##### 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, 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 StreetStockton, California
    
    95205-7087(Address of Principal Executive Offices)
    
    (Zip Code)209-467-6000(Telephone No.)
 þ o
  o þ 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
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    16Part II.OTHER INFORMATION
    
    
    17Item 1. Legal Proceedings
    
    
    17Item 1A. Risk Factors
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    17SIGNATURE
    
    
    18EXHIBIT 23.01EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 32.01
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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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 31,2007
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,703
    
    
    $
    33,755Trade receivables, net
    
    
    115,587
    
    
    
    50,662Inventories
    
    
    189,233
    
    
    
    90,619Deferred income taxes
    
    
    4,805
    
    
    
    4,805Prepaid income taxes
    
    
    
    
    
    
    1,854Prepaid expenses and other current assets
    
    
    3,921
    
    
    
    2,417Total current assets
    
    
    315,249
    
    
    
    184,112Property, plant and equipment, net
    
    
    33,882
    
    
    
    33,936Investment in CoBank
    
    
    1,774
    
    
    
    1,774Deferred income taxes
    
    
    5,092
    
    
    
    4,922Goodwill
    
    
    5,432
    
    
    
    5,432Other intangible assets, net
    
    
    3,649
    
    
    
    3,707Other assets
    
    
    2,322
    
    
    
    2,520Total assets
    
    $
    367,400
    
    
    $
    236,403LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable
    
    $
    3,775
    
    
    $
    Accounts payable and accrued liabilities
    
    
    57,327
    
    
    
    26,468Payable to growers
    
    
    143,920
    
    
    
    57,117Total current liabilities
    
    
    205,022
    
    
    
    83,585Long-term obligations
    
    
    20,288
    
    
    
    20,345Other liabilities
    
    
    7,240
    
    
    
    7,132Stockholders 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; 16,109,695
and 15,848,717 shares issued and 16,025,625 and 15,764,647 shares
outstanding at October 31, 2007 and July 31, 2007, respectively
    
    
    16
    
    
    
    16Treasury stock, at cost: 84,070 shares held at October 31, 2007 and July
31, 2007
    
    
    (1,436
    )
    
    
    (1,436
    )Additional paid-in capital
    
    
    102,996
    
    
    
    101,106Accumulated other comprehensive income
    
    
    2,230
    
    
    
    2,233Retained earnings
    
    
    31,044
    
    
    
    23,422Total stockholders equity
    
    
    134,850
    
    
    
    125,341Total liabilities and stockholders equity
    
    $
    367,400
    
    
    $
    236,403
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DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three MonthsEnded October 31,2007
    
    2006Net sales
    
    $
    184,537
    
    
    $
    169,512Cost of sales
    
    
    154,988
    
    
    
    141,572Gross margin
    
    
    29,549
    
    
    
    27,940Operating expenses:Selling, general and administrative (including $1,569 and $1,259
of stock-based compensation for 2007 and 2006)
    
    
    11,388
    
    
    
    11,533Advertising
    
    
    4,356
    
    
    
    3,237Restructuring and other costs, net
    
    
    
    
    
    
    (664
    )Gain on curtailment of defined benefit plan
    
    
    
    
    
    
    (3,039
    )Total operating expenses
    
    
    15,744
    
    
    
    11,067Income from operations
    
    
    13,805
    
    
    
    16,873Interest expense, net
    
    
    351
    
    
    
    281Other
    
    
    
    
    
    
    (30
    )Income before income tax expense
    
    
    13,454
    
    
    
    16,622Income tax expense
    
    
    5,112
    
    
    
    6,981Net income
    
    $
    8,342
    
    
    $
    9,641Earnings per share:Basic
    
    $
    0.52
    
    
    $
    0.61Diluted
    
    $
    0.52
    
    
    $
    0.61Shares used to compute earnings per share:Basic
    
    
    15,994
    
    
    
    15,737Diluted
    
    
    15,994
    
    
    
    15,737
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DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three MonthsEnded October 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    8,342
    
    
    $
    9,641Adjustments to reconcile net income
to net cash used in operating activities:Depreciation and amortization
    
    
    1,545
    
    
    
    1,826Deferred income taxes
    
    
    
    
    
    
    1,222Gain on curtailment of defined benefit plan
    
    
    
    
    
    
    (3,039
    )Tax benefit related to stock-based compensation
    
    
    19
    
    
    
    Excess tax benefit from ESPP and stock option
transactions
    
    
    (19
    )
    
    
    Stock-based compensation
    
    
    1,569
    
    
    
    1,259Gain on sale of property held for sale
    
    
    
    
    
    
    (1,193
    )Gain (loss) on foreign currency
    
    
    (3
    )
    
    
    36Changes in assets and liabilities:Trade receivables
    
    
    (64,925
    )
    
    
    (50,355
    )Inventories
    
    
    (98,614
    )
    
    
    (107,301
    )Prepaid expenses and other current assets
    
    
    350
    
    
    
    1,767Other assets
    
    
    198
    
    
    
    612Accounts payable and accrued liabilities
    
    
    30,844
    
    
    
    29,960Payable to growers
    
    
    86,803
    
    
    
    87,276Other liabilities
    
    
    (62
    )
    
    
    78Net cash used in operating activities
    
    
    (33,953
    )
    
    
    (28,211
    )CASH FLOWS FROM INVESTING ACTIVITIES:Net proceeds from sale of property held for sale
    
    
    
    
    
    
    2,927Purchases of property, plant and equipment
    
    
    (1,401
    )
    
    
    (2,642
    )Payment of additional acquisition costs
    
    
    
    
    
    
    (97
    )Net cash provided by (used in) investing activities
    
    
    (1,401
    )
    
    
    188CASH FLOWS FROM FINANCING ACTIVITIES:Note payable borrowings
    
    
    3,775
    
    
    
    Payment of long-term debt
    
    
    (75
    )
    
    
    Issuance of common stock under stock plans
    
    
    303
    
    
    
    Dividends paid
    
    
    (720
    )
    
    
    (472
    )Excess tax benefit from ESPP and stock option
transactions
    
    
    19
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (21
    )Net cash provided by (used in) financing activities
    
    
    3,302
    
    
    
    (493
    )Net decrease in cash and cash equivalents
    
    
    (32,052
    )
    
    
    (28,516
    )Cash and cash equivalents:Beginning of period
    
    
    33,755
    
    
    
    35,614End of period
    
    $
    1,703
    
    
    $
    7,098Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    329
    
    
    $
    224Income taxes
    
    $
    181
    
    
    $
    11Non-cash investing activity:Accrued capital expenditures
    
    $
    127
    
    
    $
    178
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DIAMOND FOODS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the quarters ended October 31, 2007 and 2006
(In thousands, except share and per share information)
 (1) Organization and Basis of Presentation
    (2) Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards
 (3) Stock Plan Information
 Share-Based
Payment.
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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 Ended October 31,2007
    
    
    2006Net income, as reported
    
    $
    8,342
    
    
    $
    9,641Total stock-based compensation recorded in the statement
of operations, net of related tax effects
    
    
    973
    
    
    
    730Total stock-based compensation expense determined under fair
value based method for all awards, net of related tax effects
    
    
    (1,233
    )
    
    
    (996
    )Pro forma net income
    
    $
    8,082
    
    
    $
    9,375Net income per common equivalent share:Basic  as reported
    
    $
    0.52
    
    
    $
    0.61Basic  pro forma
    
    $
    0.51
    
    
    $
    0.60Diluted  as reported
    
    $
    0.52
    
    
    $
    0.61Diluted  pro forma
    
    $
    0.51
    
    
    $
    0.60
 Stock Option Awards:
 Three Months Ended October 31,2007
    
    2006Average expected life, in years
    
    
    6
    
    
    
    6Expected volatility
    
    
    30.00
    %
    
    
    30.00
    %Risk-free interest rate
    
    
    4.57
    %
    
    
    4.75
    %Dividend rate
    
    
    0.98
    %
    
    
    0.79
    %
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Weighted averageWeighted average
    
    remaining
    
    Aggregate intrinsicNumber of Shares
    
    exercise price
    
    contractual life
    
    value (in(in thousands)
    
    per share
    
    (in years)
    
    thousands)Outstanding at July 31, 2007
    
    
    1,621
    
    
    $
    17.37Granted
    
    
    
    
    
    
    Exercised
    
    
    (18
    )
    
    
    17.04Cancelled
    
    
    (6
    )
    
    
    17.84Outstanding at October 31, 2007
    
    
    1,597
    
    
    
    17.37
    
    
    
    8.0
    
    
    $
    7,139Exerciseable at October 31, 2007
    
    
    990
    
    
    
    17.29
    
    
    
    7.9
    
    
    $
    4,501
   Weighted averageNumber of Shares
    
    grant date fair(in thousands)
    
    value per shareNonvested at July 31, 2007
    
    
    744
    
    
    $
    5.89Granted
    
    
    
    
    
    
    Vested
    
    
    (131
    )
    
    
    5.96Cancelled
    
    
    (6
    )
    
    
    6.01Nonvested at October 31, 2007
    
    
    607
    
    
    
    5.87
  Restricted Stock Awards:
 Weighted averageNumber of Shares
    
    grant date fair(in thousands)
    
    value per shareOutstanding at July 31, 2007
    
    
    310
    
    
    $
    17.50Granted
    
    
    245
    
    
    
    17.48Vested
    
    
    (3
    )
    
    
    17.00Cancelled
    
    
    (2
    )
    
    
    17.40Outstanding at October 31, 2007
    
    
    550
    
    
    
    17.49
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Employee Stock Purchase Plan:
 Three Months Ended October 31,2007
    
    2006Average expected life, in years
    
    
    0.75
    
    
    
    0.75Expected volatility
    
    
    30.00
    %
    
    
    27.50
    %Risk-free interest rate
    
    
    4.81
    %
    
    
    5.10
    %Dividend rate
    
    
    0.69
    %
    
    
    0.67
    %
 (4) Earnings Per Share
  (5) Balance Sheet Items
  October 31,
    
    
    July 31,2007
    
    
    2007Raw materials and supplies
    
    $
    123,866
    
    
    $
    19,653Work in process
    
    
    13,600
    
    
    
    14,043Finished goods
    
    
    51,767
    
    
    
    56,923Total
    
    $
    189,233
    
    
    $
    90,619
  October 31,
    
    
    July 31,2007
    
    
    2007Accounts payable
    
    $
    36,909
    
    
    $
    15,151Accrued promotion
    
    
    8,693
    
    
    
    5,882Accrued salaries and benefits
    
    
    4,662
    
    
    
    4,082Accrued other
    
    
    3,861
    
    
    
    1,191Income taxes payable
    
    
    3,058
    
    
    
    Current portion of long-term obligations
    
    
    144
    
    
    
    162Total
    
    $
    57,327
    
    
    $
    26,468
 (6) Credit Facilities
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(7) Retirement Plans
   Pension Benefits
    
    
    Other Benefits2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    164
    
    
    $
    568
    
    
    $
    25
    
    
    $
    29Interest cost
    
    
    241
    
    
    
    477
    
    
    
    70
    
    
    
    77Expected return on plan assets
    
    
    (287
    )
    
    
    (566
    )
    
    
    
    
    
    
    Amortization of prior service cost / (benefit)
    
    
    7
    
    
    
    (71
    )
    
    
    
    
    
    
    Amortization of net loss / (gain)
    
    
    1
    
    
    
    153
    
    
    
    (132
    )
    
    
    (113
    )Net periodic benefit cost / (income)
    
    
    126
    
    
    
    561
    
    
    
    (37
    )
    
    
    (7
    )SFAS 88 curtailment gain
    
    
    
    
    
    
    (3,039
    )
    
    
    
    
    
    
    Total benefit cost / (income)
    
    $
    126
    
    
    $
    (2,478
    )
    
    $
    (37
    )
    
    $
    (7
    )
 Termination of Defined Benefit Plan
  Defined Contribution Plan
  (8) Restructuring and Other Costs, Net
  11




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(9) Income Taxes
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
   Tax Year
    
    Taxing Jurisdiction2006
    
    Federal and States2005
    
    Federal and States2004
    
    Federal and States2003
    
    Federal and States2002
    
    California
 (10) Contingencies
   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
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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.
 Income Taxes. Accounting for
Income Taxes
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Accounting for Stock-Based Compensation. Share-Based Payment
 Results of Operations
   October 31,
    
    % Change from2007
    
    2006
    
    2006 to 2007North American Retail (1)
    
    $
    122,065
    
    
    $
    110,669
    
    
    
    10.3
    %International
    
    
    46,461
    
    
    
    35,981
    
    
    
    29.1
    %North American Ingredient/Food Service
    
    
    15,252
    
    
    
    22,169
    
    
    
    -31.2
    %Other
    
    
    759
    
    
    
    693
    
    
    
    9.5
    %Total
    
    $
    184,537
    
    
    $
    169,512
    
    
    
    8.9
    %
 
 (1)
    
    North American Retail represents sales of our culinary, snack and in-shell nuts in North
America.   October 31,2007
    
    2006Walnuts
    
    
    62.7
    %
    
    
    61.7
    %Other nuts
    
    
    37.3
    %
    
    
    38.3
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
  Gross margin.
 Selling, General and Administrative.
 Advertising.
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Restructuring and Other Costs, Net.
 Gain on Curtailment of Defined Benefit Plan
 Interest.
 Income Taxes.
 Liquidity and Capital Resources
          15




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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)
    
    $
    20.3
    
    
    $
    0.1
    
    
    $
    8.2
    
    
    $
    8.0
    
    
    $
    4.0Interest on long-term obligations
    
    
    6.1
    
    
    
    1.1
    
    
    
    3.8
    
    
    
    1.1
    
    
    
    0.1Operating leases
    
    
    12.5
    
    
    
    1.1
    
    
    
    3.5
    
    
    
    3.6
    
    
    
    4.3Purchase commitments (b)
    
    
    1.3
    
    
    
    1.3
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilites (d)
    
    
    6.6
    
    
    
    0.2
    
    
    
    0.5
    
    
    
    0.6
    
    
    
    5.3Total
    
    $
    46.8
    
    
    $
    3.8
    
    
    $
    16.0
    
    
    $
    13.3
    
    
    $
    13.7
 
 (a)
    
    Excludes $2.3 million in letters of credit outstanding related to normal business
transactions.(b)
    
    Commitments to purchase equipment. Excludes purchase commitments under Walnut Purchase
Agreements.(c)
    
    Represents obligations and commitments for the remaining nine months of fiscal 2008.(d)
    
    Excludes $0.4 million in deferred rent liabilities and $0.2 million of non-current tax
liabilities. Effects of Inflation
  Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
    16




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 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 Filed23.01
    
    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
 17




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SIGNATURES
  DIAMOND FOODS, INC.Date: December 10, 2007
    By:
    /s/ Seth HalioSeth HalioChief Financial Officer and duly
authorized officer 18