NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended April 30, 2014 and 2013
(In thousands, except share and per share information unless otherwise noted)
(Unaudited)
(1) Organization and Basis of Presentation
Diamond Foods, Inc. (the “Company” or “Diamond”) is an innovative packaged food company focused on
building and energizing brands. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, Diamond complemented its strong heritage in the culinary nut market under the Diamond
of California
®
brand by launching a line of snack nuts under the Emerald
®
brand. In 2008, Diamond acquired the Pop Secret
®
brand of microwave popcorn products, which provided the Company with increased scale in the snack market, significant supply chain economies of scale and cross promotional opportunities with its
existing brands. In 2010, Diamond acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and the United Kingdom, which added the complementary premium Kettle Brand
®
to Diamond’s existing portfolio of leading brands in the snack industry. Diamond sells its products to global, national, regional and independent grocery, drug, and convenience store chains,
as well as to mass merchandisers, club stores, other retail channels and non-retail channels. Sales to the Company’s largest customer accounted for approximately 18.5% and 16.2%, and 13.2% and 17.0% of total net sales for the three and nine
months ended April 30, 2014 and 2013, respectively. The Company’s second largest customer accounted for less than 10% of total net sales for the three and nine months ended April 30, 2014 and 12.3% and less than 10% for the three and nine
months ended April 30, 2013. No other customer accounted for 10% or more of the Company’s total net sales for the three and nine months ended April 30, 2014.
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 Company’s Condensed Consolidated Financial
Statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2013 Annual Report on Form 10-K.
Operating results for the three and nine months ended April 30, 2014, are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2014.
Certain prior period amounts in the Condensed Consolidated Statement of Cash Flows have been reclassified to conform to the current period
presentation. There was no impact to the totals for each prior period reclassification made.
Diamond reports its operating results on the
basis of a fiscal year that starts August 1 and ends July 31. Diamond refers to the fiscal years ended July 31, 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 Quarterly Report on Form 10-Q for the first quarter of fiscal 2014, 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 was 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 Annual Report on Form 10-K for fiscal 2014 is filed.
8
The effect of the revision on the line items within the Company’s 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 Company’s 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 Company’s 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
|
|
The effect of the revision on the line items within the Company’s 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
|
)
|
9
(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.”
The new guidance provides specific financial statement presentation requirements of an unrecognized tax benefit when a net operating loss carryforward, a similar tax
loss, or a tax credit carryforward exists. The guidance states that an unrecognized tax benefit in those circumstances should be presented as a reduction to the deferred tax asset. This guidance is effective for fiscal years and interim periods
within those years, beginning after December 15, 2013. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated
financial statements.
In January 2014, the FASB issued ASU 2014-08
, “Presentation of Financial Statements (Topic 205) and
Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an entity.”
The new guidance provides new criteria for reporting discontinued operations and specifically indicates
a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on the Company’s operations and
financial results. The new guidance also requires expanded disclosures for discontinued operations. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2014. Early adoption is
permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “
Revenue from Contracts with Customers (Topic 606
).” The new guidance provides new
criteria for recognizing revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance requires
expanded disclosures to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. Quantitative and qualitative information will be provided about the
significant judgments and changes in those judgments that management made to determine the revenue that is recorded. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016.
Early adoption is not permitted. The Company is currently assessing the provisions of the guidance and has not determined the impact of the adoption of this guidance on its consolidated financial statements.
10
(3) Financial Instruments
In May 2012, Diamond closed an agreement to recapitalize its balance sheet with an investment by Oaktree Capital Management,
L.P. (“Oaktree”). The Oaktree investment initially consisted of $225 million of newly-issued senior notes (“Oaktree Senior Notes”) and a warrant to purchase 4,420,859 shares of Diamond common stock (the “Warrant
Shares”). The warrant was issued to Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (“Securities Purchase Agreement”), under which Diamond issued the Oaktree Senior Notes. The warrant was
accounted for as a derivative liability and was remeasured at fair value each reporting period with gains and losses recorded in net income. On February 9, 2014, Diamond entered into a warrant exercise agreement with Oaktree (the “Warrant
Exercise Agreement”), which closed on February 19, 2014, pursuant to which Oaktree agreed to exercise the warrant to purchase the Warrant Shares, by paying, in cash, the exercise price of approximately $44.2 million less a cash exercise
and contractual modification inducement fee of $15 million (the “Warrant Exercise Transaction”). The Company remeasured the warrant at fair value on February 18, 2014, the day prior to the completion of the refinancing transaction,
and recorded a loss of $2.0 million on the Company’s Condensed Consolidated Statement of Operations for the three months ended April 30, 2014. As a result of the warrant exercise, the Company no longer has a liability associated with the
warrant as of April 30, 2014. See Note 5 to the Notes to the Condensed Consolidated Financial Statements for the impact to the Company’s calculation of earnings per share as a result of the issuance of these shares.
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 Company’s 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. These corn call options were sold as of April 30, 2014. The Company accounts for commodity derivatives as non-hedging derivatives.
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. No sales associated with corn call option commodity derivatives were made by the Company in the third quarter of fiscal 2014.
As of April 30, 2014, the Company had 164 corn call option commodity derivatives.
11
The fair values of the Company’s derivative instruments as of April 30,
2014, July 31, 2013 and April 30, 2013, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
Balance Sheet Location
|
|
Fair Value
|
|
|
|
|
|
|
4/30/14
|
|
|
7/31/13
|
|
|
4/30/13
|
|
|
Derivatives not designated as hedging instruments under ASC 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Prepaid and other current assets
|
|
$
|
666
|
|
|
$
|
29
|
|
|
$
|
320
|
|
|
Interest rate contracts
|
|
Other long-term assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Warrants
|
|
Warrant liability
|
|
|
—
|
|
|
|
(58,147
|
)
|
|
|
(37,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
666
|
|
|
$
|
(58,118
|
)
|
|
$
|
(37,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of the Company’s derivative instruments on the condensed consolidated statements of operations
for the three months ended April 30, 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
|
|
|
|
|
|
|
4/30/14
|
|
|
4/30/13
|
|
|
Commodity contracts
|
|
Selling, general and administrative
|
|
$
|
351
|
|
|
$
|
(11
|
)
|
|
Interest rate contracts
|
|
Interest expense
|
|
|
—
|
|
|
|
(2
|
)
|
|
Warrant
|
|
Loss on warrant liability
|
|
|
(1,995
|
)
|
|
|
(1,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(1,644
|
)
|
|
$
|
(1,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of the Company’s derivative instruments on the condensed consolidated statements of operations
for the nine months ended April 30, 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
|
|
|
|
|
|
|
4/30/14
|
|
|
4/30/13
|
|
|
Commodity contracts
|
|
Selling, general and administrative
|
|
$
|
451
|
|
|
$
|
(494
|
)
|
|
Interest rate contracts
|
|
Interest expense
|
|
|
—
|
|
|
|
(9
|
)
|
|
Warrant
|
|
Gain/ (Loss) on warrant liability
|
|
|
(25,933
|
)
|
|
|
9,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(25,482
|
)
|
|
$
|
8,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting Standards Codification (“ASC”) 820 requires that assets and liabilities carried at fair
value be measured using the following three levels of inputs:
Level 1
: Quoted market prices in active markets for identical assets
or liabilities
Level 2
: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3
: Unobservable inputs that are not corroborated by market data
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of April 30, 2014, there were no cash equivalents. The Company’s derivative assets (liabilities) measured at fair value on a
recurring basis were $0.7 million as of April 30, 2014, $29 thousand as of July 31, 2013, and $0.3 million as of April 30, 2013. The Company values the commodity derivatives using Level 2 inputs. The value of the commodity contracts
is calculated utilizing the number of contracts, therefore bushels purchased and the price of corn from the Chicago Board of Trade.
12
In August 2013, the Company obtained preliminary approval to settle the action
In re Diamond
Foods Inc., Securities Litigation
(“Securities Settlement”). Pursuant to the terms of the Securities Settlement, the Company agreed to pay a total of $11.0 million in cash and issue 4.45 million shares of common stock to resolve
all claims asserted on behalf of investors who purchased the Company’s stock between October 5, 2010 and February 2012. The stock portion of the Securities Settlement was recorded within Accounts payable and accrued liabilities, as a
liability and was remeasured at fair value each reporting period with gains and losses recorded in net income until the settlement became effective. The stock portion of the Company’s Securities Settlement was measured at fair value on a
recurring basis. The Company had elected to use the market approach to value the stock portion of the Securities Settlement. The valuation was considered Level 1 due to the use of quoted prices in an active market for identical assets at the
measurement date. The court issued an order granting final approval of the Securities Settlement on January 21, 2014, and the appeal period expired on February 20, 2014, at which time the Securities Settlement became effective. The value
of the 4.45 million shares of common stock as of February 20, 2014 was $123.3 million, nil as of April 30, 2014, $85.1 million as of July 31, 2013, and nil as of April 30, 2013 and was recorded in Accounts payable and
accrued liabilities in the Condensed Consolidated Balance Sheets. 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 to a settlement fund. See Note 5 to
the Notes to the Condensed Consolidated Financial Statements for the impact to the Company’s calculation of earnings per share as a result of the issuance of these shares.
The Company performed a final remeasurement of its warrant liability on February 18, 2014 as result of the Warrant Exercise Transaction.
The warrant liability measured at fair value on a recurring basis was $84.1 million as of February 18, 2014, nil as of April 30, 2014, $58.1 million as of July 31, 2013 and $37.6 million as of April 30, 2013. The Company had
elected to use the income approach to value the warrant liability and used the Black-Scholes option valuation model. This valuation was considered Level 3 due to the use of certain unobservable inputs. Inputs into the Black-Scholes model include:
remaining term, stock price, strike price, maturity date, risk-free rate, and expected volatility. The significant Level 3 unobservable inputs used in the valuation are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/30/14
|
|
|
7/31/13
|
|
|
4/30/13
|
|
|
Expected volatility
|
|
|
N/A
|
|
|
|
45.60
|
%
|
|
|
46.42
|
%
|
|
Probability of Special Redemption
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
The following is a reconciliation of liabilities activity, measured at fair value based on Level 3 inputs for
the three months ended April 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
|
|
4/30/14
|
|
|
4/30/13
|
|
|
Beginning Balance - January 31
|
|
$
|
(82,085
|
)
|
|
$
|
(35,712
|
)
|
|
Transfers into Level 3
|
|
|
—
|
|
|
|
—
|
|
|
Transfers out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
Total gains or (losses) (realized/unrealized)
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(1,995
|
)
|
|
|
(1,873
|
)
|
|
Included in other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
—
|
|
|
|
—
|
|
|
Issuances
|
|
|
—
|
|
|
|
—
|
|
|
Sales
|
|
|
—
|
|
|
|
—
|
|
|
Settlements
|
|
|
84,080
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance - April 30
|
|
$
|
—
|
|
|
$
|
(37,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
—
|
|
|
$
|
(1,873
|
)
|
13
The following is a reconciliation of liabilities activity, measured at fair value based on Level
3 inputs for the nine months ended April 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant Liability
|
|
|
|
|
4/30/14
|
|
|
4/30/13
|
|
|
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
|
|
|
(25,933
|
)
|
|
|
9,236
|
|
|
Included in other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
Purchases, issuances, sales and settlements
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
—
|
|
|
|
—
|
|
|
Issuances
|
|
|
—
|
|
|
|
—
|
|
|
Sales
|
|
|
—
|
|
|
|
—
|
|
|
Settlements
|
|
|
84,080
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance - April 30
|
|
$
|
—
|
|
|
$
|
(37,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
—
|
|
|
$
|
9,236
|
|
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 Senior Notes. The 7.000% Senior Notes due March 2019 (the
“Notes”) have a fixed interest rate, but due to their issuance during the quarter, their fair value is not materially different than the carrying value as of April 30, 2014. Refer to Note 10 to the Notes to the Condensed Consolidated
Financial Statements for further discussion on the Notes.
As a result of the refinancing, the total indebtedness outstanding under the
Oaktree Senior Notes were paid in full as of April 30, 2014. See Note 10 to the Notes to the Condensed Consolidated Financial Statements for further information regarding the refinancing transaction.
The following table presents the carrying value and fair value of outstanding Oaktree Senior Notes as of July 31, 2013, and
April 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/30/14
|
|
|
7/31/13
|
|
|
4/30/13
|
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Senior Note
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
121,266
|
|
|
$
|
150,295
|
|
|
$
|
116,120
|
|
|
$
|
151,859
|
|
|
Redeemable Note
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
89,660
|
|
|
$
|
75,147
|
|
|
$
|
87,428
|
|
|
$
|
75,930
|
|
The fair value of the notes was estimated using a discounted cash flow approach. The discounted cash flow
approach used a risk adjusted yield to present value the contractual cash flows of the notes. The fair value of the notes would be classified as Level 3 within the fair value measurement hierarchy.
(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 Company’s Statements of Operations, typically over the related vesting period of the options. The guidance
requires use of fair value computed at the date of grant to measure share-based awards. The fair value of restricted stock awards is recognized as stock-based compensation expense over the vesting period. Stock options may be granted to officers,
employees and directors.
14
Stock Option Awards:
The fair value of each stock option grant was estimated on the
date of grant using the Black-Scholes option valuation model. Expected stock price volatilities were estimated based on the Company’s implied historical volatility. The expected term of options granted was based on the simplified method due to
the limited amount of historical Company information. Forfeiture rates were based on assumptions and historical data to the extent it is available. The risk-free rates were based on U.S. Treasury yields in effect at the time of the grant. For
purposes of this valuation model, dividends are based on the historical rate.
Assumptions used in the Black-Scholes model are presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended April 30,
|
|
Nine Months
Ended April 30,
|
|
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
|
Average expected life, in years
|
|
5.50
|
|
5.50
|
|
5.50 - 6.06
|
|
5.50 - 6.06
|
|
Expected volatility
|
|
54.68% - 54.77%
|
|
54.92% - 55.06%
|
|
54.68% - 55.84%
|
|
52.99% - 55.06%
|
|
Risk-free interest rate
|
|
1.96% - 2.04%
|
|
1.04% - 1.11%
|
|
1.69% - 2.04%
|
|
0.83% - 1.11%
|
|
Dividend rate
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
The following table summarizes option activity during the nine months ended April 30, 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
|
|
|
220
|
|
|
|
22.55
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(64
|
)
|
|
|
17.39
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(136
|
)
|
|
|
39.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2014
|
|
|
1,477
|
|
|
|
24.65
|
|
|
|
7.4
|
|
|
$
|
15,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at April 30, 2014
|
|
|
753
|
|
|
|
27.82
|
|
|
|
6.1
|
|
|
$
|
7,021
|
|
There were 30,000 and 219,601 stock options granted during the three and nine months ended April 30,
2014, respectively, and 30,000 and 634,414 stock options granted during the three and nine months ended April 30, 2013, respectively. The weighted average fair value per share of stock options granted during the three and nine months ended
April 30, 2014 was $16.14 and $11.88, respectively, and $8.56 and $7.33 for the three and nine months ended April 30, 2013, respectively. The fair value per share of stock options vested during the three and nine months ended
April 30, 2014 was $10.24 and $10.66, respectively, and $16.44 and $18.86 for the three and nine months ended April 30, 2013, respectively. There were 19,687 and 63,637 stock options exercised during the three and nine months ended
April 30, 2014, respectively, and 22,064 exercised in the three and nine months ended April 30, 2013. The total intrinsic value of stock options exercised during the three and nine months ended April 30, 2014, was $183 thousand and
$454 thousand, respectively and $24 thousand for the three and nine months ended April 30, 2013.
The following table summarizes
nonvested stock option activity during the three and nine months ended April 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
shares
(in thousands)
|
|
|
Weighted
average grant
date fair value
per share
|
|
|
Nonvested at July 31, 2013
|
|
|
785
|
|
|
$
|
10.51
|
|
|
Granted
|
|
|
220
|
|
|
|
11.88
|
|
|
Vested
|
|
|
(237
|
)
|
|
|
10.66
|
|
|
Cancelled
|
|
|
(44
|
)
|
|
|
15.62
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at April 30, 2014
|
|
|
724
|
|
|
|
10.56
|
|
|
|
|
|
|
|
|
|
|
|
15
As of April 30, 2014, approximately $6.4 million of total unrecognized compensation expense
related to nonvested stock options was expected to be recognized over a weighted average period of 2.4 years. As of April 30, 2013, approximately $7.0 million of total unrecognized compensation expense related to nonvested stock options is
expected to be recognized over a weighted average period of 3.0 years.
Cash received from option exercises was $0.4 million, $2.0 million
and $0.3 million for the three months ended April 30, 2014, fiscal 2013, and three months ended April 30, 2013, respectively.
Restricted Stock and Awards:
Restricted stock and restricted stock unit activity during the nine months ended April 30,
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
|
|
|
|
197
|
|
|
|
21.60
|
|
|
Vested
|
|
|
(58
|
)
|
|
|
31.68
|
|
|
|
(51
|
)
|
|
|
16.84
|
|
|
Cancelled
|
|
|
(33
|
)
|
|
|
29.86
|
|
|
|
(28
|
)
|
|
|
16.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2014
|
|
|
412
|
|
|
|
19.99
|
|
|
|
336
|
|
|
|
19.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were nil and 95,735 restricted stock awards granted during the three and nine months ended
April 30, 2014, respectively, and nil and 317,970 restricted stock awards granted during three and nine months ended April 30, 2013, respectively. The weighted average fair value per share of restricted stock granted during the nine months
ended April 30, 2014 was $20.89, and was $14.25 for the nine months ended April 30, 2013. The weighted average fair value per share at the grant date of restricted stock vested during the three and nine months ended April 30, 2014 was
$41.69 and $31.68, respectively, and was $26.38 and $29.70 for the three and nine months ended April 30, 2013, respectively. The total intrinsic value of restricted stock vested in the three and nine months ended April 30, 2014 was $0.2
million and $1.4 million, respectively, and was $0.8 million and $2.5 million for the three and nine months ended April 30, 2013, respectively.
As of April 30, 2014, there was $6.0 million of unrecognized compensation expense related to nonvested restricted stock expected to be
recognized over a weighted average period of 2.6 years. As of April 30, 2014, there was $5.4 million of unrecognized compensation expense related to nonvested restricted stock units expected to be recognized over a weighted average period of
3.1 years. As of April 30, 2013, $6.7 million of unrecognized compensation expense related to nonvested restricted stock was expected to be recognized over a weighted average period of 3.0 years, and $3.0 million of unrecognized compensation
expense related to nonvested restricted stock units was expected to be recognized over a weighted average period of 3.7 years
For the
three and nine months ended April 30, 2014, stock-based compensation was $2.0 million and $5.5 million, respectively. For the three and nine months ended April 30, 2013, stock-based compensation was $1.4 million and $2.5 million,
respectively. Cash received to settle stock awards was $100, $400, and $300, as of April 30, 2014, July 31, 2013, and April 30, 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 Company’s 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
Ended April 30,
|
|
|
Nine Months
Ended April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(105,633
|
)
|
|
$
|
(15,582
|
)
|
|
$
|
(162,846
|
)
|
|
$
|
(16,170
|
)
|
|
Less: income allocated to participating securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common shareholders - basic
|
|
|
(105,633
|
)
|
|
|
(15,582
|
)
|
|
|
(162,846
|
)
|
|
|
(16,170
|
)
|
|
|
|
|
|
|
|
Add: undistributed income attributable to participating securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Less: income attributed to gain on warrant liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,236
|
)
|
|
Less: undistributed income reallocated to participating securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common shareholders - diluted
|
|
$
|
(105,633
|
)
|
|
$
|
(15,582
|
)
|
|
$
|
(162,846
|
)
|
|
$
|
(25,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
29,119
|
|
|
|
21,819
|
|
|
|
24,338
|
|
|
|
21,774
|
|
|
Dilutive shares - stock options and warrant
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - diluted
|
|
|
29,119
|
|
|
|
21,819
|
|
|
|
24,338
|
|
|
|
23,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share attributable to common shareholders (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.63
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(6.69
|
)
|
|
$
|
(0.74
|
)
|
|
Diluted
|
|
$
|
(3.63
|
)
|
|
$
|
(0.71
|
)
|
|
$
|
(6.69
|
)
|
|
$
|
(1.08
|
)
|
|
(1)
|
Computations may reflect rounding adjustments.
|
The Company was in a loss position for the
three and nine months ended April 30, 2014 and April 30, 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 nine months ended April 30, 2014 and the three months ended April 30, 2013, a
numerator adjustment was not made to the diluted earnings (loss) per share calculation. For the nine months ended April 30, 2013, the change in the fair value of the warrant liability resulted in a gain. Accordingly, a numerator and
denominator adjustment was made to the diluted earnings loss per share calculation.
On January 21, 2014 the court issued an order
granting final approval of the Securities Settlement and the appeal period expired on February 20, 2014, at which time the Securities Settlement became effective. On February 21, 2014 the Company issued the 4.45 million shares of
common stock to a settlement fund pursuant to the terms of the approved Securities Settlement. Accordingly, the 4.45 million shares were included in the computation of basic and diluted earnings (loss) per share calculation as of April 30,
2014.
On February 19, 2014, the Company closed the Warrant Exercise Agreement, pursuant to which Oaktree agreed to exercise in full
its warrant to purchase an aggregate of 4,420,859 shares of Diamond common stock, by paying in cash the exercise price of approximately $44.2 million less a cash exercise and contractual modification inducement fee of $15.0 million. Accordingly, the
4,420,859 shares were included in the computation of basic and diluted earnings (loss) per share calculation as of April 30, 2014.
(6) Balance Sheet Items
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
July 31,
|
|
|
April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
|
Raw materials and supplies
|
|
$
|
71,630
|
|
|
$
|
29,825
|
|
|
$
|
62,153
|
|
|
Work in process
|
|
|
31,699
|
|
|
|
28,058
|
|
|
|
33,066
|
|
|
Finished goods
|
|
|
59,436
|
|
|
|
57,573
|
|
|
|
55,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
162,765
|
|
|
$
|
115,456
|
|
|
$
|
150,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
In the third 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 $1.5 million for walnut sales recognized in the first six months of fiscal 2014.
Accounts payable and accrued liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
July 31,
|
|
|
April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
|
Accounts payable
|
|
$
|
56,142
|
|
|
$
|
75,833
|
|
|
$
|
64,332
|
|
|
Securities settlement
|
|
|
—
|
|
|
|
96,129
|
|
|
|
—
|
|
|
Accrued promotions
|
|
|
23,254
|
|
|
|
16,087
|
|
|
|
19,377
|
|
|
Accrued salaries and benefits
|
|
|
11,417
|
|
|
|
18,883
|
|
|
|
12,726
|
|
|
Accrued taxes
|
|
|
10,057
|
|
|
|
9,160
|
|
|
|
4,114
|
|
|
Accrued interest
|
|
|
3,372
|
|
|
|
109
|
|
|
|
259
|
|
|
Accrued current lease obligations
|
|
|
2,569
|
|
|
|
2,306
|
|
|
|
1,775
|
(1)
|
|
Other
|
|
|
2,352
|
|
|
|
2,035
|
|
|
|
2,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
109,163
|
|
|
$
|
220,542
|
|
|
$
|
104,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Long term portion of capital leases are reflected in Other liabilities on the Condensed Consolidated Balance Sheets.
|
In the third quarter of fiscal 2014, the court issued an order granting final approval of the Securities Settlement on January 21, 2014
and the appeal period expired on February 20, 2014, at which time the Securities Settlement became effective. On February 21, 2014 the Company issued the 4.45 million shares to a settlement fund pursuant to the terms of the approved
Securities Settlement. As of April 30, 2014, the Company no longer had a liability associated with the Securities Settlement.
(7) Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
July 31,
|
|
|
April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
|
Land and improvements
|
|
$
|
11,584
|
|
|
$
|
9,823
|
|
|
$
|
9,957
|
|
|
Buildings and improvements
|
|
|
59,089
|
|
|
|
56,745
|
|
|
|
52,335
|
|
|
Machinery, equipment and software
|
|
|
215,507
|
|
|
|
214,294
|
|
|
|
195,084
|
|
|
Construction in progress
|
|
|
11,866
|
|
|
|
2,024
|
|
|
|
1,951
|
|
|
Capital leases
|
|
|
16,653
|
|
|
|
14,420
|
|
|
|
11,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
314,699
|
|
|
|
297,306
|
|
|
|
271,074
|
|
|
Less: accumulated depreciation
|
|
|
(179,577
|
)
|
|
|
(163,145
|
)
|
|
|
(129,404
|
)
|
|
Less: accumulated amortization
|
|
|
(4,089
|
)
|
|
|
(1,936
|
)
|
|
|
(3,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
131,033
|
|
|
$
|
132,225
|
|
|
$
|
138,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended April 31, 2014, depreciation expense was $5.8 million and $18.1
million, respectively. For the three and nine months ended April 30, 2013, depreciation expense was $7.1 million and $19.2 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 Diamond’s 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
18
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 ($0.1) million and $1.2 million for the three and nine months ended April 30, 2013, respectively. As of April 30, 2014, the Company has paid all severance related payments.
In the three and nine months ended April 30, 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 $0.2 million and $0.9 million, respectively, within Selling, general and administrative expenses. In the
third quarter of fiscal 2013, the Company also recorded an intangible asset impairment charge of $1.6 million, within asset impairments in the Company’s 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 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 the second quarter of fiscal 2013, the Company also classified approximately
$0.7 million of assets as held for sale. The Company sold these assets in the third quarter of fiscal 2013 for a gain of $0.3 million.
In
the third quarter of 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 originally recorded in
fiscal 2013.
As of April 30, 2014, the Company has outstanding $3.6 million associated with the Fishers facility future lease
obligation. The liability extends through the lease term and will expire in 2019. As of July 31, 2013, the exit of the Fishers facility was complete.
(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
|
|
|
(1,252
|
)
|
|
|
—
|
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
329,271
|
|
|
$
|
72,635
|
|
|
$
|
401,906
|
|
|
Accumulated impairment losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
329,271
|
|
|
$
|
72,635
|
|
|
$
|
401,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
9,136
|
|
|
|
—
|
|
|
|
9,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
337,626
|
|
|
$
|
72,635
|
|
|
$
|
410,261
|
|
|
Accumulated impairment losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
337,626
|
|
|
$
|
72,635
|
|
|
$
|
410,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Goodwill was allocated amongst the Snacks and Nuts reportable segments beginning in the second
quarter of fiscal 2013 due to the change in the Company’s operating and reportable segments.
Other intangible assets consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
July 31,
|
|
|
April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2013
|
|
|
Brand intangibles (not subject to amortization)
|
|
$
|
266,363
|
|
|
$
|
297,577
|
|
|
$
|
298,534
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts and related relationships
|
|
|
163,259
|
|
|
|
157,838
|
|
|
|
156,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets, gross
|
|
|
429,622
|
|
|
|
455,415
|
|
|
|
455,469
|
|
|
Less accumulated amortization on intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer contracts and related relationships
|
|
|
(35,794
|
)
|
|
|
(29,771
|
)
|
|
|
(27,050
|
)
|
|
Less asset impairments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand intangibles
|
|
|
—
|
|
|
|
(36,000
|
)
|
|
|
—
|
|
|
Customer contracts and related relationships
|
|
|
—
|
|
|
|
(1,560
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other intangible assets, net
|
|
$
|
393,828
|
|
|
$
|
388,084
|
|
|
$
|
428,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable intangible asset amortization expense for both the three and nine months ended April 30,
2014 and 2013, respectively, was $2.0 million and $6.0 million. Identifiable intangible asset amortization expense for each of the five succeeding years will amount to approximately $8.1 million, and will amount to approximately $2.0 million for the
remainder of fiscal 2014.
In the third quarter of 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
|
|
|
|
|
|
|
|
April 30,
|
|
|
2013
|
|
|
April 30,
|
|
|
|
|
2014
|
|
|
As revised
|
|
|
2013
|
|
|
Secured Credit Facility
|
|
$
|
—
|
|
|
$
|
369,454
|
|
|
$
|
370,364
|
|
|
Oaktree Senior Notes
|
|
|
—
|
|
|
|
210,926
|
|
|
|
203,548
|
|
|
Guaranteed Loan
|
|
|
8,900
|
|
|
|
10,557
|
|
|
|
11,096
|
|
|
Notes
|
|
|
230,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Term Loan Facility, net
|
|
|
403,513
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding debt
|
|
|
642,413
|
|
|
|
590,937
|
|
|
|
585,008
|
|
|
Less: current portion
|
|
|
(4,062
|
)
|
|
|
(5,860
|
)
|
|
|
(5,806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
638,351
|
|
|
$
|
585,077
|
|
|
$
|
579,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
As of April 30, 2014, the current portion of long-term debt is presented net of an
unamortized discount of $0.5 million related to the Term Loan Facility’s stated original issue discount of $2.0 million. The non-current portion of long-term debt is presented net of an unamortized discount of $1.5 million.
Additionally, in accordance with ASC 470-50-40-2
– Debt – Modifications and Extinguishments,
as a result of certain lenders
that participated in the Company’s refinanced debt structure both prior to and after the restructuring, it was determined that a portion of the debt refinancing was considered to be a debt modification. Accordingly, the Company recorded
approximately $3.6 million, of the Oaktree call premium that is associated with the modified debt as a contra-debt liability. As of April 30, 2014, the current portion of long-term debt is presented net of these unamortized creditor fees of
$0.8 million and the non-current portion of long-term debt is presented net of these unamortized creditor fees of $2.7 million.
In
accordance with the guidance, approximately $5.2 million related the Company’s previous original issue discount on the Oaktree Notes was also determined to be associated with the modified debt as a contra-debt liability. As of April 30,
2014, the current portion of long-term debt is presented net of this unamortized discount of $1.1 million and the non-current portion of long-term debt is presented net of $3.9 million.
These balances are presented on the Company’s Condensed Consolidated Balance Sheets as a contra-debt liability and will be amortized
within Interest expense, net on the Company’s Condensed Consolidated Statement of Operations over the term of the Term Loan Facility.
Net interest expense for the three and nine months ended April 30 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
|
Ended April 30,
|
|
|
Ended April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Secured Credit Facility
|
|
$
|
1,061
|
|
|
$
|
6,292
|
|
|
$
|
12,577
|
|
|
$
|
19,993
|
|
|
Oaktree Senior Notes
|
|
|
1,060
|
|
|
|
6,448
|
|
|
|
16,428
|
|
|
|
17,690
|
|
|
Guaranteed Loan
|
|
|
115
|
|
|
|
142
|
|
|
|
365
|
|
|
|
586
|
|
|
ABL Facility
|
|
|
159
|
|
|
|
—
|
|
|
|
159
|
|
|
|
—
|
|
|
Notes
|
|
|
3,131
|
|
|
|
—
|
|
|
|
3,131
|
|
|
|
—
|
|
|
Term Loan Facility
|
|
|
3,478
|
|
|
|
—
|
|
|
|
3,478
|
|
|
|
—
|
|
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(5
|
)
|
|
Capitalized interest
|
|
|
(44
|
)
|
|
|
(32
|
)
|
|
|
(84
|
)
|
|
|
(414
|
)
|
|
Other
|
|
|
182
|
|
|
|
338
|
|
|
|
490
|
|
|
|
1,180
|
|
|
Amortization of deferred financing costs and debt discounts
|
|
|
1,440
|
|
|
|
1,354
|
|
|
|
4,993
|
|
|
|
3,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
10,582
|
|
|
$
|
14,542
|
|
|
$
|
41,534
|
|
|
$
|
42,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Refinancing
On February 19, 2014, the Company refinanced its debt capital structure. The Company entered into a 4.5 year senior secured term loan
facility (the “Term Loan Facility”) in an aggregate principal amount of $415 million, a 4.5 year senior secured asset-based revolving credit facility (the “ABL Facility”) in an aggregate principal amount of $125 million and
issued $230 million in 7.000% Senior Notes due March 2019 (the “Notes”). Pursuant to the Warrant Exercise Agreement, OCM PF/FF Adamantine Holdings, Ltd. (a subsidiary of Oaktree) exercised its warrant to purchase 4,420,859 shares of
Diamond’s common stock at the $10 exercise price per share for $44.2 million, less a warrant cash exercise and contractual modification inducement fee of $15 million. The Warrant Exercise Transaction closed on February 19, 2014, concurrent
with the refinancing transactions and the Company derecognized the warrant liability of approximately $84.1 million on that date.
Diamond
used the net proceeds of the Term Loan Facility, the Notes and the Warrant Exercise Transaction to (1) prepay approximately $348 million of indebtedness outstanding under, and terminate, the Secured Credit Facility, (2) prepay
approximately $276 million of indebtedness outstanding under, and terminate, the Oaktree Senior Notes, (3) pay approximately $32.3 million of prepayment premiums to the holders of the Oaktree Senior Notes, and (4) pay fees related to the
preparation, negotiation, execution and delivery of the definitive documentation for the Term Loan Facility, the Notes and the ABL Facility. In accordance with ASC 835-30-45-3
Imputation of Interest - Other Presentation Matters,
the Company
incurred $16.4 million of new debt issuance costs associated with the February 2014 debt refinancing. $2.1 million of these debt issuance costs were expensed to Loss on debt extinguishment based on the portion of the refinancing that was considered
a debt modification for those lenders that had
21
continued participation in the Company’s refinanced debt structure. The remaining $14.3 million debt issuance costs were recorded as deferred financing charges and will be amortized over the
life of the respective new debt agreements into Interest expense, net. Debt issuance costs largely included arrangement fees paid to underwriters, legal fees, accounting fees, consulting fees, and printing fees. The Company recorded the current
portion of these costs in Prepaid expenses and other current assets and the non-current portion was recorded in Other long-term assets in the Company’s Condensed Consolidated Balance Sheets.
In accordance with ASC 470-50-40-2
– Debt – Modifications and Extinguishments
, the Company recorded a Loss on debt
extinguishment in the Condensed Consolidated Statement of Operations for the three and nine months ended April 30, 2014. Loss on debt extinguishment for the three and nine months ended April 30, 2014 was $83.0 million. Of the $83.0
million, the Company recorded approximately $70.3 million associated with the Oaktree Senior Notes which included $28.7 million related to the prepayment premium associated with the extinguished debt that the Company paid to the holders of the
Oaktree Senior Notes and approximately $41.6 million related to the difference between the net carrying value and the repayment price of the Oaktree Senior Notes. The Oaktree Senior Notes were originally recorded at $43.2 million lower than the
contractual repayment amount due to the allocation of proceeds to the Oaktree warrant of $36.5 million and original issue discount of $6.7 million subsequently, additional discount of $6.8 million was created related to the
paid-in-kind interest that was added to the debt. The Company also paid a total call premium of $32.3 million of which $3.6 million related to the portion of the refinancing that was considered a debt modification and recorded as a contra-debt
liability on the Company’s Condensed Consolidated Balance Sheets, the remaining call premium of $28.7 million was recorded as a Loss on debt extinguishment. Additionally, the Company incurred non-cash charges of $10.6 million resulting from the
write-off of unamortized Oaktree and Secured Credit Facility transaction costs and fees. The Company also expensed $2.1 million in new third party debt issuance costs associated with certain lenders continued participation in the debt arrangements
both prior to and subsequent to the refinancing transaction.
Loss on debt extinguishment for the three and nine months ended
April 30 is as follows:
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
Ended April 30, 2014
|
|
|
Call premium - Oaktree Senior Notes
|
|
$
|
28,660
|
|
|
Difference between repayment amount and carrying value - Oaktree Senior Notes
|
|
|
41,631
|
|
|
Unamortized transaction costs- Oaktree Senior Notes
|
|
|
8,635
|
|
|
Unamortized transaction costs- Secured Credit Facility
|
|
|
2,011
|
|
|
New transaction costs - Term Loan, ABL, and Notes
|
|
|
2,067
|
|
|
|
|
|
|
|
|
Loss on debt extinguishment
|
|
$
|
83,004
|
|
|
|
|
|
|
|
Debt After Refinancing
In December 2010, Kettle Foods obtained, and Diamond guaranteed, a 10-year fixed rate loan (the “Guaranteed Loan”) in the principal
amount of $21.2 million, of which $8.9 million was outstanding as of April 30, 2014. Principal and interest payments were 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, net.
The Guaranteed Loan provides for customary affirmative and negative
covenants, which are similar to the covenants under the Secured Credit Facility, as defined below. The financial covenants within the Guaranteed Loan were reset to match those in the Waiver and Third Amendment to its Secured Credit Facility, as
described in more detail below.
Additionally, on February 19, 2014, Diamond closed the Warrant Exercise Agreement, pursuant to which
Oaktree agreed to exercise in full its warrant to purchase an aggregate of 4,420,859 shares of Diamond common stock, by paying in cash the exercise price of approximately $44.2 million less a cash exercise and contractual modification inducement fee
of $15.0 million. The warrant was issued to Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (“Securities Purchase Agreement”), under which Diamond issued the Oaktree Senior Notes. The $15.0 million
inducement fee is included within Warrant exercise fee on the Company’s Condensed Consolidated Statement of Operations.
The Warrant
Exercise Agreement provided that so long as Oaktree and/or its affiliates hold at least 10% of Diamond’s outstanding common stock, Oaktree will have the right to nominate one member of Diamond’s Board of Directors. In addition, until the
later of
22
(a) twelve months after Oaktree no longer has the right to nominate a member of Diamond’s Board of Directors or (b) twelve months after any director nominated by Oaktree under the
Warrant Exercise Agreement or the Securities Purchase Agreement no longer serves as a director, Oaktree and its affiliates agree not to: acquire or beneficially own more than 30% of the outstanding common stock of Diamond; commence or support any
tender offer for Diamond common stock; make or participate in any solicitation of proxies to vote or seek to influence any person with respect to voting its Diamond common stock; publicly announce a proposal or offer concerning any extraordinary
transaction with Diamond; form, join or participate in a group for the purpose of acquiring, holding, voting or disposing of any Diamond securities; take any actions that could reasonably be expected to require Diamond to make a public announcement
regarding the possibility of such an acquisition, tender offer or proxy solicitation; enter into any agreements with a third party regarding any such prohibited actions; or request Diamond to amend or waive such provisions. Upon the closing of the
transactions contemplated by the Warrant Exercise Agreement, the Securities Purchase Agreement, and Diamond’s obligations thereunder, terminated. The common stock issued upon exercise of the warrant will be issued in a private placement
pursuant to exemptions from the registration requirements of the Securities Act of 1933 and are covered by a Registration Rights Agreement entered into on May 29, 2012 in connection with the Securities Purchase Agreement.
The Term Loan Facility will mature in 4.5 years and will amortize in equal quarterly installments in an aggregate annual amount equal to 1.0%
of the original principal amount of the Term Loan Facility with the balance payable on the maturity date of the Term Loan Facility. The Term Loan Facility 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 the Company could incur without its senior secured leverage ratio exceeding 4.50 to 1.00 on a pro forma basis after giving effect to such increase or
addition. Amounts outstanding 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 Suisse’s prime rate, (b) the federal funds effective rate plus 0.50% and (c) the Eurodollar Rate for an interest period of one
month plus 1.00%, plus, in each case, the applicable margin to be agreed with the lenders party thereto.
Loans under the ABL facility
would be 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, the Company 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 Company’s eligible accounts receivable; plus
(b) the lesser of (i) 70% of the book value of eligible inventory in the US and (ii) 85% times the net orderly liquidation value of Diamond’s 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 0.5%, (b) the LIBOR Rate (which rate shall be calculated based upon an interest period
of 1 month and shall be determined on a daily basis), plus 1.00%, and (c) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its “prime rate”. The LIBOR Rate shall be
available for interest periods of one week or, one, two, three or six months and, if all lenders agree, twelve months.
The Term Loan
Facility and ABL Facility provide for customary affirmative and negative covenants. The Term Loan Facility has customary cross default provisions and the ABL Facility contains cross-acceleration provisions, in each case that may be triggered if
Diamond fails to comply with obligations under its other credit facilities or indebtedness. The Term Loan Facility has a first priority perfected lien on substantially all property, plant and equipment, capital stock, intangibles and second priority
lien on the ABL Priority Collateral, subject to customary exceptions. The ABL Facility requires Diamond to maintain a minimum fixed charge coverage ratio of 1.1:1 if at any time excess availability is less than 10% of maximum availability; and
requires Diamond to apply substantially all cash collections to reduce outstanding borrowings under the ABL Facility if excess availability falls below 12.5% of maximum availability for a period of 5 business days. The ABL Facility is secured by a
first-priority lien on accounts receivable, inventory, cash and deposit accounts and a second-priority lien on all real estate, equipment and equity interests of the Company under, and guarantors of, the ABL Facility.
The Notes, which will mature on March 15, 2019, were offered only to (i) qualified institutional buyers in reliance on Rule 144A of
the Securities Act of 1933, as amended (“Securities Act”), and (ii) to certain non-U.S. persons in offshore transactions in reliance on Regulation S of the Securities Act. The initial issuance and sale of the Notes were not registered
under the Securities Act, and the Notes may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and the registration or qualification requirements of
other applicable securities laws. The terms of the Notes do not provide for registration rights. Interest on the Notes 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
23
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 holder’s Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any. The indenture pursuant to which the Notes were issued contains customary covenants that, among other
things, limit Diamond’s ability and Diamond’s restricted subsidiaries’ ability to incur additional indebtedness, make restricted payments, enter into transactions with affiliates, create liens, pay dividends on or repurchase stock,
make specified types of investments, and sell all or substantially all of their assets or merge with other companies. Each of the covenants is subject to a number of important exceptions and qualifications.
For the three and nine months ended months ended April 30, 2014, the blended interest rate for the Company’s consolidated
borrowings, including obligations under the Company’s refinanced debt capital structure and excluding the Oaktree Senior Notes, was 5.43% and 5.94%, respectively. As of April 30, 2014, the Company was compliant with financial and reporting
covenants under the new refinanced debt structure.
Debt Before Refinancing
The following is a description of the Company’s debt outstanding before the refinancing described above in “Description of
Refinancing” and “Debt After Refinancing.”
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”). Diamond’s 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 Diamond’s 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
Diamond’s request for a $50 million increase in the revolving credit facility to $285 million, under the same terms.
The Secured
Credit Facility and the Securities Purchase Agreement provided for customary affirmative and negative covenants, and cross default provisions that could be triggered, if Diamond failed to comply with obligations under the other credit facilities or
indebtedness. The Secured Credit Facility and the Securities Purchase Agreement included a covenant that restricted the amount of other indebtedness (including capital leases and purchase money obligations for fixed or capital assets), to no more
than $25 million. The accounting treatment for the seven-year equipment lease for the Salem, Oregon plant (the “Kettle U.S. Lease”) and the five-year equipment lease for the Norfolk, United Kingdom plant (the “Kettle U.K.
Lease”) caused the Company to be in default of the covenants limiting other indebtedness. These defaults were waived, with respect to the Kettle U.K. Lease on July 27, 2012 (“Fourth Amendment”) and with respect to the Kettle U.S.
Lease on August 23, 2012 (“Fifth Amendment”). Additionally, the Secured Credit Facility and the Securities Purchase Agreement were each amended to allow the Company to incur up to $31 million of capital leases and purchase money
obligations for fixed or capital assets, which amount was reduced from and after December 31, 2013 (a) to $25 million under the Secured Credit Facility and (b) to $27.5 million under the Securities Purchase Agreement. As a result of
the refinancing, as of April 30, 2014, the Company no longer had outstanding obligations under the Secured Credit Facility.
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 the credit agreement
(“Second Amendment”). 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 its compliance with the terms
and conditions of the amended credit agreement. During the forbearance period, the interest rate on borrowings increased. The 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 our balance sheet with an investment by Oaktree.
In May 2012, Diamond entered into the Waiver and Third Amendment to its Secured Credit Facility (the “Third Amendment”), pursuant to
which the revolving credit facility initially was reduced from $285 million to $255 million. The Third Amendment provided for subsequent further reductions in the revolving line of credit in July 2013 and on January 31, 2014. In May 2012,
Diamond made a $100 million pre-payment on the term loan facility as part of the Third Amendment. In addition, scheduled principal
24
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. Substantially all of the Company’s tangible and intangible assets were considered collateral security under the Secured Credit Facility. Additionally, the Third Amendment provided for a lower level of total bank debt,
initially at $475 million, along with substantial covenant relief. In the second quarter of fiscal 2013, these covenants reset from the levels set forth in the Third 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 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 amended 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 was subject to a LIBOR floor, initially 125 basis points (the
“LIBOR Floor”). The applicable rate would decline, if and when Diamond were to achieve 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 Diamond’s restatement of its consolidated financial statements. As a result of the refinancing noted above, the Company had no
indebtedness outstanding under the Secured Credit Facility as of April 30, 2014.
On May 29, 2012, Diamond received an
investment from Oaktree Capital Management, L.P. (“Oaktree”). 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 would have matured in 2020 and bore interest at 12% per year that would have been paid-in-kind at Diamond’s option for the first two years. Oaktree’s warrant became exercisable at $10 per share
starting on March 1, 2013. On February 19, 2014, Oaktree exercised the warrants.
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 its other credit facilities or indebtedness. Beginning on April 30, 2014, its 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 its 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.
(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 April 30, 2014.
Components of net periodic benefit cost (income) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
Three Months
Ended
|
|
|
Nine Months
Ended
|
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
15
|
|
|
$
|
29
|
|
|
$
|
47
|
|
|
Interest cost
|
|
|
247
|
|
|
|
221
|
|
|
|
739
|
|
|
|
684
|
|
|
|
16
|
|
|
|
16
|
|
|
|
50
|
|
|
|
47
|
|
|
Expected return on plan assets
|
|
|
(271
|
)
|
|
|
(252
|
)
|
|
|
(812
|
)
|
|
|
(755
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of prior service cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization of net loss / (gain)
|
|
|
84
|
|
|
|
163
|
|
|
|
253
|
|
|
|
544
|
|
|
|
(176
|
)
|
|
|
(178
|
)
|
|
|
(529
|
)
|
|
|
(534
|
)
|
|
Settlement cost
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
519
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost / (income)
|
|
$
|
60
|
|
|
$
|
132
|
|
|
$
|
180
|
|
|
$
|
992
|
|
|
$
|
(150
|
)
|
|
$
|
(147
|
)
|
|
$
|
(450
|
)
|
|
$
|
(440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
The Company recognized defined contribution plan expenses of $0.2 million and $0.6 million for
the three and nine months ended April 30, 2014, respectively, and $0.4 million and $1.5 million for the three and nine months ended April 30, 2013, respectively. The Company expects to contribute a total of approximately $0.8 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) Accumulated Other Comprehensive Income (Loss)
Total comprehensive income (loss) attributable to the Company, determined as net income adjusted by total other
comprehensive income, was ($101.1) million and ($143.1) million for the three and nine months ended April 30, 2014 and ($20.7) million and ($17.4) million for the three and nine months ended April 30, 2013, respectively. Total other
comprehensive income (loss) presently consists of foreign currency translation adjustments and changes in pension liabilities associated with the Company’s defined benefit pension plan.
For the three and nine months ended April 30, 2014, $0.1 million and $0.3 million, respectively, were reclassified out of accumulated
other comprehensive income (loss) into income. These amounts were reclassified into Selling, general and administrative expenses and Costs of goods sold in the Condensed Consolidated Statement of Operations.
Changes in accumulated other comprehensive income for the three months ended April 30, 2014 by component were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Liability
Adjustment
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
|
Total
|
|
|
Balance as of January 31, 2014
|
|
$
|
338
|
|
|
$
|
18,861
|
|
|
$
|
19,199
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
|
4,601
|
|
|
|
4,601
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(92
|
)
|
|
|
—
|
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(92
|
)
|
|
|
4,601
|
|
|
|
4,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2014
|
|
$
|
246
|
|
|
$
|
23,462
|
|
|
$
|
23,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in accumulated other comprehensive income for the nine months ended April 30, 2014 by component
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Liability
Adjustment
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
|
Total
|
|
|
Balance as of July 31, 2013
|
|
$
|
522
|
|
|
$
|
3,485
|
|
|
$
|
4,007
|
|
|
Other comprehensive income (loss) before reclassifications
|
|
|
—
|
|
|
|
19,977
|
|
|
|
19,977
|
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(276
|
)
|
|
|
—
|
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive income (loss)
|
|
|
(276
|
)
|
|
|
19,977
|
|
|
|
19,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 30, 2014
|
|
$
|
246
|
|
|
$
|
23,462
|
|
|
$
|
23,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
(13) Commitments and Contingencies
In November 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. These suits alleged that defendants made materially false and misleading statements, or failed to disclose material facts, regarding
Diamond’s financial results, operations and prospects, including its accounting for payments to walnut growers and the anticipated closing of Diamond’s proposed merger of the Pringles business from The Procter & Gamble Company. On
January 24, 2012, these class actions were consolidated by the court as
In re Diamond Foods Inc., Securities Litigation
. On July 30, 2012, an amended complaint was filed in the consolidated action naming Diamond, certain of its
former executive officers and our former independent auditor as defendants. In August 2013, the parties reached a proposed agreement (“Securities Settlement”), subject to final court approval, to settle the action, which was preliminarily
approved in September 2013 and then finally approved in January 2014. Pursuant to the Securities Settlement, Diamond paid a total of $11.0 million in cash and issued 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. With respect to the 4.45 million shares, Diamond has 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.
In re Diamond Foods Inc., Shareholder Derivative Litigation
Beginning in November 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 and naming certain executive officers and the members of our board of directors as individual defendants. In January 2012, the court consolidated these actions as
In re Diamond Foods, Inc.,
Shareholder Derivative Litigation
and appointed co-lead counsel. In February 2012 plaintiffs filed their consolidated complaint, naming certain current and former executive officers and members of our board, and our former independent auditor,
as additional defendants. The consolidated complaint was based on the same or similar alleged facts as those alleged in the federal securities action and the federal derivative litigation discussed 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. An agreement in principle to settle all state and federal derivative
claims was reached by Diamond, plaintiffs and the current and former executive officers and members of Diamond’s board in May 2013. The agreement in principal also sought to resolve certain litigation demands by various Diamond shareholders. In
June 2013, the court preliminarily approved the settlement, and in August 2013, final approval was granted. As part of the settlement, Diamond’s 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. On September 23, 2013, an objector, one of the plaintiffs in the dismissed federal derivative litigation discussed below, filed a notice of appeal that is currently pending before the
California Court of Appeal.
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 and naming certain current and former executive officers and members of our board of directors as individual defendants. In February 2012, the court consolidated these actions as
In re Diamond Foods, Inc., Derivative Litigation
. Plaintiffs filed their consolidated complaint in March 2012, adding our 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 September 26, 2011, and for breach of fiduciary duty, unjust enrichment, contribution and indemnification, gross mismanagement and, against our auditor, for
professional negligence, accounting malpractice and aiding and abetting the breach of fiduciary duties of the other individual defendants. In April 2012, Diamond moved to dismiss the action, which the court granted in May 2012. In June 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 2012 order granting Diamond’s motion to dismiss. On May 19, 2014, the Court of
Appeals issued an order affirming the District Court’s dismissal of the action with prejudice.
27
Labeling Class Action Cases
On January 3, 2014, Deen Klacko first filed a putative class action against Diamond in the Southern District of Florida, alleging that
certain ingredients contained in our TIAS tortilla chip product were not natural and seeking damages and injunctive relief. The complaint seeks to certify a class of Florida consumers who purchased TIAS tortilla chips since January 3, 2010. In
May 2014, plaintiff filed an amended complaint making similar allegations relating to other Diamond Kettle Brand potato chip products and seeking damages and injunctive relief. The amended complaint seeks to certify a class of nationwide consumers
who purchased Kettle Brand potato chips and TIAS tortilla chips over a four-year time period. On January 9, 2014, Dominika Surzyn brought a similar class action against Diamond relating to our TIAS tortilla chips in federal court for the
Northern District of California. Surzyn purports to represent a class of California consumers who purchased said Kettle TIAS products since January 9, 2010.
On April 2, 2014, Richard Hall filed a putative class action against Diamond in San Francisco Superior Court, alleging that certain
ingredients contained in our Kettle Brand chips and TIAS Tortilla Chips are not natural and seeking damages and injunctive relief. Plaintiff purports to bring this action on his own behalf, as well as on behalf of all consumers in the United States,
or alternatively, California, within four years of the filing of the complaint who purchased certain of Diamond’s Kettle Brand Chips or Kettle Brand TIAS tortilla chips.
Other
Diamond is
involved in various legal actions in the ordinary course of our business. We do not believe it is feasible to predict or determine the outcome or resolution of the above litigation proceedings, or to estimate the amounts of, or potential range of,
loss with respect to those proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or settlements that could require
substantial payments by us, which could have a material impact on Diamond’s financial position, results of operations and cash flows.
(14) Segment Reporting
The Company’s 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 Company’s two reportable segments are Snacks and Nuts. The Snacks reportable segment predominately includes
products sold under Kettle U.S., Kettle U.K. and Pop Secret. The Nuts reportable segment predominantly includes products sold under Emerald and Diamond of California.
The Company evaluates the performance of its segments based on net sales and gross profit. Gross profit is calculated as net sales less all
cost of sales. The Company’s CODM does not receive or utilize asset information to evaluate performance of operating segments, so asset-related information has not been presented. The accounting policies of the Company’s segments are the
same as those described in the summary of critical accounting policies set forth in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”
28
The Company’s net sales and gross profit by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Snacks
|
|
$
|
114,255
|
|
|
$
|
104,201
|
|
|
$
|
343,601
|
|
|
$
|
320,865
|
|
|
Nuts
|
|
|
76,637
|
|
|
|
80,704
|
|
|
|
302,536
|
|
|
|
343,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
190,892
|
|
|
$
|
184,905
|
|
|
$
|
646,137
|
|
|
$
|
664,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Snacks
|
|
$
|
41,699
|
|
|
$
|
36,684
|
|
|
$
|
123,660
|
|
|
$
|
109,812
|
|
|
Nuts
|
|
|
3,397
|
|
|
|
6,666
|
|
|
|
35,297
|
|
|
|
42,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,096
|
|
|
$
|
43,350
|
|
|
$
|
158,957
|
|
|
$
|
152,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|