##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 31, 2009
 OR
 o
    
    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)
 Delaware
(State of Incorporation)
    
    20-2556965
(IRS Employer Identification No.)600 Montgomery Street, 17th Floor 
San Francisco, California
(Address of Principal Executive Offices)
    
    94111-2702
(Zip Code)
 415-912-3180
(Telephone No.)
 þ o
 o o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o o þ




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##### 



TABLE OF CONTENTS
 PagePart I. FINANCIAL INFORMATION
    
    
    4Item 1. Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    19Part II.OTHER INFORMATION
    
    
    19Item 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults Upon Senior Securities
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    20SIGNATURE
    
    
    21EX-31.01EX-31.02EX-32.01
  2




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##### Table of Contents



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   3




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
(Unaudited)
 October 31,
    
    
    July 31,
    
    
    October 31,2009
    
    
    2009
    
    
    2008ASSETSCurrent assets:Cash and cash
equivalents
    
    $
    6,591
    
    
    $
    24,802
    
    
    $
    4,885Trade receivables, net
    
    
    84,267
    
    
    
    33,492
    
    
    
    123,422Inventories
    
    
    174,397
    
    
    
    85,027
    
    
    
    212,147Deferred income taxes
    
    
    13,234
    
    
    
    13,109
    
    
    
    7,387Prepaid expenses and other current assets
    
    
    3,394
    
    
    
    3,594
    
    
    
    3,816Total current assets
    
    
    281,883
    
    
    
    160,024
    
    
    
    351,657Property, plant and equipment, net
    
    
    51,581
    
    
    
    51,115
    
    
    
    51,681Deferred income taxes
    
    
    5,954
    
    
    
    6,230
    
    
    
    5,227Goodwill
    
    
    75,243
    
    
    
    76,076
    
    
    
    80,416Other intangible assets, net
    
    
    97,417
    
    
    
    97,883
    
    
    
    100,523Other long-term assets
    
    
    3,786
    
    
    
    3,564
    
    
    
    4,499Total assets
    
    $
    515,864
    
    
    $
    394,892
    
    
    $
    594,003LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable
    
    $
    
    
    
    $
    
    
    
    $
    83,250Current portion of long-term debt
    
    
    16,250
    
    
    
    15,000
    
    
    
    11,250Accounts payable and accrued liabilities
    
    
    87,516
    
    
    
    64,453
    
    
    
    86,860Payable to growers
    
    
    114,626
    
    
    
    29,149
    
    
    
    135,740Total current liabilities
    
    
    218,392
    
    
    
    108,602
    
    
    
    317,100Long-term obligations
    
    
    95,053
    
    
    
    100,085
    
    
    
    111,425Deferred income taxes
    
    
    2,120
    
    
    
    1,221
    
    
    
    Other liabilities
    
    
    12,168
    
    
    
    11,643
    
    
    
    7,831Stockholders 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; 16,852,947,
16,753,796 and 16,548,985 shares issued and 16,626,540, 16,552,019 and
16,366,095 shares outstanding at October 31, 2009, July 31, 2009 and
October 31, 2008, respectively
    
    
    17
    
    
    
    17
    
    
    
    16Treasury stock, at cost: 226,407, 201,777 and 182,890 shares held at
October 31, 2009, July 31, 2009 and October 31, 2008, respectively
    
    
    (4,930
    )
    
    
    (4,256
    )
    
    
    (3,816
    )Additional paid-in capital
    
    
    123,870
    
    
    
    122,817
    
    
    
    114,819Accumulated other comprehensive income (loss)
    
    
    (1,067
    )
    
    
    (1,296
    )
    
    
    1,392Retained earnings
    
    
    70,241
    
    
    
    56,059
    
    
    
    45,236Total stockholders equity
    
    
    188,131
    
    
    
    173,341
    
    
    
    157,647Total liabilities and stockholders equity
    
    $
    515,864
    
    
    $
    394,892
    
    
    $
    594,003
  4




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##### Table of Contents



DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
(Unaudited)
 Three MonthsEnded October 31,2009
    
    
    2008Net sales
    
    $
    180,641
    
    
    $
    195,526Cost of sales
    
    
    135,150
    
    
    
    154,457Gross profit
    
    
    45,491
    
    
    
    41,069Operating expenses:Selling, general and administrative
    
    
    13,497
    
    
    
    15,772Advertising
    
    
    6,292
    
    
    
    5,850Total operating expenses
    
    
    19,789
    
    
    
    21,622Income from operations
    
    
    25,702
    
    
    
    19,447Interest expense
    
    
    1,248
    
    
    
    1,449Other expense
    
    
    
    
    
    
    898Income before income taxes
    
    
    24,454
    
    
    
    17,100Income taxes
    
    
    9,524
    
    
    
    6,404Net income
    
    $
    14,930
    
    
    $
    10,696Earnings per share:Basic
    
    $
    0.90
    
    
    $
    0.66Diluted
    
    $
    0.88
    
    
    $
    0.64Shares used to compute earnings per share:Basic
    
    
    16,269
    
    
    
    15,925Diluted
    
    
    16,685
    
    
    
    16,273Dividends declared
    
    $
    0.045
    
    
    $
    0.045
  5




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##### Table of Contents



DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three MonthsEnded October 31,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    14,930
    
    
    $
    10,696Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    2,634
    
    
    
    2,175Stock-based compensation
    
    
    571
    
    
    
    1,093Excess tax benefit from ESPP and stock option transactions
    
    
    (253
    )
    
    
    (311
    )Deferred income taxes
    
    
    1,088
    
    
    
    575Changes in assets and liabilities (excluding business acquired):Trade receivables
    
    
    (50,775
    )
    
    
    (75,483
    )Inventories
    
    
    (89,370
    )
    
    
    (115,711
    )Accounts payable and accrued liabilities
    
    
    23,589
    
    
    
    37,721Payable to growers
    
    
    85,477
    
    
    
    78,798Other, net
    
    
    631
    
    
    
    1,296Net cash used in operating activities
    
    
    (11,478
    )
    
    
    (59,151
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of assets
    
    
    133
    
    
    
    5Purchases of property, plant and equipment
    
    
    (2,085
    )
    
    
    (2,061
    )Acquisition of Pop Secret
    
    
    (62
    )
    
    
    (191,734
    )Net cash used in investing activities
    
    
    (2,014
    )
    
    
    (193,790
    )CASH FLOWS FROM FINANCING ACTIVITIES:Note payable borrowings
    
    
    
    
    
    
    83,250Proceeds from issuance of long-term debt
    
    
    
    
    
    
    125,000Payment of long-term debt
    
    
    (3,779
    )
    
    
    (22,557
    )Debt issuance costs
    
    
    
    
    
    
    (1,973
    )Dividends paid
    
    
    (748
    )
    
    
    (736
    )Excess tax benefit from ESPP and stock option transactions
    
    
    253
    
    
    
    311Other, net
    
    
    (445
    )
    
    
    252Net cash provided by (used in) financing activities
    
    
    (4,719
    )
    
    
    183,547Net decrease in cash and cash equivalents
    
    
    (18,211
    )
    
    
    (69,394
    )Cash and cash equivalents:Beginning of period
    
    
    24,802
    
    
    
    74,279End of period
    
    $
    6,591
    
    
    $
    4,885Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    768
    
    
    $
    895Income taxes
    
    $
    983
    
    
    $
    3,618Non-cash investing activity:Accrued capital expenditures
    
    $
    848
    
    
    $
    160Liabilities related to Pop Secret acquisition
    
    $
    895
    
    
    $
    7,000
  6




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##### Table of Contents



DIAMOND FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the quarters ended October 31, 2009 and 2008
 (In thousands, except share and per share information)
 (1) Organization and Basis of Presentation
     (2) Recent Accounting Pronouncements
 Generally
Accepted Accounting Principles.
 Compensation Retirement Benefits.
 (3) Fair Value Measurements
  7




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##### Table of Contents



Fair Value Measurements and Disclosures
   Level 1
 Level 2
 Level 3
 Assets and Liabilities Measured at Fair Value on a Recurring Basis
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TOTAL (a)Liabilities:Derivative liabilities
    
    $
    
    
    
    $
    394
    
    
    $
    
    
    
    $
    394Total liabilities measured at fair value
    
    $
    
    
    
    $
    394
    
    
    $
    
    
    
    $
    394
 
 (a)
    
    The total fair value amounts for liabilities also represent the related carrying
amounts.  8




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##### Table of Contents



Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
   (4) Stock Plan Information
 Compensation  Stock Compensation
 Earnings Per Share.
 Stock Option Awards:
 Three Months Ended October 31,2009
    
    
    2008Average expected life, in years
    
    
    6
    
    
    
    6Expected volatility
    
    
    46.00
    %
    
    
    36.00
    %Risk-free interest rate
    
    
    3.44
    %
    
    
    3.77
    %Dividend rate
    
    
    0.60
    %
    
    
    0.68
    %
 9




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##### Table of Contents



WeightedaverageNumber of
    
    Weighted
    
    remaining
    
    AggregateShares
    
    average exercise
    
    contractual life
    
    intrinsic value (in(in thousands)
    
    price per share
    
    (in years)
    
    thousands)Outstanding at July 31, 2009
    
    
    1,332
    
    
    $
    18.54Granted
    
    
    10
    
    
    
    33.00Exercised
    
    
    (17
    )
    
    
    17.92Cancelled
    
    
    (1
    )
    
    
    17.67Outstanding at October 31, 2009
    
    
    1,324
    
    
    
    18.65
    
    
    
    6.7
    
    
    $
    15,244Exercisable at October 31, 2009
    
    
    1,111
    
    
    
    17.82
    
    
    
    6.4
    
    
    
    13,693
   WeightedNumber of
    
    average grantShares
    
    date fair value(in thousands)
    
    per shareNonvested at July 31, 2009
    
    
    225
    
    
    $
    8.62Granted
    
    
    10
    
    
    
    15.17Vested
    
    
    (22
    )
    
    
    7.77Cancelled
    
    
    
    
    
    
    Nonvested at October 31, 2009
    
    
    213
    
    
    
    9.01
  Restricted Stock Awards:
 WeightedNumber of
    
    average grantShares
    
    date fair value(in thousands)
    
    per shareOutstanding at July 31, 2009
    
    
    336
    
    
    $
    21.78Granted
    
    
    93
    
    
    
    28.60Vested
    
    
    (67
    )
    
    
    20.88Cancelled
    
    
    (11
    )
    
    
    20.63Outstanding at October 31, 2009
    
    
    351
    
    
    
    23.81
  10




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##### Table of Contents



(5) Earnings Per Share
   Three MonthsEnded October 31,2009
    
    
    2008Numerator:Net income
    
    $
    14,930
    
    
    $
    10,696Less: income allocated to participating securities
    
    
    (309
    )
    
    
    (253
    )Income attributable to common shareholders  basic
    
    
    14,621
    
    
    
    10,443Add: undistributed income attributable to participating securities
    
    
    293
    
    
    
    234Less: undistributed income reallocated to participating securities
    
    
    (286
    )
    
    
    (229
    )Income attributable to common shareholders  diluted
    
    $
    14,628
    
    
    $
    10,448Denominator:Weighted average shares outstanding  basic
    
    
    16,269
    
    
    
    15,925Dilutive shares  stock options
    
    
    416
    
    
    
    348Weighted average shares outstanding  diluted
    
    
    16,685
    
    
    
    16,273Income per share attributable to common shareholders (1):Basic
    
    $
    0.90
    
    
    $
    0.66Diluted
    
    $
    0.88
    
    
    $
    0.64
 
 (1)
    
    Certain computations may reflect rounding adjustments.  (6) Acquisition of Pop Secret
  Business Combinations
 11




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##### Table of Contents



Inventory
    
    $
    6,817Property, plant and equipment
    
    
    17,023Brand intangibles
    
    
    62,500Customer relationships
    
    
    34,900Goodwill
    
    
    69,811Acquisition liabilities
    
    
    (765
    )Purchase price
    
    $
    190,286
   (7) Balance Sheet Items
  October 31,
    
    
    July 31,
    
    
    October 31,2009
    
    
    2009
    
    
    2008Raw materials and supplies
    
    $
    109,932
    
    
    $
    25,678
    
    
    $
    143,963Work in process
    
    
    14,268
    
    
    
    13,217
    
    
    
    23,259Finished goods
    
    
    50,197
    
    
    
    46,132
    
    
    
    44,925Total
    
    $
    174,397
    
    
    $
    85,027
    
    
    $
    212,147
  October 31,
    
    
    July 31,
    
    
    October 31,2009
    
    
    2009
    
    
    2008Accounts payable
    
    $
    50,964
    
    
    $
    32,222
    
    
    $
    60,366Accrued salaries and benefits
    
    
    6,083
    
    
    
    11,034
    
    
    
    5,645Accrued promotion
    
    
    19,385
    
    
    
    19,511
    
    
    
    11,664Income taxes payable
    
    
    7,049
    
    
    
    
    
    
    
    4,432Other
    
    
    4,035
    
    
    
    1,686
    
    
    
    4,753Total
    
    $
    87,516
    
    
    $
    64,453
    
    
    $
    86,860
 (8) Intangible Assets and Goodwill
  Balance as of July 31, 2009
    
    $
    76,076Purchase price allocation changes
    
    
    (833
    )Balance as of October 31, 2009
    
    $
    75,243
 12




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##### Table of Contents



October 31,
    
    
    July 31,
    
    
    October 31,2009
    
    
    2009
    
    
    2008Brand intangibles (not subject to amortization)
    
    $
    62,500
    
    
    $
    62,500
    
    
    $
    62,500Intangible assets subject to amortization:Customer contracts and related relationships
    
    
    37,300
    
    
    
    37,300
    
    
    
    37,300Trademarks and trade names
    
    
    
    
    
    
    
    
    
    
    1,600Total intangible assets subject to amortization
    
    
    37,300
    
    
    
    37,300
    
    
    
    38,900Total other intangible assets, gross
    
    
    99,800
    
    
    
    99,800
    
    
    
    101,400Less accumulated amortization on intangible assets:Customer contracts and related relationships
    
    
    (2,383
    )
    
    
    (1,917
    )
    
    
    (592
    )Trademarks and trade names
    
    
    
    
    
    
    
    
    
    
    (285
    )Total amortization
    
    
    (2,383
    )
    
    
    (1,917
    )
    
    
    (877
    )Total other intangible assets, net
    
    $
    97,417
    
    
    $
    97,883
    
    
    $
    100,523
  (9) Credit Facilities
    (10) Retirement Plans
  13




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##### Table of Contents



Pension Benefits
    
    
    Other Benefits2009
    
    
    2008
    
    
    2009
    
    
    2008Service cost
    
    $
    161
    
    
    $
    148
    
    
    $
    16
    
    
    $
    26Interest cost
    
    
    299
    
    
    
    270
    
    
    
    33
    
    
    
    71Expected return on plan assets
    
    
    (238
    )
    
    
    (265
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    6
    
    
    
    7
    
    
    
    
    
    
    
    Amortization of net loss / (gain)
    
    
    128
    
    
    
    13
    
    
    
    (206
    )
    
    
    (135
    )Net periodic benefit cost / (income)
    
    $
    356
    
    
    $
    173
    
    
    $
    (157
    )
    
    $
    (38
    )
  (11) Contingencies
   
 Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations
 Overview
   14




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##### Table of Contents



Results of Operations
   October 31,
    
    % Change from2009
    
    
    2008
    
    
    2008 to 2009North American Retail (1)
    
    $
    144,156
    
    
    $
    150,481
    
    
    
    -4.2
    %International
    
    
    23,119
    
    
    
    31,343
    
    
    
    -26.2
    %North American Ingredient/Food Service
    
    
    12,763
    
    
    
    12,960
    
    
    
    -1.5
    %Other
    
    
    603
    
    
    
    742
    
    
    
    -18.7
    %Total
    
    $
    180,641
    
    
    $
    195,526
    
    
    
    -7.6
    %
 
 (1)
    
    North American Retail represents sales of our culinary, snack and in-shell nuts in North
America.   October 31,2009
    
    
    2008Walnuts
    
    
    46.0
    %
    
    
    57.2
    %Other nuts and popcorn products
    
    
    54.0
    %
    
    
    42.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Gross Profit.
 Selling, General and Administrative.
 Advertising.
 Interest.
 15




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##### Table of Contents



Other expense
 Income Taxes.
 Liquidity and Capital Resources
        16




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##### Table of Contents



Contractual Obligations and Commitments
  Payments Due by PeriodLess than
    
    1-3
    
    3-5
    
    More thanTotal
    
    1 Year (d)
    
    Years
    
    Years
    
    5 YearsLong-term obligation
    
    $
    111.3
    
    
    $
    11.3
    
    
    $
    45.0
    
    
    $
    55.0
    
    
    $
    Interest on long-term obligations (a)
    
    
    4.4
    
    
    
    1.4
    
    
    
    2.4
    
    
    
    0.6
    
    
    
    Operating leases
    
    
    11.0
    
    
    
    2.6
    
    
    
    3.8
    
    
    
    3.0
    
    
    
    1.6Purchase commitments (b)
    
    
    1.3
    
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    Pension liability
    
    
    20.7
    
    
    
    0.3
    
    
    
    1.0
    
    
    
    8.0
    
    
    
    11.4Other long-term liabilities (c)
    
    
    2.5
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    1.3
    
    
    
    0.6Total
    
    $
    151.2
    
    
    $
    17.1
    
    
    $
    52.6
    
    
    $
    67.9
    
    
    $
    13.6
 
 (a)
    
    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 October 31, 2009.(b)
    
    Commitments to purchase inventory and equipment. Excludes purchase commitments under Walnut
Purchase Agreements due to uncertainty of pricing and quantity.(c)
    
    Excludes $0.6 million in deferred rent liabilities, $0.4 million of non-current deferred tax
liabilities and $0.1 million of other non-current liabilities.(d)
    
    Represents obligations and commitments for the remaining nine months of fiscal year 2010. Effects of Inflation
  Critical Accounting Policies
  Revenue Recognition.
 Inventories.
  Valuation of Long-lived and Intangible Assets and Goodwill. Property, Plant, and Equipment Intangibles  Goodwill and Other,
 17




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Employee Benefits.
 Income Taxes. Income Taxe
 Accounting for Stock-Based Compensation. Compensation  Stock Compensation
 18




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##### Table of Contents



Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
    
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  19




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Total number of
    
    Approximate DollarTotal number
    
    Average price
    
    shares repurchased as
    
    value of sharesof shares
    
    paid per
    
    part of publicly
    
    that may yet be purchasedPeriod
    
    repurchased (1)
    
    share
    
    announced plans
    
    under the plansRepurchases
from August 1 - August 31, 2009
    
    
    22,384
    
    
    $
    27.33
    
    
    
    
    
    
    $
    Repurchases
from September 1 - September 30, 2009
    
    
    2,183
    
    
    $
    27.53
    
    
    
    
    
    
    $
    Repurchases
from October 1 - October 31, 2009
    
    
    63
    
    
    $
    32.73
    
    
    
    
    
    
    $
    Total
    
    
    24,630
    
    
    $
    27.36
    
    
    
    
    
    
    $
    
 
 (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
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  Filed with this
    
    Incorporated by referenceNumber
    
    Exhibit Title
    
    10-Q
    
    Form
    
    File No.
    
    Date Filed31.01
    
    
    Certification of
Chief Executive
Officer pursuant to
Exchange Act Rules
13a-14(a) and
15d-14(a), as
adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    X31.02
    
    
    Certification of
Chief Financial
Officer pursuant to
Exchange Act Rules
13a-14(a) and
15d-14(a), as
adopted pursuant to
Section 302 of the
Sarbanes-Oxley Act
of 2002
    
    X32.01
    
    
    Certifications of
Chief Executive
Officer and Chief
Financial Officer
pursuant to 18
U.S.C. Section
1350, as adopted
pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002
    
    X
 20




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##### Table of Contents



SIGNATURES
  DIAMOND FOODS, INC.Date: December 3, 2009
    By:
    /s/ Steven M. NeilSteven M. NeilChief Financial and Administrative Officer
and duly authorized officer 21