Diamond Foods Reports Financial Results for First Three Quarters of Fiscal 2012

SAN FRANCISCO, Nov. 14, 2012 (GLOBE NEWSWIRE) -- Diamond Foods, Inc. (Nasdaq:DMND) ("Diamond") today reported financial results for the first three quarters of its fiscal 2012 and filed with the Securities and Exchange Commission ("SEC") its restated consolidated financial statements for the fiscal years 2010 and 2011, and interim periods ended January 31, 2010, April 30, 2010, July 31, 2010, October 31, 2010, January 31, 2011, April 30, 2011 and July 31, 2011. The restatement resulted in reductions in income before taxes of $39.5 million in fiscal 2011 and $17.0 million in fiscal 2010 from amounts previously reported.

"Today Diamond made an important first step in becoming current with our financial reporting and we look forward to completing our other required filings," said Diamond's Chief Executive Officer Brian Driscoll, who joined the company on May 8, 2012. "Clearly, the results for the first three quarters of 2012 demonstrate that Diamond faced challenges. However, we have a strong brand portfolio to build upon and have launched a new strategic direction with a focus on investing in innovation and brand building, significantly improving our cost structure and rebuilding our walnut supply."

Q1 – Q3 Fiscal Year 2012 Financial Review

• For the three quarters ended April 30, 2012, net sales were $757.4 million, up 3.5 percent over the prior year restated period. The increase was primarily due to an 11.0 percent increase in culinary/retail in-shell sales and a 10.0 percent increase in snack sales, offset by a 36.2 percent decrease in total non-retail sales. The decline in non-retail sales was primarily due to a significant drop in walnut crop deliveries to Diamond in the fall of 2011.
   
• Gross profit as a percentage of net sales was 18.1 percent in the first three quarters of fiscal 2012, down from 22.9 percent in the prior year restated period. The greatest impact on gross margin was a substantial decline in walnut crop deliveries to Diamond and an increase in average walnut cost per pound of over 50 percent. Rising prices of other commodities and higher operating costs primarily due to excess plant capacity also contributed to the downward pressure on gross margin.
   
• Selling, general and administrative expense (SG&A) was $97.0 million in the first three quarters of fiscal 2012, a 35.6 percent increase compared to $71.6 million in the prior year restated period. The increase in SG&A expense was primarily related to the audit committee investigation, restatement and related expenses. When adjusted for certain costs associated with the audit committee investigation, restatement, and related matters, SG&A was $76.0 million compared to $71.6 million in the prior year restated period. The increase was due primarily to an increase in selling related expenses.
   
• Advertising expense was $31.6 million in the first three quarters of fiscal 2012 compared to $34.4 million in the prior year restated period, a decline of 8.2 percent. The decrease in advertising expenses was primarily due to the cancellation of programs during the third quarter of fiscal 2012 in an effort to reduce costs.
   
• Acquisition and integration expenses were $40.6 million in the first three quarters of fiscal 2102 primarily related to the terminated Pringles acquisition, compared to $7.5 million in the prior year restated period primarily related to Kettle integration.
   
• Interest expense was $19.9 million in the three quarters of fiscal 2012 compared to $18.1 million in the prior year restated period, an increase of 9.9% due primarily to the forbearance fee of 0.25% paid to our lenders.
   
• Income tax expense was $1.7 million in the first three quarters of fiscal 2012, compared to $12.3 million in the prior year restated period. The tax benefits of the company's pre-tax loss of $51.7 million for the first three quarters of fiscal 2012 were offset by a $27.6 million charge to establish a valuation allowance against deferred tax assets. The valuation allowance charge was a result of recent net operating losses. Diamond also recognized a $5.6 million benefit in taxes in the first quarter of fiscal 2012 due to a favorable ruling with the U.K. tax authorities. Reversal of the valuation allowance in future periods is dependent on future taxable income and would result in income tax benefit in those periods.
   
• The net loss for the first three quarters of fiscal 2012 was $53.4 million compared to net income of $23.7 million in the prior year restated period. The decrease was due primarily to the decline in gross profit, the significant increase in expenses related to the audit committee investigation, restatement, and Pringles integration planning, and the tax charge related to the valuation allowance against net deferred tax assets.
   
• Non-GAAP income before income taxes for the first three quarters of fiscal 2012, which excludes acquisition and integration, audit committee investigation, restatement, legal and other related expenses, was $11.0 million compared to $43.6 million in the prior year restated period. The decrease was due primarily to the decline in gross profit. Please refer to the non-GAAP information table that follows.
   
• GAAP EPS on a fully diluted basis for the first three quarters of fiscal 2012 was ($2.46) compared to $1.05 in the prior year restated period.
   
• Non-GAAP EPS on a fully diluted basis for the first three quarters of fiscal 2012 was $0.53 compared to a restated non-GAAP EPS of $1.54 in the prior year restated period. Please refer to the non-GAAP information table that follows.
   
• Capital expenditures were $40.6 million in the first three quarters of fiscal 2012, compared to $15.2 million in the prior year restated period. The increase was primarily due to the Kettle plant expansions in Beloit, Wisconsin and Norwich, England and for automation of Emerald's 'Breakfast on the Go' product line.
   
• Adjusted EBITDA for the first three quarters of fiscal 2012 declined to $58.9 million from $89.6 million in the prior year primarily due to lower gross profit. Please refer to the reconciliation of net income to adjusted EBIDTA that follows.
   
• As of July 31, 2012, cash and availability on Diamond's bank revolving line of credit was in excess of $70 million.

Brand Performance

In the most recent 12-week Nielsen tracking period ended October 27, 2012, retail sales results reflect Diamond's recent changes in brand strategy direction. For both Emerald and Kettle, Diamond has reduced trade spend to improve net price realization and leverage brand equity rather than use discounting as a means to drive sales. While Emerald snack nuts and Kettle Brand potato chips experienced retail sales declines and lost share as a result of planned reductions in promotional spending, non-promoted sales growth for both brands outpaced category growth resulting in share gains in a non-promoted environment. Emerald Breakfast on the go! and Pop Secret outgrew their respective categories and gained share. Diamond of California culinary sales declined primarily due to volume declines following price increases, which resulted in lost share in the category.

Diamond's U.S. Nielsen retail scanner performance along with category data for the 12-week period ended October 27, 2012 (U.S. Expanded All Outlets Combined) compared to the similar prior year period was as follows:

Business Outlook

Full-year fiscal 2012 financial results have not yet been finalized, but the following are estimates for full year results:

• Net sales: $975 to $980 million
• Snack sales: $600 to $605 million
• Culinary sales: $290 to $295 million
• Gross margin: 18.0% to 18.5%
• Adjusted EBITDA: $78 to $81 million

Note: Adjusted EBITDA above excludes Pringles integration related costs, Fishers, Indiana plant closure charges, audit committee and restatement related accounting and legal expenses and other costs.

Restatement

Diamond today also filed its restated consolidated financial statements for fiscal years 2011 and 2010 and interim periods ended January 31, 2010, April 30, 2010, July 31, 2010, October 31, 2010, January 31, 2011, April 30, 2011 and July 31, 2011 with the SEC.

"The company regrets the extended time investors had to wait for financial reports during the restatement process," said Brian Driscoll, Diamond's President and CEO. "The company has emerged from this process with strengthened financial discipline and rigorous commitment to enhancing internal controls and remediating material weaknesses."

• The Audit Committee and the company have determined that certain grower payments of $20.8 million and $61.5 million previously accounted for in fiscal 2011 and 2012, were not accounted for in the correct periods. Corrections were made to account for these payments in the appropriate periods of fiscal 2010 and 2011. The restatement also included corrections related to accounts payable and accrued expenses which were accounted for in incorrect periods; these adjustments decreased net income $3.5 million in 2011 and $0.1 million in 2010.
   
• The restatement resulted in a reduction in fiscal 2011 income before income taxes of $39.5 million ($69.1 million previously reported compared to $29.7 million restated), and $17.0 million in fiscal 2010 ($40.2 million previously reported compared to $23.2 million restated). Please refer to the summarized GAAP Statement of Operations table that follows.
   
• Diluted EPS for restated fiscal 2011 was $1.17 compared to $2.22 per share as previously reported and $0.82 for restated fiscal 2010 as compared to $1.36 per share as previously reported.
   
• Non-GAAP diluted EPS for restated fiscal 2011 was $1.76 compared to $2.61 per share as previously reported and $1.29 for restated fiscal 2010 as compared to $1.91 per share as previously reported. Please refer to  the non-GAAP financial information table that follows.
   
• Gross margin for restated fiscal 2011 was 22.4 percent compared to 26.0 percent as previously reported and 21.2 percent for restated fiscal 2010 as compared to 23.7 percent as previously reported. The decrease primarily was due to the correction of the walnut costs, which increased cost of goods sold in fiscal 2010 and 2011.
   
• Adjusted EBITDA for restated fiscal 2011 was $111.5 million compared to $146.2 million as previously reported and $68.2 million for restated fiscal 2010 compared to $84.9 million as previously reported.
   
• In connection with the Audit Committee investigation, management identified material weaknesses in internal control over financial reporting in three areas: control environment, walnut grower accounting, and accounts payable and accrued expenses. Numerous remediation steps have been implemented or are in progress to correct these weaknesses, including: enhanced oversight and controls, leadership changes, revised walnut cost estimation policy, enhanced documentation, oversight and monitoring of accounting policies related to walnut payments, and improved financial and operational reporting throughout the organization. For a list of remediation steps, please refer to the 10-K/A or supplemental presentation, both of which are available on the Diamond Foods website.

Conference Call and Webcast

Diamond will host an investor conference call and webcast today, November 14, 2012, at 2:00 p.m. Pacific Standard Time, to discuss these results and the restatement. To participate in the call via telephone dial (877) 681-3373 from the U.S./Canada or (719) 325-2171 elsewhere and enter the participant pass code of 279-604. To listen to the call over the internet, visit Diamond's website at www.diamondfoods.com and select "Investor Relations."

Archived audio replays of the call will be available on the Company's website and via telephone. The latter will begin approximately two hours after the call's conclusion and remain available through 5:00 p.m. Pacific Standard Time November 21, 2012. It can be accessed by dialing (888) 203-1112 from the U.S./Canada or (719) 457-0820 elsewhere. Both phone numbers require the participant pass code 884-2287.

To receive email notification of future press releases from Diamond Foods, please visit http://investor.diamondfoods.com and select "email alerts."

**Q1 tax benefit is comprised of: discrete tax benefit of $5.5 million resulting, primarily, from the conclusion of a tax ruling with the United Kingdom tax authorities, acquisition and integration related expenses resulting in a tax benefit of $6.1 million, and the forecasted annual tax rate applied to profit before tax and acquisition and integration related expenses, resulting in a tax benefit of $3.0 million. 

Q2 tax benefit is the result of acquisition and integration related expenses and the forecasted annual tax rate applied to profit before tax and acquisition and integration related expenses.

Q3 tax expense is, primary, the effect of a valuation allowance applied against deferred tax assets (principally, net operating losses in the current fiscal year and carryforward State tax credits).

Non-GAAP Financial Information

We have provided the following non-GAAP financial information for the 12 months ended July 31, 2011 and 2010.

About Diamond's non-GAAP Financial Measures

This release contains non-GAAP financial measures of Diamond's performance ("non-GAAP financial measures") for different periods. Non-GAAP financial measures should not be considered as a substitute for financial measures prepared in accordance with GAAP. Diamond's non-GAAP financial measures do not reflect a comprehensive system of accounting, and differ both from GAAP financial measures and from non-GAAP financial measures used by other companies. Diamond urges investors to review its reconciliation of non-GAAP financial measures to GAAP financial measures, and its financial statements to evaluate its business.

Diamond believes that its non-GAAP financial measures provide meaningful information regarding operating results because they do not include amounts that Diamond excludes when monitoring operating results and assessing performance of the business. Diamond believes that its non-GAAP financial measures also facilitate comparison of results for current periods and business outlook for future periods. Diamond's non-GAAP financial measures include adjustments for the following items:

• In the third quarter of fiscal 2012, $11.3 million in fees were incurred as a result of the proposed merger of Pringles, $5.7 million in fees were incurred related to the audit committee investigation, resulting restatement, and related items, $2.6 million in expenses were incurred related to certain SG&A costs, and $1.0 million in expenses were incurred related to the forbearance fee.
   
• In the second quarter of fiscal 2012, $12.1 million in fees were incurred as a result of the proposed merger of Pringles and $10.7 million in fees were incurred related to the audit committee investigation.
   
• In the first quarter of fiscal 2012, $17.2 million in fees were incurred as a result of the proposed merger of Pringles, $1.8 million was accrued for settlement of walnut labeling claims, and $0.2 million in fees were incurred related to the audit committee investigation.
   
• In the fourth quarter of fiscal 2011, $12.9 million in expenses were incurred as a result of the integration of Kettle Foods and the proposed merger of Pringles.
   
• In the third quarter of fiscal 2011, $5.9 million in expenses were incurred as a result of the integration of Kettle Foods and the proposed merger of Pringles.
   
• In the second quarter of fiscal 2011, $1.0 million in expenses were incurred as a result of the integration of Kettle Foods.
   
• In the first quarter of fiscal 2011, $0.6 million in expenses were incurred as a result of the integration of Kettle Foods.
   
• In the fourth quarter of fiscal 2010, $1.1 million in expenses were incurred as a result of the acquisition of Kettle Foods.
   
• In the third quarter of fiscal 2010, $12.3 million in expenses were incurred as a result of the acquisition of Kettle Foods. Other expense included $1.8 million in early extinguishment charges from our prior credit facility, and $10.2 million in transaction expenses, primarily legal and accounting fees, bridge financing costs and advisory fees. Additionally, Cost of Goods Sold included $0.3 million in inventory step-up charges.
   
• In the second quarter of fiscal 2010, $0.5 million in fees were incurred primarily to achieve $1 million in various prior period R&D and other tax credits, including costs to file amended tax returns.
   
• Adjusted EBITDA is used by management as a measure of operating performance. Adjusted EBITDA is defined as net income before interest expense, income taxes, stock-based compensation, depreciation, amortization, and other expenses, including the aforementioned acquisition and integration costs. We believe that adjusted EBITDA is useful as an indicator of ongoing operating performance. As a result, some management reports feature adjusted EBITDA, in conjunction with traditional GAAP measures, as part of our overall assessment of company performance.

Diamond's management uses non-GAAP financial measures in internal reports used to monitor and make decisions about its business, such as monthly financial reports prepared for management. The principal limitation of the non-GAAP financial measures is that they exclude significant expenses and gains required under GAAP. They also reflect the exercise of management's judgments about which adjustments are appropriately made. To mitigate this limitation, Diamond presents the non-GAAP financial measures in connection with GAAP results, and recommends that investors do not give undue weight to them. Diamond believes that non-GAAP financial measures provide useful information to investors by allowing them to view the business through the eyes of management, facilitating comparison of results across historical and future periods, and providing a focus on the underlying operating performance of the business.

Note regarding forward-looking statements

This press release includes forward-looking statements, including statements about our future financial and operating performance and results, business strategy, strength of our brand portfolio, our filing of delayed SEC filings, our position in the walnut industry, potential for optimizing our cost structure and streamlining our supply chain, ability to grow, expand margins and deliver shareholder value, fiscal 2012 financial results, enhancing 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 press release, and we make such forward-looking statements pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. 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 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 press release 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 press release. Actual results may differ materially from what we currently expect because of many risks and uncertainties, such as: uncertainty about the need to file additional periodic reports and financial information in connection with our restatement disclosures; risks relating to our leverage and its effect on our ability to respond to changes in our business, markets and industry; increase in the cost of our debt; ability to raise additional capital and possible dilutive impact of raising such capital; risks relating to litigation and regulatory proceedings; risks related to our current inability to timely file required periodic reports under the Securities Exchange Act of 1934, as amended, and any resulting delisting of Diamond's common stock on the NASDAQ Global Select Market; uncertainties relating to relations with growers; availability and cost of walnuts and other raw materials; increasing competition and possible loss of key customers; and general economic and capital markets conditions. 

About Diamond

http://www.diamondfoods.com/">Diamond Foods is an innovative packaged food company focused on building and energizing brands including http://www.kettlefoods.co.uk/">Kettle® Chips, http://www.emeraldnuts.com/">Emerald® snack nuts, http://www.popsecret.com/">Pop Secret® popcorn, and http://www.diamondnuts.com/">Diamond of California® culinary and snack nuts. The Company's products are distributed in a wide range of stores where snacks and culinary nuts are sold.

Corporate Web Site: www.diamondfoods.com

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