##### 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, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For
the transition period fromto
 Commission File Number: 000-51439
 DIAMOND FOODS, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    20-2556965(State of Incorporation)
    
    (IRS Employer Identification No.)600 Montgomery Street, 17th FloorSan Francisco, California
    
    94111-2702(Address of Principal Executive Offices)
    
    (Zip Code)415-912-3180(Telephone No.)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 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
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II.OTHER INFORMATION
    
    
    20Item 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 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
    
    
    21SIGNATURE
    
    
    22EX-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 31,2008
    
    
    2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,885
    
    
    $
    74,279
    
    
    $
    1,703Trade receivables, net
    
    
    123,422
    
    
    
    46,256
    
    
    
    115,587Inventories
    
    
    212,147
    
    
    
    88,526
    
    
    
    189,233Deferred income taxes
    
    
    7,387
    
    
    
    7,387
    
    
    
    4,805Prepaid expenses and other current assets
    
    
    3,816
    
    
    
    4,261
    
    
    
    3,921Total current assets
    
    
    351,657
    
    
    
    220,709
    
    
    
    315,249Property, plant and equipment, net
    
    
    51,681
    
    
    
    34,606
    
    
    
    33,882Deferred income taxes
    
    
    5,227
    
    
    
    5,802
    
    
    
    5,092Goodwill
    
    
    80,416
    
    
    
    5,432
    
    
    
    5,432Other intangible assets, net
    
    
    100,523
    
    
    
    3,473
    
    
    
    3,649Other long-term assets
    
    
    4,499
    
    
    
    3,245
    
    
    
    4,096Total assets
    
    $
    594,003
    
    
    $
    273,267
    
    
    $
    367,400LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Notes payable
    
    $
    83,250
    
    
    $
    
    
    
    $
    3,775Current portion of long-term debt
    
    
    11,250
    
    
    
    
    
    
    
    Accounts payable and accrued liabilities
    
    
    86,860
    
    
    
    42,251
    
    
    
    57,327Payable to growers
    
    
    135,740
    
    
    
    56,942
    
    
    
    143,920Total current liabilities
    
    
    317,100
    
    
    
    99,193
    
    
    
    205,022Long-term obligations
    
    
    111,425
    
    
    
    20,204
    
    
    
    20,288Other liabilities
    
    
    7,831
    
    
    
    7,647
    
    
    
    7,240Stockholders 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; 16,548,985,
16,340,076 and 16,109,695 shares issued and 16,366,095, 16,180,771 and
16,025,625 shares outstanding at October 31, 2008, July 31, 2008 and
October 31, 2007, respectively
    
    
    16
    
    
    
    16
    
    
    
    16Treasury stock, at cost: 182,890, 159,305 and 84,070 shares held at
October 31, 2008 , July 31, 2008 and October 31, 2007, respectively
    
    
    (3,816
    )
    
    
    (3,203
    )
    
    
    (1,436
    )Additional paid-in capital
    
    
    114,819
    
    
    
    112,550
    
    
    
    102,996Accumulated other comprehensive income
    
    
    1,392
    
    
    
    1,584
    
    
    
    2,230Retained earnings
    
    
    45,236
    
    
    
    35,276
    
    
    
    31,044Total stockholders equity
    
    
    157,647
    
    
    
    146,223
    
    
    
    134,850Total liabilities and stockholders equity
    
    $
    594,003
    
    
    $
    273,267
    
    
    $
    367,400
  4




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##### Table of Contents



DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three MonthsEnded October 31,2008
    
    2007Net sales
    
    $
    195,526
    
    
    $
    184,537Cost of sales
    
    
    154,457
    
    
    
    154,988Gross profit
    
    
    41,069
    
    
    
    29,549Operating expenses:Selling, general and administrative
    
    
    15,772
    
    
    
    11,388Advertising
    
    
    5,850
    
    
    
    4,356Total operating expenses
    
    
    21,622
    
    
    
    15,744Income from operations
    
    
    19,447
    
    
    
    13,805Interest expense
    
    
    1,449
    
    
    
    351Other
(income) expense, net
    
    
    898
    
    
    
    Income before income taxes
    
    
    17,100
    
    
    
    13,454Income taxes
    
    
    6,404
    
    
    
    5,112Net income
    
    $
    10,696
    
    
    $
    8,342Earnings per share:Basic
    
    $
    0.66
    
    
    $
    0.52Diluted
    
    $
    0.64
    
    
    $
    0.52Shares used to compute earnings per share:Basic
    
    
    16,308
    
    
    
    15,994Diluted
    
    
    16,656
    
    
    
    15,994
  5




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##### Table of Contents



DIAMOND FOODS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Three MonthsEnded October 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    10,696
    
    
    $
    8,342Adjustments to reconcile net income to net cash used in operating activities:Depreciation and amortization
    
    
    2,175
    
    
    
    1,545Stock-based compensation
    
    
    1,093
    
    
    
    1,569Deferred income taxes
    
    
    575
    
    
    
    Changes in assets and liabilities:Trade receivables
    
    
    (75,483
    )
    
    
    (64,925
    )Inventories
    
    
    (115,711
    )
    
    
    (98,614
    )Accounts payable and accrued liabilities
    
    
    37,410
    
    
    
    30,844Payable to growers
    
    
    78,798
    
    
    
    86,803Other, net
    
    
    1,296
    
    
    
    483Net cash used in operating activities
    
    
    (59,151
    )
    
    
    (33,953
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of assets
    
    
    5
    
    
    
    Purchase of property, plant and equipment
    
    
    (2,061
    )
    
    
    (1,401
    )Acquisition
of Pop Secret business
    
    
    (191,734
    )
    
    
    Net cash used in investing activities
    
    
    (193,790
    )
    
    
    (1,401
    )CASH FLOWS FROM FINANCING ACTIVITIES:Note payable borrowings
    
    
    83,250
    
    
    
    3,775Proceeds from issuance of long-term debt
    
    
    125,000
    
    
    
    Payment of long-term debt
    
    
    (22,557
    )
    
    
    (75
    )Debt issuance costs
    
    
    (1,973
    )
    
    
    Other, net
    
    
    (173
    )
    
    
    (398
    )Net cash provided by financing activities
    
    
    183,547
    
    
    
    3,302Net decrease in cash and cash equivalents
    
    
    (69,394
    )
    
    
    (32,052
    )Cash and cash equivalents:Beginning of period
    
    
    74,279
    
    
    
    33,755End of period
    
    $
    4,885
    
    
    $
    1,703Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    895
    
    
    $
    329Income taxes
    
    $
    3,618
    
    
    $
    181Non-cash investing activity:Accrued capital expenditures
    
    $
    160
    
    
    $
    127Liabilities related to Pop Secret acquisition
    
    $
    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, 2008 and 2007
(In thousands, except share and per share information)
 (1) Organization and Basis of Presentation
    (2) Recent Accounting Pronouncements
 Disclosures about Derivative Instruments and
Hedging Activities
 Business Combinations Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51.
 (3) Fair Value Measurements
 Fair Value Measurements The Effective Date of FASB
Statement No. 157
 7




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##### Table of Contents



Level 1
 Level 2
 Level 3
   Fair Value Option for
Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115
 (4) Stock Plan Information
 Share-Based
Payment.
 8




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##### Table of Contents



Accounting for Stock Issued to Employees
 Stock Option Awards:
 Three Months Ended October 31,2008
    
    2007Average expected life, in years
    
    
    6
    
    
    
    6Expected volatility
    
    
    36.00
    %
    
    
    30.00
    %Risk-free interest rate
    
    
    3.77
    %
    
    
    4.57
    %Dividend rate
    
    
    0.68
    %
    
    
    0.98
    %
  WeightedaverageNumber of
    
    Weighted
    
    remaining
    
    AggregateShares
    
    average exercise
    
    contractual life
    
    intrinsic value (in(in thousands)
    
    price per share
    
    (in years)
    
    thousands)Outstanding at July 31, 2008
    
    
    1,510
    
    
    $
    17.74Granted
    
    
    33
    
    
    
    28.03Exercised
    
    
    (48
    )
    
    
    17.72Cancelled
    
    
    (4
    )
    
    
    17.13Outstanding at October 31, 2008
    
    
    1,491
    
    
    
    17.97
    
    
    
    7.3
    
    
    $
    16,790Exercisable at October 31, 2008
    
    
    1,199
    
    
    
    17.34
    
    
    
    7.0
    
    
    $
    14,256
   WeightedNumber of
    
    average grantShares
    
    date fair value(in thousands)
    
    per shareNonvested at July 31, 2008
    
    
    298
    
    
    $
    6.74Granted
    
    
    33
    
    
    
    10.86Vested
    
    
    (35
    )
    
    
    6.53Cancelled
    
    
    (4
    )
    
    
    4.07Nonvested at October 31, 2008
    
    
    292
    
    
    
    7.27
  9




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##### Table of Contents



Restricted Stock Awards:
 WeightedNumber of
    
    average grantShares
    
    date fair value(in thousands)
    
    per shareOutstanding at July 31, 2008
    
    
    332
    
    
    $
    17.74Granted
    
    
    178
    
    
    
    25.87Vested
    
    
    (60
    )
    
    
    17.45Cancelled
    
    
    (17
    )
    
    
    19.62Outstanding at October 31, 2008
    
    
    433
    
    
    
    21.04
   Employee Stock Purchase Plan:
 Three Months Ended October 31,2008
    
    2007Average expected life, in years
    
    
    0.75
    
    
    
    0.75Expected volatility
    
    
    30.00
    %
    
    
    30.00
    %Risk-free interest rate
    
    
    4.01
    %
    
    
    4.81
    %Dividend rate
    
    
    0.90
    %
    
    
    0.69
    %
 Suspension of the ESPP Program:
 (5) Earnings Per Share
  (6) Acquisition of Pop Secret
  10




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##### Table of Contents



Business Combinations
  Inventory
    
    $
    7,910Property, plant and equipment
    
    
    17,023Brand intangibles
    
    
    62,500Customer relationships
    
    
    34,900Goodwill
    
    
    74,984Acquisition liabilities
    
    
    (7,000
    )Purchase price
    
    $
    190,317
    Pro Forma  Financial Information
  October 31,2008
    
    2007Net sales
    
    $
    209,035
    
    
    $
    210,553Net income
    
    $
    13,129
    
    
    $
    7,954Diluted earnings per share
    
    $
    0.79
    
    
    $
    0.50
 (7) Balance Sheet Items
  October 31,
    
    
    July 31,
    
    
    October 31,2008
    
    
    2008
    
    
    2007Raw materials and supplies
    
    $
    143,963
    
    
    $
    33,501
    
    
    $
    123,866Work in process
    
    
    23,259
    
    
    
    19,084
    
    
    
    13,600Finished goods
    
    
    44,925
    
    
    
    35,941
    
    
    
    51,767Total
    
    $
    212,147
    
    
    $
    88,526
    
    
    $
    189,233
 11




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##### Table of Contents



October 31,
    
    
    July 31,
    
    
    October 31,2008
    
    
    2008
    
    
    2007Accounts payable
    
    $
    60,366
    
    
    $
    21,848
    
    
    $
    36,909Accrued promotion
    
    
    11,664
    
    
    
    8,695
    
    
    
    8,693Accrued salaries and benefits
    
    
    5,645
    
    
    
    7,886
    
    
    
    4,662Income taxes payable
    
    
    4,432
    
    
    
    
    
    
    
    3,058Other
    
    
    4,753
    
    
    
    3,822
    
    
    
    4,005Total
    
    $
    86,860
    
    
    $
    42,251
    
    
    $
    57,327
 (8) Intangible Assets and Goodwill
  October 31,
    
    
    July 31,
    
    
    October 31,2008
    
    
    2008
    
    
    2007Goodwill
    
    $
    80,416
    
    
    $
    5,432
    
    
    $
    5,432Brand intangibles
    
    
    62,500
    
    
    
    
    
    
    
    Intangible assets subject to amortization:Customer contracts and related relationships
    
    
    37,300
    
    
    
    2,400
    
    
    
    2,400Trademarks and trade names
    
    
    1,600
    
    
    
    1,600
    
    
    
    1,600Total intangible assets subject to amortization
    
    
    38,900
    
    
    
    4,000
    
    
    
    4,000Total goodwill and intangible assets, gross
    
    $
    181,816
    
    
    $
    9,432
    
    
    $
    9,432
  October 31,
    
    
    July 31,
    
    
    October 31,2008
    
    
    2008
    
    
    2007Goodwill
    
    $
    80,416
    
    
    $
    5,432
    
    
    $
    5,432Brand intangibles
    
    
    62,500
    
    
    
    
    
    
    
    Intangible assets subject to amortization:Customer contracts and related
relationships, net of accumulated
amortization of $592, $270 and $180,
as of October 31, 2008,
July 31, 2008 and October 31,
2007, respectively
    
    
    36,708
    
    
    
    2,130
    
    
    
    2,220Trademarks and trade names, net of
accumulated amortization
of $285, $257 and $171 as of October
31, 2008, July 31, 2008
and October 31, 2007, respectively
    
    
    1,315
    
    
    
    1,343
    
    
    
    1,429Total intangible assets
subject to amortization
    
    
    38,023
    
    
    
    3,473
    
    
    
    3,649Total goodwill and intangible assets, net
    
    $
    180,939
    
    
    $
    8,905
    
    
    $
    9,081
  (9) Credit Facilities
  12




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##### Table of Contents



(10) Retirement Plans
   Pension Benefits
    
    
    Other Benefits2008
    
    
    2007
    
    
    2008
    
    
    2007Service cost
    
    $
    148
    
    
    $
    164
    
    
    $
    26
    
    
    $
    25Interest cost
    
    
    270
    
    
    
    241
    
    
    
    71
    
    
    
    70Expected return on plan assets
    
    
    (265
    )
    
    
    (287
    )
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    7
    
    
    
    7
    
    
    
    
    
    
    
    Amortization of net loss / (gain)
    
    
    13
    
    
    
    1
    
    
    
    (135
    )
    
    
    (132
    )Net periodic benefit cost / (income)
    
    $
    173
    
    
    $
    126
    
    
    $
    (38
    )
    
    $
    (37
    )
  (11) Derivatives
 Accounting for Derivative Instruments and Hedging Activities Accounting for Certain Derivative Instruments and Hedging Activities,
 13




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(12) Contingencies
 
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
    14




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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,
 15




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Accounting for Uncertainty in Income Taxes.


Accounting for Stock-Based Compensation. Share-Based Payment


Results of Operations






October 31,
    
    
    % Change from2008
    
    
    2007
    
    
    2007 to 2008North American Retail (1)
    
    $
    150,481
    
    
    $
    122,065
    
    
    
    23.3
    %International
    
    
    31,343
    
    
    
    46,461
    
    
    
    -32.5
    %North American Ingredient/Food Service
    
    
    12,960
    
    
    
    15,252
    
    
    
    -15.0
    %Other
    
    
    742
    
    
    
    759
    
    
    
    -2.2
    %Total
    
    $
    195,526
    
    
    $
    184,537
    
    
    
    6.0
    %





|    |  |                                                                                                  
|--- |  | -------------------------------------------------------------------------------------------------
|(1) |  | North American Retail represents sales of our culinary, snack and in-shell nuts in North
America.





October 31,2008
    
    
    2007Walnuts
    
    
    57.2
    %
    
    
    62.7
    %Other nuts and popcorn products
    
    
    42.8
    %
    
    
    37.3
    %Total
    
    
    100.0
    %
    
    
    100.0
    %




Gross Profit. Selling, General and Administrative.
 16




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##### Table of Contents



Advertising.
 Interest.
 Other
(income) expense, net
 Income Taxes.
 Liquidity and Capital Resources
        17




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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
    
    $
    122.8
    
    
    $
    7.6
    
    
    $
    35.2
    
    
    $
    80.0
    
    
    $
    Interest on long-term obligations (a)
    
    
    24.2
    
    
    
    5.5
    
    
    
    12.3
    
    
    
    6.4
    
    
    
    Operating leases
    
    
    11.5
    
    
    
    1.6
    
    
    
    5.1
    
    
    
    2.4
    
    
    
    2.4Purchase commitments (b)
    
    
    1.1
    
    
    
    1.1
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities (c)
    
    
    6.9
    
    
    
    0.2
    
    
    
    0.5
    
    
    
    0.6
    
    
    
    5.6Total
    
    $
    166.5
    
    
    $
    16.0
    
    
    $
    53.1
    
    
    $
    89.4
    
    
    $
    8.0
 
 (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, 2008.(b)
    
    Commitments to purchase equipment. Excludes purchase commitments under Walnut Purchase Agreements.(c)
    
    Excludes $0.4 million in deferred rent liabilities and $0.2 million of non-current FIN 48 tax liabilities.(d)
    
    Represents obligations and commitments for the remaining nine months of fiscal year 2009. Effects of Inflation
  Recent Accounting Pronouncements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   18




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19




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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
 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, 2008
    
    
    22,347
    
    
    $
    25.86
    
    
    
    
    
    
    $
    Repurchases from September 1 - September 30, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Repurchases from October 1 - October 31, 2008
    
    
    1,238
    
    
    $
    27.30
    
    
    
    
    
    
    $
    Total
    
    
    23,585
    
    
    $
    25.94
    
    
    
    
    
    
    $
    
 
 (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
  20




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##### Table of Contents



Item 6. Exhibits
  Filed with this
    
    Incorporated by referenceNumber
    
    Exhibit Title
    
    10-Q
    
    Form
    
    File No.
    
    Date Filed10.01
    
    Offer letter between Lloyd Johnson
and Diamond Foods, Inc.
    
    
    
    10-K
    
    000-51439
    
    9/25/0831.01
    
    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
 21




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##### Table of Contents



SIGNATURES
  DIAMOND FOODS, INC.Date: December 3, 2008
    By:
    /s/ Steven M. NeilSteven M. NeilChief Financial and Administrative Officer
and duly authorized officer 22