##### 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 April 30, 2007
 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.)1050 South Diamond Street 
Stockton, California
(Address of Principal Executive Offices)
    
    95205-7087
(Zip Code)209-467-6000
(Telephone No.)
 þ o
  o þ o
 o þ




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##### Table of Contents



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
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4. Controls and Procedures
    
    
    20Part II.OTHER INFORMATION
    
    
    21Item 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    22SIGNATURE
    
    
    23EXHIBIT 23.01EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 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)
 April 30,
    
    
    July 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,060
    
    
    $
    35,614Trade receivables, less allowance for doubtful accounts of $548
and $598 at April 30, 2007 and July 31, 2006, respectively
    
    
    42,207
    
    
    
    49,536Inventories
    
    
    139,685
    
    
    
    99,177Deferred income taxes
    
    
    4,795
    
    
    
    4,578Prepaid income taxes
    
    
    2,506
    
    
    
    3,147Property held for sale
    
    
    
    
    
    
    1,728Prepaid expenses and other current assets
    
    
    4,063
    
    
    
    4,182Total current assets
    
    
    195,316
    
    
    
    197,962Property, plant and equipment, net
    
    
    33,928
    
    
    
    34,291Investment in CoBank
    
    
    1,774
    
    
    
    2,191Deferred income taxes
    
    
    5,216
    
    
    
    4,812Goodwill
    
    
    5,432
    
    
    
    5,077Other intangible assets, net
    
    
    3,765
    
    
    
    3,941Other assets
    
    
    3,141
    
    
    
    4,758Total assets
    
    $
    248,572
    
    
    $
    253,032LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable
    
    $
    4,975
    
    
    $
    Accounts payable and accrued liabilities
    
    
    32,681
    
    
    
    28,371Payable to growers
    
    
    57,733
    
    
    
    81,902Total current liabilities
    
    
    95,389
    
    
    
    110,273Long-term obligations
    
    
    20,000
    
    
    
    20,000Other
long-term liabilities
    
    
    11,509
    
    
    
    11,933Commitments and contingenciesStockholders 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; 15,814,609 and 15,737,194 shares issued and
15,800,854 and 15,737,194 shares outstanding at April 30, 2007 and
July 31, 2006, respectively
    
    
    16
    
    
    
    16Treasury stock, at cost: 13,755 shares at April 30, 2007
    
    
    (238
    )
    
    
    Additional paid-in capital
    
    
    98,774
    
    
    
    93,962Accumulated other comprehensive loss
    
    
    
    
    
    
    (36
    )Retained earnings
    
    
    23,122
    
    
    
    16,884Total stockholders equity
    
    
    121,674
    
    
    
    110,826Total liabilities and stockholders equity
    
    $
    248,572
    
    
    $
    253,032
  4




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##### Table of Contents



DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except for per share data)
(Unaudited)
 Three Months
    
    
    Nine MonthsEnded April 30,
    
    
    Ended April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    97,016
    
    
    $
    67,798
    
    
    $
    410,150
    
    
    $
    370,015Cost of sales
    
    
    83,310
    
    
    
    59,370
    
    
    
    348,163
    
    
    
    317,436Cost of sales  NRV amount
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,770Total cost of sales
    
    
    83,310
    
    
    
    59,370
    
    
    
    348,163
    
    
    
    320,206Gross margin
    
    
    13,706
    
    
    
    8,428
    
    
    
    61,987
    
    
    
    49,809Operating expenses:Selling, general and administrative (including $1,228 and $3,840
of stock based compensation for the three and nine months
ended April 30, 2007 and $906 and $2,797 for for the
three and nine months ended April 30, 2006)
    
    
    9,282
    
    
    
    8,168
    
    
    
    32,327
    
    
    
    26,356Advertising
    
    
    7,273
    
    
    
    5,399
    
    
    
    15,627
    
    
    
    16,286Restructuring and other costs, net
    
    
    532
    
    
    
    
    
    
    
    (322
    )
    
    
    Loss on termination of defined benefit plan
    
    
    4,679
    
    
    
    
    
    
    
    1,640
    
    
    
    Total operating expenses
    
    
    21,766
    
    
    
    13,567
    
    
    
    49,272
    
    
    
    42,642Income (loss) from operations
    
    
    (8,060
    )
    
    
    (5,139
    )
    
    
    12,715
    
    
    
    7,167Interest expense (income), net
    
    
    498
    
    
    
    (61
    )
    
    
    1,069
    
    
    
    211Other (income) expense, net
    
    
    (10
    )
    
    
    116
    
    
    
    72
    
    
    
    332Income (loss) before income tax expense (benefit)
    
    
    (8,548
    )
    
    
    (5,194
    )
    
    
    11,574
    
    
    
    6,624Income tax expense (benefit)
    
    
    (4,536
    )
    
    
    (2,019
    )
    
    
    3,915
    
    
    
    2,648Net income (loss)
    
    $
    (4,012
    )
    
    $
    (3,175
    )
    
    $
    7,659
    
    
    $
    3,976Earnings per share:Basic
    
    $
    (0.25
    )
    
    $
    (0.20
    )
    
    $
    0.49
    
    
    $
    0.25Diluted
    
    $
    (0.25
    )
    
    $
    (0.20
    )
    
    $
    0.49
    
    
    $
    0.25Shares used to compute earnings per share:Basic
    
    
    15,808
    
    
    
    15,668
    
    
    
    15,773
    
    
    
    15,604Diluted
    
    
    15,808
    
    
    
    15,668
    
    
    
    15,773
    
    
    
    15,630
  5




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##### Table of Contents



DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine Months Ended April 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    7,659
    
    
    $
    3,976Adjustments to reconcile net income
to net cash used in operating activities:Depreciation and amortization
    
    
    5,429
    
    
    
    3,613Deferred income taxes
    
    
    (621
    )
    
    
    4,332Loss on termination of defined benefit plan
    
    
    1,640
    
    
    
    Tax benefit related to stock-based compensation plans
    
    
    41
    
    
    
    Excess tax benefit from stock-based compensation plans
    
    
    (41
    )
    
    
    Stock-based compensation
    
    
    3,840
    
    
    
    2,797Gain on sale of property held for sale
    
    
    (1,193
    )
    
    
    Loss on disposal of property, plant and equipment
    
    
    (9
    )
    
    
    440Gain on foreign currency
    
    
    36
    
    
    
    CoBank patronage dividend
    
    
    
    
    
    
    (47
    )Changes in operating assets and liabilities:Trade receivables
    
    
    7,407
    
    
    
    8,569Inventories
    
    
    (40,989
    )
    
    
    (29,962
    )Prepaid expenses, prepaid income taxes and other current assets
    
    
    (880
    )
    
    
    (5,125
    )Other assets
    
    
    1,617
    
    
    
    1,281Accounts payable and accrued liabilities
    
    
    4,878
    
    
    
    (3,360
    )Payable to growers
    
    
    (24,169
    )
    
    
    9,824Other liabilities
    
    
    (424
    )
    
    
    777Net cash used in operating activities
    
    
    (35,779
    )
    
    
    (2,885
    )CASH FLOWS FROM INVESTING ACTIVITIES:Capital revolvement from CoBank
    
    
    417
    
    
    
    126Net proceeds from sale of property held for sale
    
    
    2,941
    
    
    
    28Purchases of property, plant and equipment
    
    
    (5,224
    )
    
    
    (6,318
    )Payment of additional acquisition costs
    
    
    (197
    )
    
    
    Net cash used in investing activities
    
    
    (2,063
    )
    
    
    (6,164
    )CASH FLOWS FROM FINANCING ACTIVITIES:Note payable borrowings (repayment), net
    
    
    4,975
    
    
    
    (2,119
    )Payment to members for membership interest
    
    
    
    
    
    
    (17,329
    )Issuance of common stock under stock plans
    
    
    387
    
    
    
    611Dividends paid
    
    
    (1,421
    )
    
    
    (937
    )Excess tax benefit from stock-based compensation plans
    
    
    41
    
    
    
    Stock options exercised
    
    
    544
    
    
    
    Purchase of treasury stock
    
    
    (238
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    4,288
    
    
    
    (19,774
    )Net decrease in cash and cash equivalents
    
    
    (33,554
    )
    
    
    (28,823
    )Cash and cash equivalents:Beginning of period
    
    
    35,614
    
    
    
    49,035End of period
    
    $
    2,060
    
    
    $
    20,212Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    1,343
    
    
    $
    871Income taxes
    
    
    3,844
    
    
    
    2,176Non-cash investing activity:Accrued capital expenditures
    
    
    57
    
    
    
    Non-cash financing activity:Accrued liability exchanged for options
to acquire common stock
    
    
    
    
    
    
    640
  6




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DIAMOND FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended April 30, 2007 and 2006
(in thousands, except share and per share information)
 (1) Organization and Basis of Presentation
    (2) Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement 109,
 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
 Fair Value Measurements
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Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans
 The Fair Value Option for Financial Assets
and Financial Liabilities
 (3) Stock Plan Information
 Share-Based Payment. Accounting for Stock Issued to Employees. Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement
No. 123
 Accounting for Stock-Based Compensation
 Three Months
    
    
    Nine MonthsEnded April 30,
    
    
    Ended April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net
income (loss), as reported
    
    $
    (4,012
    )
    
    $
    (3,175
    )
    
    $
    7,659
    
    
    $
    3,976Total stock-based compensation recorded in the statement
of operations, net of related tax effects
    
    
    576
    
    
    
    554
    
    
    
    2,543
    
    
    
    1,678Total stock-based compensation expense determined under fair
value based method for all awards, net of related tax effects
    
    
    (769
    )
    
    
    (842
    )
    
    
    (3,417
    )
    
    
    (2,497
    )Pro forma
net income (loss)
    
    $
    (4,205
    )
    
    $
    (3,463
    )
    
    $
    6,785
    
    
    $
    3,157Net
income (loss) per common equivalent share:Basic  as reported
    
    $
    (0.25
    )
    
    $
    (0.20
    )
    
    $
    0.49
    
    
    $
    0.25Basic  pro forma
    
    $
    (0.27
    )
    
    $
    (0.22
    )
    
    $
    0.43
    
    
    $
    0.20Diluted  as reported
    
    $
    (0.25
    )
    
    $
    (0.20
    )
    
    $
    0.49
    
    
    $
    0.25Diluted  pro forma
    
    $
    (0.27
    )
    
    $
    (0.22
    )
    
    $
    0.43
    
    
    $
    0.20
 Stock Option Awards:
 8




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##### Table of Contents



Three Months
    
    Nine MonthsEnded April 30,
    
    Ended April 30,2007
    
    2006
    
    2007
    
    2006Average expected life, in years
    
    
    6
    
    
    
    6
    
    
    
    6
    
    
    
    6Expected volatility
    
    
    30.00
    %
    
    
    27.50
    %
    
    
    30.00
    %
    
    
    27.50
    %Risk-free interest rate
    
    
    4.65
    %
    
    
    4.75
    %
    
    
    4.68
    %
    
    
    4.45
    %Dividend rate
    
    
    0.70
    %
    
    
    0.64
    %
    
    
    0.73
    %
    
    
    0.64
    %
  WeightedaverageNumber of
    
    Weighted
    
    remaining
    
    AggregateShares
    
    average exercise
    
    contractual life
    
    intrinsic value (in(in thousands)
    
    price per share
    
    (in years)
    
    thousands)Outstanding at July 31, 2006
    
    
    1,648
    
    
    $
    17.43Granted
    
    
    31
    
    
    
    16.82Exercised
    
    
    (32
    )
    
    
    17.00Cancelled
    
    
    (100
    )
    
    
    17.88Outstanding at April 30, 2007
    
    
    1,547
    
    
    
    17.39
    
    
    
    8.5
    
    
    $
    Exerciseable at April 30, 2007
    
    
    690
    
    
    
    17.45
    
    
    
    8.3
    
    
    $
    
   WeightedNumber of
    
    average grantShares
    
    date fair value(in thousands)
    
    per shareNonvested at July 31, 2006
    
    
    1,307
    
    
    $
    5.80Granted
    
    
    31
    
    
    
    5.94Vested
    
    
    (417
    )
    
    
    5.88Cancelled
    
    
    (64
    )
    
    
    5.88Nonvested at April 30, 2007
    
    
    857
    
    
    
    5.75
  Restricted Stock Awards:
 9




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##### Table of Contents



WeightedNumber of
    
    average grantShares
    
    date fair value(in thousands)
    
    per shareOutstanding at July 31, 2006
    
    
    529
    
    
    $
    17.52Granted
    
    
    18
    
    
    
    17.23Vested
    
    
    (34
    )
    
    
    19.99Cancelled
    
    
    (4
    )
    
    
    19.67Outstanding at April 30, 2007
    
    
    509
    
    
    
    17.33
   Employee Stock Purchase Plan:
 Nine Months Ended April 30,2007
    
    2006Average expected life, in years
    
    
    0.75
    
    
    
    0.75Expected volatility
    
    
    29.17
    %
    
    
    27.50
    %Risk-free interest rate
    
    
    4.80
    %
    
    
    4.35
    %Dividend rate
    
    
    0.68
    %
    
    
    0.71
    %
 (4) Earnings Per Share
  (5) Balance sheet items
  10




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April 30,
    
    
    July 31,2007
    
    
    2006Raw materials and supplies
    
    $
    77,543
    
    
    $
    32,484Work in process
    
    
    10,959
    
    
    
    16,148Finished goods
    
    
    51,183
    
    
    
    50,545Total
    
    $
    139,685
    
    
    $
    99,177
  April 30,
    
    
    July 31,2007
    
    
    2006Accounts payable
    
    $
    23,257
    
    
    $
    19,090Accrued salaries and benefits
    
    
    3,861
    
    
    
    4,496Accrued promotion
    
    
    4,596
    
    
    
    3,477Other
    
    
    967
    
    
    
    1,308Total
    
    $
    32,681
    
    
    $
    28,371
 (6) Acquisition of Assets of Harmony Foods Corporation
  Business Combinations.
 (7) Credit Facilities
 11




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##### Table of Contents



(8) Retirement Plans
   Pension Benefits
    
    
    Other BenefitsThree Months ended
    
    
    Nine Months ended
    
    
    Three Months ended
    
    
    Nine Months endedApril 30,
    
    
    April 30,
    
    
    April 30,
    
    
    April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    190
    
    
    $
    559
    
    
    $
    998
    
    
    $
    1,676
    
    
    $
    29
    
    
    $
    64
    
    
    $
    86
    
    
    $
    190Interest cost
    
    
    412
    
    
    
    432
    
    
    
    1,331
    
    
    
    1,295
    
    
    
    77
    
    
    
    135
    
    
    
    232
    
    
    
    407Expected return on plan assets
    
    
    (533
    )
    
    
    (575
    )
    
    
    (1,677
    )
    
    
    (1,725
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    5
    
    
    
    (72
    )
    
    
    (62
    )
    
    
    (215
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of net loss
    
    
    100
    
    
    
    202
    
    
    
    358
    
    
    
    606
    
    
    
    (113
    )
    
    
    
    
    
    
    (340
    )Other
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    15Net periodic benefit cost / (income)
    
    
    174
    
    
    
    546
    
    
    
    948
    
    
    
    1,637
    
    
    
    (7
    )
    
    
    204
    
    
    
    (22
    )
    
    
    612Gain on curtailment of defined benefit plan
    
    
    
    
    
    
    
    
    
    
    (3,039
    )Loss on settlement of defined benefit plan
    
    
    4,545
    
    
    
    
    
    
    
    4,545
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total benefit cost / (income)
    
    $
    4,719
    
    
    $
    546
    
    
    $
    2,454
    
    
    $
    1,637
    
    
    $
    (7
    )
    
    $
    204
    
    
    $
    (22
    )
    
    $
    612
 12




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##### Table of Contents



Termination of Defined Benefit Plan
   (9) Restructuring and Other Costs, Net
  (10) Contingencies
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
    13




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Critical Accounting Policies
  Revenue Recognition.
 Inventories.
  Valuation of Long-lived and
Intangible Assets and Goodwill. Accounting for the Impairment or Disposal of
Long-lived Assets. Goodwill and Other Intangible Assets.
   Employee Benefits.
 14




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##### Table of Contents



Income Taxes. Accounting for
Income Taxes"
 Accounting for Stock-Based Compensation. Share-Based Payment
 Non-GAAP Financial Information
  Non-GAAP Financial InformationThree Months Ended
    
    
    Nine Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)
    
    
    (Unaudited)(in thousands)
    
    
    (in thousands)Net sales
    
    $
    97,016
    
    
    $
    67,798
    
    
    $
    410,150
    
    
    $
    370,015Non-GAAP cost of sales
    
    
    83,310
    
    
    
    59,370
    
    
    
    348,163
    
    
    
    317,436Non-GAAP gross margin
    
    
    13,706
    
    
    
    8,428
    
    
    
    61,987
    
    
    
    52,579Operating expenses:Selling, general and administrative
    
    
    9,282
    
    
    
    8,168
    
    
    
    32,327
    
    
    
    26,356Advertising
    
    
    7,273
    
    
    
    5,399
    
    
    
    15,627
    
    
    
    16,286Non-GAAP total operating expenses
    
    
    16,555
    
    
    
    13,567
    
    
    
    47,954
    
    
    
    42,642Non-GAAP operating income (loss)
    
    
    (2,849
    )
    
    
    (5,139
    )
    
    
    14,033
    
    
    
    9,937Interest expense (income)
    
    
    498
    
    
    
    (61
    )
    
    
    1,069
    
    
    
    211Other (income), expense
    
    
    (10
    )
    
    
    116
    
    
    
    72
    
    
    
    332Non-GAAP income (loss) before income tax expense
    
    $
    (3,337
    )
    
    $
    (5,194
    )
    
    $
    12,892
    
    
    $
    9,394
 15




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedApril 30,
    
    
    April 30,2007
    
    
    2006
    
    
    2007
    
    
    2006GAAP (loss) income before income tax expense (benefit)
    
    $
    (8,548
    )
    
    $
    (5,194
    )
    
    $
    11,574
    
    
    $
    6,624Adjustment to cost of sales to remove one time
impact of accounting for certain inventories
on NRV basis
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,770Adjustment to remove restructuring and other
costs and loss on termination of defined
benefit plan
    
    
    5,211
    
    
    
    
    
    
    
    1,318
    
    
    
    Non-GAAP (loss) income before income tax expense (benefit)
    
    
    (3,337
    )
    
    
    (5,194
    )
    
    
    12,892
    
    
    
    9,394GAAP income tax expense (benefit)
    
    
    (4,536
    )
    
    
    (2,019
    )
    
    
    3,915
    
    
    
    2,648Adjustment for tax effects of Non-GAAP
adjustments
    
    
    1,980
    
    
    
    
    
    
    
    501
    
    
    
    1,108Adjustment for effects of discrete tax items
    
    
    639
    
    
    
    
    
    
    
    483
    
    
    
    Non-GAAP income tax expense (benefit)
    
    
    (1,917
    )
    
    
    (2,019
    )
    
    
    4,899
    
    
    
    3,756Non-GAAP net income (loss)
    
    $
    (1,420
    )
    
    $
    (3,175
    )
    
    $
    7,993
    
    
    $
    5,638
 About Diamonds non-GAAP Financial Measures.
   
    
    A one-time charge to costs of sales in connection with our conversion. As an agricultural
cooperative association, we were required to use net realizable value (NRV) accounting for
certain inventories; as a for-profit corporation we are required to use the lower of cost or
market method to value all inventories. As a result of using NRV accounting, certain
inventories were valued higher than they would have been under the lower of cost or market
method. Therefore, as these inventories were sold, the amount charged to cost of goods sold
was higher. We excluded this charge because it is non-recurring and is not indicative of
ongoing operations.
    
    Restructuring and other costs and non-recurring gains which are principally related to
the closure of our Lemont facility and the costs incurred to consolidate operations in our
Fishers facility, a gain on the sale of the Lemont facility, the estimated costs of
terminating certain contracts and certain professional service fees. Our management believes
it is useful to investors to exclude these amounts since they are non-recurring in nature
and are not reflective of our operating results on an on-going basis.
    
    Amounts associated with curtailing and terminating our pension plan for administrative
employees due to its non-recurring nature.
    
    Income tax benefits from tax credits related to years prior to 2006 and the effects of
discrete tax items since they are non-recurring.
  16




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##### Table of Contents



Results of Operations
   Three Months ended
    
    
    
    
    
    Nine Months endedApril 30,
    
    % Change from
    
    April 30,
    
    % Change from2007
    
    2006
    
    2006 to 2007
    
    2007
    
    2006
    
    2006 to 2007North American Retail (1)
    
    $
    57,421
    
    
    $
    34,943
    
    
    
    64.3
    %
    
    $
    269,062
    
    
    $
    221,108
    
    
    
    21.7
    %International
    
    
    23,868
    
    
    
    15,585
    
    
    
    53.1
    
    
    
    84,116
    
    
    
    84,921
    
    
    
    (0.9
    )North American Ingredient/Food Service
    
    
    14,943
    
    
    
    16,461
    
    
    
    (9.2
    )
    
    
    54,718
    
    
    
    61,272
    
    
    
    (10.7
    )Other
    
    
    784
    
    
    
    809
    
    
    
    (3.1
    )
    
    
    2,254
    
    
    
    2,714
    
    
    
    (16.9
    )Total
    
    $
    97,016
    
    
    $
    67,798
    
    
    
    43.1
    %
    
    $
    410,150
    
    
    $
    370,015
    
    
    
    10.8
    %
 
 (1)
    
    North American Retail represents sales of our culinary, snack and in-shell nuts in North
America.   Three Months ended
    
    Nine Months endedApril 30,
    
    April 30,2007
    
    2006
    
    2007
    
    2006Walnuts
    
    
    63.2
    %
    
    
    70.1
    %
    
    
    59.9
    %
    
    
    67.2
    %Other nuts
    
    
    36.8
    %
    
    
    29.9
    %
    
    
    40.1
    %
    
    
    32.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  Gross margin.
 17




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##### Table of Contents



Selling, General and Administrative.
 Advertising.
 Restructuring and Other Costs, Net.
 Loss on termination of defined benefit plan.
 Interest.
 Income Taxes.
 Liquidity and Capital Resources
     18




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##### Table of Contents



Contractual Obligations and Commitments
  Payments Due by PeriodLess than
    
    1-3
    
    3-5
    
    More thanTotal
    
    1 Year (c)
    
    Years
    
    Years
    
    5 YearsLong-term obligation (a)
    
    $
    20.0
    
    
    $
    
    
    
    $
    
    
    
    $
    8.0
    
    
    $
    12.0Interest on long-term obligations
    
    
    6.9
    
    
    
    0.4
    
    
    
    3.0
    
    
    
    2.3
    
    
    
    1.2Operating leases
    
    
    14.4
    
    
    
    0.5
    
    
    
    4.0
    
    
    
    4.4
    
    
    
    5.5Purchase commitments (b)
    
    
    1.8
    
    
    
    1.8
    
    
    
    
    
    
    
    
    
    
    
    $
    43.1
    
    
    $
    2.7
    
    
    $
    7.0
    
    
    $
    14.7
    
    
    $
    18.7
 
 (a)
    
    Excludes $2.0 million in letters of credit outstanding related to normal business
transactions.(b)
    
    Commitments to purchase equipment.(c)
    
    Represents obligations and commitments for the remaining three months of fiscal 2007. Effects of Inflation
  Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  19




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##### Table of Contents








Item 4. Controls and Procedures








20



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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 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 February 1
through February 28, 2007
    
    
    284
    
    
    $
    18.13
    
    
    
    
    
    
    
    Repurchases from March 1
through March 31, 2007
    
    
    
    
    
    
    Repurchases from April 1
through April 30, 2007
    
    
    1,954
    
    
    $
    16.66
    
    
    
    
    
    
    
    Total
    
    
    2,238
    
    
    $
    16.85
    
    
    
    
    
    
    
    
 
 (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 and cancelled by Diamond 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
 21




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##### Table of Contents



Item 6. Exhibits
  Filed with this
    
    Incorporated by referenceNumber
    
    Exhibit Title
    
    10-Q
    
    Form
    
    File No.
    
    Exhibit

    Date Filed10.01
    
    Amended Supplements to Master Loan Agreement between Diamond Foods, Inc. and CoBank, ACB
    
    
    
    8-K
    
    000-51439
    
    99.01

    3/21/0710.02
    
    Amendment to Master Loan Agreement, dated as of March 19, 2007, between Diamond Foods, Inc. and CoBank, ACB
    
    
    
    8-K
    
    000-51439
    
    99.02

    3/21/0710.03
    
    Third Amendment to Credit
Agreement, dated as of March 19, 2007, between Diamond Foods, Inc. and Bank of the West
    
    
    
    8-K
    
    000-51439
    
    99.03

    3/21/0710.04
    
    Third Amendment to Note Purchase Agreement, dated as of March 19, 2007, between Diamond Foods, Inc., Teachers Insurance and Annuity Association of America and Prn & Co.
    
    
    
    8-K
    
    000-51439
    
    99.04

    3/21/0723.01
    
    Consent of Curcio Webb
    
    X31.01
    
    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
 22




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##### Table of Contents



SIGNATURES
  DIAMOND FOODS, INC.Date: June 4, 2007
    By:
    /s/ Seth HalioSeth HalioExecutive Vice-President,Chief Financial Officer and duly
authorized officer 23