UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-Q
_____________________________
(Mark One) |
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2015
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51439
_____________________________
DIAMOND FOODS, INC.
(Exact name of registrant as specified in its charter)
_____________________________
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| | |
Delaware | | 20-2556965 |
(State of Incorporation) | | (IRS Employer Identification No.) |
| |
600 Montgomery Street, 13th Floor San Francisco, California | | 94111-2702 |
(Address of Principal Executive Offices) | | (Zip Code) |
415-445-7444
(Telephone No.)
_____________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | | |
Large accelerated filer | ¨ | Accelerated filer | x |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
Number of shares of common stock outstanding as of May 29, 2015: 31,477,363
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements, including statements about our future operating performance and results, commodity prices, liquidity position and sufficiency, brand portfolio and performance, availability of raw materials, our position in the walnut industry, the effectiveness of internal controls and remediating material weaknesses. These forward-looking statements are based on our assumptions, expectations and projections about future events only as of the date of this report. Many of our forward-looking statements include discussions of trends and anticipated developments under the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the periodic reports that we file with the U.S. Securities and Exchange Commission (the "SEC"). We use the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “may” and other similar expressions to identify forward-looking statements that discuss our future expectations, contain projections of our results of operations or financial condition or state other “forward-looking” information. You also should carefully consider other cautionary statements elsewhere in this report and in other documents we file from time to time with the SEC. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report. Actual results may differ materially from what we currently expect because of many risks and uncertainties such as: availability and cost of walnuts and other raw materials; inability to increase prices for our products if commodity prices rise; increasing competition and possible loss of key customers; risks associated with our operations outside the U.S., including foreign currency fluctuations; pressure to decrease prices; unexpected delays or increased costs in implementing our business strategies; upgrading our information technology infrastructure, including implementation of a new Enterprise Resource Planning software platform; changes in consumer preferences for snack and nut products; risks relating to our indebtedness, including the cost of our debt and its effect on our ability to respond to changes in our business, markets and industry; the dilutive impact of equity issuances; risks relating to litigation and regulatory factors including changes in food safety, advertising and labeling laws and regulations; uncertainties relating to our relations with growers; and general economic and capital markets conditions.
As used in this Quarterly Report, the terms “Diamond Foods,” “Diamond,” “Company,” “registrant,” “we,” “us,” and “our” mean Diamond Foods, Inc. and its direct and indirect subsidiaries unless the context indicates otherwise.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
(Unaudited)
|
| | | | | | | | | | | |
| April 30, 2015 | | July 31, 2014 | | April 30, 2014 |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 32,172 |
| | $ | 5,318 |
| | $ | 7,003 |
|
Trade receivables, net | 97,078 |
| | 95,505 |
| | 87,721 |
|
Inventories, net | 174,511 |
| | 124,273 |
| | 162,765 |
|
Deferred income taxes | 5,130 |
| | 4,154 |
| | — |
|
Prepaid income taxes | 246 |
| | 5,196 |
| | 53 |
|
Prepaid expenses and other current assets | 11,383 |
| | 9,425 |
| | 10,576 |
|
Total current assets | 320,520 |
| | 243,871 |
| | 268,118 |
|
Property, plant and equipment, net | 133,675 |
| | 131,891 |
| | 131,033 |
|
Goodwill | 401,815 |
| | 410,720 |
| | 410,261 |
|
Other intangible assets, net | 375,360 |
| | 392,358 |
| | 393,828 |
|
Equity method investments
| 1,873 |
| | — |
| | — |
|
Other long-term assets | 12,524 |
| | 13,994 |
| | 20,045 |
|
Total assets | $ | 1,245,767 |
| | $ | 1,192,834 |
| | $ | 1,223,285 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Current portion of long-term debt, net | $ | 4,165 |
| | $ | 10,088 |
| | $ | 4,062 |
|
Accounts payable and accrued liabilities | 116,857 |
| | 117,677 |
| | 109,163 |
|
Payable to growers | 60,870 |
| | 5,784 |
| | 58,290 |
|
Total current liabilities | 181,892 |
| | 133,549 |
| | 171,515 |
|
Long-term obligations, net | 634,185 |
| | 637,327 |
| | 638,351 |
|
Deferred income taxes | 113,634 |
| | 115,902 |
| | 108,457 |
|
Other liabilities | 19,423 |
| | 22,256 |
| | 20,927 |
|
Commitments and contingencies (Note 14) |
| |
| |
|
Stockholders’ equity: | | | | | |
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares; no shares issued or outstanding | — |
| | — |
| | — |
|
Common stock, $0.001 par value; Authorized: 100,000,000 shares; 31,985,284, 31,824,701 and 31,815,416 shares issued and 31,486,727, 31,380,758 and 31,387,890 shares outstanding at April 30, 2015, July 31, 2014, and April 30, 2014, respectively | 31 |
| | 31 |
| | 31 |
|
Treasury stock, at cost: 498,557, 443,943 and 427,526 shares held at April 30, 2015, July 31, 2014, and April 30, 2014, respectively | (13,974 | ) | | (12,418 | ) | | (11,927 | ) |
Additional paid-in capital | 603,421 |
| | 594,608 |
| | 592,421 |
|
Accumulated other comprehensive income | 4,048 |
| | 23,633 |
| | 23,708 |
|
Retained deficit | (296,893 | ) | | (322,054 | ) | | (320,198 | ) |
Total stockholders’ equity | 296,633 |
| | 283,800 |
| | 284,035 |
|
Total liabilities and stockholders’ equity | $ | 1,245,767 |
| | $ | 1,192,834 |
| | $ | 1,223,285 |
|
See notes to condensed consolidated financial statements.
DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Nine Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net sales | $ | 186,067 |
| | $ | 190,892 |
| | $ | 662,355 |
| | $ | 646,137 |
|
Cost of sales | 133,110 |
| | 145,796 |
| | 488,850 |
| | 487,180 |
|
Gross profit | 52,957 |
| | 45,096 |
| | 173,505 |
| | 158,957 |
|
Operating expenses: | | | | | | |
|
Selling, general and administrative | 27,714 |
| | 30,735 |
| | 86,100 |
| | 121,113 |
|
Advertising | 8,311 |
| | 8,590 |
| | 29,835 |
| | 32,377 |
|
Loss on warrant liability | — |
| | 1,995 |
| | — |
| | 25,933 |
|
Warrant exercise fee | — |
| | 15,000 |
| | — |
| | 15,000 |
|
Total operating expenses | 36,025 |
| | 56,320 |
| | 115,935 |
| | 194,423 |
|
Income (loss) from operations | 16,932 |
| | (11,224 | ) | | 57,570 |
| | (35,466 | ) |
Loss on debt extinguishment | — |
| | 83,004 |
| | — |
| | 83,004 |
|
Interest expense, net | 10,052 |
| | 10,582 |
| | 30,561 |
| | 41,534 |
|
Income (loss) before income taxes and equity investee | 6,880 |
| | (104,810 | ) | | 27,009 |
| | (160,004 | ) |
Income taxes | 626 |
| | 823 |
| | 1,884 |
| | 2,842 |
|
Net income (loss) before interest in income of equity investee | 6,254 |
| | (105,633 | ) | | 25,125 |
| | (162,846 | ) |
Interest in income of equity investee, net | 36 |
| | — |
| | 36 |
| | — |
|
Net income (loss) | $ | 6,290 |
| | $ | (105,633 | ) | | $ | 25,161 |
| | $ | (162,846 | ) |
Income (loss) per share: | | | | | | | |
Basic | $ | 0.20 |
| | $ | (3.63 | ) | | $ | 0.80 |
| | $ | (6.69 | ) |
Diluted | $ | 0.20 |
| | $ | (3.63 | ) | | $ | 0.79 |
| | $ | (6.69 | ) |
Shares used to compute income (loss) per share: | | | | | | |
|
Basic | 31,184 |
| | 29,119 |
| | 31,101 |
| | 24,338 |
|
Diluted | 31,671 |
| | 29,119 |
| | 31,517 |
| | 24,338 |
|
See notes to condensed consolidated financial statements.
DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Nine Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net income (loss) | $ | 6,290 |
| | $ | (105,633 | ) | | $ | 25,161 |
| | $ | (162,846 | ) |
Other comprehensive income (loss): | | |
| | | |
|
Foreign currency translation adjustments, net of tax(1) | 3,937 |
| | 4,601 |
| | (19,556 | ) | | 19,977 |
|
Change in pension liabilities, net of tax(2) | | |
| | | |
|
Less: amortization of prior loss included in net periodic pension cost | (17 | ) | | (92 | ) | | (29 | ) | | (276 | ) |
Other comprehensive income (loss) | 3,920 |
| | 4,509 |
| | (19,585 | ) | | 19,701 |
|
Comprehensive income (loss) | $ | 10,210 |
| | $ | (101,124 | ) | | $ | 5,576 |
| | $ | (143,145 | ) |
| |
(1) | Net of tax of $(0.3) million for the three months and of $1.1 million for the nine months ended April 30, 2015, respectively, and net of tax of nil for both the three and nine months ended April 30, 2014. |
| |
(2) | Net of tax of nil for the three and nine months ended April 30, 2015 and April 30, 2014, respectively. |
See notes to condensed consolidated financial statements.
DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| | | | | | | |
| Nine Months Ended April 30, |
| 2015 | | 2014 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income (loss) | $ | 25,161 |
| | $ | (162,846 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 21,569 |
| | 24,152 |
|
Deferred income taxes | 1,407 |
| | 1,235 |
|
Stock-based compensation | 7,159 |
| | 5,458 |
|
Loss on warrant liability | — |
| | 25,933 |
|
Loss on debt extinguishment | — |
| | 54,358 |
|
Repayment of Oaktree Senior Notes payment-in-kind interest | — |
| | (44,110 | ) |
Repayment of Oaktree Senior Notes original issued discount | — |
| | (50,014 | ) |
Debt prepayment penalty | — |
| | (3,600 | ) |
Loss on securities settlement | — |
| | 38,136 |
|
Gain on shareholder derivative case | — |
| | (1,600 | ) |
Original issue discount amortization, Term Loan Facility | 1,208 |
| | 2,095 |
|
Debt issuance cost amortization | 3,175 |
| | 2,518 |
|
Payment-in-kind interest on debt | — |
| | 16,428 |
|
Equity in earnings of investee, net of cash distributions | (36 | ) | | — |
|
Other, net | 395 |
| | 1,514 |
|
Changes in assets and liabilities: | | | |
Trade receivables, net | (4,986 | ) | | 17,910 |
|
Inventories, net | (50,859 | ) | | (46,792 | ) |
Prepaid expenses and other current assets and income taxes | 2,962 |
| | 2,060 |
|
Other assets | (76 | ) | | (5,103 | ) |
Accounts payable and accrued liabilities | 2,224 |
| | (30,854 | ) |
Payable to growers | 55,086 |
| | 52,194 |
|
Other liabilities | (845 | ) | | (991 | ) |
Net cash provided by operating activities | 63,544 |
| | (101,919 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property, plant and equipment | (20,680 | ) | | (14,643 | ) |
Investment in equity method investee, net | (1,923 | ) | | — |
|
Loan to equity investee | (1,253 | ) | | — |
|
Proceeds from sale of property, plant and equipment and other | — |
| | 56 |
|
Other, net | 237 |
| | 140 |
|
Net cash used in investing activities | (23,619 | ) | | (14,447 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Repayments of revolving line of credit under the Secured Credit Facility, net | (6,000 | ) | | (154,000 | ) |
Payments of long-term debt and notes payable | (6,803 | ) |
| (6,056 | ) |
Repayment of Oaktree Senior Notes | — |
| | (181,789 | ) |
Repayment of long-term debt and notes payable | — |
| | (213,636 | ) |
Proceeds from Term Loan Facility, net of original issue discount | — |
| | 412,925 |
|
Proceeds from Notes issuance | — |
| | 230,000 |
|
Debt issuance costs | — |
| | (14,356 | ) |
Proceeds from warrant exercise | — |
| | 44,209 |
|
Purchase of treasury stock | (1,555 | ) | | (908 | ) |
Other, net | 1,651 |
| | 1,131 |
|
Net cash (used in) provided by financing activities | (12,707 | ) | | 117,520 |
|
Effect of exchange rate changes on cash | (364 | ) | | (36 | ) |
Net increase in cash and cash equivalents | 26,854 |
| | 1,118 |
|
Cash and cash equivalents: | | | |
Beginning of period | 5,318 |
| | 5,885 |
|
End of period | $ | 32,172 |
| | $ | 7,003 |
|
Supplemental disclosure of cash flow information: | | | |
Cash paid (refunded) during the period for: | | | |
Interest | $ | 31,805 |
| | $ | 16,445 |
|
Income taxes | (4,595 | ) | | 563 |
|
Non-cash investing activity: | | | |
Accrued capital expenditures | 1,292 |
| | 1,057 |
|
Capital lease | 345 |
| | 112 |
|
See notes to condensed consolidated financial statements.
DIAMOND FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended April 30, 2015 and 2014
(In thousands, except share and per share information unless otherwise noted)
(Unaudited)
(1) Organization, Basis of Presentation and Principles of Consolidation
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.
The accompanying unaudited condensed consolidated financial statements of Diamond (“Condensed Consolidated Financial Statements”) 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 Condensed Consolidated Financial Statements have been prepared on the same basis as the audited consolidated financial statements at and for the fiscal year ended July 31, 2014, and in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s Condensed Consolidated Financial Statements. The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company uses the equity method to account for investments in which the Company exercises significant influence over but does not control. The Condensed Consolidated Balance Sheet as of July 31, 2014, included herein was derived from the audited consolidated financial statements as of that date but does not include all disclosures required by GAAP. Therefore, the Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2014 Annual Report on Form 10-K. Operating results for the three and nine months ended April 30, 2015 are not necessarily indicative of the results that may be expected for any future periods.
Certain prior period amounts have been reclassified to conform to the current period presentation. There was no impact to net income or stockholders' equity for each prior period reclassification made.
Diamond reports its operating results on the basis of a fiscal year that starts August 1 and ends July 31. Diamond refers to the fiscal years ended July 31, 2015, 2014, 2013, 2012, as “fiscal 2015,” “fiscal 2014,” “fiscal 2013” and “fiscal 2012”, respectively.
(2) Recent Accounting Pronouncements
In January 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2014-8, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an entity.” The new guidance provides new criteria for reporting discontinued operations and specifically indicates a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on the Company’s operations and financial results. The new guidance also requires expanded disclosures for discontinued operations. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2014. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers (Topic 606).” The new guidance provides new criteria for recognizing revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance also 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. In April 2015, the FASB issued a proposed ASU that would defer the effective date of the new revenue recognition standard by one year. The FASB also proposed permitting early adoption of the standard, but not before the original effective date which is for annual reports beginning after December 15, 2016. The Company is currently assessing the provisions of the guidance and has not determined the impact of the adoption of this guidance on its consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718).” The new guidance provides new criteria for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40).” The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs." The new guidance simplifies presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
(3) Investment
On February 3, 2015, the Company purchased 51% of the outstanding shares of Yellow Chips Holding B.V. (“Yellow Chips”), which produces vegetable chips and organic potato chips primarily for the Dutch and other European markets. The transaction was undertaken primarily to secure manufacturing of vegetable chips for the European and U.K. markets. The investment is accounted for under the equity method and had a carrying value at April 30, 2015, of $1.9 million. The Company also had a loan receivable outstanding with Yellow Chips of $1.3 million at April 30, 2015.
Provided that Yellow Chips reaches an agreed upon EBITDA on or around January 1, 2016, the Company will pay an additional €0.5 million of cash consideration as deferred consideration for the purchase of the 51% interest as part of the agreement. The agreement also includes call and put options on the remaining 49% outstanding equity that the Company or the other shareholders can exercise if a certain EBITDA target is met after 2018 or under other circumstances as well as rights for the Company to sell its shareholding and require the remaining shareholders to sell their shareholdings to the same buyer in the event that the Company wants to sell its shares if the EBITDA threshold is not met, and similar rights for the other shareholders to sell their shares and require the Company to also sell its shares to the same buyer if the Company has not first exercised its right to initiate a sale. If the party initiating such a sale does not require the other shareholder(s) to sell, the other shareholder(s) can in any case choose to require the same buyer to also buy their shares.
(4) Financial Instruments
In January 2015, the Company purchased 175 corn call option commodity derivatives with a total notional amount of approximately $0.3 million. These purchases were in accordance with Company policy to mitigate the market price risk associated with the anticipated raw material purchase requirements, specifically future corn purchases expected to be made by the Company. The Company accounts for commodity derivatives as non-hedging derivatives.
The fair values of the Company’s derivative instruments as of April 30, 2015, July 31, 2014 and April 30, 2014, were as follows: |
| | | | | | | | | | | | | |
Asset & Liability Derivatives | Balance Sheet Location | | Fair Value |
| | | 4/30/2015 | | 7/31/2014 | | 4/30/2014 |
Derivatives not designated as hedging instruments: | | | | | | | |
Commodity contracts | Prepaid and other current assets | | $ | 195 |
| | $ | 11 |
| | $ | 666 |
|
Total | | | $ | 195 |
| | $ | 11 |
| | $ | 666 |
|
Commodity derivative gains and losses were not material to the Consolidated Statements of Operations for the three and nine months ended April 30, 2015 and April 30, 2014.
A warrant was exercised in the third quarter of fiscal 2014, as a result of the Warrant Exercise Transaction, as described in Note 10 to the Notes to the Condensed Consolidated Financial Statements and accordingly, for the three and nine months ended April 30, 2015, there were no effects of the Company's warrant liability on the Condensed Consolidated Statements of Operations. For the three and nine months ended April 30, 2014, the Company recognized a loss of $2.0 million and $25.9 million, respectively, associated with the warrants in Loss on warrant liability on the Consolidated Statements of Operations.
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
The Company values the commodity derivatives using Level 2 inputs. The value of the commodity contracts is calculated utilizing the number of contracts, as measured in bushels, multiplied by the price of corn per bushel obtained from the Chicago Mercantile Exchange.
The Company performed a final re-measurement of its warrant liability on February 18, 2014. The warrant liability measured at fair value on a recurring basis was $84.1 million as of February 18, 2014. 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 previously used in the valuation were expected volatility and the probability to exchange $75 million of the senior notes for convertible preferred stock upon achievement of certain profitability targets (the “Special Redemption”). The expected volatility used to measure the warrant liability at fair value was 45.0% as of February 18, 2014. As provided in certain agreements between Diamond and Oaktree Capital. L.P. (“Oaktree”), described in Note 10 to the Notes to the Condensed Consolidated Financial Statements, based on the Company’s operating results for the six months ended January 31, 2013, the Special Redemption did not occur. As such, the probability of Special Redemption was not applicable for the warrant liability valuation performed as of February 18, 2014.
Assets and Liabilities Disclosed at Fair Value
The fair value of certain financial instruments, including cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate the amounts recorded in the balance sheet because of the relatively short term nature of these financial instruments. The fair value of notes payable and long-term obligations at the end of each fiscal period approximates the amounts recorded in the balance sheet based on information available to the Company with respect to current interest rates and terms for similar financial instruments, except for the 7.000% Senior Notes (the "Notes") issued during the third quarter of fiscal 2014. The Company measured the $230.0 million Notes based on Level 3 inputs, and determined the fair value was $238.1 million as of April 30, 2015, and $228.8 million as of July 31, 2014. The fair value of the Notes was not materially different than the carrying value as of April 30, 2014. The fair value was estimated using a discounted cash flow methodology with unobservable inputs including the market yield and redemption rate. The discounted cash flow used a risk adjusted yield to present value the contractual cash flows. Refer to Note 10 to the Notes to the Condensed Consolidated Financial Statements for further discussion on the Notes.
(5) Stock-Based Compensation
The 2015 Equity Incentive Plan (the “Plan”) was approved by the Company's stockholders in January 2015 and provides for the awarding of options, restricted stock awards, stock bonus awards, restricted stock units, stock appreciation rights, and performance awards. A total of 1,000,000 shares plus certain rollover shares from the Company's 2005 Equity Incentive Plan are reserved and available for grant and issuance pursuant to this Plan as of the date of approval of the Plan. The Compensation Committee of the Board of Directors administers the Plan.
The Company 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 and performance stock unit awards are recognized as stock-based compensation expense over the vesting period. Equity awards may be granted to officers, other employees, consultants and directors.
Stock-Based Compensation Expense: The Company recorded total stock-based compensation expense of $2.6 million and $7.2 million for the three and nine months ended April 30, 2015, respectively, and $2.0 million and $5.5 million for the three and nine months ended April 30, 2014, respectively.
The following table summarizes stock-based compensation expense:
|
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Nine Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Stock options | $ | 756 |
| | $ | 860 |
| | $ | 2,477 |
| | $ | 2,420 |
|
Restricted stock | 583 |
| | 697 |
| | 1,770 |
| | 1,871 |
|
Restricted stock units | 852 |
| | 438 |
| | 2,090 |
| | 1,167 |
|
Performance share units | 359 |
| | — |
| | 822 |
| | — |
|
Total | $ | 2,550 |
| | $ | 1,995 |
| | $ | 7,159 |
| | $ | 5,458 |
|
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. Since the Company does not currently pay dividends, the dividend rate variable in the Black-Scholes option-pricing model is zero.
For the three and nine months ended April 30, 2015 and April 30, 2014, assumptions used in the Black-Scholes model are presented below:
|
| | | | | | | |
| Three Months Ended April 30, | | Nine Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Average expected life, in years | NA | | 5.50 | | 5.50 | | 5.50-6.06 |
Expected volatility | NA | | 54.68%-54.77% | | 53.16% | | 54.68%-55.84% |
Risk-free interest rate | NA | | 1.96%-2.04% | | 1.82% | | 1.69%-2.04% |
Dividend rate | NA | | 0.00% | | 0.00% | | 0.00% |
The following table summarizes option activity during the nine months ended April 30, 2015:
|
| | | | | | | | | | | | |
| Number of shares (in thousands) | | Weighted average exercise price per share | | Weighted average remaining contractual life (in years) | | Aggregate intrinsic value (in thousands) |
Outstanding at July 31, 2014 | 1,496 |
| | $ | 24.79 |
| | | | |
Granted | 10 |
| | 30.11 |
| | | | |
Exercised | (98 | ) | | 16.92 |
| | | | |
Cancelled/Forfeited | (67 | ) | | 44.39 |
| | | | |
Outstanding at April 30, 2015 | 1,341 |
| | 24.42 |
| | 6.9 | | $ | 11,068 |
|
Exercisable at April 30, 2015 | 938 |
| | $ | 26.14 |
| | 6.4 | | $ | 7,273 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Nine Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Total intrinsic value of stock options exercised | $ | 397 |
| | $ | 183 |
| | $ | 1,245 |
| | $ | 454 |
|
Cash received from stock option exercises | $ | 483 |
| | $ | 387 |
| | $ | 1,651 |
| | $ | 1,107 |
|
There were nil and 10,000 stock options granted during the three and nine months ended April 30, 2015, respectively, and 30,000 and 219,601 stock options granted during the three and nine months ended April 30, 2014, respectively. The weighted average grant date fair value per share of stock options granted was $14.86 for the nine months ended April 30, 2015. The weighted average grant date fair value per share of stock options granted was $16.14 and $11.88 during the three and nine months ended April 30, 2014, respectively. The fair value per share of stock options vested was $12.50 and $11.69 during the three and nine months ended April 30, 2015, respectively, and $10.24 and $10.66 for the three and nine months ended April 30, 2014, respectively. There were 28,229 and 97,592 stock options exercised during the three and nine months ended April 30, 2015, respectively, and 19,687 and 63,637 stock options exercised in the three and nine months ended April 30, 2014, respectively.
The following table summarizes nonvested stock option activity during the nine months ended April 30, 2015:
|
| | | | | | |
| Number of shares (in thousands) | | Weighted average grant date fair value per share |
Nonvested at July 31, 2014 | 660 |
| | $ | 10.81 |
|
Granted | 10 |
| | 14.86 |
|
Vested | (242 | ) | | 11.69 |
|
Cancelled/Forfeited | (25 | ) | | 12.24 |
|
Nonvested at April 30, 2015 | 403 |
| | 10.29 |
|
As of April 30, 2015, approximately $3.3 million of total unrecognized compensation expense related to nonvested stock options is expected to be recognized over a weighted average period of 1.6 years.
Restricted Stock and Restricted Stock Unit Awards: Restricted stock and restricted stock unit activity during the nine months ended April 30, 2015:
|
| | | | | | | | | | | | | |
| Restricted Stock | | Restricted Stock Units |
| Number of shares (in thousands) | | Weighted average grant date fair value per share | | Number of units (in thousands) | | Weighted average grant date fair value per share |
Outstanding at July 31, 2014 | 366 |
| | $ | 20.47 |
| | 310 |
| | $ | 19.72 |
|
Granted | — |
| | — |
| | 234 |
| | 28.64 |
|
Vested | (65 | ) | | 28.37 |
| | (84 | ) | | 19.41 |
|
Cancelled/Forfeited | (20 | ) | | 20.38 |
| | (26 | ) | | 22.00 |
|
Outstanding at April 30, 2015 | 281 |
| | 18.67 |
| | 434 |
| | 24.44 |
|
There were no restricted stock awards granted during the three and nine months ended April 30, 2015, and nil and 95,735 restricted stock awards granted during the three and nine months ended April 30, 2014, respectively. The weighted average grant date fair value per share of restricted stock granted during the nine months ended April 30, 2014 was $20.89. The weighted average fair value per share at the grant date of restricted stock vested was $41.69 and $28.37 for the three and nine months ended April 30, 2015, respectively. The weighted average fair value per share at the grant date of restricted stock vested was $41.69 and $31.68 for the three and nine months ended April 30, 2014, respectively. The total intrinsic value of restricted stock vested during the three and nine months ended April 30, 2015 was $0.2 million and $1.8 million, respectively, and was $0.2 million and $1.4 million for the three and nine months ended April 30, 2014, respectively. As of April 30, 2015, there was $3.2 million of unrecognized compensation expense related to nonvested restricted stock expected to be recognized over a weighted average period of 1.7 years.
There were 8,277 and 233,505 restricted stock units granted during the three and nine months ended April 30, 2015, respectively, and 9,230 and 196,695 restricted stock units granted during the three and nine months ended April 30, 2014, respectively. The weighted average grant date fair value per share of restricted stock units granted during the three and nine months ended April 30, 2015 was $28.39 and $28.64, respectively, and was $31.41 and $21.60 during the three and nine months ended April 30, 2014, respectively. The weighted average grant date fair value per share of restricted stock units vested was $21.85 and $19.41 for the three and nine months ended April 30, 2015, respectively, and was $15.01 and $16.84 during the three and nine months ended April 30, 2014, respectively. The total intrinsic value of restricted stock units vested during the three and nine months ended April 30, 2015 was $0.2 million and $2.4 million, respectively, and was $0.1 million and $1.3 million for the three and nine months ended April 30, 2014, respectively. As of April 30, 2015, there was $8.3 million of unrecognized compensation expense related to nonvested restricted stock units expected to be recognized over a weighted average period of 2.7 years.
Performance Stock Units: In the first quarter of fiscal 2015, the Company began granting performance stock units under the 2005 Equity Incentive Plan. Each performance stock unit represents one equivalent share of the Company's common stock. The performance stock units cliff vest after three years based on the achievement of a performance based market condition, except that 40% of the October 2014 awards will vest after two years if the performance based market condition is achieved. The number of shares of common stock ultimately issued in connection with these performance share units is based on a measurement of the comparative performance of the Company's common stock against the total shareholder return of a selected group of peer companies. The number of shares of common stock ultimately issued will range from zero to two hundred percent of the granted performance stock units.
Compensation expense related to these performance stock units that are classified as market condition awards under GAAP is determined based on the grant-date fair value times the number of shares issuable pursuant to the award and is recognized over the vesting period. The fair value per performance share unit at the grant date was $32.44 which was measured using the Monte-Carlo model. The Monte-Carlo option-pricing model uses similar input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination the possibility that the performance based market condition may not be satisfied. Compensation costs related to awards with a market-based condition are recognized regardless of whether the market condition is satisfied. Compensation cost is not reversed if the achievement of the market condition does not occur.
There were no performance stock units granted for the three and nine months ended April 30, 2014. Assumptions used in the Monte-Carlo model for the nine months ended April 30, 2015 are presented below. Since the Company does not currently pay dividends, the dividend rate variable is zero.
|
| |
| Nine Months Ended April 30, 2015 |
Expected term, in years | 2.81 |
Expected volatility | 52.76% |
Risk-free interest rate | 0.89% |
Dividend rate | 0.00% |
Performance stock unit activity during the nine months ended April 30, 2015:
|
| | | | | | | | | | | | |
| Number of Units (in thousands) | | Weighted average grant date fair value | | Weighted average remaining contractual life (in years) | | Aggregate intrinsic value (in thousands) |
Outstanding at July 31, 2014 | — |
| | $ | — |
| | | | |
Granted | 123 |
| | 32.44 |
| | | | |
Vested | — |
| | — |
| | | | |
Cancelled/Forfeited | (3 | ) | | 32.44 |
| | | | |
Outstanding at April 30, 2015 | 120 |
| | 32.44 |
| | 2.4 | | $ | 3,370 |
|
There were nil and 122,787 performance stock units granted during the three and nine months ended April 30, 2015, respectively. The weighted average grant date fair value per share of performance stock units granted during the nine months ended April 30, 2015 was $32.44. As of April 30, 2015, there was $2.9 million of unrecognized compensation expense related to nonvested performance stock units expected to be recognized over a weighted average period of 2.4 years.
(6) 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.
The computations for basic and diluted earnings (loss) per share are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Nine Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Numerator: | | | | | | | |
Net income (loss) | $ | 6,290 |
| | $ | (105,633 | ) | | $ | 25,161 |
| | $ | (162,846 | ) |
Less: income allocated to participating securities | (57 | ) | | — |
| | (259 | ) | | — |
|
Income (loss) attributable to common shareholders - basic | 6,233 |
| | (105,633 | ) | | 24,902 |
| | (162,846 | ) |
Add: undistributed income attributable to participating securities | 57 |
| | — |
| | 259 |
| | — |
|
Less: undistributed income reallocated to participating securities | (56 | ) | | — |
| | (256 | ) | | — |
|
Income (loss) attributable to common shareholders - diluted | $ | 6,234 |
| | $ | (105,633 | ) | | $ | 24,905 |
| | $ | (162,846 | ) |
Denominator: | | | | | | | |
Weighted average shares outstanding - basic | 31,184 |
| | 29,119 |
| | 31,101 |
| | 24,338 |
|
Dilutive shares - stock options, RSU's, PSU's | 487 |
| | — |
| | 416 |
| | — |
|
Weighted average shares outstanding - diluted | 31,671 |
| | 29,119 |
| | 31,517 |
| | 24,338 |
|
Income (loss) per share attributable to common shareholders (1): | | | | | | | |
Basic | $ | 0.20 |
| | $ | (3.63 | ) | | $ | 0.80 |
| | $ | (6.69 | ) |
Diluted | $ | 0.20 |
| | $ | (3.63 | ) | | $ | 0.79 |
| | $ | (6.69 | ) |
| |
(1) | Computations may reflect rounding adjustments. |
The Company was in an income position for the three and nine months ended April 30, 2015 and included stock options, restricted stock units, and performance share units in the diluted earnings per share calculation to the extent their effect was dilutive. Options to purchase 129,243 and 208,037 shares of common stock were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of Diamond’s common stock of $29.59 and $28.61 for the three and nine months ended April 30, 2015 and therefore their effect would be antidilutive. For the three and nine months ended April 30, 2014, the Company was in a loss position and, therefore, potential shares related to stock options and restricted stock units were excluded in the computation of diluted loss per share because their effect was antidilutive.
(7) Balance Sheet Items
Inventories consisted of the following:
|
| | | | | | | | | | | |
| April 30, 2015 | | July 31, 2014 | | April 30, 2014 |
Raw materials and supplies | $ | 73,568 |
| | $ | 39,726 |
| | $ | 71,630 |
|
Work in process | 41,429 |
| | 24,946 |
| | 31,699 |
|
Finished goods | 59,514 |
| | 59,601 |
| | 59,436 |
|
Total | $ | 174,511 |
| | $ | 124,273 |
| | $ | 162,765 |
|
All inventories are accounted for on a lower of cost or market basis, with cost historically determined using a combination of first-in first-out ("FIFO") and weighted average cost. Beginning in the first fiscal quarter of 2015, the Company changed the inventory valuation method from FIFO to weighted average cost for certain inventories. The effect of this change was not material to the Company's Condensed Consolidated Financial Statements for the three and nine months ended April 30, 2014.
In the third quarter of fiscal 2015, the Company set its final walnut cost for the year which resulted in a pre-tax decrease in cost of sales of approximately $0.9 million for walnut sales recognized in the first six months of fiscal 2015.
Accounts payable and accrued liabilities consisted of the following:
|
| | | | | | | | | | | |
| April 30, 2015 | | July 31, 2014 | | April 30, 2014 |
Accounts payable | $ | 63,324 |
| | $ | 64,673 |
| | $ | 56,142 |
|
Accrued promotions | 27,878 |
| | 22,638 |
| | 23,254 |
|
Accrued salaries and benefits | 13,084 |
| | 13,364 |
| | 11,417 |
|
Accrued taxes | 4,557 |
| | 4,706 |
| | 10,057 |
|
Accrued interest | 2,151 |
| | 7,336 |
| | 3,372 |
|
Accrued current lease obligations (1) | 2,784 |
| | 2,620 |
| | 2,569 |
|
Other | 3,079 |
| | 2,340 |
| | 2,352 |
|
Total | $ | 116,857 |
| | $ | 117,677 |
| | $ | 109,163 |
|
| |
(1) | Long-term portion of capital leases are reflected in Other liabilities within the Condensed Consolidated Balance Sheets. |
During fiscal 2013, the Company announced a plan to consolidate its manufacturing operations within the Nuts reportable segment and to close its facility in Fishers, Indiana. In fiscal 2013, the Company also recorded a liability within Other liabilities associated with the Fishers facility future lease obligation. As of April 30, 2015, the Company has outstanding $3.3 million associated with the Fishers facility future lease obligation. In the first quarter of fiscal 2015, the Company revised the Fishers facility future lease obligation based on updated assumptions associated with utility contractual payments and increased the liability by $0.2 million with the corresponding expense recorded within Selling, general and administrative expenses. The liability extends through the lease term and will expire in 2019.
(8) Property, Plant and Equipment
Property, plant and equipment consisted of the following:
|
| | | | | | | | | | | | |
| April 30, 2015 | | July 31, 2014 | | April 30, 2014 | |
Land and improvements | $ | 10,914 |
| | $ | 11,622 |
| | $ | 11,584 |
| |
Buildings and improvements | 59,697 |
| | 59,260 |
| | 59,089 |
| |
Machinery, equipment and software | 218,392 |
| | 217,159 |
| | 215,507 |
| |
Construction in progress | 25,679 |
| | 16,368 |
| | 11,866 |
| |
Capital leases (1) | 16,594 |
| | 16,678 |
| | 16,653 |
| |
Total | 331,276 |
| | 321,087 |
| | 314,699 |
| |
Less: accumulated depreciation | (190,246 | ) | | (184,088 | ) | | (179,577 | ) | |
Less: accumulated amortization | (7,355 | ) | | (5,108 | ) | | (4,089 | ) | |
Property, plant and equipment, net | $ | 133,675 |
| | $ | 131,891 |
| | $ | 131,033 |
| |
(1) Gross amounts of assets recorded under capital leases represent machinery, equipment and software as of April 30, 2015, July 31, 2014, and April 30, 2014.
Depreciation and amortization expense, excluding amortization expense for intangible assets, was $5.2 million and $15.7 million, respectively, for the three and nine months ended April 30, 2015, and was $5.8 million and $18.1 million, respectively, for the three and nine months ended April 30, 2014. For amortization expense of Other intangible assets, net see Note 9 to the Notes to the Condensed Consolidated Financial Statements
(9) Intangible Assets and Goodwill
The changes in the carrying amount of goodwill were as follows:
|
| | | | | | | | | | | |
| Snacks | | Nuts | | Total |
Balance as of July 31, 2013 | | | | | |
Goodwill | $ | 328,490 |
| | $ | 72,635 |
| | $ | 401,125 |
|
Accumulated impairment losses | — |
| | — |
| | — |
|
| 328,490 |
| | 72,635 |
| | 401,125 |
|
Goodwill acquired during the year | — |
| | — |
| | — |
|
Translation adjustments | 9,136 |
| | — |
| | 9,136 |
|
Balance as of April 30, 2014 | | | | | |
Goodwill | 337,626 |
| | 72,635 |
| | 410,261 |
|
| $ | 337,626 |
| | $ | 72,635 |
| | $ | 410,261 |
|
Balance as of July 31, 2014 | | | | | |
Goodwill | $ | 338,085 |
| | $ | 72,635 |
| | $ | 410,720 |
|
Accumulated impairment losses | — |
| | — |
| | — |
|
| 338,085 |
| | 72,635 |
| | 410,720 |
|
Goodwill acquired during the year | — |
| | — |
| | — |
|
Translation adjustments | (8,905 | ) | | — |
| | (8,905 | ) |
Balance as of April 30, 2015 | | | | | |
Goodwill | 329,180 |
| | 72,635 |
| | 401,815 |
|
| $ | 329,180 |
| | $ | 72,635 |
| | $ | 401,815 |
|
Other intangible assets, net consisted of the following:
|
| | | | | | | | | | | |
| April 30, 2015 | | July 31, 2014 | | April 30, 2014 |
Brand intangibles (not subject to amortization) | $ | 261,939 |
| | $ | 266,603 |
| | $ | 266,363 |
|
Intangible assets subject to amortization: | | | | | |
Customer contracts and related relationships | 157,168 |
| | 163,600 |
| | 163,259 |
|
Total other intangible assets, gross | 419,107 |
| | 430,203 |
| | 429,622 |
|
Less accumulated amortization on intangible assets: | | | | | |
Customer contracts and related relationships | (43,747 | ) | | (37,845 | ) | | (35,794 | ) |
Less asset impairments: | | | | | |
Brand intangibles | — |
| | — |
| | — |
|
Customer contracts and related relationships | — |
| | — |
| | — |
|
Total other intangible assets, net | $ | 375,360 |
| | $ | 392,358 |
| | $ | 393,828 |
|
Beginning in fiscal 2015, the Company changed the date of its annual impairment testing of goodwill and indefinite lived intangibles from June 30 to May 1. The Company believes this change in the method of applying an accounting principle, is preferable as it will provide additional time for the Company to quantify the fair value of its operating divisions and better align the strategic planning process as well as the resources used in the testing. It is not intended to nor does it delay, accelerate, or avoid an impairment charge.
Identifiable intangible asset amortization expense was $1.9 million and $5.9 million for the three and nine months ended April 30, 2015 and $2.0 million and $6.0 million for the three and nine months ended April 30, 2014. Identifiable intangible asset amortization expense will amount to approximately $1.9 million for the remainder of fiscal 2015 and approximately $7.6 million for each of the next five fiscal years.
(10) Notes Payable and Long-Term Obligations
Long-term debt outstanding:
|
| | | | | | | | | | | |
| April 30, | | July 31, | | April 30, |
| 2015 | | 2014 | | 2014 |
Guaranteed Loan | $ | 6,592 |
| | $ | 8,333 |
| | $ | 8,900 |
|
ABL Facility | — |
| | 6,000 |
| | — |
|
Notes | 230,000 |
| | 230,000 |
| | 230,000 |
|
Term Loan Facility, net | 401,758 |
| | 403,082 |
| | 403,513 |
|
Total outstanding debt | 638,350 |
| | 647,415 |
| | 642,413 |
|
Less: current portion | (4,165 | ) | | (10,088 | ) | | (4,062 | ) |
Long-term obligations, net | $ | 634,185 |
| | $ | 637,327 |
| | $ | 638,351 |
|
As of April 30, 2015, the current portion of long-term debt is presented net of an unamortized discount of $0.4 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 $1.1 million.
In accordance with ASC 470-50-40-2 – Debt – "Modifications and Extinguishments," as a result of certain lenders that participated in the Company’s debt structure both prior to and after the refinancing discussed below, it was determined that a portion of the debt refinancing was considered to be a debt modification. Accordingly, the Company recorded approximately $3.6 million, of the Oaktree call premium that is associated with the modified debt (Term Loan Facility) as a contra-debt liability. As of April 30, 2015, 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 $1.8 million.
In accordance with the guidance, approximately $5.2 million related to the Company’s previous original issue discount on the Oaktree Notes was also determined to be associated with the modified debt (Term Loan Facility) as a contra-debt liability. As of April 30, 2015, the current portion of long-term debt is presented net of this unamortized discount of $1.2 million and the non-current portion of long-term debt is presented net of $2.7 million.
These balances are presented on the Condensed Consolidated Balance Sheets as a contra-debt liability and will be amortized within Interest expense, net, on the Condensed Consolidated Statements 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 Ended April 30, | | Nine Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Secured Credit Facility | $ | — |
| | $ | 1,061 |
| | $ | — |
| | $ | 12,577 |
|
Oaktree Senior Notes | — |
| | 1,060 |
| | — |
| | 16,428 |
|
Guaranteed Loan | 87 |
| | 115 |
| | 281 |
| | 365 |
|
ABL Facility | 210 |
| | 159 |
| | 497 |
| | 159 |
|
Notes | 4,025 |
| | 3,131 |
| | 12,026 |
| | 3,131 |
|
Term Loan Facility | 4,393 |
| | 3,478 |
| | 13,393 |
| | 3,478 |
|
Interest income | (14 | ) | | — |
| | (14 | ) | | (3 | ) |
Capitalized interest | (287 | ) | | (44 | ) | | (720 | ) | | (84 | ) |
Other | 210 |
| | 182 |
| | 728 |
| | 490 |
|
Amortization of deferred financing costs and debt discounts (1) | 1,428 |
| | 1,440 |
| | 4,370 |
| | 4,993 |
|
Interest expense, net | $ | 10,052 |
| | $ | 10,582 |
| | $ | 30,561 |
| | $ | 41,534 |
|
(1) Represents non-cash amortization of deferred charges incurred as a result of debt refinancings.
Description of Refinancing
On February 19, 2014, we refinanced our debt capital structure. We entered into a 4.5 year senior secured term loan facility, (the "Term Loan Facility") in an aggregate principal amount of $415.0 million, a 4.5 year senior secured asset-based revolving credit facility (the “ABL Facility”) in an aggregate principal amount of $125.0 million and issued $230.0 million in 7.000% Senior Notes due March 2019.
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 $6.6 million was outstanding as of April 30, 2015. 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.
The Guaranteed Loan provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility, as defined below. The financial covenants within the Guaranteed Loan were reset to match those in the Waiver and Third Amendment to the Company's Secured Credit Facility, as described in more detail below.
Additionally, on February 19, 2014, Diamond closed a transaction under a warrant exercise agreement ("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 ("Warrant Exercise Transaction"). The warrant was issued to Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (“Securities Purchase Agreement”), under which Diamond issued the Oaktree Senior Notes. The $15.0 million inducement fee was included within Warrant exercise fee on the Company’s Consolidated Statement of Operations in the 2014 Annual Report on Form 10-K.
The Warrant Exercise Agreement provided that so long as Oaktree and/or its affiliates hold at least 10% of Diamond’s outstanding common stock, Oaktree will have the right to nominate one member of Diamond’s Board of Directors. In addition, until the later of (a) twelve months after Oaktree no longer has the right to nominate a member of Diamond’s Board of Directors or (b) twelve months after any director nominated by Oaktree under the Warrant Exercise Agreement or the Securities Purchase Agreement no longer serves as a director, Oaktree and its affiliates agree not to: acquire or beneficially own more than 30% of the outstanding common stock of Diamond; commence or support any tender offer for Diamond common stock; make or participate in any solicitation of proxies to vote or seek to influence any person with respect to voting its Diamond common stock; publicly announce a proposal or offer concerning any extraordinary transaction with Diamond; form, join or participate in a group for the purpose of acquiring, holding, voting or disposing of any Diamond securities; take any actions that could reasonably be expected to require Diamond to make a public announcement regarding the possibility of such an acquisition, tender offer or proxy solicitation; enter into any agreements with a third party regarding any such prohibited actions; or request Diamond to amend or waive such provisions. Upon the closing of the transactions contemplated by the Warrant Exercise Agreement, the Securities Purchase Agreement, and Diamond’s obligations thereunder, terminated. The common stock issued upon exercise of the warrant was issued in a private placement pursuant to exemptions from the registration requirements of the Securities Act of 1933 and are covered by a Registration Rights Agreement entered into on May 29, 2012 in connection with the Securities Purchase Agreement.
The Term Loan Facility will mature on August 20, 2018 and will amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loan Facility with the balance payable on the maturity date of the Term Loan Facility. The Term Loan Facility permits the Company to increase the term loans, or add a separate tranche of term loans, by an amount not to exceed $100.0 million plus the maximum amount of additional term loans that the Company could incur without its senior secured leverage ratio exceeding 4.50 to 1.00 on a pro forma basis after giving effect to such increase or addition. Amounts outstanding bear interest at a rate per annum equal to: (i) the "Eurodollar Rate" (as defined in the Term Loan Facility and subject to a “floor” of 1.00%) plus the applicable margin or (ii) the Base Rate (as defined in the Term Loan Facility), which is the greatest of (a) Credit Suisse’s prime rate, (b) the federal funds effective rate plus 0.50% and (c) the Eurodollar Rate for an interest period of one month plus 1.00%, plus, in each case, the applicable margin to be agreed with the lenders party thereto.
Loans under the ABL facility are available up to a maximum amount outstanding at any one time equal to the lesser of (a) $125.0 million and (b) the amount of the Borrowing Base, in each case, less customary reserves. Under the ABL Facility, the Company has a $20.0 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 U.S.; 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 LIBOR Rate plus the applicable margin; or (ii) the Base rate plus applicable margin. “LIBOR Rate” means the rate per annum equal to (i) the Intercontinental Exchange Benchmark Administration Ltd. LIBOR Rate (“ICE LIBOR”), at approximately 11:00 a.m., London time, two Business Days prior to the commencement of the requested Interest Period. “Base Rate” means the greatest of (a) the Federal Funds Rate plus 0.5%, (b) the LIBOR Rate (which rate shall be calculated based upon an interest period of 1 month and shall be determined on a daily basis), plus 1.00%, and (c) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its “prime rate”. The LIBOR Rate shall be available for interest periods of one week or, one, two, three or six months and, if all lenders agree, twelve months. “Applicable Margin” means, as of any date of determination and with respect to Base Rate Loans or LIBOR Rate Loans, as applicable, the applicable margin set forth in the following table that corresponds to the Average Daily Net Availability of Borrower for the most recently completed fiscal quarter period.
The Term Loan Facility and ABL Facility provide for customary affirmative and negative covenants. The Term Loan Facility has customary cross-default provisions and the ABL Facility contains cross-acceleration provisions, in each case that may be triggered if Diamond fails to comply with obligations under its other credit facilities or indebtedness. The Term Loan Facility has a first priority perfected lien on substantially all property, plant and equipment, capital stock, intangibles and second priority lien on the ABL Priority Collateral, subject to customary exceptions. The ABL Facility requires Diamond to maintain a minimum fixed charge coverage ratio of 1.1:1 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 five consecutive business days. The ABL Facility is secured by a first-priority lien on accounts receivable, inventory, cash and deposit accounts and a second-priority lien on all real estate, equipment and equity interests of the Company under, and guarantors of, the ABL Facility.
The Notes, which will mature on March 15, 2019, were offered only to (i) qualified institutional buyers in reliance on Rule 144A of the Securities Act of 1933, as amended (“Securities Act”), and (ii) to certain non-U.S. persons in offshore transactions in reliance on Regulation S of the Securities Act. The initial issuance and sale of the Notes were not registered under the Securities Act, and the Notes may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and the registration or qualification requirements of other applicable securities laws. The terms of the Notes do not provide for registration rights. Interest on the Notes is payable on March 15 and September 15 of each year, commencing September 15, 2014. On or after March 15, 2016, Diamond may redeem all or a part of the Notes at a price equal to 103.50% of the principal amount of the Notes, plus accrued and unpaid interest, with such optional redemption prices decreasing to 101.750% 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 April 30, 2015 and April 30, 2014, the interest rate for the Company’s consolidated borrowings, and excluding the Oaktree Senior Notes, was 5.31% and 5.29% and 5.43% and 5.94%, respectively. For the three and nine months ended April 30, 2015 and April 30, 2014, the blended interest rate for the Company’s consolidated short-term borrowings, excluding the Oaktree Senior Notes, was 3.70% and 1.66% and 5.91% and 6.23%, respectively. As of April 30, 2015, the Company was compliant with financial and reporting covenants under the new refinanced debt structure.
(11) Income Taxes
The Company's effective tax rate was approximately 9.1% and 7.0% for the three and nine months ended April 30, 2015, respectively, compared with approximately (0.8%) and (1.8%) for the three and nine months ended April 30, 2014, respectively.
Our effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or
de-recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business.
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and tax basis of assets and liabilities as well as net operating loss and tax credit carryovers. We record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce the valuation allowance against our deferred tax assets, our provision for income taxes will increase or decrease respectively in the period such determination is made.
The provision for the three and nine months ended April 30, 2015 was determined using an estimated annual effective tax rate adjusted for discrete items that occurred in the quarter. The Company’s effective tax rates in the three and nine month periods in the current year are favorably impacted by valuation allowances against deferred tax assets and the mix of pretax income by jurisdiction. The rates are negatively impacted by changes in deferred taxes resulting from the amortization of long- lived intangibles, and increased pretax income in the U.S.
The effective tax rates for the three and nine months ended April 30, 2014 were determined by estimating the U.S. tax provision using the discrete method provided in ASC 740 and using an estimated annual effective tax rate for the U.K. tax provision. The discrete method was used in the U.S. because of unpredictable trends in the Company’s U.S. net income or loss position due to loss on debt extinguishment and expense associated with the shareholder derivative litigation, which we do not expect to be recurring. The Company’s effective tax rates were negatively impacted by changes in deferred taxes resulting from the amortization of long-lived intangibles, valuation allowances against deferred tax assets, and state income tax expense.
(12) Retirement Plans
Diamond provides retiree medical benefits and sponsors one defined benefit pension plan. Any employee who joined the Company after January 15, 1999 is not entitled to retiree medical benefits. The defined benefit plan is a qualified plan covering all bargaining unit employees. Diamond uses a July 31 measurement date for its plans. Plan assets are held in trust and primarily include mutual funds and money market accounts. Diamond previously sponsored a nonqualified plan that was terminated in fiscal 2013 and all benefits were distributed in December 2012. There are no obligations under the nonqualified plan as of April 30, 2015.
Components of net periodic benefit cost (income) were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Three Months Ended April 30, | | Nine Months Ended April 30, | | Three Months Ended April 30, | | Nine Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
Service cost | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | 10 |
| | 33 |
| | 29 |
|
Interest cost | 256 |
| | 247 |
| | 767 |
| | 739 |
| | 17 |
| | 16 |
| | 51 |
| | 50 |
|
Expected return on plan assets | (292 | ) | | (271 | ) | | (875 | ) | | (812 | ) | | — |
| | — |
| | — |
| | — |
|
Amortization of net loss / (gain) | 114 |
| | 84 |
| | 365 |
| | 253 |
| | (131 | ) | | (176 | ) | | (394 | ) | | (529 | ) |
Net periodic benefit cost / (income) | $ | 78 |
| | $ | 60 |
| | $ | 257 |
| | $ | 180 |
| | $ | (103 | ) | | $ | (150 | ) | | $ | (310 | ) | | $ | (450 | ) |
The Company sponsors two defined contribution plans and recognized expenses of $0.5 million and $1.2 million for the three and nine months ended April 30, 2015, respectively, and $0.2 million and $0.6 million for the three and nine months ended April 30, 2014, respectively. The Company expects to contribute a total of approximately $1.6 million to the defined contribution plan during fiscal 2015.
(13) Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) attributable to the Company are foreign currency translation adjustments and changes in pension liabilities.
Changes in accumulated other comprehensive income for the nine months ended April 30, 2015 by component were as follows (net of tax):
|
| | | | | | | | | | | |
| Pension Liability Adjustment | | Foreign Currency Translation Adjustment | | Total |
Balance as of August 1, 2014 | $ | (1,968 | ) | | $ | 25,601 |
| | $ | 23,633 |
|
Other comprehensive loss before reclassifications | — |
| | (19,556 | ) | | (19,556 | ) |
Amounts reclassified from accumulated other comprehensive income: | | | | | |
Amortization of prior loss included in net periodic pension cost | (29 | ) | | — |
| | (29 | ) |
Other comprehensive loss | (29 | ) | | (19,556 | ) | | (19,585 | ) |
Balance as of April 30, 2015 | $ | (1,997 | ) | | $ | 6,045 |
| | $ | 4,048 |
|
Changes in accumulated other comprehensive income for the nine months ended April 30, 2014 by component were as follows (net of tax):
|
| | | | | | | | | | | |
| Pension Liability Adjustment | | Foreign Currency Translation Adjustment | | Total |
Balance as of August 1, 2013 | $ | 522 |
| | $ | 3,485 |
| | $ | 4,007 |
|
Other comprehensive income before reclassifications | — |
| | 19,977 |
| | 19,977 |
|
Amounts reclassified from accumulated other comprehensive income: |
|
| |
|
| |
|
|
Amortization of prior loss included in net periodic pension cost | (276 | ) | | — |
| | (276 | ) |
Other comprehensive income (loss) | (276 | ) | | 19,977 |
| | 19,701 |
|
Balance as of April 30, 2014 | $ | 246 |
| | $ | 23,462 |
| | $ | 23,708 |
|
The reclassifications out of accumulated other comprehensive income (loss) related to the pension liability are reflected in Selling, general and administrative expenses and Cost of goods sold in the Condensed Consolidated Statements of Operations for the nine months ended April 30, 2015 and 2014 respectively.
(14) Commitments and Contingencies
In re Diamond Foods Inc., Shareholder Derivative Litigation
In fiscal 2012, putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond and naming certain executive officers and the members of Diamond’s board of directors as individual defendants. These lawsuits, which related principally to the Company’s accounting for certain payments to walnut growers in fiscal 2010 and 2011, were subsequently consolidated as In re Diamond Foods Inc., Shareholder Derivative Litigation which purports to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement. Following mediation efforts, the parties agreed to terms of a proposed settlement and the court entered an order granting final approval of the settlement on August 19, 2013. On September 23, 2013, a Notice of Appeal from the order granting final approval was filed by a single stockholder. No date for this hearing on this appeal has been scheduled. The Company will continue to incur costs associated with this action, and, depending on the ultimate outcome, could continue to do so, and management’s attention may be diverted to this matter. This could have a material adverse effect on the Company’s business, financial condition and results of operations.
Labeling Class Action Cases
On January 3, 2014, Deena Klacko first filed a putative class action against Diamond in the Southern District of Florida, alleging that certain ingredients contained in the Company’s TIAS tortilla chip product were not natural and seeking damages and injunctive relief. The lawsuit alleged five causes of actions alleging violations of Florida’s Deceptive and Unfair Trade Practices Act, negligent misrepresentation, breach of implied warranty for particular purpose, breach of express warranty and the Magnuson-Warranty Act. The complaint seeks to certify a class of Florida consumers who purchased TIAS tortilla chips
since January 3, 2010. On January 9, 2014, Dominika Surzyn brought a similar class action against Diamond relating to our TIAS tortilla chips in federal court for the Northern District of California. Surzyn purports to represent a class of California consumers who purchased said Kettle TIAS products since January 9, 2010.
On April 2, 2014, Richard Hall filed a putative class action against the Company in San Francisco Superior Court, alleging that certain ingredients contained in the Company’s Kettle Brand chips and TIAS Tortilla Chips are not natural and seeking damages and injunctive relief. The complaint purports to assert seven causes of action for alleged violations of California’s Business and Profession’s Code, California’s Consumer Legal Remedies Act and for restitution based on quasi-contract/unjust enrichment. Plaintiff purports to bring this action on his own behalf, as well as on behalf of all consumers in the United States, or alternatively, California, who purchased certain of Diamond’s Kettle Brand Chips or Kettle Brand TIAS tortilla chips within 4 years of the filing of the complaint.
The Company denies all allegations in these cases. Following mediation and settlement discussions among plaintiffs’ counsel in Klacko, Surzyn and Hall, the parties entered into a settlement agreement, and it is expected that this settlement will resolve all claims on a nationwide basis and include: Diamond to take certain injunctive relief measures to confirm labeling compliance matters; establishment of a $3.0 million common fund for claims made available to the class and for the payment of class administration and attorneys’ fees; and any funds unclaimed by the class to be provided cy pres to a charity as a food donation. The Company recognized the related settlement charges within the consolidated financial statements for fiscal 2014. On October 30, 2014, the court granted preliminary approval of the settlement. On February 23, 2015, the plaintiffs filed a motion for final approval of the settlement. The settlement is subject to final court approval. The Company cannot predict with certainty the ultimate resolution of these lawsuits, and an unfavorable outcome in excess of amounts recognized as of July 31, 2014, with respect to one or more of these proceedings could have a material adverse effect on the Company’s results of operations for the periods in which a loss is recognized.
Other
Diamond is involved in various legal actions in the ordinary course of our business. The Company does not believe it is feasible to predict or determine the outcome or resolution of these 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.
(15) Segment Reporting
The Company has five operating segments that it aggregates into two reportable segments based on similarities between: economic characteristics, nature of the products, production process, type of customer, methods of distribution, and regulatory environment. The Company’s two reportable segments are Snacks and Nuts. The Snacks reportable segment predominantly 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, accordingly, 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.”
The Company’s net sales and gross profit by segment were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | Nine Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net sales | | | | | | | |
Snacks | $ | 113,897 |
| | $ | 114,255 |
| | $ | 350,924 |
| | $ | 343,601 |
|
Nuts | 72,170 |
| | 76,637 |
| | 311,431 |
| | 302,536 |
|
Total | $ | 186,067 |
| | $ | 190,892 |
| | $ | 662,355 |
| | $ | 646,137 |
|
Gross profit | | | | | | | |
Snacks | $ | 40,862 |
| | $ | 41,699 |
| | $ | 125,585 |
| | $ | 123,660 |
|
Nuts | 12,095 |
| | 3,397 |
| | 47,920 |
| | 35,297 |
|
Total | $ | 52,957 |
| | $ | 45,096 |
| | $ | 173,505 |
| | $ | 158,957 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are an innovative packaged food company focused on building and energizing brands. We specialize in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, we complemented our strong heritage in the culinary nut market under the Diamond of California® brand by launching a line of snack nuts under the Emerald® brand. In 2008, we acquired the Pop Secret® brand of microwave popcorn products, which provided us with increased scale in the snack market. In 2010, we acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and the United Kingdom, adding the complementary premium Kettle Brand® to our existing portfolio.
Our business is seasonal. In sourcing walnuts, we contract directly with growers for their walnut crop. We typically receive walnuts during the period from September to November, and we pay for the crop throughout the year in accordance with our walnut purchase agreements with the growers. We typically receive in-shell pecans during the period from October to March and shelled pecans are received throughout the fiscal year. The pecans are paid for over those periods based on the various vendor terms. As a result of this seasonality, our personnel, working capital requirements and walnut inventories peak during the last four months of each calendar year. We experience seasonality in capacity utilization at our Stockton, California facility associated with the annual walnut harvest and seasonal in-shell and culinary product demand. Generally, we receive and pay for approximately 50% of the corn for popcorn in November and approximately 50% in April. We contract for potatoes and oil annually and at times throughout the year and receive and pay for this supply throughout the year.
We report our operating results on the basis of a fiscal year that starts August 1 and ends July 31. We refer to the fiscal years ended July 31, 2015, 2014, 2013, and 2012, as “fiscal 2015,” “fiscal 2014,” “fiscal 2013” and “fiscal 2012”, respectively.
Results of Operations
The following table sets forth certain financial data as percentage of net sales for the three and nine months ended April 30, 2015 and 2014:
|
| | | | | | | | | | | |
| Three Months Ended April 30, | | Nine Months Ended April 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | 71.5 | % | | 76.4 | % | | 73.8 | % | | 75.4 | % |
Gross profit | 28.5 | % | | 23.6 | % | | 26.2 | % | | 24.6 | % |
Operating expenses: | | | | | | | |
Selling, general and administrative | 14.9 | % | | 16.1 | % | | 13.0 | % | | 18.7 | % |
Advertising | 4.5 | % | | 4.5 | % | | 4.5 | % | | 5.0 | % |
Loss on warrant liability | — | % | | 1.0 | % | | — | % | | 4.0 | % |
Warrant exercise fee | — | % | | 7.9 | % | | — | % | | 2.3 | % |
Total operating expenses | 19.4 | % | | 29.5 | % | | 17.5 | % | | 30.1 | % |
Income (loss) from operations | 9.1 | % | | (5.9 | )% | | 8.7 | % | | (5.5 | )% |
Loss on debt extinguishment | — | % | | 43.5 | % | | — | % | | 12.9 | % |
Interest expense, net | 5.4 | % | | 5.5 | % | | 4.6 | % | | 6.4 | % |
Income (loss) before income taxes and equity investee | 3.7 | % | | (54.9 | )% | | 4.1 | % | | (24.8 | )% |
Income taxes | 0.3 | % | | 0.4 | % | | 0.3 | % | | 0.4 | % |
Net income (loss) before interest in income of equity investee | 3.4 | % | | (55.3 | )% | | 3.8 | % | | (25.2 | )% |
Interest in income of equity investee, net | — | % | | — | % | | — | % | | — | % |
Net income (loss) | 3.4 | % | | (55.3 | )% | | 3.8 | % | | (25.2 | )% |
We aggregate our operating segments into two reportable segments, which are Snacks and Nuts. The Snacks reportable segment predominantly includes products sold under the Kettle Brand®, Kettle Chips®, and Pop Secret® trade names. The Nuts reportable segment predominantly includes products sold under the Emerald® and Diamond of California® trade names.
We evaluate the performance of our segments based on net sales and gross profit for each segment. Gross profit is calculated as net sales less all cost of sales. Our net sales and gross profit by segment for the periods identified below were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended April 30, | | % Change from | | Nine Months Ended April 30, | | % Change from |
| 2015 | | 2014 | | 2014 to 2015 | | 2015 | | 2014 | | 2014 to 2015 |
Net sales | | | | | | | | | | | |
Snacks | $ | 113,897 |
| | $ | 114,255 |
| | —% | | $ | 350,924 |
| | $ | 343,601 |
| | 2% |
Nuts | 72,170 |
| | 76,637 |
| | (6)% | | 311,431 |
| | 302,536 |
| | 3% |
Total | $ | 186,067 |
| | $ | 190,892 |
| | (3)% | | $ | 662,355 |
| | $ | 646,137 |
| | 3% |
Gross profit | | | | | | | | | | | |
Snacks | $ | 40,862 |
| | $ | 41,699 |
| | (2)% | | $ | 125,585 |
| | $ | 123,660 |
| | 2% |
Nuts | 12,095 |
| | 3,397 |
| | 256% | | 47,920 |
| | 35,297 |
| | 36% |
Total | $ | 52,957 |
| | $ | 45,096 |
| | 17% | | $ | 173,505 |
| | $ | 158,957 |
| | 9% |
For the three and nine months ended April 30, 2015, Snacks segment net sales decreased to $113.9 million from $114.3 million and increased to $350.9 million from $343.6 million, respectively. Snacks segment net sales for the three months ended April 30, 2015 decreased primarily due to a shift to larger package sizes in Pop Secret as well as continued competitive promotional activity in Pop Secret and Kettle UK. Unfavorable changes in foreign exchange rates also negatively impacted net sales by approximately $3.6 million. These decreases were partially offset by increases in both selling price and volume in Kettle US. For the nine months ended April 30, 2015, snacks segment net sales increased primarily due to volume increases and
net price realization in Kettle US. This increase was partially offset by the difficult trading environment experienced by our U.K. operations manifested by increased competition and promotional activity. It was also offset by unfavorable changes in our foreign exchange rates, primarily related to the U.K. pound and the Canadian dollar, which impacted net sales by approximately $4.6 million.
For the three and nine months ended April 30, 2015, Nuts segment net sales decreased to $72.2 million from $76.6 million and increased to $311.4 million from $302.5 million, respectively. Nut segment net sales for the three months ended April 30, 2015 decreased primarily due to our fiscal 2015 decision to exit some high-volume, low-margin SKU's that contributed approximately $10.0 million to net sales during the three months ended April 30, 2014. This decrease was partially offset by increases in pricing. Nut segment net sales for the nine months ended April 30, 2015 increased primarily due to increases in pricing in our Diamond of California and Emerald brands, which more than offset the impact of exiting the high-volume, low-margin SKU's.
Sales to our largest customer, Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), represented approximately 17.7% and 17.6% of total net sales for the three and nine months ended April 30, 2015, respectively, and 18.5% and 16.2% of total net sales for the three and nine months ended April 30, 2014, respectively. No other customer accounted for 10% or more of our total net sales for those periods.
Gross margin. Snacks segment gross profit as a percentage of net sales was 35.9% and 35.8% for the three and nine months ended April 30, 2015, respectively, and 36.5% and 36.0% for the three and nine months ended April 30, 2014. For the three months ended April 30, 2015, gross margin decreased primarily due to a shift to larger package sizes and increased promotion frequency in Pop Secret as well as increased promotion spend on Kettle in the U.K., partially offset by a price increase and volume growth for Kettle in the US. Gross margin for the nine months ended April 30, 2015 remained relatively consistent as compared to prior year.
Nuts segment gross profit as a percentage of net sales was 16.8% and 15.4% for the three and nine months ended April 30, 2015 and 4.4% and 11.7% for the three and nine months ended April 30, 2014. For the three months ended April 30, 2015, gross margin increased primarily due to improved net price realization and lower walnut costs, partially offset by higher other tree nut costs. For the nine months ended April 30, 2015, gross margin increased due to improved net price realization offset by higher tree nut costs. As discussed in Item 1A. Risk Factors, our commodity costs are subject to fluctuations in availability and price that could adversely impact our business and financial results.
Selling, general and administrative. Selling, general and administrative expenses consist principally of salaries and benefits for sales and administrative personnel, brokerage, professional services, travel, non-manufacturing depreciation and facility costs. Selling, general and administrative expenses were $27.7 million and 14.9% of net sales and $86.1 million and 13.0% of net sales for the three and nine months ended April 30, 2015, respectively, and were $30.7 million and 16.1% of net sales and $121.1 million and 18.7% of net sales for the three and nine months ended April 30, 2014, respectively. Selling, general and administrative expenses included $0.6 million of U.K. workforce reduction expenses for both three and nine months ended April 30, 2015. In addition, selling, general and administrative expenses included $23 thousand and $3.3 million for the three and nine months ended April 30, 2015, respectively, and $1.9 million and $4.3 million for the three and nine months ended April 30, 2014, respectively, associated with legal expenses related to matters stemming from our audit committee investigation and restatement. In fiscal 2014, we obtained preliminary approval to settle the action In re Diamond Foods Inc., Securities Litigation ("Securities Settlement"). Therefore, for the three and nine months ended April 30, 2015, Selling, general and administrative expenses decreased as we no longer recorded changes in the fair value of the stock portion of the Securities Settlement. For the three and nine months ended April 30, 2014 we recorded $6.0 million and $38.1 million, respectively, of loss associated with the change in fair value of the Securities Settlement. Additionally, in the nine months ended April 30, 2014, we recorded a $5.0 million expense associated with the resolution of a SEC investigation.
Advertising. Advertising costs were $8.3 million and $29.8 million for the three and nine months ended April 30, 2015, respectively, and $8.6 million and $32.4 million for the three and nine months ended April 30, 2014, respectively. Advertising expenses as a percentage of net sales was 4.5% for both the three and nine months ended April 30, 2015, respectively, and 4.5% and 5.0% for the three and nine months ended April 30, 2014, respectively. Advertising expense decreased for the three and nine months ended April 30, 2015 primarily due to a strategic shift into promotional programs in the U.K. partially offset by increased spending on Kettle US.
Loss on warrant liability. The warrant liability was not outstanding for the three and nine months ended April 30, 2015, respectively. For the three and nine months ended April 30, 2014, the loss on warrant liability was $2.0 million and 1.0% of net sales and $25.9 million and 4.0% of net sales, respectively. The loss on warrant liability for the three and nine months ended April 30, 2014 was due to the change in the fair value of the warrant liability associated with a warrant issued to a subsidiary of
Oaktree Capital Management, L.P. ("Oaktree") in May 2012. The warrant was exercised in February 2014 in connection with a subsequent refinancing, and accordingly we no longer have a liability associated with the warrant as of April 30, 2015.
Warrant exercise fee. Warrant exercise fee was nil for the three and nine months ended April 30, 2015. Warrant exercise fee was $15.0 million and 7.9% and 2.3% of net sales for the three and nine months ended April 30, 2014, respectively. The $15.0 million warrant exercise fee represents the contractual modification inducement fee paid to Oaktree Capital Management, L.P. ("Oaktree") as part of the 2014 debt refinancing transaction.
Loss on debt extinguishment. Loss on debt extinguishment was nil for the three and nine months ended April 30, 2015. Loss on debt extinguishment and other related charges was $83.0 million for the three and nine months ended April 30, 2014 and 43.5% and 12.9% of net sales, respectively. We recorded certain expenses in accordance with Accounting Standards Codification (“ASC”) Section 470-50-40-2 - Debt - Modifications and Extinguishments including the differential between the reacquisition price and carrying value of the senior notes (“Oaktree Senior Notes”) held by Oaktree, a call premium associated with senior notes held by Oaktree, write-offs of unamortized debt issuance and transaction costs related to our five-year $600 million secured credit facility (the “Secured Credit Facility”) and Oaktree debt obligations and write-offs of unamortized debt issuance costs associated the new refinancing. For additional description of our debt, see Note 10 to the Notes to the Condensed Consolidated Financial Statements.
Interest expense, net. Interest expense, net was $10.1 million, and 5.4% of net sales and $30.6 million and 4.6% of net sales for the three and nine months ended April 30, 2015, respectively, and was $10.6 million and 5.5% of net sales and $41.5 million and 6.4% of net sales for the three and nine months ended April 30, 2014, respectively. For the three and nine months ended April 30, 2015, approximately $1.4 million and $4.4 million, respectively, and for the three and nine months ended April 30, 2014, approximately $1.4 million and $5.0 million, respectively, of interest expense represented non-cash amortization of deferred charges incurred as a result of debt refinancing. Interest expense, net decreased for the three and nine months ended April 30, 2015 primarily due to our refinanced debt structure which yields lower interest rates than our previously held debt obligations which included the payment-in-kind interest on the Oaktree Senior Notes, including $75 million of the senior notes subject to exchange for convertible preferred stock upon achievement of certain profitability targets.
Income taxes. Our effective tax rate was approximately 9.1% and 7.0% for the three and nine months ended April 30, 2015, respectively, compared with approximately (0.8%) and (1.8%) for the three and nine months ended April 30, 2014, respectively. The change in the effective tax rate for the three and nine months ended April 30, 2015, as compared to 2014 was due to tax impacts of shifts in pretax income by jurisdiction, valuation allowances against deferred tax assets, and using the annualized effective rate in 2015 versus using the discrete method in computing the tax rates in 2014.
Interest in income of equity investee, net. On February 3, 2015, we purchased 51% of the outstanding shares of Yellow Chips Holding B.V. (“Yellow Chips”), which produces vegetable chips and organic potato chips primarily for the Dutch and other European markets. The transaction primarily was undertaken to secure manufacturing of vegetable chips for the European and U.K. markets. The investment is accounted for under the equity method because we exercise significant influence over but do not control Yellow Chips. Our interest in the income of Yellow Chips was $36 thousand for the three and nine ended April 30, 2015.
Liquidity and Capital Resources
Our liquidity is dependent upon funds generated from operations and external sources of financing, including our ABL Facility discussed below.
Cash provided by operating activities was $63.5 million during the nine months ended April 30, 2015, compared to $101.9 million cash used in operating activities for the nine months ended April 30, 2014. The increase in cash provided by operating activities was primarily due to improved operating results, and the positive cash flow impact of changes in certain working capital items; primarily an increase in grower payables, offset by an increase in inventories. The increase was also due to the settlement associated with the Oaktree Senior Notes as part of the debt refinancing transaction in the comparative year. Cash used in investing activities was $23.6 million during the nine months ended April 30, 2015, compared to cash used in investing activities of $14.4 million for the nine months ended April 30, 2014. The change in cash used for investing activities primarily related to machinery and equipment additions associated with our standard business operations in the U.S. and U.K., capitalizable costs associated with our financial system upgrade implementation and an equity method investment in Yellow Chips and an associated loan. In addition, cash used in financing activities was $12.7 million during the nine months ended April 30, 2015, compared to $117.5 million of cash provided by financing activities during the nine months ended April 30, 2014. The decrease in cash used in financing activities is primarily due to net repayments under our existing revolving line of
credit for the nine months ended April 30, 2015 versus receipt of cash funds as part of our debt refinancing arrangements for the nine months ended April 30, 2014.
Working capital and stockholders’ equity were $138.6 million and $296.6 million at April 30, 2015, compared to $110.3 million and $283.8 million at July 31, 2014, and $96.6 million and $284.0 million at April 30, 2014. The increase in working capital between April 30, 2015 and April 30, 2014 was primarily due to increased cash on hand, inventories and trade receivables which was partially offset by increased accounts payable and accrued liabilities as of the balance sheet date. Capitalized expenditures were $20.7 million for the nine months ended April 30, 2015 and $14.6 million for the nine months ended April 30, 2014.
Description of Refinancing
On February 19, 2014, we refinanced our debt capital structure. We entered into a 4.5 year senior secured term loan facility, (the "Term Loan Facility") in an aggregate principal amount of $415.0 million, a 4.5 year senior secured asset-based revolving credit facility (the “ABL Facility”) in an aggregate principal amount of $125.0 million and issued $230.0 million in 7.000% Senior Notes due March 2019 (the “Notes”).
Debt After Refinancing
In December 2010, Kettle Foods obtained, and we guaranteed, a 10-year fixed rate loan (the “Guaranteed Loan”) in the principal amount of $21.2 million, of which $6.6 million was outstanding as of April 30, 2015. Principal and interest payments were due monthly throughout the term of the loan. The Guaranteed Loan was being used to purchase equipment for our Beloit, Wisconsin plant expansion.
The Guaranteed Loan provides for customary affirmative and negative covenants. The financial covenants within the Guaranteed Loan were reset to match those in the Waiver and Third Amendment to its Secured Credit Facility.
Additionally, on February 9, 2014, we entered into the Warrant Exercise Agreement pursuant to which Oaktree agreed to exercise in full its warrant to purchase an aggregate of 4,420,859 shares of our common stock, by paying in cash the exercise price of approximately $44.2 million; less a cash exercise and contractual modification inducement fee of $15.0 million. The warrant was issued to Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (“Securities Purchase Agreement”), under which we issued the Oaktree Senior Notes.
The Warrant Exercise Agreement provided that so long as Oaktree and/or its affiliates hold at least 10% of our outstanding common stock, Oaktree will have the right to nominate one member of our Board of Directors. In addition, until the later of (a) twelve months after Oaktree no longer has the right to nominate a member of our Board of Directors or (b) twelve months after any director nominated by Oaktree under the Warrant Exercise Agreement or the Securities Purchase Agreement no longer serves as a director, Oaktree and its affiliates agree not to: acquire or beneficially own more than 30% of the outstanding common stock of Diamond; commence or support any tender offer for our common stock; make or participate in any solicitation of proxies to vote or seek to influence any person with respect to voting its Diamond common stock; publicly announce a proposal or offer concerning any extraordinary transaction with us; form, join or participate in a group for the purpose of acquiring, holding, voting or disposing of any our securities; take any actions that could reasonably be expected to require us to make a public announcement regarding the possibility of such an acquisition, tender offer or proxy solicitation; enter into any agreements with a third party regarding any such prohibited actions; or request us to amend or waive such provisions. Upon the closing of the transactions contemplated by the Warrant Exercise Agreement, the Securities Purchase Agreement, and our obligations thereunder, terminated. The common stock issued upon exercise of the warrant were issued in a private placement pursuant to exemptions from the registration requirements of the Securities Act of 1933 and are covered by a Registration Rights Agreement entered into on May 29, 2012 in connection with the Securities Purchase Agreement.
The Term Loan Facility will mature on August 20, 2018 and will amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loan Facility with the balance payable on the maturity date of the Term Loan Facility. The Term Loan Facility permits us to increase the term loans, or add a separate tranche of term loans, by an amount not to exceed $100 million plus the maximum amount of additional term loans that we could incur without our senior secured leverage ratio exceeding 4.50 to 1.00 on a pro forma basis after giving effect to such increase or addition. Amounts outstanding bear interest at a rate per annum equal to: (i) the "Eurodollar Rate" (as defined in the Term Loan Facility and subject to a “floor” of 1.00%) plus the applicable margin or (ii) the Base Rate (as defined in the Term Loan Facility), which is the greatest of (a) Credit Suisse’s prime rate, (b) the federal funds effective rate plus 0.50% and (c) the Eurodollar Rate for an interest period of one month plus 1.00%, plus, in each case, the applicable margin to be agreed with the lenders party thereto.
Loans under the ABL Facility are available up to a maximum amount outstanding at any one time equal to the lesser of (a) $125 million and (b) the amount of the Borrowing Base, in each case, less customary reserves. Under the ABL Facility, we have a $20 million sub-limit for the issuance of letters of credit, and a Swing Line Facility of up to $12.5 million for same day borrowings. Borrowing Base is defined as (a) 85% of the amount of our eligible accounts receivable; plus (b) the lesser of (i) 70% of the book value of eligible inventory in the US and (ii) 85% times the net orderly liquidation value of our eligible inventory in the U.S.; less (c) in each case, customary reserves. As of April 30, 2015, there were no loans outstanding under the ABL Facility, the amount of letters of credit issued under the ABL Facility was $6.2 million and the net availability under the ABL Facility was $118.3 million. The maximum balance outstanding under the ABL Facility for the nine months ended April 30, 2015 was $10.0 million.
Under the ABL Facility, we may elect that the loans bear interest at a rate per annum equal to: (i) the Base Rate plus the applicable margin; or (ii) the LIBOR Rate plus the applicable margin. “Base Rate” means the greatest of (a) the Federal Funds Rate plus 0.5%, (b) the LIBOR Rate (which rate shall be calculated based upon an interest period of 1 month and shall be determined on a daily basis), plus 1.00%, and (c) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its “prime rate.” The LIBOR Rate shall be available for interest periods of one week or, one, two, three or six months and, if all lenders agree, twelve months.
The Term Loan Facility and ABL Facility provide for customary affirmative and negative covenants. The Term Loan Facility has customary cross-default provisions and the ABL Facility contains cross-acceleration provisions, in each case that may be triggered if we fail to comply with obligations under our other credit facilities or indebtedness. The Term Loan Facility has a first priority perfected lien on substantially all property, plant and equipment, capital stock, intangibles and second priority lien on the ABL Priority Collateral, subject to customary exceptions. The ABL Facility requires us to maintain a minimum fixed charge coverage ratio of 1.1:1 if at any time excess availability is less than 10% of maximum availability; and requires us to apply substantially all cash collections to reduce outstanding borrowings under the ABL Facility if excess availability falls below 12.5% of maximum availability for a period of 5 consecutive business days. The ABL Facility is secured by a first-priority lien on accounts receivable, inventory, cash and deposit accounts and a second-priority lien on all real estate, equipment and equity interests of the Company under, and guarantors of, the ABL Facility.
The Notes, which will mature on March 15, 2019, were offered only to (i) qualified institutional buyers in reliance on Rule 144A of the Securities Act of 1933, as amended (“Securities Act”), and (ii) to certain non-U.S. persons in offshore transactions in reliance on Regulation S of the Securities Act. The initial issuance and sale of the Notes were not registered under the Securities Act, and the Notes may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and the registration or qualification requirements of other applicable securities laws. The terms of the Notes do not provide for registration rights. Interest on the Notes is payable on March 15 and September 15 of each year, commencing September 15, 2014. On or after March 15, 2016, we may redeem all or a part of the Notes at a price equal to 103.500% of the principal amount of the Notes, plus accrued and unpaid interest, with such optional redemption prices decreasing to 101.750% on and after March 15, 2017 and 100.000% on and after March 15, 2018. Before March 15, 2016, we 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, we may redeem up to 35% of the Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.000% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of redemption. If we experience a change of control, we must offer to purchase for cash all or any part of each holder’s Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any. The indenture pursuant to which the Notes were issued contains customary covenants that, among other things, limit our ability and our restricted subsidiaries’ ability to incur additional indebtedness, make restricted payments, enter into transactions with affiliates, create liens, pay dividends on or repurchase stock, make specified types of investments, and sell all or substantially all of their assets or merge with other companies. Each of the covenants is subject to a number of important exceptions and qualifications.
For the three and nine months ended April 30, 2015 and April 30, 2014, the blended interest rate for our consolidated borrowings, including obligations under the our refinanced debt capital structure and excluding the Oaktree Senior Notes, was 5.31% and 5.29% and 5.43% and 5.94%, respectively. For the three and nine months ended April 30, 2015 and April 30, 2014, the blended interest rate for consolidated short-term borrowings, including obligations under the our refinanced debt capital structure and excluding the Oaktree Senior Notes, was 3.70% and 1.66% and 5.91% and 6.23%, respectively. As of April 30, 2015, we were compliant with financial and reporting covenants under our refinanced debt structure.
Contractual Obligations and Commitments
Contractual obligations and commitments at April 30, 2015, were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| Payments Due by Period |
| Total |
| FY2015 |
| FY 2016- FY 2017 |
| FY 2018- FY 2019 |
| Thereafter |
Long-term obligations | $ | 646.4 |
|
| $ | 1.6 |
| | $ | 13.3 |
| | $ | 631.5 |
| | $ | — |
|
Interest on long-term obligations(1) | 122.4 |
|
| 8.5 |
| | 67.9 |
| | 46.0 |
| | — |
|
Capital leases | 9.3 |
|
| 0.7 |
| | 5.8 |
| | 2.1 |
| | 0.7 |
|
Interest on capital leases | 1.1 |
|
| 0.1 |
| | 0.7 |
| | 0.2 |
| | 0.1 |
|
Operating leases | 35.6 |
|
| 1.3 |
| | 9.3 |
| | 8.7 |
| | 16.3 |
|
Purchase commitments(2) | 67.4 |
|
| 65.7 |
| | 1.7 |
| | — |
| | — |
|
Pension liability | 6.8 |
|
| 0.2 |
| | 1.5 |
| | 1.7 |
| | 3.4 |
|
Long-term deferred tax liabilities(3) | 113.6 |
|
| — |
| | — |
| | — |
| | 113.6 |
|
Other long-term liabilities(4) | 7.3 |
|
| 0.3 |
| | 2.7 |
| | 2.7 |
| | 1.6 |
|
Total(5) | $ | 1,009.9 |
| | $ | 78.4 |
| | $ | 102.9 |
| | $ | 692.9 |
| | $ | 135.7 |
|
| |
(1) | Amounts represent the expected cash interest payments on our long-term debt. Interest on our variable rate debt was forecasted using a LIBOR forward curve analysis as of April 30, 2015. |
| |
(2) | Commitments to purchase inventory and equipment. Excludes purchase commitments under Walnut Purchase Agreements as the price is not fixed within these contracts. |
| |
(3) | Primarily relates to the intangible assets of Kettle Foods. |
| |
(4) | Excludes $0.4 million in deferred rent liabilities. Additionally, the liability for uncertain tax positions ($1.5 million at April 30, 2015, excluding associated interest and penalties) has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined. |
| |
(5) | In the above table we did not include either the €0.5 million of deferred cash contingent consideration or the call and put options on the remaining 49% of Yellow Chips outstanding equity. See Note 3 to the Notes to Condensed Consolidated Financial Statements. |
Effects of Inflation
There has been no material change in our exposure to inflation from that discussed in our 2014 Annual Report on Form 10-K.
Critical Accounting Policies
Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
There have been no material changes to our critical accounting policies from those discussed in our 2014 Annual Report on Form 10-K except as described below:
Inventories. All inventories are accounted for on a lower of cost or market basis, with cost historically determined using a combination of first-in first-out ("FIFO") and weighted average cost. Beginning in the first fiscal quarter of 2015, we have changed our inventory valuation method from FIFO to weighted average cost for certain of our inventories. The effect of this change was not material to our Condensed Consolidated Financial Statements for the three and nine months ended April 31, 2014.
We have entered into walnut purchase agreements with growers, under which they deliver their walnut crop to us during the fall harvest season, and we determine the price for this inventory after receipt and by the end of the fiscal year. This
purchase price is determined by us based on our discretion as provided in the agreements, taking into account market conditions, crop size and quality and nut varieties, among other relevant factors. Since the ultimate purchase price to be paid will be determined subsequent to receiving the walnut crop, we estimate the final purchase price for our interim financial statements. Those interim estimates may subsequently change due to changes in the factors described above and the effect of the change could be significant. Any such changes in estimates are accounted for in the period of change by adjusting inventory on hand or cost of goods sold if the inventory is sold through.
Recent Accounting Pronouncements
See Note 2 to the Notes to Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in our exposure to market risk from that discussed in our 2014 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that, due to the material weakness in our internal control over financial reporting described below, the Company’s disclosure controls and procedures were not effective as of April 30, 2015.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended April 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. There were changes in our internal control over financial reporting during the quarter ended January 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting to remediate the previously reported material weakness related to complex and non-routine transactions. We have enhanced our internal technical accounting capabilities and augmented those capabilities through the use of third party advisors, when necessary. We also developed a technical accounting training program to enhance awareness and understanding of standards and principles related to complex technical accounting topics.
Material Weakness Previously Identified
We previously identified and disclosed in our Annual Report on Form 10-K for the period ended July 31, 2014, a material weakness in our internal control over financial reporting over complex and non-routine transactions that still existed as of April 30, 2015. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness in our internal control over financial reporting was as follows:
| |
• | Complex and Non-routine Transactions — We did not maintain effective controls over the accounting for complex and non-routine transactions. Specifically, we did not utilize sufficient technical accounting capabilities related to complex and non-routine transactions. |
This material weakness resulted in audit adjustments in prior periods related to currency translation associated with the allocation of goodwill to reporting units resulting from a change in segments, impairment of a long-lived intangible asset resulting from a facility closure, classification of restricted cash on the consolidated statement of cash flows and the restatement of the Company’s condensed consolidated financial statements for the three and six months ended January 31, 2013 to correct diluted earnings (loss) per share. Additionally, this material weakness could result in misstatements of the condensed
consolidated financial statements that would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.
Remediation Efforts
We have implemented the following remediation steps to address the previously disclosed material weakness discussed above and to improve our internal control over financial reporting:
Complex and Non-routine Transactions
| |
• | Continued evaluation and enhancement of internal technical accounting capabilities augmented by the use of third-party advisors and consultants to assist with areas requiring specialized technical accounting expertise and reviewed by management. |
| |
• | Development and implementation of technical accounting training, led by appropriate technical accounting experts, to enhance awareness and understanding of standards and principles related to relevant complex technical accounting topics. |
We believe that these remediation actions represent significant improvements to our internal controls. However, before management can conclude that the material weakness has been remediated, the control will need to be operating effectively and tested over a reasonable period of time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting. If not remediated, further remediation measures may be required, which may result in additional implementation time.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
In re Diamond Foods Inc., Shareholder Derivative Litigation
In fiscal 2012, putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond and naming certain executive officers and the members of our board of directors as individual defendants. These lawsuits, which related principally to our accounting for certain payments to walnut growers in fiscal 2010 and 2011, were subsequently consolidated as In re Diamond Foods Inc., Shareholder Derivative Litigation which purports to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement. Following mediation efforts, the parties agreed to terms of a proposed settlement and the court entered an order granting final approval of the settlement on August 19, 2013. On September 23, 2013, a Notice of Appeal from the order granting final approval was filed by a single stockholder. No date for this hearing on this appeal has been scheduled. The Company will continue to incur costs associated with this action, and, depending on the ultimate outcome, could continue to do so, and management’s attention may be diverted to this matter. This could have a material adverse effect on our business, financial condition and results of operations.
Labeling Class Action Cases
On January 3, 2014, Deena Klacko first filed a putative class action against Diamond in the Southern District of Florida, alleging that certain ingredients contained in our TIAS tortilla chip product were not natural and seeking damages and injunctive relief. The lawsuit alleged five causes of actions alleging violations of Florida’s Deceptive and Unfair Trade Practices Act, negligent misrepresentation, breach of implied warranty for particular purpose, breach of express warranty and the Magnuson-Warranty Act. The complaint seeks to certify a class of Florida consumers who purchased TIAS tortilla chips since January 3, 2010. On January 9, 2014, Dominika Surzyn brought a similar class action against Diamond relating to our TIAS tortilla chips in federal court for the Northern District of California. Surzyn purports to represent a class of California consumers who purchased said Kettle TIAS products since January 9, 2010.
On April 2, 2014, Richard Hall filed a putative class action against the Company in San Francisco Superior Court, alleging that certain ingredients contained in our Kettle Brand chips and TIAS Tortilla Chips are not natural and seeking damages and injunctive relief. The complaint purports to assert seven causes of action for alleged violations of California’s Business and Profession’s Code, California’s Consumer Legal Remedies Act and for restitution based on quasi-contract/unjust enrichment. Plaintiff purports to bring this action on his own behalf, as well as on behalf of all consumers in the United States, or alternatively, California, who purchased certain of Diamond’s Kettle Brand Chips or Kettle Brand TIAS tortilla chips within four years of the filing of the complaint.
The Company denies all allegations in these cases. Following mediation and settlement discussions among plaintiffs’
counsel in Klacko, Surzyn and Hall, the parties entered into a settlement agreement, and it is expected that this settlement will resolve all claims on a nationwide basis and include: Diamond to take certain injunctive relief measures to confirm labeling compliance matters; establishment of a $3.0 million common fund for claims made available to the class and for the payment of class administration and attorneys’ fees; and any funds unclaimed by the class to be provided cy pres to a charity as a food donation. The Company recognized the related settlement charges within the consolidated financial statements for fiscal 2014. On October 30, 2014, the court granted preliminary approval of the settlement. On February 23, 2015, the plaintiffs filed a motion for final approval of the settlement. The settlement is subject to final court approval. We cannot predict with certainty the ultimate resolution of these lawsuits, and an unfavorable outcome in excess of amounts recognized as of July 31, 2014, with respect to one or more of these proceedings could have a material adverse effect on our results of operations for the periods in which a loss is recognized.
Other
We are involved in various legal actions in the ordinary course of our business. We do not believe it is feasible to predict or determine the outcome or resolution of these litigation proceedings, or to estimate the amounts of, or potential range of, loss with respect to those proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or settlements that could require substantial payments by us, which could have a material impact on our financial position, results of operations and cash flows.
Item 1A. Risk Factors
You should consider carefully each of the risks described below, together with all of the information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended July 31, 2014, before deciding to invest in our common stock. The risks described herein are applicable to both our domestic and foreign operations. If any of the risks outlined herein occurs, our business, financial condition, or results of operations may suffer.
Risks Related to Our Business
Raw materials that are key ingredients to our products are subject to fluctuations in availability and price that could adversely impact our business and financial results.
The availability, size, quality and cost of raw materials for the production and packaging of our products, including nuts, potatoes, corn and corn products, cooking and vegetable oils, corrugate, resins and other commodities, are subject to price volatility and fluctuations in availability caused by changes in global supply and demand, weather conditions, governmental agricultural and energy programs, exchange rates for foreign currencies and consumer demand. In particular, the availability and cost of walnuts and other nuts are subject to supply contract renewals, crop size, quality, yield fluctuations, and changes in governmental regulation as well as other factors. Additionally, we rely on raw materials that come from regions that suffer from severe water scarcity or yearly fluctuations, such as California, and such conditions may affect the availability of raw materials not only in a particular season but also over time.
We source walnuts primarily from growers with whom we have entered into walnut purchase agreements. To the extent contracted growers deliver less supply than we expected or we are unable to renew enough walnut purchase agreements or enter into such agreements with new growers in any particular year, we may not have sufficient walnut supply under contract to satisfy our business requirements, which could have an adverse effect on our sales and our results of operations. To obtain sufficient walnut supply, which represents a significant portion of our cost of goods sold, we may be required to purchase walnuts from third parties at substantially higher prices or forgo sales to some market segments, which would reduce our profitability. If we forgo sales to such market segments, we may lose customers and may not be able to replace them later. Given our fixed costs from our manufacturing facilities, if we have a lower supply of walnuts or other raw materials, our unit costs will increase and our gross margin will decline.
We make estimates of the price we will pay for walnuts to growers under contract starting in the first quarter of our fiscal year and, pursuant to our accounting policies, finalize the price to be paid to growers by the end of the fiscal year. The selling price to customers for walnuts fluctuates throughout the year depending on market forces. To the extent that we underestimate the price to be paid for walnuts and enter into contracts with our customers for products including walnuts at prices prevailing at the market at that time and based on walnut cost estimates that ultimately prove to be below the final price we determine to pay to growers, our business and results of operations could be harmed. Additionally, to the extent that the price we determine to pay growers ultimately proves to be higher than the value of walnuts, we may sell our walnuts below cost or at lower margins than we desire, and we may need to impair the carrying value of our walnut inventory, so our business and results of operations could be harmed. Each year some of our walnut supply agreements are up for renewal, and competition among
walnut handlers makes renewal with us uncertain. Disruption in our walnut supply and inability to secure walnuts cost effectively may adversely impact our business and our financial results.
Our potato chip products are dependent on suppliers providing us with an adequate supply of quality potatoes on a timely basis. The failure of our suppliers to meet our specifications, quality standards or delivery schedules could have an adverse effect on our potato chip operations. In particular, a sudden scarcity, substantial price increase, quality issues or unavailability of ingredients could adversely affect our operating results. There can be no assurance that alternative ingredients would be available when needed on commercially attractive terms, if at all. In addition, high commodity prices could lead to unexpected costs and price increases of our products which might dampen growth of consumer demand for our products. If we are unable to increase productivity to offset these increased costs or increase our prices, this could substantially harm our business and results of operations.
If we are unable to compete effectively in the markets in which we operate, our sales and profitability would be negatively affected.
Our markets are highly competitive and competition is generally based on product quality, price, brand recognition and loyalty. As a result, there are ongoing competitive product and pricing pressures in the markets in which we operate, as well as challenges in establishing and maintaining profit margins. Our products compete against food and snack products sold by many regional and national companies, some of which are substantially larger and have greater resources than we have. The greater scale and resources that may be available to our competitors could provide them with the ability to lower prices or increase their promotional or marketing spending to compete more effectively. To address these challenges, we must be able to successfully respond to competitive factors, including pricing, promotional incentives and trade terms. We may need to reduce our prices or increase promotional incentives in response to competition or to grow or maintain our market share. If we decide to reduce or eliminate promotional incentives to improve our profitability, we may not be able to compete effectively and we may lose distribution and market share, which could also lead to a decline in revenue. Additionally, losing sales could result in increased inventories, which would adversely impact our liquidity.
Competition and customer pressures may restrict our ability to increase prices in response to commodity or other cost increases or may force us to decrease prices, in the event of commodity or other cost decreases or otherwise. We may also need to increase spending on marketing, advertising and new product innovation to maintain or increase our market share. If we are unable to compete effectively, we could be unable to increase the breadth of the distribution of our products or lose customers or distribution of products, which could have an adverse impact on our sales and profitability. In addition, if we are required to maintain high levels of promotional incentives or trade terms with respect to particular product lines, our margins and profitability would be adversely effected.
If the parties we depend upon for raw material supplies do not perform adequately, our ability to manufacture our products may be impaired, which could harm our business and results of operations.
We rely on third-party suppliers for the raw materials we use to manufacture our products, and our ability to manufacture our products depends on receiving adequate supplies on a timely basis, which may be difficult or uneconomical to procure. If we do not maintain good relationships with suppliers that are important to us or are unable to identify a replacement supplier or develop our own sourcing capabilities, our ability to manufacture our products may be harmed, which would result in interruptions in our business. In addition, even if we are able to find replacement suppliers when needed, we may not be able to enter into agreements with them on favorable terms and conditions, which could increase our costs of production. The occurrence of any of these risks could adversely affect our business and results of operations.
Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations, including foreign currency risks.
We conduct a substantial amount of business with vendors and customers located outside the United States. We hold assets and incur liabilities, earn revenue, and pay expenses in currencies other than the United States dollar, primarily the British pound. Our consolidated financial statements are presented in U.S. dollars and we must translate the assets, liabilities, revenue and expenses into U.S dollars for external reporting purposes. Many factors relating to our international sales and operations, many of which factors are outside of our control, could have a material negative impact on our business, financial condition and results of operations. During fiscal 2014, fiscal 2013, and fiscal 2012, sales outside the United States, primarily in the United Kingdom, Canada, South Korea, Japan, and Netherlands, accounted for approximately 25%, 24% and 23% of our net sales, respectively.
In addition to the other risks described herein, factors that could impact our international sales and operations include:
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• | foreign currency, exchange and transfer restriction, which may unpredictably and adversely impact our consolidated operating results, our asset and liability balances and our cash flow in our consolidated financial statement, even if their value has not changed in their original currency; |
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• | negative economic developments in economies around the world and the instability of governments, including the threat of war, terrorist attacks, epidemic or civil unrest; |
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• | pandemics, such as the flu, which may adversely affect our workforce as well as our local suppliers and customers; |
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• | earthquakes, tsunamis, floods or other major disasters that may limit the supply of nuts or other products that we purchase abroad; |
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• | tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements imposed by governments; |
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• | foreign currency exchange and transfer restrictions; |
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• | increased costs, disruptions in shipping or reduced availability of freight transportation; |
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• | differing labor standards; |
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• | differing levels of protection of intellectual property; |
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• | difficulties and costs associated with complying with U.S. laws and regulations applicable to entities with overseas operations; |
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• | the threat that our operations or property could be subject to nationalization and expropriation; |
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• | varying regulatory, tax, judicial and administrative practices in the jurisdictions where we operate; |
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• | difficulties associated with operating under a wide variety of complex foreign laws, treaties and regulations; and |
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• | potentially burdensome taxation. |
Any of these factors could have an adverse effect on our business, financial condition and results of operations.
We may be required to conduct product recalls, potentially triggering concerns with the safety and quality of our products, which could cause consumers to avoid our products and reduce our sales and net income.
The sale of food products for human consumption involves risk of injury to consumers. We face risks associated with product recalls and liability claims if our products become adulterated, mislabeled or misbranded, or cause injury, illness, or death. Our products may be subject to product tampering and to contamination and spoilage risks, such as mold, bacteria, insects and other pests, shell fragments, cross-contamination and off-flavor contamination. If any of our products were to be tampered with, or otherwise tainted and we were unable to detect it prior to shipment, our products could be subject to a recall. Recalls might also be required due to usage of raw materials provided by third-party ingredient suppliers. Such suppliers are required to supply material free of contamination, but may, on occasion, identify issues after selling material to Diamond manufacturing locations. Our ability to sell products could be reduced if governmental agencies conclude that our products have been tampered with, or that certain pesticides, herbicides or other chemicals used by growers have left harmful residues on portions of the crop or that the crop has been contaminated by aflatoxin or other agents. A significant product recall could cause our products to be unavailable for a period of time and reduce our sales. Adverse publicity could result in a loss of consumer confidence in our products, damage to our reputation and also reduce our sales for an extended period. Product recalls and product liability claims could increase our expenses and have an adverse effect on demand for our products and, consequently, reduce our sales, net income and liquidity.
Material weaknesses can exist in our system of internal control over financial reporting, which could have a material impact on our business.
Our ability to implement our business plan and comply with regulations requires an effective planning and management process. We expect that we will need to improve existing operational and financial systems, procedures and controls, and
implement new ones, to manage our future business effectively. Any implementation delays, or disruption in the transition to new or enhanced systems, procedures or controls, could harm our ability to forecast sales, manage our supply chain, and record and report financial and management information on a timely and accurate basis.
Furthermore, we are required to maintain internal control over financial reporting adequate to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with generally accepted accounting principles. In connection with the restatement of our Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2013, we determined that we had a material weakness as of July 31, 2013, namely that our controls over the evaluation and review of complex and non-routine transactions were not effective. In addition, we had determined that we had a material weakness as of July 31, 2013 relating to our controls over journal entries. As of July 31, 2014, the material weakness related to our controls over journal entries had been remediated. The material weakness related to the evaluation and review of complex and non-routine transactions, however, has not been remediated.
Because the material weakness over the evaluation and review of complex and non-routine transactions has not been remediated, we have concluded that as of April 30, 2015, our internal control over financial reporting were not effective. Until the evaluation and review of complex and non-routine transactions material weakness is fully remediated, it may be difficult for us to manage our business, our results of operations could be harmed, our ability to report results accurately and on time could be impaired, investors may lose faith in the reliability of our statements, and the price of our securities may be materially impacted. We cannot assure you whether, or when, the remaining control deficiency that has been identified as a material weakness will be fully remediated.
We do not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. A material weakness means a deficiency, or combination of deficiencies, in internal control over financial reporting exists such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.
Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our consolidated financial statements. Any such failure could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting, cause us to incur unforeseen costs, negatively impact our results of operations, or cause the market price of our common stock and/or the notes to decline.
Diamond and some of our current and former officers and directors remain parties to lawsuits arising out of or related to Diamond’s restatement of its fiscal 2010 and fiscal 2011 consolidated financial statements, primarily resulting from our accounting for payments to walnut growers related to fiscal 2010 and fiscal 2011, and could result in additional legal expenses and damages, and cause our business, financial condition, results of operations and cash flows to suffer.
In fiscal 2012, putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond and naming certain executive officers and the members of our board of directors as individual defendants. These lawsuits, which related principally to our accounting for certain payments to walnut growers in fiscal 2010 and 2011, were subsequently consolidated as In re Diamond Foods, Inc. Shareholder Derivative Litigation which purports to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement. Following mediation efforts, the parties agreed to terms of a proposed settlement and the court entered an order granting final approval of the settlement on August 19, 2013. On September 23, 2013, a Notice of Appeal from the order granting final approval was filed by a single stockholder. No date for this hearing on this appeal has been scheduled. Former executive officers and members of our board of directors as individual defendants have been the subject of government investigations and lawsuits. Under Delaware law, our bylaws and certain indemnification agreements, we may have an obligation to indemnify former officers and directors in relation to these matters. Insurance funds from our director and officer liability policies were used in connection with the settlements of the shareholder derivative litigation and securities class action litigation and as a result, we will be required to fund indemnity obligations from claims relating to these matters. For example, if appeal proceeds in the shareholder derivative action, our indemnity obligations could result in significant legal expenses or damages and cause our business, financial condition, results of operations and cash flow to suffer.
Government regulations could increase our costs of production and our business could be adversely affected.
As a food company, we are subject to extensive government regulation, including regulation of the manufacturing, importation, transportation, exportation, processing, product quality, packaging, storage, distribution and labeling of our products. Furthermore, there may be changes in the legal and regulatory environment, and governmental entities or agencies in jurisdictions where we operate may impose new manufacturing, importation, transportation, exportation, processing, packaging, storage, distribution, labeling or other restrictions, which could increase our costs and affect our profitability. For example, various regulatory authorities and others have paid increasing attention to the effect on humans due to the consumption of acrylamide—a naturally-occurring chemical compound that is formed in the process of cooking many foods, including potato chips, and a potential carcinogen—and have imposed additional regulatory requirements. In the State of California, we are required to warn about the presence of acrylamide and other potential carcinogens in our products. In addition, the U.S. Food and Drug Administration is currently evaluating banning the use of partially hydrogenated oils in food, which some of our products contain. If consumer concerns about acrylamide or partially hydrogenated oils increase or these substances are regulated further or not allowed in food products, demand for affected products could decline or we may be unable to sell certain products and our revenues and business could be harmed. Efforts to reformulate may be expensive or unsuccessful or may fail to meet consumer expectations, in which event our revenues or business would be harmed. Our manufacturing operations are subject to various national, regional or state and local laws and regulations that require us to obtain licenses relating to customs, health and safety, building and land use and environmental protection. We are also subject to environmental regulations governing the discharge into the air, and the generation, handling, storage, transportation, treatment and disposal of waste materials. New or amended statutes and regulations, increased production at our existing facilities and our expansion into new operations and jurisdictions may require us to obtain new licenses and permits, and could require us to change our methods of operations, which could be costly. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as possible criminal sanctions, all of which could have an adverse effect on our business.
A disruption at any of our production facilities would significantly decrease production, which could increase our cost of sales and reduce our net sales and income from operations.
We process and package our products in several domestic and international facilities and also have co-manufacturing agreements and co-pack arrangements with third parties. A temporary or extended interruption in operations at any of our facilities, whether due to technical or labor difficulties, destruction or damage from fire, flood or earthquake, infrastructure failures such as power or water shortages, raw material shortage or any other reason, whether or not covered by insurance, could interrupt our manufacturing operations, disrupt communications with our customers and suppliers and cause us to lose sales and write off inventory. Any prolonged disruption in the operations of our facilities or our co-packer facilities would have a significant negative impact on our ability to manufacture and package our products on our own or have our products manufactured and packaged and may cause us to seek additional third-party arrangements, thereby increasing production costs. These third parties may not be as efficient as we are and may not have the capabilities to process and package some of our products, which could adversely affect sales or operating income. Further, current and potential customers might not purchase our products if they perceive our lack of alternate manufacturing facilities to be a risk to their continuing source of products.
Changes in the food industry, including changing dietary trends and consumer preferences and adverse publicity about Diamond and the health effects of consuming some products could reduce demand for our products.
Consumer tastes can change rapidly as a result of many factors, including shifting consumer preferences, dietary trends and purchasing patterns. To address consumer preferences, we invest significant resources in research and development of new products. Dietary trends, such as the consumption of food in low carbohydrate content, have in the past, and may in the future, harm our sales. If we fail to anticipate, identify or react to consumer trends, or if new products we develop do not achieve acceptance by retailers or consumers, demand for our products could decline, which would in turn cause our revenue and profitability to be lower.
In addition, some of our products contain sodium, preservatives and other ingredients, the health effects of which are the subject of increasing public scrutiny, including the suggestion that excessive consumption of these ingredients can lead to a variety of adverse health effects. In the United States and other countries, there is increasing consumer awareness of health risks, including obesity, associated with consumption of these ingredients, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food products. A continuing global focus on health and wellness, including weight management, and increasing media attention to the role of food marketing, could adversely affect our sales or lead to stricter regulations and greater scrutiny of food marketing practices. For example, the U.S. Food and Drug Administration is currently evaluating banning the use of partially hydrogenated oils in food, which certain of our products contain. Additionally, we believe consumers are looking increasingly for all natural products. From time to time we have been subject to lawsuits challenging our product labeling practices, including with respect to natural claims, and may be sued for
such practices in the future. These lawsuits can be expensive to defend. Moreover, adverse publicity about regulatory or legal action against us or adverse publicity about our products (including the resources needed to produce them) could damage our reputation and brand image, undermine consumer confidence or customer relations, and reduce demand for our products, even if the regulatory or legal action is unfounded or not material to our operations or even if the adverse publicity regarding our products is unfounded.
Increased costs associated with product processing and transportation, such as water, electricity, natural gas and fuel costs, could increase our expenses and reduce our profitability.
We require a substantial amount of energy and water to make our products. Transportation costs, including fuel and labor, also represent a significant portion of the cost of our products, because we use third-party truck and rail companies to collect our raw materials and deliver our products to our distributors and customers. These costs fluctuate significantly over time due to factors that may be beyond our control, including increased fuel prices, adverse weather conditions or natural disasters, employee strikes or work slowdowns, regulation and increased export and import restrictions. We may not be able to pass on increased costs of production or transportation to our customers. In addition, from time to time, transportation service providers have a backlog of shipping requests, which could impact our ability to ship products in a timely fashion. Increases in the cost of water, electricity, natural gas, fuel or labor and failure to ship products on time, could increase our costs of production and adversely affect our profitability.
The loss of any major customer could decrease sales and adversely impact our net income.
We depend on a few significant customers for a large proportion of our net sales. This concentration has become more pronounced with the trend toward consolidation in the retail grocery store industry. Sales to our largest customer, Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), represented approximately 16%, 16% and 18% of our total net sales in fiscal 2014, 2013, and 2012 respectively. Sales to our second largest customer, Costco Wholesale Corporation, represented approximately 9%, 9%, and 12% of our total net sales in fiscal 2014, 2013, and 2012, respectively. The success of our business is dependent on our ability to successfully manage relationships with these customers, or any other significant customer. Further, there is a continuing trend towards retail trade consolidation, which can create significant cost and margin pressure on our business. The loss of any major customers, or any other significant customer, or a material decrease in their purchases from us, could result in decreased sales and adversely impact our net income.
The consolidation of retail customers could adversely affect us.
Retail customers, such as supermarkets, warehouse clubs and food distributors, continue to consolidate, resulting in fewer customers on which we can rely for business. Consolidation also produces larger, more sophisticated retail customers that can resist price increases and demand lower pricing, increased promotional programs or specifically tailored products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. Further retail consolidation and increasing retail power could materially and adversely affect our product sales, financial condition and results of operations.
If we need to compete with other manufacturers or with retailer brands on the basis of price, our business and results of operations could be negatively impacted.
Our branded products face competition from private label products (retailer brands) that at times may be sold at lower price points. The impact of price gaps between our products and private label products may result in share erosion and harm our business. A number of our competitors have broader product lines, substantially greater financial and other resources and/or lower fixed costs than we have. Our competitors may succeed in developing new or enhanced products that are more attractive to customers or consumers than ours. These competitors may also prove to be more successful in marketing and selling their products than we are; and may be better able to increase prices to reflect cost pressures. We may not compete successfully with these other companies or maintain or grow the distribution of our products. We cannot predict the pricing, commodity costs, or promotional activities of our competitors or whether they will have a negative effect on us. Many of our competitors engage in aggressive pricing and promotional activities. There are competitive pressures and other factors which could cause our products to lose market share, decline in sales, or result in significant price or margin erosion, which would have a material effect on our business, financial condition and results of operations.
A material impairment in the carrying value of acquired goodwill, other intangible assets or tangible assets could negatively affect our consolidated operating results and net worth.
A significant portion of our assets are goodwill and other intangible assets, the majority of which are not amortized but are reviewed at least annually for impairment. If the carrying value of these assets exceeds the current fair value, the asset is considered impaired and is reduced to fair value resulting in a non-cash charge to earnings. Events and conditions that could
result in impairment include a sustained drop in the market price of our common stock, increased competition or loss of market share, product innovation or obsolescence, or product claims that result in a significant loss of sales or profitability over the product life. To the extent our market capitalization (increased by a reasonable control premium) results in a fair value of our common stock that is below our net book value, or if other indicators of potential impairment are present, then we will be required to take further steps to determine if an impairment of goodwill and other intangible assets has occurred and to calculate an impairment loss. If there are future changes in our stock price, or significant changes in the business climate or operating results of our reporting units, we may incur impairment charges related to our intangible assets and goodwill which would negatively impact our consolidated operating results and further reduce our stock price. At April 30, 2015, the carrying value of goodwill and other intangible assets totaled approximately $777.2 million, compared to total assets of approximately $1,245.8 million and total shareholders’ equity of approximately $296.6 million. At April 30, 2014, the carrying value of goodwill and other intangible assets totaled approximately $804.1 million, compared to total assets of approximately $1,223.3 million and total shareholders’ equity of approximately $284.0 million.
Our proprietary brands and packaging designs are essential to the value of our business, and the inability to protect, and costs associated with protecting, our intellectual property could harm the value of our brands and adversely affect our business and results of operations.
Our success depends significantly on our know-how and other intellectual property. We rely on a combination of trademarks, service marks, trade secrets, patents, copyrights and similar rights to protect our intellectual property. Our success also depends in large part on our continued ability to use existing trademarks and service marks in order to maintain and increase brand awareness and further develop our brands.
Our efforts to protect our intellectual property may not be adequate. Third parties may misappropriate or infringe on our intellectual property or develop more efficient and advanced technologies. Our patents expire over time and third parties may use such previously patented technology to compete against us; our third-party manufacturers and partners may also disclose our trade secrets. From time to time, we engage in litigation to protect our intellectual property, which could result in substantial costs as well as diversion of management attention. The occurrence of any of these risks could adversely affect our business and results of operations.
We depend on our key personnel and if we lose the services of any of these individuals, or fail to attract and retain additional key personnel, we may not be able to implement our business strategy or operate our business effectively.
Our future success largely depends on the contributions of our senior management team. We believe that these individuals’ expertise and knowledge about our industry, their respective fields and their relationships with other individuals in our industry are critical factors to our continued growth and success. We do not carry key person insurance. The loss of the services of any member of our senior management team and the failure to hire and retain qualified management and other key personnel could have an adverse effect on our business and prospects. Our success also depends upon our ability to attract and retain additional qualified sales, marketing and other personnel.
Economic downturns may adversely affect our business, financial condition and results of operations.
Unfavorable economic conditions may negatively affect our business and financial results. Poor economic conditions could negatively impact consumer demand for our products, the mix of our products’ sales, our ability to collect accounts receivable on a timely basis, the ability of suppliers to provide the materials required in our operations, and our ability to obtain financing or to otherwise access the capital markets. The occurrence of any of these risks could adversely affect our business, financial condition and results of operations.
The acquisition or divestiture of product lines or businesses could pose risks to our business and the market price of our common stock.
We may review acquisition prospects that we believe could complement our existing business. There is no assurance that we will be successful in identifying, negotiating or consummating any future acquisitions. Any such future acquisitions could result in accounting charges, potentially dilutive issuances of stock and increased debt and contingent liabilities, any of which could have a material effect on our business and the market price of our common stock. Acquisitions entail many financial, managerial and operational risks, including difficulties integrating the acquired operations, effective and immediate implementation of internal control over financial reporting, diversion of management attention during the negotiation and integration phases, uncertainty entering markets in which we have limited prior experience, and potential loss of key employees of acquired organizations. We may be unable to integrate product lines or businesses that we acquire, which could have a material effect on our business and on the market price of our common stock. We may evaluate the various components of our portfolio of businesses and may, as a result, explore divesting such products or businesses. Divestitures have inherent risks, including possible delays in closing transactions (including potential difficulties in obtaining regulatory approvals), the risk of
lower-than-expected sales proceeds for the divested businesses, unexpected costs associated with the separation of the business to be sold from our integrated information technology systems and other operating systems and potential post-closing claims for indemnification. In addition, adverse economic or market conditions may result in fewer potential bidders and unsuccessful divestiture efforts. Transaction costs may be high, and expected cost savings, which are offset by revenue losses from divested businesses, may be difficult to achieve, and we may experience varying success in reducing costs or transferring liabilities previously associated with the divested businesses. In addition, acquisitions or divestitures may result in litigation that can be expensive and divert management’s attention and resources from our core business.
Our business and operations could be negatively impacted if we fail to maintain satisfactory labor relations.
The success of our business depends substantially upon our ability to maintain satisfactory relations with our employees. Our production workforce in one of our facilities is covered by a collective bargaining agreement which expires in March 2018. Strikes or work stoppages and interruptions could occur if we are unable to renew this agreement on satisfactory terms. If a work stoppage or slow down were to occur, it could adversely affect our business and disrupt our operations. The terms and conditions of existing or renegotiated agreements also could increase our costs or otherwise affect our ability to fully implement future operational changes to our business.
Unauthorized access to confidential information and data on our information technology systems and security and data breaches could materially adversely affect our business, financial condition and operating results.
As part of our operations, we rely on our computer systems, some of which are managed by third parties, to manage inventory, process transactions, and process, transmit and store electronic information, communicate with our suppliers and other third parties, and on continued and unimpeded access to secure network connections to use our computer systems. We have physical, technical and procedural safeguards in place that are designed to protect information and protect against security and data breaches as well as fraudulent transactions and other activities. Despite these safeguards and our other security processes and protections, we cannot be assured that all of our systems and processes, including those managed by third parties, are free from vulnerability to security breaches (through cyberattacks, which are evolving and becoming increasingly sophisticated, physical breach or other means) or inadvertent data disclosure by third parties or by us. A significant data security breach, including misappropriation of customer, distributor or employee confidential information, could cause us to incur significant costs, which may include potential cost of investigations, legal, forensic and consulting fees and expenses, costs and diversion of management attention required for investigation, remediation and litigation, substantial repair or replacement costs. We could also experience data losses either by us, or the third parties we rely on to manage certain computer systems, that would impair our ability to manage inventories or process transactions and the negative impact on our reputation and loss of confidence of our customers, distributors, suppliers and others, any of which could have a material adverse impact on our business, financial condition and operating results.
We are in the process of upgrading our information technology infrastructure; including implementing a new enterprise resource planning system and problems with the transition, design or implementation of this upgrade could interfere with our business and operations and adversely affect our financial condition.
We are in the process of upgrading our information technology infrastructure, including implementing a new enterprise resource planning (ERP) system and other complementary information technology systems. We have invested, and will continue to invest, significant capital and human resources in the upgrade, including but not limited to the transition, design and implementation of a new ERP system, which may be disruptive to our underlying business. Any disruptions, delays or deficiencies in the transition, design and implementation of the upgrade and new ERP system, particularly any disruptions, delays or deficiencies that impact our operations, could have a material adverse effect on the implementation of our overall information technology infrastructure. We may experience difficulties as we transition to these new upgraded systems and processes including loss of data, ability to process customer orders, ship products, provide services and support to our customers, bill and track our customers, fulfill contractual obligations, generally conduct financial reporting and file SEC reports in a timely manner and otherwise run our business. We may also experience decreases in productivity as our personnel implement and become familiar with new systems, increased costs and lost revenues. In addition, as we are dependent upon our ability to gather and promptly transmit accurate information to key decision makers, our business, results of operations and financial condition may be materially and adversely affected if our information technology infrastructure does not allow us to transmit accurate information, even for a short period of time. Even if we do not encounter these adverse effects, the transition, design and implementation of the upgrade and new ERP system may be much more costly than we anticipated. If we are unable to successfully design and implement the upgrade and new ERP system as planned, our financial position, results of operations and cash flows could be adversely impacted.
Risks Related to our Indebtedness
We are highly leveraged and have substantial debt service requirements that could adversely affect our ability to fulfill our debt obligations, place us at a competitive disadvantage in our industry and limit our ability to react to changes in the economy or our industry.
We have incurred and will continue to have a substantial amount of indebtedness. Our high debt-service requirements could adversely affect our ability to operate our business, and might limit our ability to take advantage of potential business opportunities. Our ability to make scheduled payments or to refinance our indebtedness depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business and other factors beyond our control. Our business may not generate cash flow in an amount sufficient to enable us to pay the principal of, or interest on, our indebtedness, or to fund our other liquidity needs, including working capital, capital expenditures, product development efforts and other general corporate requirements. We may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. This high degree of leverage could have other important consequences, including: making it more difficult to satisfy obligations with respect to the 7.000% Notes due 2019 (the “Notes”) and our other indebtedness, including restrictive covenants and borrowing conditions, which could result in an event of default under the indenture governing the Notes or the agreements governing our other indebtedness;
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• | increasing our vulnerability to adverse economic, industry or competitive developments; |
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• | exposing us to the risk of increased interest rates because our debt arrangements will be at variable rates of interest; |
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• | restricting us from making strategic acquisitions or causing us to make non-strategic divestitures; |
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• | limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and |
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• | placing us at a competitive disadvantage compared to competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from pursuing. |
Our ability to satisfy our debt obligations, including our obligations under the Notes, will depend upon, among other things, our future operating performance and our ability to refinance indebtedness when necessary. Each of these factors is, to a large extent, dependent on economic, financial, competitive and other factors beyond our control. If, in the future, we cannot generate sufficient cash from operations to make scheduled payments on our debt obligations, we will need to refinance our debt, obtain additional financing, issue additional equity or sell assets. We cannot assure you that our business will generate cash flow or that we will be able to obtain funding sufficient to satisfy our debt service requirements.
Despite current indebtedness levels, we may still be able to incur substantially more debt, including secured debt. This could further increase the risks associated with our significant indebtedness.
We may be able to incur additional substantial indebtedness in the future. Although the terms of the agreements governing our existing indebtedness, the terms of our senior secured asset-based revolving credit facility and our senior secured term loan facility and the indenture governing the Notes contain restrictions on the incurrence of additional indebtedness, indebtedness incurred in compliance with these restrictions could be substantial. The incurrence of additional indebtedness could make it more likely that we will experience some or all of the risks associated with substantial indebtedness.
Our other debt agreements contain restrictions that may limit our flexibility in operating our business.
The agreements governing our debt arrangements contain various covenants that may limit our ability or the ability of our domestic subsidiaries to engage in specified types of transactions that may be in our long-term best interests. These covenants limit our ability, among other things to:
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• | borrow money or guarantee debt; |
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• | pay dividends on or redeem or repurchase stock; |
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• | make specified types of investments and acquisitions; |
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• | enter into or permit to exist contractual limits on the ability of our subsidiaries to pay dividends to us; |
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• | enter into transactions with affiliates; and |
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• | sell assets or merge with other companies. |
These covenants limit our operational flexibility and could prevent us from taking advantage of business opportunities as they arise. A breach of any of these covenants or other provisions in our debt agreements could result in an event of default that, if not cured or waived, could result in such debt becoming immediately due and payable. This, in turn, could cause our other debt to become due and payable as a result of cross-default or cross-acceleration provisions contained in the agreements governing such other debt. In the event that some or all of our debt is accelerated and becomes immediately due and payable, we may not have the funds to repay, or the ability to refinance, such debt.
Risks Related to Our Common Stock
The market price of our common stock is volatile and may result in investors selling shares of our common stock at a loss.
The trading price of our common stock is volatile and subject to fluctuations in price in response to various factors, many of which are beyond our control, including:
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• | our operating performance and the performance of other similar companies; |
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• | changes in our revenues, earnings, prospects, or recommendations of securities analysts who follow our stock or our industry; |
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• | publication of research reports about us or our industry by any securities analysts who follow our stock or our industry; |
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• | speculation in the press or investment community; |
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• | general market conditions, including economic factors unrelated to our performance. |
In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation against us could result in substantial costs and divert our management’s attention and resources from our core business.
We issued a substantial number of shares in connection with our securities litigation settlement and pursuant to the exercise of an outstanding warrant issued to Oaktree, and the trading of these shares in the open market could cause the market price of our common stock to decline.
In connection with an agreement that we entered into to settle a private securities class action against us and two of our former officers, in fiscal 2014 we paid a total of $11.0 million in cash and issued approximately 4.45 million shares of our common stock to a settlement fund. In mid-November, the escrow agent began notifying eligible class participants of their portion of the settlement fund. The shares were issued to eligible class participants on November 14, 2014. The volatility in the trading price of our common stock may increase as a result of our shares being sold after distribution. In addition, on February 19, 2014 Oaktree exercised a warrant to purchase 4,420,859 million shares of our common stock. As a result of the warrant exercise, the volatility in the trading price of our common stock may increase if and when Oaktree decides to sell shares.
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our strategy.
The timing and amount of our working capital and capital expenditure requirements may vary significantly as a result of many factors, including:
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• | market acceptance of our products; |
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• | the need to make large capital expenditures to support and expand production capacity; |
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• | the existence of opportunities for expansion; and |
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• | access to and availability of sufficient management, technical, marketing and financial personnel. |
If our capital resources are not sufficient to satisfy our liquidity needs, we may seek to sell additional equity or debt securities or obtain other debt financing. The sale of additional equity or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. With the exception of the secured credit facility, we have not made arrangements to obtain additional
financing. We may not be able to obtain additional financing, if required, in amounts or on terms acceptable to us, or at all.
Anti-takeover provisions could make it more difficult for a third party to acquire us.
Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Further, some provisions of our charter documents, including provisions establishing a classified board of directors, eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or our management, which could have an adverse effect on the market price of our stock. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit an “interested stockholder” from engaging in a “business combination” with us for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. All of the foregoing could have the effect of delaying or preventing a change in control or management.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following are details of repurchases of common stock during the three months ended April 30, 2015:
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| | | | | | | | | | | | | |
Period | Total number of shares repurchased (1) | | Average price paid per share | | Total number of shares repurchased as part of publicly announced plans | | Approximate Dollar value of shares that may yet be purchased under the plans |
Repurchases from February 1 - February 28, 2015 | 206 |
| | $ | 26.61 |
| | — |
| | $ | — |
|
Repurchases from March 1 - March 31, 2015 | 1,904 |
| | $ | 31.02 |
| | — |
| | $ | — |
|
Repurchases from April 1 - April 30, 2015 | 1,942 |
| | $ | 30.41 |
| | — |
| | $ | — |
|
Total | 4,052 |
| | $ | 30.51 |
| | — |
| | $ | — |
|
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(1) | All of the shares in the table above were originally granted to employees as restricted stock pursuant to our 2005 Equity Incentive Plan (“EIP”). Pursuant to the EIP, all of the shares reflected above were relinquished by employees in exchange for Diamond’s agreement to pay federal and state withholding obligations resulting from the vesting of the restricted stock. The repurchases reflected above were not made pursuant to a publicly announced plan. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed as part of this report or are incorporated by reference to exhibits previously filed with the SEC.
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| | | | | | | | |
| | Filed with this 10-Q | Incorporated by reference |
Number | Exhibit Title | | Form | | File No. | | Date Filed |
| | | | | | | | |
*10.01 | Change of Control Policy | X | | | | | | |
| | | | | | | | |
31.01 | Rule 13a-14(a) and 15d-14(a) Certification of Chief Executive Officer | X | | | | | | |
| | | | | |
31.02 | Rule 13a-14(a) and 15d-14(a) Certification of Chief Financial Officer | X | | | | | | |
| | | | | |
32.01 | Section 1350 Certifications | X | | | | | | |
| | | | | |
101.INS | XBRL Instance Document | X | | | | | | |
| | | | | |
101.SCH | XBRL Taxonomy Extension Schema Document | X | | | | | | |
| | | | | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | | | | | | |
| | | | | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | | | | | | |
| | | | | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | X | | | | | | |
| | | | | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | | | | | | |
*Indicates management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | |
| | DIAMOND FOODS, INC. |
| | | |
Date: June 4, 2015 | | By: | /s/ Raymond P. Silcock |
| | | Raymond P. Silcock |
| | | Executive Vice President and Chief |
| | | Financial Officer |
EXHIBIT INDEX
|
| | | | | | | | |
| | Filed with this 10-Q | Incorporated by reference |
Number | Exhibit Title |
| Form |
| File No. |
| Date Filed |
|
|
|
|
|
|
*10.01 | Change of Control Policy | X | | | | | | |
| | | | | | | | |
31.01 | Rule 13a-14(a) and 15d-14(a) Certification of Chief Executive Officer | X |
|
|
|
|
|
|
|
|
|
|
|
|
31.02 | Rule 13a-14(a) and 15d-14(a) Certification of Chief Financial Officer | X |
|
|
|
|
|
|
|
|
|
|
|
|
32.01 | Section 1350 Certifications | X |
|
|
|
|
|
|
|
|
|
|
|
|
101.INS | XBRL Instance Document | X |
|
|
|
|
|
|
|
|
|
|
|
|
101.SCH | XBRL Taxonomy Extension Schema Document | X |
|
|
|
|
|
|
|
|
|
|
|
|
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X |
|
|
|
|
|
|
|
|
|
|
|
|
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X |
|
|
|
|
|
|
|
|
|
|
|
|
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | X |
|
|
|
|
|
|
|
|
|
|
|
|
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X |
|
|
|
|
|
|
*Indicates management contract or compensatory plan or arrangement.
Exhibit 10.01
DIAMOND FOODS, INC. CHANGE OF CONTROL PLAN
Effective June 2, 2015
This Diamond Foods, Inc. Change of Control Plan (the “Plan”) for the benefit of Designated Employees of Diamond Foods, Inc. (the “Company”) was adopted by the Compensation Committee of the Board of Directors of the Company at a meeting held on June 2, 2015.
RECITALS:
WHEREAS, the Company benefits from the knowledge, experience, expertise and advice of the Designated Employees to manage its business for the benefit of the Company’s stockholders; and
WHEREAS, the Company recognizes that it is necessary to attract and retain key employees, and a key element of programs to attract and retain key employees is to provide assurance about their status in the event of any Change of Control and to avoid uncertainty regarding the consequences of such an event that could adversely affect the performance of the Designated Employees; and
WHEREAS, the Company believes that the existence of this Plan will serve as an incentive to Designated Employees to remain in the employ of the Company, and enhances the Company’s ability to call on and rely upon Designated Employees if a Change of Control were to occur; and
WHEREAS, the Company desires to adopt this Plan to encourage the Designated Employees to continue to devote the Designated Employees’ full attention and dedication to the success of the Company, and to provide specified benefits to the Designated Employees in the event of a Change of Control pursuant to the terms of this Plan.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
1.GENERAL
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1.1 | Purpose. The purpose of this Plan is to provide specified compensation benefits to selected executives, officers and key employees of the Company in the event of a Qualified Termination. |
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1.2 | No Employment Agreement. This Plan does not obligate the Company to continue to employ a Designated Employee for any specific period of time, or in any specific role or geographic location. Subject to the terms of any applicable written employment agreement between the Company and a Designated Employee, the Company may assign a Designated Employee to other duties, and either the Company or the Designated Employee may terminate the Designated Employee’s employment at any time for any reason. |
2. QUALIFIED TERMINATION
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2.1 | Prior Obligations. In the event of a Qualified Termination, the Designated Employee shall be entitled to the benefits described in this Section 2.1. |
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2.1.1 | Accrued Salary and Vacation. All salary and accrued vacation earned through the date of a Qualified Termination shall be paid to the Designated Employee on such Qualified Termination. |
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2.1.2 | Accrued Bonus Payment. The Designated Employee shall receive a lump sum payment of Designated Employee’s bonus for the Company’s prior fiscal year to the extent that any such bonus was earned (as determined by the Company) and is unpaid on the date of a Qualified Termination. |
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2.1.3 | Expense Reimbursement. Within ten (10) days of submission of proper expense reports by the Designated Employee, the Company shall reimburse the Designated Employee for all expenses incurred by the Designated Employee, consistent with Company policy in connection with the business of the Company prior to the date of a Qualified Termination. |
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2.2 | Cash Severance Benefits. In the event of a Qualified Termination of a Senior Executive, such Senior Executive (or beneficiary) shall be entitled to receive an amount equal to six (6) months of such Senior Executive’s Base Salary. The amount shall be paid in cash in one lump sum. Payment shall be made upon the later of ten (10) days following (i) the Qualified Termination, or (ii) delivery of an effective Release (as defined in Section 5.3 below), but not later than sixty (60) days following a Qualified Termination. |
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2.3 | Additional Insurance Benefits. In the event of a Qualified Termination of a Senior Executive, and if, pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”), the Senior Executive elects timely continuation coverage for such Senior Executive and/or any or all dependents of such Senior Executive under the Company’s medical or dental plans as in effect immediately prior to the date of a Qualified Termination, then for a period of up to six (6) months following such Qualified Termination the Senior Executive shall receive a monthly payment from the Company equal to the Company’s portion of the premium(s) for the coverage elected under COBRA for such Senior Executive and such dependents. The Company’s obligation under this Section 2.3 shall terminate upon the insured (e.g., the Designated Employee or a dependent) accepting insurance coverage of that type under another group health plan. For purposes of this COBRA coverage, the date of the “qualifying event” for the Senior Executive and any dependents shall be the date of a Qualified Termination. If the Company determines in its sole discretion that it cannot provide the COBRA benefits without potentially violating applicable laws (including, without limitation, Section 2716 of the Public Health Service Act and the Employee Retirement Income Security Act of 1974, as amended), the Company will in lieu thereof provide to the Senior Executive a taxable monthly payment for a period of six (6) months in an amount equal to the monthly COBRA premium that the Senior Executive would be required to pay to continue the group health coverage in effect on the date of the Senior Executive’s termination of employment (which amount will be based on the premium for the first month of COBRA coverage), which payments will be made regardless of whether the Senior Executive elects COBRA continuation coverage. |
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2.4 | Acceleration of Vesting and Exercisability. If a Designated Employee is subject to a Qualified Termination, contingent upon the Designated Employee’s delivery of an effective Release (as defined in Section 5.3 below), all Equity Compensation Awards granted by the Company to such Designated Employee, shall become fully vested and exercisable. Notwithstanding the foregoing, in the event a performance share unit award specifically provides for accelerated |
vesting in whole or in part upon a Change of Control, the terms of such award shall govern in lieu of this Section 2.4. Additionally, notwithstanding the foregoing, in the event a performance share unit award specifically provides for adjustment or conversion in whole or in part upon a Change of Control (such as conversion into a time-based restricted stock unit), such adjustment or conversion shall be deemed to occur prior to the Qualified Termination.
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2.5 | Alternative Cash Severance and Equity Treatment. Notwithstanding anything in this Plan to the contrary, if a Designated Employee has any cash severance or Equity Compensation Award accelerated vesting or exercisability related to termination of employment pursuant to any other plan, agreement or arrangement with the Company, but, in the case of a Group 3 Employee, disregarding and not including any cash severance arrangement generally available to employees upon termination of employment whether existing or newly adopted by the Company (the “Alternative Change of Control Benefit”), then such Designated Employee shall continue to be subject to such Alternative Change of Control Benefit unless such Designated Employee affirmatively elects in writing to participate in this Plan with such election to be delivered to the Company no later than five business days prior to the closing of the Change of Control or as otherwise determined by the Compensation Committee. In the event such Designated Employee has properly elected to participate in this Plan, the Designated Employee shall not be entitled to any benefits under the Alternative Change of Control Benefit and any benefits under the Alternative Change of Control Benefit shall be disregarded in their entirety and shall not be paid or become effective. |
3. FEDERAL TAX ISSUES
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3.1 | Section 280G. If (1) any amounts payable to the Designated Employee under this Plan or otherwise are characterized as excess parachute payments pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), and (2) the Designated Employee thereby would be subject to any United States federal excise tax due to that characterization, then it is agreed between the parties that amounts payable under this Plan to the Designated Employee shall be reduced (to the extent necessary) in order to achieve the greatest after-tax benefit to the Designated Employee, with reduction to occur in the following order: (i) reduction of payments of cash; and (ii) reduction in equity awards; and in each category reduction shall be pro rata between those payments subject to Section 409A and payments not subject to Section 409A. Unless the Company and the Designated Employee otherwise agree in writing, determination of whether the Designated Employee would be subject to any United States federal excise tax pursuant to Section 4999 of the Code shall be made in writing by an independent public accountant agreed to by the Company and the Designated Employee (the “Accountant”), whose determination shall be conclusive and binding upon the Designated Employee and the Company for all purposes. For purposes of making the calculations required by this Section 3, the Accountant may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Designated Employee shall furnish the Accountant such information and documents as the Accountant may reasonably request in order to make the required determinations. The Company shall bear all reasonable fees and expenses of the Accountant in connection with the services contemplated by this Section 3. |
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3.2 | Section 409A. To the extent that (i) any payments to which the Designated Employee becomes entitled under this Plan in connection with a separation from service constitute nonqualified deferred compensation subject to Code Section 409A, and (ii) the Designated Employee is |
deemed at the time of the separation from service to be a specified employee (as such term is defined in U.S. Treasury Regulation 1.409A-1(i)), then such payment or payments shall not be made or commence until the earlier of (A) the expiration of the six-month period measured from the date of the Designated Employee's separation from service with the Company, or (B) the Designated Employee's date of death following such separation from service; provided, however, that such delay shall only be effected to the extent required to avoid adverse tax treatment to the Designated Employee, including (without limitation) the additional twenty percent (20%) tax for which the Designated Employee would otherwise be liable under Section 409A(a)(l)(B) in the absence of such delay. Upon the expiration of the applicable delay period, any payments which would have otherwise been made during that period in the absence of this paragraph shall be paid to the Designated Employee or his or her beneficiary in one lump sum (without interest). The benefits under this Plan are intended to be exempt from or otherwise comply with the provisions of Section 409A of the Code. If any provision of this Plan is subject to more than one interpretation or construction, such ambiguity shall be resolved in favor of that interpretation or construction which is consistent with such provisions not being subject to the provisions of Section 409A, and for any payments where such construction is not tenable, that those payments comply with Section 409A to the maximum permissible extent. To the extent any payment under this Plan may be classified as a “short-term deferral” within the meaning of Section 409A, such payment shall be deemed a short-term deferral, even if it may also qualify for an exemption from Section 409A under another provision of Section 409A. Payments pursuant to this Plan are intended to constitute separate payments for purposes of U.S. Treasury Regulation 1.409A-2(b)(2).
4. DEFINITIONS
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4.1 | Capitalized Terms Defined. Capitalized terms used in this Plan shall have the meanings set forth in this Section 4, unless the context clearly requires a different meaning or they are defined elsewhere in this Plan. |
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4.2.1 | For a Group 1 Employee, the occurrence of any of the following |
(a) An material act of dishonesty made by the Designated Employee in connection with his or her responsibilities as an employee;
(b) The Designated Employee’s conviction of, or plea of nolo contendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude;
(c) The Designated Employee’s gross misconduct that is materially injurious to the Company;
(d) The Designated Employee’s intentional or willful misconduct or refusal to follow the lawful instructions of the CEO or the Board of Directors of the Company;
(e) The Designated Employee’s unauthorized use or disclosure of any propriety information or trade secrets of the Company or any other party to whom the Designated Employee owes an obligation of nondisclosure as a result of his or her relationship with the Company; and
(f) The Designated Employee’s willful breach of any obligations under any written agreement or covenant with the Company.
Notwithstanding the foregoing, if any of the occurrences set forth in this Section 4.2.1 are capable of being cured after receiving notice from the Company of such occurrence, then the Designated Employee shall have 5 business days from such notice to cure such occurrence. For these purposes, no act or failure to act shall be considered “intentional” or “willful” unless it is done, or omitted to be done, in bad faith without a reasonable belief that the action or omission is in the best interests of the Company.
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4.2.2 | For a Group 2 Employee and/or Group 3 Employee, the occurrence of any of the following |
(a) An material act of dishonesty made by the Designated Employee in connection with his or her responsibilities as an employee;
(b) The Designated Employee’s conviction of, or plea of nolo contendere to, a felony or any crime involving fraud, embezzlement or any other act of moral turpitude;
(c) The Designated Employee’s gross misconduct that is materially injurious to the Company;
(d) The Designated Employee’s intentional or willful misconduct or refusal to follow the lawful instructions of the CEO or the Board of Directors of the Company;
(e) The Designated Employee’s unauthorized use or disclosure of any propriety information or trade secrets of the Company or any other party to whom the Designated Employee owes an obligation of nondisclosure as a result of his or her relationship with the Company;
(f) The Designated Employee’s willful breach of any obligations under any written agreement or covenant with the Company; and
(g) The Designated Employee’s continued failure to perform his or her employment duties after having received a written demand of performance from the Company which specifically sets forth the factual basis for the Company’s belief that the Designated Employee has not substantially performed his or her duties.
Notwithstanding the foregoing, if any of the occurrences set forth in this Section 4.2.2 are capable of being cured after receiving notice from the Company of such occurrence, then the Designated Employee shall have 5 business days from such notice to cure such occurrence. For these purposes, no act or failure to act shall be considered “intentional” or “willful” unless it is done, or omitted to be done, in bad faith without a reasonable belief that the action or omission is in the best interests of the Company.
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4.3 | “Change of Control” means: |
(a) any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended) who, by the acquisition or aggregation of securities, becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities ordinarily (and apart from rights accruing under special circumstances) having the right to vote on elections of directors (the “Base Capital Stock”); except that any change in the relative beneficial ownership of the Company’s securities by any person resulting
solely from a reduction in the aggregate number of outstanding shares of Base Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall be disregarded until such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any securities of the Company; or
(b) the consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization 50% or more of the voting power of the outstanding securities of each of (i) the continuing or surviving entity and (ii) any direct or indirect parent corporation of such continuing or surviving entity; or
(c) a change in the composition of the Board, occurring over a twelve-month period, as a result of which the individuals who constitute the Board at the beginning of such twelve-month period (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such an individual were a member of the Incumbent Board; or
(d) the sale, transfer or other disposition of all or substantially all of the Company’s assets.
Any other provision of this Section 4.3 notwithstanding, a transaction shall not constitute a Change of Control if its sole purpose is (i) to change the state of the Company’s incorporation, (ii) to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction or (iii) to effect a reverse morris trust transaction.
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4.4 | “Change of Control Period” means the period commencing on a Change of Control and ending twelve (12) months following a Change of Control. |
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4.5 | “Company” shall mean Diamond Foods, Inc., a Delaware corporation, and, following a Change of Control, any Successor. |
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4.6 | “Designated Employees” means (A) each of (i) the Chief Executive Officer (“CEO”), (ii) other officers with the title of Executive Vice President or above, and (iii) those employees who are designated as Group 1 Employees by the Company’s Compensation Committee based on recommendations made by the CEO (together, the “Group 1 Employees” and each a “Group 1 Employee”); (B) (i) all employees who are not Group 1 Employees of the Company, who are Vice President level and above (including the UK General Manager), and (ii) those employees who are designated as Group 2 Employees by the Company’s Compensation Committee based on recommendations made by the CEO (together, the “Group 2 Employees” and each a “Group 2 Employee”), and (C) all employees who are not Group 1 Employees or Group 2 Employees of the Company and who hold an outstanding Equity Compensation Award (the “Group 3 Employees” and each a “Group 3 Employee”). |
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4.7 | “Equity Compensation Award” shall mean any award of stock options, restricted stock, restricted stock units, stock appreciation rights or such other equity compensation award held by a Designated Employee granted under an equity compensation plan of the Company or an individual award. |
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4.8.1 | For a Group 1 Employee, the occurrence of any of the following conditions, without the Group 1 Employee’s written consent: |
(a) a reduction of the Designated Employee’s title, position duties or responsibilities to a level materially less than the title, position duties or responsibilities the Designated Employee occupied on the date immediately preceding the date of a Qualified Termination or such other date as agreed to in writing by the Designated Employee and the Company;
(b) a material reduction in the Designated Employee’s base salary or target bonus opportunity from what they were on the date immediately preceding the date of a Qualified Termination;
(c) the Company’s requiring the Designated Employee to be based at any office or location more than fifty (50) miles from the office where the Designated Employee was employed on the date immediately preceding the date of a Qualified Termination; or
(d) failure by the Company to obtain the assumption of this Plan by any Successor.
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4.8.2 | For a Group 2 Employee or Group 3 Employee, the occurrence of any of the following conditions, without the Group 2 Employee’s or Group 3 Employee’s written consent: |
(a) a material reduction in the Designated Employee’s base salary or target bonus opportunity from what they were on the date immediately preceding the date of a Qualified Termination;
(b) the Company’s requiring the Designated Employee to be based at any office or location more than fifty (50) miles from the office where the Designated Employee was employed on the date immediately preceding the date of a Qualified Termination; or
(c) failure by the Company to obtain the assumption of this Plan by any Successor.
Any event shall constitute Good Reason only if: (i) the Designated Employee gives the Company written notice of the Designated Employee’s intention to terminate for Good Reason, which written notice shall specify in reasonable detail the nature of the events, facts and circumstances giving rise to such Good Reason, within ninety (90) days following the later of the occurrence of such events, facts or circumstances or the Designated Employee’s knowledge thereof; and (iii) the Company fails to cure such events, facts or circumstances so as to remove such Good Reason within thirty (30) business days after receipt of such written notice from the Designated Employee. The Designated Employee may terminate the Designated Employee’s employment for the Good Reason specified above if the Designated Employee gives the Company written notice of such termination within sixty (60) days after the expiration of the thirty (30)-day cure period.
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4.9 | “Permanent Disability” means that: |
(a) the Designated Employee has been incapacitated by bodily injury, illness or disease so as to be prevented thereby from engaging in the performance of the Designated Employee’s duties;
(b) such total incapacity shall have continued for a period of six consecutive months; and
(c) such incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Designated Employee’s life.
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4.10 | “Successor” means any successor to or assignee of substantially all of the Company’s business and/or assets, including without limitation, and following a Change of Control, the Company. |
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4.11 | “Senior Executive” means any Group 1 Employee or Group 2 Employee as such terms are defined in Section 4.6 above. |
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4.12 | “Qualified Termination” means a termination of a Designated Employee by the Company other than for Cause, or a Designated Employee’s resignation for Good Reason, in either case within the Change of Control Period. For clarity, the term “Qualified Termination” shall not include any termination of the employment of the Designated Employee: (1) by the Company for Cause; (2) solely as a result of the Permanent Disability of the Designated Employee; (3) as a result of the death of the Designated Employee; or (4) by the Designated Employee resigning from employment (other than resignation for Good Reason). |
5. EXCLUSIVE REMEDY
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5.1 | No Other Benefits Payable. The Designated Employee shall be entitled to no other acceleration of equity benefits from the Company that are expressly conditioned on a Qualified Termination with respect to which the payments and/or benefits described in Section 2 have been provided to the Designated Employee, except as expressly set forth in this Plan. |
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5.2 | No Limitation of Regular Benefit Plans. Except as provided in Section 5.4 below, this Plan is not intended to and shall not affect, limit or terminate any plans, programs or arrangements of the Company that are regularly made available to a significant number of employees or officers of the Company, including, without limitation, the Company’s stock option plans, or, in the case of a Group 3 Employee, any cash severance arrangement generally available to employees upon termination of employment whether existing or newly adopted by the Company. |
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5.3 | Release of Claims. Notwithstanding anything in this Plan to the contrary, the Designated Employee shall not be entitled to any of the benefits under Sections 2.2, 2.3 or 2.4 of this Plan unless the Designated Employee has signed, delivered and satisfied all conditions to an effective and non-revocable release to the Company within sixty (60) days following the Designated Employee’s termination of employment, which shall not release the Designated Employee’s rights to indemnification and/or any fiduciary insurance or arrangements in effect at the time of any Change of Control (the “Release”) covering all known and unknown claims that he or she may then have against the Company or persons affiliated with the Company and such Release has become effective and (ii) has agreed not to prosecute any legal action or other proceeding based upon any of such claims. |
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5.4 | Acceleration Following Non-Assumption of Equity Compensation Awards. For purposes of clarification, notwithstanding anything in this Plan to the contrary, if there is a Change of Control in which unvested Equity Compensation Awards granted to the Designated Employees by the Company are not fully assumed, substituted, or replaced by equivalent Equity Compensation Awards of the Successor, then: (1) any unvested Equity Compensation Awards held by Designated Employees shall have their vesting and exercisability fully accelerated such that such unvested Equity Compensation Awards become fully vested and exercisable |
immediately prior to the effective date of the Change of Control and (2) the Company shall provide reasonable prior written notice to the Designated Employees of: (a) the date that each such unvested Equity Compensation Awards will terminate and (b) the period during which the Designated Employees may exercise (to the extent applicable) any unvested Equity Compensation Awards.
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5.5 | Noncumulation of Benefits. The Designated Employee may not cumulate benefits under this Plan, and any other written agreement or arrangement with the Company. |
6. PROPRIETARY AND CONFIDENTIAL INFORMATION
During the term of this Plan and following any Qualified Termination, the Designated Employee agrees to continue to abide by the terms and conditions of any confidentiality and/or proprietary rights agreement(s) between the Designated Employee and the Company.
7. NON-SOLICITATION
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7.1 | For a period of one (1) year after Qualified Termination, the Senior Executive will not solicit the services or business of any person or entity providing services to, or business with, the Company, or solicit any such person to discontinue provision of such services for, or business with, the Company without the written consent of the Company. |
8. ADMINISTRATION
This Plan shall be administered by the Company’s Board of Directors or its Compensation Committee (collectively, the “Board”). All questions of interpretation or application of this Plan shall be interpreted and determined by the Board, which determination shall be made in good faith, and each such determination by the Board shall be final and binding upon all Designated Employees.
9. ARBITRATION
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9.1 | Disputes Subject to Arbitration. Any claim, dispute or controversy arising out of this Plan, the interpretation, validity or enforceability of this Plan or the alleged breach thereof shall be submitted by the parties to binding arbitration by a sole arbitrator under the rules of the American Arbitration Association; provided, however, that (1) the arbitrator shall have no authority to make any ruling or judgment that would confer any rights with respect to the trade secrets, confidential and proprietary information or other intellectual property of the Company upon the Designated Employee or any third party; and (2) this arbitration provision shall not preclude the Company from seeking legal and equitable relief from any court having jurisdiction with respect to any disputes or claims relating to or arising out of the misuse or misappropriation of the Company’s intellectual property. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. |
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9.2 | Site of Arbitration. The site of the arbitration proceeding shall be in San Francisco, California. |
10. MISCELLANEOUS PROVISIONS
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10.1 | Heirs and Representatives of the Designated Employee; Successors and Assigns of the Company. This Plan shall be binding upon and shall inure to the benefit of and be enforceable by the Designated Employee’s personal and legal representatives, executors, administrators, |
successors, heirs, distributees, devises and legatees. This Plan shall be binding upon and inure to the benefit of and be enforceable by the successors and assigns of the Company.
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10.2 | Amendment and Waiver. This Plan may be modified, amended or terminated by the Board at any time; provided, that no such amendment or termination that is adverse to the rights of the Designated Employees shall be effective (i) with respect to any Equity Compensation Awards that are outstanding at the time of such amendment or termination (A) for a period of one (1) year following such amendment or termination or (B) if such one (1) year period would expire during a Change of Control Period or (ii) with respect to any cash benefits under this Plan for a period of one (1) year following such amendment or termination; provided, however, that this Section 10.2 shall not apply to any new equity compensation awards made to any Designated Employees by an acquirer following a Change of Control (other than awards granted in assumption, substitution or replacement of any Equity Compensation Award that was granted prior to the Change of Control). |
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10.3 | Source of Payments. All cash payments will be paid in cash from the general fund of the Company; no separate funds will be established under the Plan, and the Plan will have no assets. No right of any person to receive any payment under the Plan will be any greater than the right of any other general unsecured creditor of the Company. |
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10.4 | Right of Setoff. The Company’s obligations under this Plan are absolute and unconditional and are not diminished under any circumstances other than as set forth in this Plan or as required under the Company’s Compensation Recovery Policy, and the obligations under this Plan shall not be diminished by any other set-off, counterclaim, defense or other right which the Company may have against the Designated Employee. Nothing in this Plan shall be construed to obligate the Designated Employee to seek other employment or take any other action by way of mitigation of the amounts payable to the Designated Employee under any of the provisions of this Plan. |
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10.5 | Withholding Taxes. All payments made under this Plan shall be subject to reduction to reflect all federal, state, local and other taxes required to be withheld by applicable law. |
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10.6 | Entire Agreement. This Plan represents the entire agreement and understanding between the parties as to the subject matter herein (whether oral or written and whether express or implied). |
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10.7 | Severability. The invalidity or unenforceability of any provision or provisions of this Plan shall not affect the validity or enforceability of any other provision hereof, which shall remain in full force and effect. |
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10.8 | Choice of Law. The validity, interpretation, construction and performance of this Plan shall be governed by the laws of the State of California, without regard to where the Designated Employee has his residence or principal office or where he performs his duties hereunder. |
Exhibit 31.01
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer
I, Brian J. Driscoll, certify that:
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1. | I have reviewed this quarterly report on Form 10-Q for the quarter ended April 30, 2015, of Diamond Foods, Inc.; |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: June 4, 2015
|
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By: | /s/ Brian J. Driscoll |
Name: | Brian J. Driscoll |
Title: | President and Chief Executive Officer |
Exhibit 31.02
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer
I, Raymond P. Silcock, certify that:
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1. | I have reviewed this quarterly report on Form 10-Q for the quarter ended April 30, 2015, of Diamond Foods, Inc.; |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: June 4, 2015
|
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By: | /s/ Raymond P. Silcock |
Name: | Raymond P. Silcock |
Title: | Executive Vice President and Chief Financial Officer |
Exhibit 32.01
Section 1350 Certifications
Pursuant to 18 U. S. C. Section 1350, I, Raymond P. Silcock, hereby certify that, to the best of my knowledge, the Quarterly Report of Diamond Foods, Inc. on Form 10-Q for the quarter ended April 30, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of Diamond Foods, Inc.
/s/ Raymond P. Silcock
Raymond P. Silcock
Executive Vice President and Chief Financial Officer
Date: June 4, 2015
Pursuant to 18 U. S. C. Section 1350, I, Brian J. Driscoll, hereby certify that, to the best of my knowledge, the Quarterly Report of Diamond Foods, Inc. on Form 10-Q for the quarter ended April 30, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in that Report fairly presents, in all material respects, the financial condition and results of operations of Diamond Foods, Inc.
/s/ Brian J. Driscoll
Brian J. Driscoll
President and Chief Executive Officer
Date: June 4, 2015
These certifications accompany this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the registrant specifically incorporates them by reference.
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