Companys total net sales for those periods.
The accompanying unaudited condensed consolidated financial statements of Diamond have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required for annual financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements at
and for the fiscal year ended July 31, 2013, and in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Companys Condensed Consolidated Financial
Statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Companys 2013 Annual Report on Form 10-K.
Operating results for the three and six months ended January 31, 2014, are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2014.
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, 2013, and 2014, as fiscal 2010, fiscal 2011, fiscal 2012, fiscal 2013 and fiscal 2014, respectively.
Revision of Financial Statements
During the
preparation of the first quarter fiscal 2014 Form 10-Q, the Company determined that the statutory income tax rate used to value United Kingdom deferred taxes was not correct as of July 31, 2013. This is due to a change in the statutory tax rate
enacted in the fourth quarter of fiscal 2013, which resulted in a $3.2 million overstatement of the net deferred income tax liability balance at July 31, 2013 and a $3.3 million understatement of the income tax benefit for the year. The Company
assessed the materiality of the error in accordance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 99,
Materiality
and concluded that this error was not material to the fiscal 2013 consolidated
financial statements. In accordance with SEC Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements,
due to the immaterial nature of this
error, the Company revised the 2013 consolidated financial statements in this filing and will revise the 2013 consolidated financial statements when the fiscal 2014 Annual Report on Form 10-K is filed.
8
The effect of the revision on the line items within the Companys consolidated statements of
operations for the year ended July 31, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2013
|
|
|
|
As Reported
|
|
|
Correction
|
|
|
As Revised
|
|
Income taxes (benefit)
|
|
$
|
(12,957
|
)
|
|
|
(3,321
|
)
|
|
$
|
(16,278
|
)
|
Net loss
|
|
|
(163,232
|
)
|
|
|
3,321
|
|
|
|
(159,911
|
)
|
Loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(7.48
|
)
|
|
|
0.15
|
|
|
|
(7.33
|
)
|
Diluted
|
|
|
(7.48
|
)
|
|
|
0.15
|
|
|
|
(7.33
|
)
|
Shares used to compute earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,813
|
|
|
|
21,813
|
|
|
|
21,813
|
|
Diluted
|
|
|
21,813
|
|
|
|
21,813
|
|
|
|
21,813
|
|
The effect of the revision on the line items within the Companys consolidated balance sheet as of
July 31, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2013
|
|
|
|
As Reported
|
|
|
Correction
|
|
|
As Revised
|
|
Deferred income taxes
|
|
$
|
106,767
|
|
|
$
|
(3,249
|
)
|
|
$
|
103,518
|
|
Retained earnings (deficit)
|
|
|
(160,673
|
)
|
|
|
3,321
|
|
|
|
(157,352
|
)
|
Accumulated other comprehensive income
|
|
|
4,079
|
|
|
|
(72
|
)
|
|
|
4,007
|
|
Total stockholders equity
|
|
|
166,720
|
|
|
|
3,249
|
|
|
|
169,969
|
|
Total liabilities and stockholders equity
|
|
|
1,172,315
|
|
|
|
|
|
|
|
1,172,315
|
|
The effect of the revision on the line items within the Companys consolidated statements of cash flows
for the year ended July 31, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2013
|
|
|
|
As Reported
|
|
|
Correction
|
|
|
As Revised
|
|
Net loss
|
|
$
|
(163,232
|
)
|
|
$
|
3,321
|
|
|
$
|
(159,911
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
(11,412
|
)
|
|
|
(3,321
|
)
|
|
|
(14,733
|
)
|
Net cash provided by operating activities
|
|
|
44,261
|
|
|
|
|
|
|
|
44,261
|
|
9
The effect of the revision on the line items within the Companys consolidated statements of
comprehensive income (loss) for the year ended July 31, 2013 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2013
|
|
|
|
As Reported
|
|
|
Correction
|
|
|
As Revised
|
|
Net (loss) income
|
|
$
|
(163,232
|
)
|
|
$
|
3,321
|
|
|
$
|
(159,911
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net of tax
|
|
|
(5,806
|
)
|
|
|
(72
|
)
|
|
|
(5,878
|
)
|
Other comprehensive (loss) income
|
|
|
35
|
|
|
|
(72
|
)
|
|
|
(37
|
)
|
Comprehensive (loss) income
|
|
|
(163,197
|
)
|
|
|
3,249
|
|
|
|
(159,948
|
)
|
(2) Recent Accounting Pronouncements
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 has adopted this guidance and it did not 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 under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP 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 has adopted this guidance and it did not have a material impact on its consolidated financial statements. See Note 12 to the Notes to the Condensed Consolidated Financial Statements for these disclosures.
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
10
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.
(3) 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 other than the Oaktree debt (described below) 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.
In May 2012, Diamond closed an agreement to recapitalize its balance sheet with an investment by Oaktree Capital Management, L.P.
(Oaktree). The Oaktree investment initially consisted of $225 million of newly-issued senior notes (Oaktree Senior Notes) and a warrant to purchase approximately 4.4 million shares of Diamond common stock. Oaktrees
warrant became exercisable at $10.00 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. On February 19,
2014, Oaktree exercised the warrant. See Note 15 to the Notes to the Condensed Consolidated Financial Statements for further details.
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, specifically to mitigate the market price risk of future corn purchases expected to be made by the Company. This agreement had a total notional amount
of approximately $0.3 million. The Company accounts for commodity derivatives as non-hedging derivatives.
In the second quarter of fiscal
2014, the Company sold the remaining 80 corn call option commodity derivatives that were purchased in February 2013. The amount of gain recognized in income associated with this sale was $3 thousand.
In August 2013, the Company obtained preliminary approval to settle the action
In re Diamond Foods Inc, Securities Litigation
(Securities Settlement). Pursuant to the terms of the Securities Settlement, the Company agreed to pay a total of $11.0 million in cash and issue 4.45 million shares of common stock to resolve all claims asserted on behalf of
investors who purchased the Companys stock between October 5, 2010 and February 2012. The court issued an order granting final approval of the Securities Settlement on January 21, 2014 and the appeal period expired on
February 20, 2014, at which time the Securities Settlement became effective. See Note 15 to the Notes to the Condensed Consolidated Financial Statements for further details. The stock portion of the Securities Settlement, recorded within
accounts payable and accrued liabilities, is accounted for as a liability and is remeasured at fair value each reporting period with gains and losses recorded in net income until the settlement becomes effective.
In January 2014, the Company purchased an additional 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, specifically to mitigate the market price risk of future corn purchases expected to be made by the Company. This agreement had a total
notional amount of approximately $0.3 million. The Company accounts for commodity derivatives as non-hedging derivatives. As of January 31, 2014, the Company had 164 corn call option commodity derivatives.
The fair values of the Companys derivative instruments as of January 31, 2014, July 31, 2013 and January 31, 2013,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
|
|
|
1/31/14
|
|
|
7/31/13
|
|
|
1/31/13
|
|
Derivatives not designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Prepaid and other current assets
|
|
$
|
316
|
|
|
$
|
29
|
|
|
$
|
|
|
Interest rate contracts
|
|
Other long-term assets
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Warrants
|
|
Warrant liability
|
|
|
(82,085
|
)
|
|
|
(58,147
|
)
|
|
|
(35,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(81,769
|
)
|
|
$
|
(58,118
|
)
|
|
$
|
(35,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The effect of the Companys derivative instruments on the condensed consolidated statements
of operations for the three months ended January 31, 2014 and 2013, is summarized below:
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as
Hedging Instruments under ASC 815
|
|
Location of Gain (Loss)
Recognized in Income on Derivative
|
|
Amount of Gain (Loss)
Recognized in Income on
Derivative
|
|
|
|
|
|
1/31/14
|
|
|
1/13/13
|
|
Commodity contracts
|
|
Selling, general and administrative
|
|
$
|
128
|
|
|
$
|
(27
|
)
|
Interest rate contracts
|
|
Interest expense
|
|
|
|
|
|
|
(1
|
)
|
Warrant
|
|
Loss on warrant liability
|
|
|
(6,962
|
)
|
|
|
18,625
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(6,834
|
)
|
|
$
|
18,597
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of the Companys derivative instruments on the condensed consolidated statements of operations
for the six months ended January 31, 2014 and 2013 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated as
Hedging Instruments under ASC 815
|
|
Location of Gain (Loss)
Recognized in Income on Derivative
|
|
Amount of Gain
(Loss) Recognized in Income
on Derivative
|
|
|
|
|
|
1/31/14
|
|
|
1/13/13
|
|
Commodity contracts
|
|
Selling, general and administrative
|
|
$
|
100
|
|
|
$
|
(483
|
)
|
Interest rate contracts
|
|
Interest expense
|
|
|
|
|
|
|
(8
|
)
|
Warrant
|
|
Gain on warrant liability
|
|
|
(23,938
|
)
|
|
|
11,109
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(23,838
|
)
|
|
$
|
10,618
|
|
|
|
|
|
|
|
|
|
|
|
|
ASC 820 requires that assets and liabilities carried at fair value be measured using the following three
levels of inputs:
Level 1
: Quoted market prices in active markets for identical assets or liabilities
Level 2
: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3
: Unobservable inputs that are not corroborated by market data
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of January 31, 2014 there were no cash equivalents. The Companys derivative assets (liabilities) measured at fair value on a
recurring basis were $0.3 million as of January 31, 2014, $29 thousand as of July 31, 2013, and $2 thousand as of January 31, 2013. 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
stock portion of the Companys Securities Settlement measured at fair value on a recurring basis, was $117.3 million as of January 31, 2014, $85.1 million as of July 31, 2013, and nil as of January 31, 2013 and is recorded in the
Accounts payable and accrued liabilities line in the Condensed Consolidated Balance Sheets. The Company has elected to use the market approach to value the stock portion of the Securities Settlement. The valuation is considered Level 1 due to the
use of quoted prices in an active market for identical assets at the measurement date. The court issued an order granting final approval of the Securities Settlement on January 21, 2014, and the appeal period expired on February 20, 2014,
at which time the Securities Settlement became effective. Refer to Note 15 to the Notes to the Condensed Consolidated Financial Statements for further information.
12
The Companys warrant liability measured at fair value on a recurring basis was $82.1
million as of January 31, 2014, $58.1 million as of July 31, 2013 and $35.7 million as of January 31, 2013. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/31/14
|
|
|
7/31/13
|
|
|
1/31/13
|
|
Expected volatility
|
|
|
47.50
|
%
|
|
|
45.60
|
%
|
|
|
47.23
|
%
|
Probability of Special Redemption
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
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 the three and six months
ended January 31, 2014 related to the warrant liability due to changes in the fair value of the warrant. On February 19, 2014, Oaktree exercised the warrant. See Note 15 to the Notes to the Condensed Consolidated Financial Statements for
further details.
The following is a reconciliation of liabilities activity, measured at fair value based on Level 3 inputs for the three
months ended January 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
|
1/31/14
|
|
|
1/31/13
|
|
Beginning Balance - October 31
|
|
$
|
(75,123
|
)
|
|
$
|
(54,337
|
)
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(6,962
|
)
|
|
|
18,625
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance - January 31
|
|
$
|
(82,085
|
)
|
|
$
|
(35,712
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(6,962
|
)
|
|
$
|
18,625
|
|
13
The following is a reconciliation of liabilities activity, measured at fair value based on Level
3 inputs for the six months ended January 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
|
1/31/14
|
|
|
1/31/13
|
|
Beginning Balance - July 31
|
|
$
|
(58,147
|
)
|
|
$
|
(46,821
|
)
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
Transfers out of Level 3
|
|
|
|
|
|
|
|
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(23,938
|
)
|
|
|
11,109
|
|
Included in other comprehensive income
|
|
|
|
|
|
|
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance - January 31
|
|
$
|
(82,085
|
)
|
|
$
|
(35,712
|
)
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(23,938
|
)
|
|
$
|
11,109
|
|
Assets and Liabilities Disclosed at Fair Value
The fair value of certain financial instruments, including cash and cash equivalents, trade receivables, accounts payable and accrued
liabilities approximate the amounts recorded in the balance sheet because of the relatively short term nature of these financial instruments. The fair value of notes payable and long-term obligations at the end of each fiscal period approximates the
amounts recorded in the balance sheet based on information available to 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 January 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/31/14
|
|
|
7/31/13
|
|
|
1/31/13
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Senior Note
|
|
$
|
133,118
|
|
|
$
|
204,613
|
|
|
$
|
121,266
|
|
|
$
|
150,295
|
|
|
$
|
111,376
|
|
|
$
|
134,285
|
|
Redeemable Note
|
|
$
|
94,705
|
|
|
$
|
102,306
|
|
|
$
|
89,660
|
|
|
$
|
75,147
|
|
|
$
|
85,335
|
|
|
$
|
67,142
|
|
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.
(4) Equity Offering and Stock-Based Compensation
The Company uses a broad-based equity incentive plan and accounts for stock-based compensation in accordance with ASC 718,
Compensation Stock Compensation
. The fair value of all stock options granted is recognized as an expense in the Companys Statements of Operations, typically over the related vesting period of the options. The guidance
requires use of fair value computed at the date of grant to measure share-based awards. The fair value of restricted stock awards is recognized as stock-based compensation expense over the vesting period. Stock options may be granted to officers,
employees and directors.
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 was based on the simplified method due to the limited
amount of historical Company information. Forfeiture rates were based on assumptions and historical data to the extent it is available. The risk-free rates were based on U.S. Treasury yields in effect at the time of the grant. For purposes of this
valuation model, dividends are based on the historical rate.
14
Assumptions used in the Black-Scholes model are presented below:
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Six Months
|
|
|
Ended January 31,
|
|
Ended January 31,
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Average expected life, in years
|
|
5.50
|
|
5.50-6.06
|
|
5.50-6.06
|
|
5.50-6.06
|
Expected volatility
|
|
55.78%
|
|
53.29%-54.53%
|
|
55.78%-55.84%
|
|
52.99%-54.53%
|
Risk-free interest rate
|
|
1.69%
|
|
0.83%-1.01%
|
|
1.69%-1.70%
|
|
0.83%-1.01%
|
Dividend rate
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
The following table summarizes option activity during the six months ended January 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(in thousands)
|
|
|
Weighted
average exercise
price per share
|
|
|
Weighted
average remaining
contractual life
(in years)
|
|
|
Aggregate
intrinsic value
(in thousands)
|
|
Outstanding at July 31, 2013
|
|
|
1,457
|
|
|
$
|
26.06
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
190
|
|
|
|
21.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(44
|
)
|
|
|
16.38
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(134
|
)
|
|
|
38.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2014
|
|
|
1,469
|
|
|
|
24.54
|
|
|
|
7.6
|
|
|
$
|
10,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at January 31, 2014
|
|
|
699
|
|
|
|
28.33
|
|
|
|
5.9
|
|
|
$
|
4,149
|
|
There were 10,000 and 189,601 stock options granted during the three and six months ended January 31,
2014, respectively, and 604,414 in the three and six months ended January 31, 2013. The weighted average fair value per share of stock options granted during the three and six months ended January 31, 2014 was $12.53 and $11.21,
respectively, and $7.27 for the three and six months ended January 31, 2013. The fair value per share of stock options vested during the three and six months ended January 31, 2014 was $9.23 and $10.61, respectively, and $16.49 and $21.48
for the three and six months ended January 2013. There were 3,950 and 43,950 stock options exercised during the three and six months ended January 31, 2014, respectively, and none exercised in the three and six months ended January 31,
2013. The total intrinsic value of stock options exercised during the three and six months ended January 31, 2014, was $0.03 million and $0.3 million, respectively.
The following table summarizes nonvested stock option activity during the six months ended January 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
Number of
shares
(in thousands)
|
|
|
Weighted
average grant
date fair value
per share
|
|
Nonvested at July 31, 2013
|
|
|
785
|
|
|
$
|
10.51
|
|
Granted
|
|
|
190
|
|
|
|
11.21
|
|
Vested
|
|
|
(156
|
)
|
|
|
10.61
|
|
Cancelled
|
|
|
(49
|
)
|
|
|
15.32
|
|
|
|
|
|
|
|
|
|
|
Nonvested at January 31, 2014
|
|
|
770
|
|
|
|
10.36
|
|
|
|
|
|
|
|
|
|
|
As of January 31, 2014, approximately $6.8 million of total unrecognized compensation expense related to
nonvested stock options was expected to be recognized over a weighted average period of 2.6 years. As of January 31, 2013 approximately $8.3 million of total unrecognized compensation expense related to nonvested stock options was expected to be
recognized over a weighted average period of 3.2 years. Cash received from option exercises was $0.07 million, $2.0 million, and nil for the three months ended January 31, 2014, fiscal 2013, and three months ended January 31, 2013,
respectively.
15
Restricted Stock and Awards:
Restricted stock and restricted stock unit activity
during the six months ended January 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
Restricted Stock Units
|
|
|
|
Number of
shares
(in thousands)
|
|
|
Weighted average
grant date fair
value per share
|
|
|
Number of
shares
(in thousands)
|
|
|
Weighted average
grant date fair
value per share
|
|
Outstanding at July 31, 2013
|
|
|
407
|
|
|
$
|
22.25
|
|
|
|
218
|
|
|
$
|
16.87
|
|
Granted
|
|
|
96
|
|
|
|
20.89
|
|
|
|
187
|
|
|
|
21.12
|
|
Vested
|
|
|
(51
|
)
|
|
|
30.34
|
|
|
|
(47
|
)
|
|
|
16.99
|
|
Cancelled
|
|
|
(32
|
)
|
|
|
29.82
|
|
|
|
(15
|
)
|
|
|
15.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 31, 2014
|
|
|
420
|
|
|
|
20.37
|
|
|
|
343
|
|
|
|
19.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were nil and 95,735 restricted stock awards granted during the three and six months ended
January 31, 2014 and 317,970 restricted stock awards granted during three and six months ended January 31, 2013. The weighted average fair value per share of restricted stock granted during the six months ended January 31, 2014 was
$20.89 and was $14.25 for the three and six months ended January 31, 2013. The weighted average fair value per share at the grant date of restricted stock vested during the three and six months ended January 31, 2014 was $16.43 and $30.34,
respectively, and was $27.39 and $31.59 for the three and six months ended January 31, 2013, respectively. The total intrinsic value of restricted stock vested in the three and six months ended January 31, 2014 was $0.6 million and $1.2
milllion, respectively, and was $0.1 million and $1.7 million for the three and six months ended January 31, 2013, respectively.
As
of January 31, 2014, there was $6.6 million of unrecognized compensation expense related to nonvested restricted stock expected to be recognized over a weighted average period of 2.8 years. As of January 31, 2014, there was $5.3 million of
unrecognized compensation expense related to nonvested restricted stock units expected to be recognized over a weighted average period of 3.3 years. As of January 31, 2013 $8.2 million of unrecognized compensation expense related to nonvested
restricted stock was expected to be recognized over a weighted average period of 2.9 years, and $3.3 million of unrecognized compensation expense related to nonvested restricted stock units is expected to be recognized over a weighted average period
of 3.9 years. Cash received to settle stock awards was $100, $400, and $300, as of January 31, 2014, July 31, 2013, and January 31, 2013, respectively.
(5) Earnings Per Share
ASC 260,
Earnings Per Share,
impacts the determination and reporting of earnings (loss) per share by
requiring the inclusion of participating securities, which have the right to share in dividends, if declared, equally with common shareholders. Participating securities are allocated a proportional share of net income determined by dividing total
weighted average participating securities by the sum of total weighted average common shares and participating securities (the two-class method). ASC 260 also impacts the determination and reporting of earnings (loss) per share by
requiring inclusion of the impact of changes in fair value of warrant liabilities, such as the Oaktree warrant liability described in Note 10 of the Notes to Condensed 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.
16
The computations for basic and diluted earnings (loss) per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended January 31,
|
|
|
Ended January 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(15,060
|
)
|
|
$
|
10,141
|
|
|
$
|
(57,213
|
)
|
|
$
|
(588
|
)
|
Less: income allocated to participating securities
|
|
|
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common shareholdersbasic
|
|
|
(15,060
|
)
|
|
|
9,966
|
|
|
|
(57,213
|
)
|
|
|
(588
|
)
|
Add: undistributed income attributable to participating securities
|
|
|
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
Less: income attributed to gain on warrant liability
|
|
|
|
|
|
|
(18,625
|
)
|
|
|
|
|
|
|
(11,109
|
)
|
Less: undistributed income reallocated to participating securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common shareholdersdiluted
|
|
$
|
(15,060
|
)
|
|
$
|
(8,484
|
)
|
|
$
|
(57,213
|
)
|
|
$
|
(11,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingbasic
|
|
|
22,052
|
|
|
|
21,781
|
|
|
|
22,019
|
|
|
|
21,703
|
|
Dilutive sharesstock options and warrant
|
|
|
|
|
|
|
1,434
|
|
|
|
|
|
|
|
1,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstandingdiluted
|
|
|
22,052
|
|
|
|
23,215
|
|
|
|
22,019
|
|
|
|
23,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share attributable to common shareholders (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.68
|
)
|
|
$
|
0.46
|
|
|
$
|
(2.60
|
)
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
(0.68
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(2.60
|
)
|
|
$
|
(0.50
|
)
|
(1)
|
Computations may reflect rounding adjustments.
|
The Company was in a loss position for both
the three and six months ended January 31, 2014 and the six months ended January 31, 2013. Accordingly, 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 the three and six months ended January 31, 2014 and the six months ended
2013, a numerator adjustment was not made to the diluted earnings (loss) per share calculation. The 4.45 million shares of common stock, pursuant to the terms of the preliminarily approved Securities Settlement, were excluded in the computation
of diluted earnings (loss) per share calculation as of January 31, 2014 as the Securities Settlement was not effective and the shares were not yet issued. The court issued an order granting final approval of the Securities Settlement on
January 21, 2014 and the appeal period expired on February 20, 2014, at which time the Securities Settlement became effective. See Note 15 to the Notes to the Condensed Consolidated Financial Statements for further details.
(6) Balance Sheet Items
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
July 31,
|
|
|
January 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
Raw materials and supplies
|
|
$
|
88,545
|
|
|
$
|
29,825
|
|
|
$
|
97,147
|
|
Work in process
|
|
|
28,400
|
|
|
|
28,058
|
|
|
|
26,439
|
|
Finished goods
|
|
|
59,096
|
|
|
|
57,573
|
|
|
|
58,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
176,041
|
|
|
$
|
115,456
|
|
|
$
|
182,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of fiscal 2014, the Company revised its estimate for expected walnut costs which
resulted in a pre-tax increase in cost of sales of approximately $0.8 million for walnut sales recognized in the first three months of fiscal 2014.
17
Accounts payable and accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
July 31,
|
|
|
January 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
Accounts payable
|
|
$
|
67,139
|
|
|
$
|
75,833
|
|
|
$
|
58,355
|
|
Securities litigation settlement
|
|
|
117,302
|
|
|
|
96,129
|
|
|
|
|
|
Accrued promotions
|
|
|
21,025
|
|
|
|
16,087
|
|
|
|
21,302
|
|
Accrued salaries and benefits
|
|
|
10,577
|
|
|
|
18,883
|
|
|
|
13,290
|
|
Accrued taxes
|
|
|
7,118
|
|
|
|
9,160
|
|
|
|
4,435
|
|
Other
|
|
|
4,331
|
|
|
|
4,450
|
|
|
|
5,355
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
227,492
|
|
|
$
|
220,542
|
|
|
$
|
102,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The current and long term portions of capital leases are reflected in Accounts payable and accrued liabilities and Other liabilities, respectively, on the Condensed Consolidated Balance Sheets.
|
(7) Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
July 31,
|
|
|
January 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
Land and improvements
|
|
$
|
10,332
|
|
|
$
|
9,823
|
|
|
$
|
10,090
|
|
Buildings and improvements
|
|
|
57,448
|
|
|
|
56,745
|
|
|
|
53,535
|
|
Machinery, equipment and software
|
|
|
214,446
|
|
|
|
214,294
|
|
|
|
184,479
|
|
Construction in progress
|
|
|
9,356
|
|
|
|
2,024
|
|
|
|
5,718
|
|
Capital leases
|
|
|
14,796
|
|
|
|
14,420
|
|
|
|
11,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
306,378
|
|
|
|
297,306
|
|
|
|
265,668
|
|
Less: accumulated depreciation
|
|
|
(174,101
|
)
|
|
|
(163,145
|
)
|
|
|
(124,898
|
)
|
Less: accumulated amortization
|
|
|
(2,165
|
)
|
|
|
(1,936
|
)
|
|
|
(2,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
130,112
|
|
|
$
|
132,225
|
|
|
$
|
138,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended January 31, 2014, depreciation expense was $5.9 million and $12.3
million, respectively. For the three and six months ended January 31, 2013, depreciation expense was $6.2 million and $12.1 million, respectively.
During fiscal 2013, the Company accelerated the remaining useful lives of leasehold and building improvement assets at the Fishers facility.
Refer to Note 8 to the Notes to the Condensed Consolidated Financial Statements for further discussion on the Fishers facility closure.
(8) 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 expenses related to Fishers employees of $1.2 million and $1.3 million for the three and six months ended January 31, 2013, respectively. As of January 31, 2014, the Company has paid
all severance related payments.
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, within selling, general and administrative expenses. In fiscal 2013, the Company also recorded an
intangible asset impairment charge of $1.6 million, within asset impairments in the Companys Condensed Consolidated Statement of Operations, associated with customer contracts and related relationships. This impairment charge represented a
write down of the total net book value of the intangible asset
18
as of April 30, 2013, within the Nuts reportable segment. This impairment charge was recognized in conjunction with the Fishers facility closure because certain products were no longer being
produced and therefore would not generate future cash flows after the closure of this facility. 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.
In fiscal 2013, the Company recorded an additional charge within selling general and administrative expenses of
$4.9 million associated with the Fishers facility future lease obligations. 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. In the
second quarter of fiscal 2014, the Company entered into an agreement to sublease a portion of the Fishers facility. Accordingly, the Company updated the assumptions used to arrive at the Fishers facility future lease obligation for the sublease
rental income and determined no adjustment was considered necessary to the liability that was recorded in fiscal 2013.
As of
January 31, 2014, the Company has outstanding $3.9 million associated with the Fishers facility future lease obligation. As of July 31, 2013, the exit of the Fishers facility was complete.
(9) Intangible Assets and Goodwill
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Snacks
|
|
|
Nuts
|
|
|
Total
|
|
Balance as of July 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
403,158
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
1,633
|
|
|
|
|
|
|
|
1,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
404,791
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
332,156
|
|
|
$
|
72,635
|
|
|
$
|
404,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
328,490
|
|
|
$
|
72,635
|
|
|
$
|
401,125
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328,490
|
|
|
|
72,635
|
|
|
|
401,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Translation adjustments
|
|
|
6,964
|
|
|
|
|
|
|
|
6,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
335,454
|
|
|
|
72,635
|
|
|
|
408,089
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
335,454
|
|
|
$
|
72,635
|
|
|
$
|
408,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill was allocated amongst the Snacks and Nuts reportable segments beginning in the second quarter of
fiscal 2013 due to the change in the Companys operating and reportable segments.
19
Other intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
July 31,
|
|
|
January 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
Brand intangibles (not subject to amortization)
|
|
$
|
265,225
|
|
|
$
|
297,577
|
|
|
$
|
299,497
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts and related relationships
|
|
|
161,635
|
|
|
|
157,838
|
|
|
|
160,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets, gross
|
|
|
426,860
|
|
|
|
455,415
|
|
|
|
460,318
|
|
Less accumulated amortization on intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts and related relationships
|
|
|
(33,761
|
)
|
|
|
(29,771
|
)
|
|
|
(25,917
|
)
|
Less asset impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand intangibles
|
|
|
|
|
|
|
(36,000
|
)
|
|
|
|
|
Customer contracts and related relationships
|
|
|
|
|
|
|
(1,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets, net
|
|
$
|
393,099
|
|
|
$
|
388,084
|
|
|
$
|
434,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible asset amortization expense for the three and six months ended January 31, 2014,
was $2.0 million and $4.0 million, respectively and was $2.0 million and $4.0 million for the three and six months ended January 31, 2013, respectively. Identifiable intangible asset amortization expense for each of the five succeeding years
will amount to approximately $8.0 million, and will amount to approximately $4.0 million for the remainder of fiscal 2014.
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 the third quarter and is included within the Nuts reportable segment.
In fiscal 2013, the Company performed
its annual impairment test of goodwill and non-amortizing intangible assets required by ASC 350 as of June 30, 2013. Goodwill was determined not to be impaired. The Company determined 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 during fiscal 2013.
(10) Notes Payable and Long-Term Obligations
Long term debt outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
2014
|
|
|
July 31,
2013
|
|
|
January 31,
2013
|
|
|
|
|
As Revised
|
|
|
Secured Credit Facility
|
|
$
|
318,024
|
|
|
$
|
369,454
|
|
|
$
|
350,022
|
|
Oaktree Debt
|
|
|
227,823
|
|
|
|
210,926
|
|
|
|
196,710
|
|
Guaranteed Loan
|
|
|
9,459
|
|
|
|
10,557
|
|
|
|
11,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding debt
|
|
|
555,306
|
|
|
|
590,937
|
|
|
|
558,360
|
|
Less: current portion
|
|
|
(5,916
|
)
|
|
|
(5,860
|
)
|
|
|
(5,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
549,390
|
|
|
$
|
585,077
|
|
|
$
|
552,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company determined that the Guaranteed Loan line item was understated by $2.2 million and the Secured
Credit Facility line item was overstated by the same amount in the above disclosure as of July 31, 2013. Total long-term debt, total outstanding debt and the total current portion of debt were presented correctly. The Company assessed the
materiality of this correction, concluded that this error was not material to the fiscal 2013 Consolidated Financial Statements and revised the July 31, 2013 balances to correct the presentation.
20
Net interest expense for the three and six months ended January 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended January 31,
|
|
|
Ended January 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Secured Credit Facility
|
|
$
|
6,339
|
|
|
$
|
7,510
|
|
|
$
|
13,005
|
|
|
$
|
15,347
|
|
Oaktree Debt
|
|
|
9,410
|
|
|
|
6,110
|
|
|
|
17,240
|
|
|
|
11,907
|
|
Guaranteed Loan
|
|
|
122
|
|
|
|
215
|
|
|
|
250
|
|
|
|
445
|
|
Interest income
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(5
|
)
|
Capitalized interest
|
|
|
(26
|
)
|
|
|
(68
|
)
|
|
|
(40
|
)
|
|
|
(382
|
)
|
Other
|
|
|
259
|
|
|
|
465
|
|
|
|
497
|
|
|
|
831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
16,104
|
|
|
$
|
14,231
|
|
|
$
|
30,952
|
|
|
$
|
28,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 the 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 the revolving credit facility to $285 million, under the same terms. As part of the Waiver and Third Amendment to its Secured Credit Facility (the Third Amendment), the revolving credit facility was reduced from
$285 million to $255 million in May 2012, to $230 million in July 2013 and as of January 31, 2014, the capacity on the revolving credit facility was reduced to $180 million. As of January 31, 2014, $104.4 million was outstanding under the
revolving credit facility. In May 2012, Diamond made a $100 million pre-payment on the term loan facility as part of the Third Amendment. As of January 31, 2014, the term loan facility had $214 million 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 February 25, 2015. For the three and six months
ended months ended January 31, 2014, the blended interest rate for the Companys consolidated borrowings, excluding the Oaktree debt, was 6.37% and 6.35%, respectively. Substantially all of the Companys tangible and intangible assets
are considered collateral security under the Secured Credit Facility.
The Secured Credit Facility provided for customary affirmative and
negative covenants and cross default provisions that may be triggered if Diamond fails to comply with obligations under its other credit facilities or indebtedness. Beginning on January 31, 2014, the Companys senior debt to consolidated
EBITDA ratio (Consolidated Senior Leverage Ratio), as defined in the Third Amendment, would 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 would 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 $9.5 million was outstanding as of January 31, 2014. 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 were placed in an interest-bearing escrow account and made available as expenditures were
approved for reimbursement. As the cash was used to purchase non-current assets, such restricted cash was classified as non-current on the balance sheet. In December 2012, the remaining balance within the escrow account was released back to the
lender and was used to pay down the outstanding loan balance. Also, as part of the paydown, the Company paid a 4% prepayment penalty, which was recorded in interest expense.
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).
21
The Oaktree investment initially consisted of $225 million of newly-issued Oaktree Senior Notes
and a warrant to purchase approximately 4.4 million shares of Diamond common stock. The Oaktree 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. 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 Oaktree 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 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 Condensed 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 Senior 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. As of January 31, 2014, Diamond would pay a prepayment penalty of $32.3 million, excluding accrued interest, on the Oaktree Senior Notes. For further details on the
actual prepayment made as part of the refinancing refer to Note 15 to the Notes to the Condensed Consolidated Financial Statements.
On
May 22, 2012, Diamond entered into the Third Amendment, which provided for a lower level of total bank debt, initially at $475 million, along with substantial covenant relief which the Company is no longer provided as of January 31, 2014.
In the second fiscal quarter, these covenants became 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, as defined in the Third Amendment. 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 January 31, 2014, the Company was compliant with financial and reporting covenants.
On February 19, 2014, the Company refinanced its debt capital structure and repaid and terminated the obligations under the Secured
Credit Facility and the Oaktree Senior Notes. See Note 15 to the Notes to the Condensed Consolidated Financial Statements for further details.
(11) 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 January 31, 2014.
22
Components of net periodic benefit cost (income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
16
|
|
|
$
|
19
|
|
|
$
|
32
|
|
Interest cost
|
|
|
247
|
|
|
|
230
|
|
|
|
492
|
|
|
|
463
|
|
|
|
17
|
|
|
|
16
|
|
|
|
34
|
|
|
|
31
|
|
Expected return on plan assets
|
|
|
(271
|
)
|
|
|
(216
|
)
|
|
|
(541
|
)
|
|
|
(503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss / (gain)
|
|
|
84
|
|
|
|
189
|
|
|
|
169
|
|
|
|
381
|
|
|
|
(177
|
)
|
|
|
(178
|
)
|
|
|
(353
|
)
|
|
|
(356
|
)
|
Settlement cost
|
|
|
|
|
|
|
519
|
|
|
|
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost / (income)
|
|
$
|
60
|
|
|
$
|
722
|
|
|
$
|
120
|
|
|
$
|
860
|
|
|
$
|
(150
|
)
|
|
$
|
(146
|
)
|
|
$
|
(300
|
)
|
|
$
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized defined contribution plan expenses of $0.1 million and $0.4 million for the three and
six months ended January 31, 2014, respectively, and $0.4 million and $1.1 million for the three and six months ended January 31, 2013, respectively. The Company expects to contribute a total of approximately $1.3 million to the defined
contribution plan during fiscal 2014.
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 in the second quarter of fiscal 2013 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.
(12) Other Comprehensive Income (Loss)
Total comprehensive income (loss) attributable to the Company, determined as net income adjusted by total other
comprehensive income, was ($10.1) and ($42.0) million for the three and six months ended January 31, 2014 and $6.4 million and $3.3 million for the three and six months ended January 31, 2013, respectively. Total other comprehensive income
(loss) presently consists of foreign currency translation adjustments and changes in pension liabilities associated with the Companys defined benefit pension plan.
There were no amounts reclassified out of accumulated other comprehensive income (loss) into income for the three and six months ended
January 31, 2014 and 2013.
Changes in accumulated other comprehensive income for the three months ended January 31, 2014 by
component were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Liability
Adjustment
|
|
|
Foreign Currency
Translation
Adjustment
|
|
|
Total
|
|
Balance as of November 1, 2013
|
|
$
|
431
|
|
|
$
|
13,851
|
|
|
$
|
14,282
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(93
|
)
|
|
|
5,010
|
|
|
|
4,917
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(93
|
)
|
|
|
5,010
|
|
|
|
4,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2013
|
|
$
|
338
|
|
|
$
|
18,861
|
|
|
$
|
19,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Changes in accumulated other comprehensive income for the six months ended January 31, 2014
by component were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Liability
Adjustment
|
|
|
Foreign Currency
Translation
Adjustment
|
|
|
Total
|
|
Balance as of August 1, 2013
|
|
$
|
522
|
|
|
$
|
3,485
|
|
|
$
|
4,007
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
(184
|
)
|
|
|
15,376
|
|
|
|
15,192
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(184
|
)
|
|
|
15,376
|
|
|
|
15,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 31, 2014
|
|
$
|
338
|
|
|
$
|
18,861
|
|
|
$
|
19,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13) 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 alleged 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 acquisition of the Pringles
business from The Procter & Gamble Company (P&G). On January 24, 2012, these class actions were consolidated by the court as
In re Diamond Foods Inc., Securities Litigation
, and on June 13, 2012, the court
appointed legal 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 our former outside auditor as defendants. The amended complaint
purported to allege claims covering the period from October 5, 2010 through February 8, 2012, and sought compensatory damages, interest thereon, costs and expenses incurred in the action and other relief. On May 6, 2013, the Court
certified a class in the consolidated action. Thereafter, the parties reached a proposed agreement (the Securities Settlement), 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. Pursuant to the terms of the preliminarily approved settlement, Diamond agreed to 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. During the first quarter of fiscal 2014, the
Company paid into escrow $1.0 million and received another $10.0 million from insurers to fund the cash portion of the settlement. The total amount of director and officer liability coverage available under Diamonds insurance policies was
$30.0 million.
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 August 20, 2013, the day before the preliminary approval motion was filed. The value of the 4.45 million shares of common stock at July 31, 2013 was $90.7 million. The
4.45 million shares are measured at fair value on a recurring basis, and as of January 31, 2014, the fair value of the shares was $117.3 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. The court issued an order granting final approval of the Securities Settlement on January 21, 2014 and the appeal period expired on February 20, 2014, at which time the Securities Settlement became effective. See Note 15
to the Notes to the Condensed Consolidated Financial Statements for further details.
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 the Companys 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 the Companys board, and the
24
Companys former outside auditor, as individual defendants. The consolidated complaint arose from the same or similar alleged facts as alleged in the federal securities action and the
federal derivative litigation (discussed in the next paragraph below), and purported to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement, and against the auditor for professional negligence
and breach of contract. The suit sought the recovery of unspecified damages allegedly sustained by Diamond, which was 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 the Companys 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 the Company was reached by plaintiffs and the current and former executive officers and members of the
Companys 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. In the first quarter of fiscal 2014, the $5.0 million payment was received from
Diamonds insurers, and $1.6 million of the $5.0 million settlement was recorded as a gain. 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 the Companys 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 the Companys
board of directors as individual defendants, and also adding the Companys former outside 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 the Companys 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, and oral argument in the
appeal is scheduled for May 2014.
Governmental Proceedings
On December 14, 2011, Diamond received a formal order of investigation from the Division of Enforcement 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. Diamond has cooperated with the government and expects to continue to do so. As a result of ongoing
discussions with SEC enforcement staff regarding a potential resolution of the SEC investigation, Diamond recorded a liability as of October 31, 2013, in the amount of $5.0 million, which Diamond believed was a reasonable estimate of the
potential liability in this matter. On January 9, 2014, the SEC authorized the $5.0 million settlement between Diamond and the SEC and the funds were paid into escrow during the second quarter of fiscal 2014. On January 31, 2014, the $5.0
million was released from escrow and paid to the SEC.
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.
25
Other than the aforementioned, 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.
(14) 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 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 Financial Conditions and Results of Operations.
The Companys net sales and gross profit by segment for the three and six months ended January 31, 2014 and the three and six months
ended January 31, 2013, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended
|
|
|
Six Months Ended
|
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Snacks
|
|
$
|
116,756
|
|
|
$
|
105,421
|
|
|
$
|
229,346
|
|
|
$
|
216,664
|
|
Nuts
|
|
|
103,821
|
|
|
|
115,423
|
|
|
|
225,899
|
|
|
|
262,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
220,577
|
|
|
$
|
220,844
|
|
|
$
|
455,245
|
|
|
$
|
479,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Snacks
|
|
$
|
42,538
|
|
|
$
|
34,836
|
|
|
$
|
81,961
|
|
|
$
|
73,129
|
|
Nuts
|
|
|
13,390
|
|
|
|
15,733
|
|
|
|
31,900
|
|
|
|
35,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,928
|
|
|
$
|
50,569
|
|
|
$
|
113,861
|
|
|
$
|
109,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15) Subsequent Events
Debt Refinancing
On
February 19, 2014, the Company refinanced its debt capital structure. The Company entered into a 4.5 year senior secured term loan facility (the Term Loan Facility) in an aggregate principal amount of $415 million, a 4.5 year
senior secured asset-based revolving credit facility (the ABL Facility) in an aggregate principal amount of $125 million and issued $230 million in 7.000% Senior Notes due 2019 (the Notes). Pursuant to an agreement dated
February 9, 2014, (the Warrant Exercise Agreement) OCM PF/FF Adamantine Holdings, Ltd. (a subsidiary of Oaktree Capital Management, L.P. (Oaktree) exercised its warrant (the Oaktree Warrant) to purchase
4,420,859 shares of Diamonds common stock at the $10 exercise price per share, less a warrant cash exercise inducement fee of $15 million. The warrant exercise transaction closed on February 19, 2014, concurrent with the refinancing
transactions.The Company will account for the refinancing transactions in the third quarter of fiscal 2014 and may record a significant loss within that period.
26
Diamond used the net proceeds of the Term Loan Facility, the Notes and the Oaktree Warrant
exercise to (1) prepay approximately $348 million of indebtedness outstanding under, and terminate, the Secured Credit Facility, (2) prepay approximately $276 million of indebtedness outstanding under, and terminate, the Oaktree Senior
Notes, (3) pay approximately $32.3 million of prepayment premiums to the holders of the Oaktree Senior Notes, and (4) pay fees, expenses and original issue discounts in connection with the foregoing and related to the preparation,
negotiation, execution and delivery of the definitive documentation for the Term Loan Facility, the Notes and the ABL Facility. To the extent any such proceeds remain after payment of the foregoing, the Company will use such amounts to fund general
corporate purposes.
The Term Loan Facility will mature in 4.5 years and will amortize in equal quarterly installments in an aggregate
annual amount equal to 1.0% of the original principal amount of the Term Loan Facility with the balance payable on the maturity date of the Term Loan Facility. The Term Loan Facility will permit the Company to increase the term loans, or add a
separate tranche of term loans, by an amount not to exceed $100 million plus the maximum amount of additional term loans that Diamond could incur without their senior secured leverage ratio exceeding 4.50 to 1.00 on a pro forma basis after giving
effect to such increase or addition. Amounts outstanding are expected to bear interest at a rate
per annum
equal to: (i) the Eurodollar Rate (as defined in the Term Loan Facility and subject to a floor of 1.00%) plus the
applicable margin or (ii) the Base Rate (as defined in the Term Loan Facility), which is the greatest of (a) Credit Suisses prime rate, (b) the federal funds effective rate plus 0.50% and (c) the Eurodollar Rate for an
interest period of one month plus 1.00%, plus, in each case, the applicable margin.
Loans under the ABL facility are available up to a
maximum amount outstanding at any one time equal to the lesser of (a) $125 million and (b) the amount of the Borrowing Base, in each case, less customary reserves. Under the ABL Facility, Diamond has a $20 million sublimit for the issuance
of letters of credit, and a Swing Line Facility of up to $12.5 million for same day borrowings. Borrowing Base is defined as (a) 85% of the amount of the Companys eligible accounts receivable; plus (b) the lesser of (i) 70% of
the book value of eligible inventory in the U.S. and (ii) 85% times the net orderly liquidation value of Diamonds eligible inventory in the US; less (c) in each case, customary reserves.
Under the ABL Facility, Diamond may elect that the loans bear interest at a rate
per annum
equal to: (i) the Base Rate plus the
applicable margin; or (ii) the LIBOR Rate plus the applicable margin. Base Rate means the greatest of (a) the Federal Funds Rate plus
1
⁄
2
%, (b) the LIBOR Rate (which rate shall be calculated based upon an Interest Period of 1 month and shall be determined on a daily basis), plus 1.00%,
and (c) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its prime rate. The LIBOR Rate shall be available for interest periods of one week or, one, two, three or six
months and, if all lenders agree, twelve months.
The Term Loan Facility and ABL Facility provide for customary affirmative and negative
covenants. The Term Loan Facility has customary cross default provisions and the ABL Facility contains cross-acceleration prvisions, in each case that may be triggered if Diamond fails to comply with obligations under its other credit facilities or
indebtedness. The Term Loan Facility has a first priority perfected lien on substantially all property, plant and equipment, capital stock, intangibles and second priority lien on the ABL Priority Collateral, subject to customary exceptions. The ABL
Facility requires us to maintain a minimum fixed charge coverage ratio of 1.1:1 if at any time excess availability is less than 10% of maximum availability; and requires the Company to apply substantially all cash collections to reduce outstanding
borrowings under the ABL Facility if excess availability falls below 12.5% of maximum availability for a period of 5 business days. The ABL Facility is secured by a first priority lien on accounts receivable, inventory, cash and deposit accounts and
a second priority lien on all real estate, equipment and equity interests of the Company under, and guarantors of, the ABL Facility.
The
Notes, which will mature on March 15, 2019, were offered only (i) to qualified institutional buyers in reliance on Rule 144A of the Securities Act of 1933, as amended (Securities Act), and (ii) to certain non-U.S. persons in offshore
transactions in reliance on Regulation S of the Securities Act. The initial issuance and sale of the Notes were not registered under the Securities Act, and, the Notes may not be offered or sold in the United States absent registration or an
applicable exemption from the registration requirements of the Securities Act and the registration or qualification requirements of other applicable securities laws. The terms of the Notes do not provide for registration rights. Interest on the
Notes will be payable on March 15 and September 15 of each year, commencing September 15, 2014. On or after March 15, 2016, Diamond may redeem all or a part of the Notes at a price equal to 103.500% of the principal amount of the
Notes, plus accrued and unpaid interest, with such optional redemption prices decreasing to 101.750% on and after March 15, 2017 and 100.000% on and after March 15, 2018. Before March 15, 2016, Diamond may redeem some or all of the
Notes at a price equal to 100.000% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the redemption date and the make-whole premium. Before March 15, 2016, Diamond may redeem up to 35% of the Notes with the net
cash proceeds of certain equity offerings at a redemption price equal to 107.000% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of redemption. If Diamond experiences a change of control, Diamond must offer
to purchase for cash all or any part of each holders Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any. The indenture pursuant to which the Notes were issued contains
customary covenants that, among other things, limit our ability and our restricted subsidiaries ability to incur additional indebtedness, make restricted payments, enter into transactions with affiliates, create liens, pay dividends on or
repurchase stock, make specified types of investments, and sell all or substantially all of their assets or merge with other companies. Each of the covenants is subject to a number of important exceptions and qualifications.
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Oaktree Warrant Exercise
On February 19, 2014, Diamond closed the Warrant Exercise Agreement, pursuant to which Oaktree agreed to exercise in full its warrant to
purchase an aggregate of 4,420,859 shares of Diamond common stock, by paying in cash the exercise price of approximately $44.2 million less a cash exercise and contractual modification inducement fee of $15.0 million. The warrant was issued to
Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (Securities Purchase Agreement), under which Diamond issued the Oaktree Senior Notes.
In addition, the Warrant Exercise Agreement provided that so long as Oaktree and/or its affiliates hold at least 10% of Diamonds
outstanding common stock, Oaktree will have the right to nominate one member of Diamonds Board of Directors until the later of (a) twelve months after Oaktree no longer has the right to nominate a member of Diamonds Board of
Directors or (b) twelve months after any director nominated by Oaktree under the Warrant Exercise Agreement or the Securities Purchase Agreement no longer serves as a director, Oaktree and its affiliates agree not to: acquire or beneficially
own more than 30% of the outstanding common stock of Diamond; commence or support any tender offer for Diamond common stock; make or participate in any solicitation of proxies to vote or seek to influence any person with respect to voting its
Diamond common stock; publicly announce a proposal or offer concerning any extraordinary transaction with Diamond; form, join or participate in a group for the purpose of acquiring, holding, voting or disposing of any Diamond securities; take any
actions that could reasonably be expected to require Diamond to make a public announcement regarding the possibility of such an acquisition, tender offer or proxy solicitation; enter into any agreements with a third party regarding any such
prohibited actions; or request Diamond to amend or waive such provisions. Upon the closing of the transactions contemplated by the Warrant Exercise Agreement, the Securities Purchase Agreement, and Diamonds obligations thereunder, terminated.
The Common Stock issuable upon exercise of the warrant is covered by a Registration Rights Agreement entered into on May 29, 2012 in connection with the Securities Purchase Agreement.
Securities Settlement
The court issued an order granting final approval of the Securities Settlement on January 21, 2014 and the appeal period expired on
February 20, 2014, at which time the Securities Settlement became effective. The value of the 4.45 million shares of common stock as of this date was $123.3 million. In the third quarter of fiscal 2014, the Company recorded a $6.0 million
loss associated with this final mark to market adjustment related to the change in the stock price from January 31, 2014 to February 20, 2014, derecognized the liability and insurance receivable associated with the Securities Settlement,
and on February 21, 2014, issued the 4.45 million shares of common stock. The impact of these shares will be considered for the calculation of diluted earnings per share in the third quarter of fiscal 2014.