##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended July 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 No.: 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.)
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class:
    
    Name of Exchange on Which Registered:Common Stock, $0.001 par value
    
    NASDAQ Global Select MarketSeries A Junior Preferred Stock Purchase Right
    
    NASDAQ Global Select Market
 Securities registered pursuant to Section 12(g) of the Act:
None
 o þ
 o þ
 þ o
 o o
 þ
  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
  DOCUMENTS INCORPORATED BY REFERENCE:




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##### 



TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    8Item 1B.
    
    Unresolved Staff Comments
    
    
    12Item 2.
    
    Properties
    
    
    12Item 3.
    
    Legal Proceedings
    
    
    13Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    13PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    13Item 6.
    
    Selected Financial Data
    
    
    14Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 7A.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    21Item 8.
    
    Financial Statements and Supplementary Data
    
    
    22Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    45Item 9A.
    
    Controls and Procedures
    
    
    45Item 9B.
    
    Other Information
    
    
    46PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    46Item 11.
    
    Executive Compensation
    
    
    46Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    46Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    47Item 14.
    
    Principal Accounting Fees and Services
    
    
    47PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    47Signatures
    
    
    
    
    50EX-10.20EX-23.01EX-31.01EX-31.02EX-32.01
  2




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   
 PART I
 
 Item 1. Business
 Overview
  ® ® ®
  
    
    Culinary.We sell culinary nuts under the Diamond of California brand in grocery store
center aisles and produce aisles and through mass merchandisers and club stores. Culinary
nuts are marketed to individuals who prepare meals or baked goods at home and who value
fresh, high-quality products.
    
    Snack.We sell snack products under the Emerald and Pop Secret brands. These products,
which include roasted, glazed and flavored nuts, trail mixes, seeds, dried fruit and similar
offerings packaged in innovative resealable containers, are typically available in grocery
store snack and produce aisles, mass merchandisers, club stores, convenience stores, drug
stores and other places where snacks are sold. In September 2008, we expanded our snack
product line with the acquisition of the Pop Secret microwave popcorn product line from
General Mills, Inc. Microwave popcorn products are offered in a variety of traditional
flavors, as well as a better-for-you product offering featuring 100-calorie packs and are
typically available in grocery store snack aisles.
    
    In-shell.We sell in-shell nuts under the Diamond of California brand, primarily during
the winter holiday season. These products are typically available in grocery store produce
sections, mass merchandisers and club stores.
 3




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##### Table of Contents




    
    Ingredient/Food Service.We market ingredient and food service nuts under the Diamond of
California brand to food processors, restaurants, bakeries and food service companies and
their suppliers. Our institutional and industrial customers use our standard or
customer-specified products to add flavor and enhance nutritional value and texture in their
product offerings.
  Year Ended July 31, 2009
    
    
    Year Ended July 31, 2008
    
    
    Year Ended July 31, 2007North
    
    
    Inter-
    
    
    
    
    
    
    North
    
    
    Inter-
    
    
    
    
    
    
    North
    
    
    Inter-America
    
    
    national
    
    
    Total
    
    
    America
    
    
    national
    
    
    Total
    
    
    America
    
    
    national
    
    
    TotalCulinary
    
    $
    241.9
    
    
    $
    4.6
    
    
    $
    246.5
    
    
    $
    239.9
    
    
    $
    8.5
    
    
    $
    248.4
    
    
    $
    207.0
    
    
    $
    9.0
    
    
    $
    216.0Snack
    
    
    188.9
    
    
    
    
    
    
    
    188.9
    
    
    
    88.6
    
    
    
    
    
    
    
    88.6
    
    
    
    79.6
    
    
    
    
    
    
    
    79.6In-shell
    
    
    34.3
    
    
    
    33.3
    
    
    
    67.6
    
    
    
    41.9
    
    
    
    45.1
    
    
    
    87.0
    
    
    
    46.5
    
    
    
    34.7
    
    
    
    81.2Total retail
    
    
    465.1
    
    
    
    37.9
    
    
    
    503.0
    
    
    
    370.4
    
    
    
    53.6
    
    
    
    424.0
    
    
    
    333.1
    
    
    
    43.7
    
    
    
    376.8Ingredient/Food Service
    
    
    34.5
    
    
    
    31.0
    
    
    
    65.5
    
    
    
    56.9
    
    
    
    48.0
    
    
    
    104.9
    
    
    
    73.9
    
    
    
    69.1
    
    
    
    143.0Other
    
    
    2.4
    
    
    
    
    
    
    
    2.4
    
    
    
    2.6
    
    
    
    
    
    
    
    2.6
    
    
    
    2.8
    
    
    
    
    
    
    
    2.8Total
    
    $
    502.0
    
    
    $
    68.9
    
    
    $
    570.9
    
    
    $
    429.9
    
    
    $
    101.6
    
    
    $
    531.5
    
    
    $
    409.8
    
    
    $
    112.8
    
    
    $
    522.6
  www.diamondfoods.com.
 Our Strategy
  Increase market share in the snack industry.
 Improve margins.
 Expand and improve our position in distribution channels.
 4




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Pursue external growth opportunities.
 
    
    introduce new products that are complementary to our existing product lines and can be
marketed through our existing production and distribution systems;
    
    build the value of our brands; and
    
    enhance or leverage our processing and distribution capabilities to lower our costs.
 Principal Products
  Category
    
    
    
    Products
    
    
    
    Product FeaturesCulinary
    
    
    
    Shelled nuts
    
    
    
    Whole, sliced, slivered, chopped and ground nuts
    
    Pegboard nuts
    
    
    
    Recipe ready packages ranging from 2.25-ounce
to 4.0-ounce sizes
    
    Glazed nuts
    
    
    
    Patented glazing process combined with unique
flavors
    
    Harvest Reserve Premium nuts
    
    
    
    Premium specialty nuts sold in resealable bagsSnack
    
    
    
    Glazed nuts
    
    
    
    Patented glazing process combined with unique
flavors
    
    Mixed nuts
    
    
    
    Package sizes ranging from 2.5-ounce to
38-ounce in foil bags, canisters, and
Polyethylene Terephthalate (PET) Jugs
    
    Roasted nuts
    
    
    
    Innovative canisters designed to be portable
with a lid measuring one serving of 1.5-ounces
of nuts
    
    Trail mix
    
    
    
    Unique blends and nutritionally dense products
    
    Natural snack products for
the produce aisle
    
    
    
    Four segments for produce snacks: nuts and
seeds; trail/snack mixes; dried fruits; sweet
snacks
    
    Microwave popcorn
    
    
    
    Packaged in 3 count, 6 count, snack
(100-calorie) and larger count sizes in
traditional butter flavorings, reduced fat and
other flavoringsIn-shell
    
    
    
    Various uncracked nuts,
cleaned and/or polished
    
    
    
    Packaged in clear visible bags, mesh bags and
bulk display units
    
    Mixed nuts
    
    
    
    Various package sizes ranging from one-pound
bags to 25-kilogram sacks, with nut sizes
ranging from baby to jumboIngredient/Food Service
    
    
    
    Shelled and processed nuts
    
    
    
    Whole, sliced, chopped, diced and ground nuts
    
    Custom-processed nuts
    
    
    
    Food processor product of uniform size and
consistent color
    
    Glazed nuts
    
    
    
    Various large package sizes (ranging from 2
pounds to 30 pounds) tailored for business
usage
    
    Flexible processing and packaging operations
  5




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Marketing
    Sales and Distribution
   Product Development and Production
  6




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Competition
  Raw Materials and Supplies
    Trademarks and Patents
  Seasonality
  7




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Employees
  
 Item 1A. Risk Factors
  Our raw materials are subject to fluctuations in availability and price.
    8




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We face intense competition from national and regional competitors and snack food industry
competitors that could negatively affect our results of operations.
   Sales to our top customer represented approximately 21% of our net sales. The loss of any major
customer could adversely impact our business.
  Because we experience seasonal fluctuations in our sales, our quarterly results will fluctuate and
our annual performance will depend largely on results from two quarters.
  We could be required to conduct product recalls; concerns with the safety and quality of food
products could harm our sales or cause consumers to avoid our products.
  9




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We depend on our key personnel and if we lose the services of any of these individuals, or
fail to attract and retain additional key personnel, we may not be able to implement our business
strategy or operate our business effectively.
  We recently acquired a microwave popcorn product line, and it is difficult to determine what the
impact of that acquisition on our financial results will be.
  
    
    our ability to successfully market, promote and provide consumer support for our
microwave popcorn products;
    
    growth in demand for microwave popcorn products and the degree of competition from other
companies that sell microwave popcorn;
    
    our management of the additional financial commitments resulting from our incurrence of
debt to finance the acquisition;
    
    our management of commodity risks associated with sourcing the raw materials for Pop
Secret products.
 The acquisition of other product lines or businesses could pose risks to our profitability.
  Changes in the food industry, including changing dietary trends and consumer preferences, could
reduce demand for our products.
  Developments in the walnut industry could threaten our position in the industry.
  10




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Bioterrorism legislation could disrupt our supply of imported nuts.
  Government regulation could increase our costs of production and increase our legal and regulatory
expenditures.
  The current global economic downturn and capital and credit market crisis may materially and
adversely affect our business, financial condition and results of operations.
  We are subject to risks of doing business internationally.
  
    
    local economic and political conditions, including disruptions in trading markets;
 
    
    restrictive foreign governmental actions, including restrictions on transfers of funds,
and trade protection measures, including export duties and quotas and customs duties and
tariffs;
    
    changes in legal or regulatory requirements affecting foreign investment, loans, taxes,
imports and exports;
 11




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
    
    currency exchange rate fluctuations which, depending upon the nature of the changes, may
make our finished products more expensive compared to foreign grown products or may increase
our cost of obtaining foreign-sourced raw materials; and
    
    earthquakes, tsunamis, floods or other major disasters may limit the supply of nuts that
we purchase abroad.
  Increased costs associated with product processing and transportation, such as water, electricity,
natural gas and fuel, could increase our expenses and reduce our profitability.
  A disruption at any of our production facilities would significantly decrease production, which
could increase our cost of sales and reduce our net sales and income from operations.
  Our business could be negatively impacted if we fail to maintain satisfactory labor relations.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  12




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Item 3. Legal Proceedings
   
 Item 4. Submission of Matters to a Vote of Security Holders
  
 PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
  DividendsHigh
    
    Low
    
    DeclaredYear Ended July 31, 2009:Fourth Quarter
    
    $
    30.39
    
    
    $
    22.67
    
    
    $
    0.045Third Quarter
    
    $
    29.25
    
    
    $
    19.85
    
    
    $
    0.045Second Quarter
    
    $
    31.94
    
    
    $
    18.39
    
    
    $
    0.045First Quarter
    
    $
    32.14
    
    
    $
    23.50
    
    
    $
    0.045Year Ended July 31, 2008:Fourth Quarter
    
    $
    27.15
    
    
    $
    19.50
    
    
    $
    0.045Third Quarter
    
    $
    21.79
    
    
    $
    15.94
    
    
    $
    0.045Second Quarter
    
    $
    22.68
    
    
    $
    15.83
    
    
    $
    0.045First Quarter
    
    $
    22.42
    
    
    $
    15.28
    
    
    $
    0.045
   13




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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 May 1 through May 31, 2009
    
    
    3,269
    
    
    $
    27.20
    
    
    
    
    
    
    
    Repurchases from June 1 through June 30, 2009
    
    
    2,718
    
    
    $
    27.24
    
    
    
    
    
    
    
    Repurchases from July 1 through July 31, 2009
    
    
    140
    
    
    $
    25.39
    
    
    
    
    
    
    
    Total
    
    
    6,127
    
    
    $
    27.18
    
    
    
    
    
    
    
    
 
 (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 our 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 6. Selected Financial Data
  Year Ended July 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(In thousands, except per share information)Statements of operations/Net proceeds data (2005) (1):Net sales
    
    $
    570,940
    
    
    $
    531,492
    
    
    $
    522,585
    
    
    $
    477,205
    
    
    $
    462,548Patronage inventory at beginning of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101,403
    )Patronage inventory at end of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,152Total net sales/Gross marketing pool proceeds (2005)
    
    
    570,940
    
    
    
    531,492
    
    
    
    522,585
    
    
    
    477,205
    
    
    
    428,297Total cost of sales
    
    
    435,344
    
    
    
    443,490
    
    
    
    443,945
    
    
    
    411,809
    
    
    
    191,387Gross profit/Proceeds before operating expenses (2005)
    
    
    135,596
    
    
    
    88,002
    
    
    
    78,640
    
    
    
    65,396
    
    
    
    236,910Operating expenses:Selling, general and administrative
    
    
    60,971
    
    
    
    43,613
    
    
    
    42,541
    
    
    
    37,046
    
    
    
    33,188Advertising
    
    
    28,785
    
    
    
    20,508
    
    
    
    20,445
    
    
    
    17,977
    
    
    
    22,153Restructuring and other costs, net
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    3,442
    
    
    
    Loss on termination of defined benefit plan
    
    
    
    
    
    
    
    
    
    
    3,054
    
    
    
    
    
    
    
    Total operating expenses
    
    
    89,756
    
    
    
    64,121
    
    
    
    66,025
    
    
    
    58,465
    
    
    
    55,341Income from operations/Operating proceeds (2005)
    
    
    45,840
    
    
    
    23,881
    
    
    
    12,615
    
    
    
    6,931
    
    
    
    181,569Interest expense, net
    
    
    6,255
    
    
    
    1,040
    
    
    
    1,291
    
    
    
    295
    
    
    
    4,433Conversion costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    697Early extinguishment of debt
    
    
    2,609
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,028Other expenses (income)
    
    
    (1,711
    )
    
    
    
    
    
    
    98
    
    
    
    310
    
    
    
    Income/Proceeds (2005) before income taxes
    
    
    38,687
    
    
    
    22,841
    
    
    
    11,226
    
    
    
    6,326
    
    
    
    174,411Income taxes (tax benefits)
    
    
    14,944
    
    
    
    8,085
    
    
    
    2,793
    
    
    
    (1,010
    )
    
    
    (8,385
    )Net income/Net proceeds (2005)
    
    $
    23,743
    
    
    $
    14,756
    
    
    $
    8,433
    
    
    $
    7,336
    
    
    $
    182,796Earnings per shareBasic
    
    $
    1.48
    
    
    $
    0.92
    
    
    $
    0.53
    
    
    $
    0.47Diluted
    
    $
    1.44
    
    
    $
    0.91
    
    
    $
    0.53
    
    
    $
    0.47Shares used to compute earnings per shareBasic
    
    
    16,022
    
    
    
    16,088
    
    
    
    15,786
    
    
    
    15,634Diluted
    
    
    16,459
    
    
    
    16,152
    
    
    
    15,786
    
    
    
    15,653Dividends declared
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    0.12
    
    
    $
    0.09
 14




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(1)
    
    As an agricultural cooperative association, we derived revenues from our patronage
business, which consisted of processing and marketing walnuts on behalf of Diamond members and
our non-patronage business, which consisted of purchasing, processing and marketing nut
varieties other than walnuts. Our financial statements prior to fiscal year 2006 included
statements of net proceeds prepared in accordance with generally accepted accounting
principles (GAAP) for agricultural cooperative associations, rather than statements of
operations. Net proceeds are amounts distributable to member growers from the patronage
business. Net proceeds also include net income or loss from non-patronage business. Net
proceeds do not include walnut acquisition costs. Beginning in fiscal year 2006, our financial
statements have been prepared in accordance with GAAP for companies that are not cooperative
associations. We were not a public company during fiscal years prior to 2006, thus no earnings
per share nor dividends declared data is presented for fiscal year 2005. Year Ended July 31,2009
    
    2008
    
    2007
    
    2006
    
    2005(In thousands)Balance sheet data:Cash and cash equivalents
    
    $
    24,802
    
    
    $
    74,279
    
    
    $
    33,755
    
    
    $
    35,614
    
    
    $
    49,035Working capital
    
    
    51,422
    
    
    
    121,516
    
    
    
    100,527
    
    
    
    87,689
    
    
    
    89,022Total assets
    
    
    394,892
    
    
    
    273,267
    
    
    
    236,403
    
    
    
    253,032
    
    
    
    252,028Total debt, including short-term debt
    
    
    115,085
    
    
    
    20,204
    
    
    
    20,507
    
    
    
    20,000
    
    
    
    22,119Total stockholders/members equity
    
    
    173,341
    
    
    
    146,223
    
    
    
    125,341
    
    
    
    110,826
    
    
    
    99,462
 Year Ended July 31,2009
    
    2008
    
    2007
    
    2006
    
    2005Other data (Unaudited):Walnuts sales as a percentage of total net sales
    
    
    47.0
    %
    
    
    60.2
    %
    
    
    59.8
    %
    
    
    67.0
    %
    
    
    71.4
    %
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Summary
   Critical Accounting Policies
  15




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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,
     16




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Employee Benefits.
 Income Taxes. Accounting for
Income Taxes, Accounting for Income Taxes
 Accounting for Stock-Based Compensation. Share-Based Payment
 Results of Operations
 2009 Compared to 2008
   Year Ended July 31,
    
    
    % Change from2009
    
    
    2008
    
    
    2008 to 2009North American Retail (1)
    
    $
    465,126
    
    
    $
    370,411
    
    
    
    25.6
    %International
    
    
    68,890
    
    
    
    101,640
    
    
    
    -32.2
    %North American Ingredient/Food Service
    
    
    34,504
    
    
    
    56,869
    
    
    
    -39.3
    %Other
    
    
    2,420
    
    
    
    2,572
    
    
    
    -5.9
    %Total
    
    $
    570,940
    
    
    $
    531,492
    
    
    
    7.4
    %
 
 (1)
    
    North American Retail represents sales of our culinary, snack and in-shell products in
North America. 17




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Year Ended July 31,2009
    
    2008Walnuts
    
    
    47.0
    %
    
    
    60.2
    %Other nuts and popcorn products
    
    
    53.0
    %
    
    
    39.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Gross profit.
 Selling, general and administrative.
 Advertising.
 Interest expense.
 Early extinguishment of debt.
 Other income.
 Income taxes.
 2008 Compared to 2007
   Year Ended July 31,
    
    
    % Change from2008
    
    
    2007
    
    
    2007 to 2008North American Retail
    
    $
    370,411
    
    
    $
    333,117
    
    
    
    11.2
    %International
    
    
    101,640
    
    
    
    112,830
    
    
    
    -9.9
    %North American Ingredient/Food Service
    
    
    56,869
    
    
    
    73,822
    
    
    
    -23.0
    %Other
    
    
    2,572
    
    
    
    2,816
    
    
    
    -8.7
    %Total
    
    $
    531,492
    
    
    $
    522,585
    
    
    
    1.7
    %
 
 (1)
    
    North American Retail represents sales of our culinary, snack and in-shell products in
North America. 18




---



##### Table of Contents



Year Ended July 31,2008
    
    2007Walnuts
    
    
    60.2
    %
    
    
    59.8
    %Other nuts
    
    
    39.8
    %
    
    
    40.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Gross profit.
 Selling, general and administrative.
 Advertising.
 Income taxes.
 Liquidity and Capital Resources
     19




---



##### Table of Contents



Contractual Obligations and Commitments
  Payments Due by PeriodLess than
    
    1-3
    
    3-5
    
    More thanTotal
    
    1 Year
    
    Years
    
    Years
    
    5 YearsLong-term obligations
    
    $
    115.2
    
    
    $
    15.1
    
    
    $
    45.1
    
    
    $
    55.0
    
    
    $
    Interest on long-term obligations (a)
    
    
    5.8
    
    
    
    2.3
    
    
    
    2.9
    
    
    
    0.6
    
    
    
    Operating leases
    
    
    14.1
    
    
    
    2.7
    
    
    
    4.5
    
    
    
    3.7
    
    
    
    3.2Purchase commitments (b)
    
    
    12.9
    
    
    
    12.9
    
    
    
    
    
    
    
    
    
    
    
    Pension liability
    
    
    20.8
    
    
    
    0.4
    
    
    
    1.0
    
    
    
    7.3
    
    
    
    12.1Other long-term liabilities (c)
    
    
    2.4
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    1.6Total
    
    $
    171.2
    
    
    $
    33.5
    
    
    $
    53.8
    
    
    $
    67.0
    
    
    $
    16.9
 
 (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 July 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 FIN 48 tax
liabilities and $0.1 million of other non-current liabilities. Off-Balance Sheet Arrangements
  Effects of Inflation
  20




---



##### Table of Contents



Recent Accounting Pronouncements
   Employers Disclosures about Postretirement Benefit Plan Assets
 Determining
Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 Market Risk.
 Commodities Risk.
 Interest Rate Risk.
  21




---



##### Table of Contents



Item 8. Financial Statements and Supplementary Data
 22




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal
Control  Integrated Framework
    Internal Control  Integrated
Framework
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans
  
 23




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##### Table of Contents



DIAMOND FOODS, INC.
 CONSOLIDATED BALANCE SHEETS
 July 31,2009
    
    
    2008(In thousands, except share andper share information)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,802
    
    
    $
    74,279Trade receivables, net
    
    
    33,492
    
    
    
    46,256Inventories
    
    
    85,027
    
    
    
    88,526Deferred income taxes
    
    
    13,109
    
    
    
    7,387Prepaid expenses and other current assets
    
    
    3,594
    
    
    
    4,261Total current assets
    
    
    160,024
    
    
    
    220,709Property, plant and equipment, net
    
    
    51,115
    
    
    
    34,606Deferred income taxes
    
    
    6,230
    
    
    
    5,802Goodwill
    
    
    76,076
    
    
    
    5,432Other intangible assets, net
    
    
    97,883
    
    
    
    3,473Other long-term assets
    
    
    3,564
    
    
    
    3,245Total assets
    
    $
    394,892
    
    
    $
    273,267LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    15,000
    
    
    $
    Accounts payable and accrued liabilities
    
    
    64,453
    
    
    
    42,251Payable to growers
    
    
    29,149
    
    
    
    56,942Total current liabilities
    
    
    108,602
    
    
    
    99,193Long-term obligations
    
    
    100,085
    
    
    
    20,204Deferred income taxes
    
    
    1,221
    
    
    
    Other liabilities
    
    
    11,643
    
    
    
    7,647Commitments 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; 16,753,796 and
16,340,076 shares issued and 16,552,019 and 16,180,771 shares outstanding
at July 31, 2009 and 2008, respectively
    
    
    17
    
    
    
    16Treasury stock, at cost: 201,777 and 159,305 shares at July 31, 2009 and 2008
    
    
    (4,256
    )
    
    
    (3,203
    )Additional paid-in capital
    
    
    122,817
    
    
    
    112,550Accumulated other comprehensive income (loss)
    
    
    (1,296
    )
    
    
    1,584Retained earnings
    
    
    56,059
    
    
    
    35,276Total stockholders equity
    
    
    173,341
    
    
    
    146,223Total liabilities and stockholders equity
    
    $
    394,892
    
    
    $
    273,267
  24




---



##### Table of Contents



DIAMOND FOODS, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended July 31,2009
    
    
    2008
    
    
    2007(In thousands, except per share information)Net sales
    
    $
    570,940
    
    
    $
    531,492
    
    
    $
    522,585Cost of sales
    
    
    435,344
    
    
    
    443,490
    
    
    
    443,945Gross profit
    
    
    135,596
    
    
    
    88,002
    
    
    
    78,640Operating expenses:Selling, general and administrative
    
    
    60,971
    
    
    
    43,613
    
    
    
    42,541Advertising
    
    
    28,785
    
    
    
    20,508
    
    
    
    20,445Restructuring and other costs, net
    
    
    
    
    
    
    
    
    
    
    (15
    )Loss on termination of defined benefit plan
    
    
    
    
    
    
    
    
    
    
    3,054Total operating expenses
    
    
    89,756
    
    
    
    64,121
    
    
    
    66,025Income from operations
    
    
    45,840
    
    
    
    23,881
    
    
    
    12,615Interest expense, net
    
    
    6,255
    
    
    
    1,040
    
    
    
    1,291Early extinguishment of debt
    
    
    2,609
    
    
    
    
    
    
    
    Other expenses (income)
    
    
    (1,711
    )
    
    
    
    
    
    
    98Income before income taxes
    
    
    38,687
    
    
    
    22,841
    
    
    
    11,226Income taxes
    
    
    14,944
    
    
    
    8,085
    
    
    
    2,793Net income
    
    $
    23,743
    
    
    $
    14,756
    
    
    $
    8,433Earnings per shareBasic
    
    $
    1.48
    
    
    $
    0.92
    
    
    $
    0.53Diluted
    
    $
    1.44
    
    
    $
    0.91
    
    
    $
    0.53Shares used to compute earnings per shareBasic
    
    
    16,022
    
    
    
    16,088
    
    
    
    15,786Diluted
    
    
    16,459
    
    
    
    16,152
    
    
    
    15,786Dividends declared
    
    $
    0.18
    
    
    $
    0.18
    
    
    $
    0.12
  25




---



##### Table of Contents



DIAMOND FOODS, INC.
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Treasury
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Equity(In thousands, except share information)Balance, July 31, 2006
    
    
    15,737,194
    
    
    $
    16
    
    
    $
    
    
    
    $
    93,962
    
    
    $
    16,884
    
    
    $
    (36
    )
    
    $
    110,826Shares issued under ESPP and upon
stock option exercises
    
    
    88,355
    
    
    
    
    
    
    
    
    
    
    
    1,204
    
    
    
    
    
    
    
    
    
    
    
    1,204Stock compensation expense
    
    
    23,168
    
    
    
    
    
    
    
    
    
    
    
    5,859
    
    
    
    
    
    
    
    
    
    
    
    5,859ESPP disqualifying dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    78Tax benefit  restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Treasury stock repurchased
    
    
    (84,070
    )
    
    
    
    
    
    
    (1,436
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,436
    )Adjustment to initially apply SFAS 158
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,230
    
    
    
    2,230Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,895
    )
    
    
    
    
    
    
    (1,895
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,433
    
    
    
    
    
    
    
    8,433Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    39Total comprehensive Income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,472Balance, July 31, 2007
    
    
    15,764,647
    
    
    
    16
    
    
    
    (1,436
    )
    
    
    101,106
    
    
    
    23,422
    
    
    
    2,233
    
    
    
    125,341Shares issued under ESPP and upon
stock option exercises
    
    
    233,710
    
    
    
    
    
    
    
    
    
    
    
    3,972
    
    
    
    
    
    
    
    
    
    
    
    3,972Stock compensation expense
    
    
    257,649
    
    
    
    
    
    
    
    
    
    
    
    6,893
    
    
    
    
    
    
    
    
    
    
    
    6,893Tax benefit from ESPP and stock
option transactions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    579
    
    
    
    
    
    
    
    
    
    
    
    579Treasury stock repurchased
    
    
    (75,235
    )
    
    
    
    
    
    
    (1,767
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,767
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,902
    )
    
    
    
    
    
    
    (2,902
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,756
    
    
    
    
    
    
    
    14,756Change in pension liabilities SFAS 158
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (646
    )
    
    
    (646
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )Total comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,107Balance, July 31, 2008
    
    
    16,180,771
    
    
    
    16
    
    
    
    (3,203
    )
    
    
    112,550
    
    
    
    35,276
    
    
    
    1,584
    
    
    
    146,223Shares issued under ESPP and upon
stock option exercises
    
    
    298,133
    
    
    
    1
    
    
    
    
    
    
    
    5,299
    
    
    
    
    
    
    
    
    
    
    
    5,300Stock compensation expense
    
    
    115,587
    
    
    
    
    
    
    
    
    
    
    
    3,901
    
    
    
    
    
    
    
    
    
    
    
    3,901Tax benefit from ESPP and stock
option transactions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,067
    
    
    
    
    
    
    
    
    
    
    
    1,067Treasury stock repurchased
    
    
    (42,472
    )
    
    
    
    
    
    
    (1,053
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,053
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,960
    )
    
    
    
    
    
    
    (2,960
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,743
    
    
    
    
    
    
    
    23,743Change in pension liabilities SFAS 158
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,743
    )
    
    
    (2,743
    )Other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )
    
    
    (137
    )Total comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,863Balance, July 31, 2009
    
    
    16,552,019
    
    
    $
    17
    
    
    $
    (4,256
    )
    
    $
    122,817
    
    
    $
    56,059
    
    
    $
    (1,296
    )
    
    $
    173,341
  26




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##### Table of Contents



DIAMOND FOODS, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended July 31,2009
    
    
    2008
    
    
    2007(In thousands)CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    23,743
    
    
    $
    14,756
    
    
    $
    8,433Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    11,362
    
    
    
    6,420
    
    
    
    7,561Deferred income taxes
    
    
    (2,800
    )
    
    
    (3,022
    )
    
    
    (1,874
    )Loss on termination of defined benefit plan
    
    
    
    
    
    
    
    
    
    
    2,575Tax benefit related to stock-based compensation plans
    
    
    
    
    
    
    579
    
    
    
    81Excess tax benefit from ESPP and stock option transactions
    
    
    (1,067
    )
    
    
    (579
    )
    
    
    (81
    )Stock-based compensation
    
    
    3,901
    
    
    
    6,893
    
    
    
    5,859Gain on sale of property held for sale
    
    
    
    
    
    
    
    
    
    
    (1,193
    )Other, net
    
    
    858
    
    
    
    4
    
    
    
    56Changes in assets and liabilities (excluding business acquired):Trade receivables
    
    
    12,764
    
    
    
    4,406
    
    
    
    (1,048
    )Inventories
    
    
    10,316
    
    
    
    2,093
    
    
    
    8,077Prepaid expenses and income taxes and other current assets
    
    
    1,053
    
    
    
    10
    
    
    
    1,581Other assets
    
    
    10
    
    
    
    24
    
    
    
    454Accounts payable and accrued liabilities
    
    
    21,231
    
    
    
    15,475
    
    
    
    (1,871
    )Payable to growers
    
    
    (27,793
    )
    
    
    (175
    )
    
    
    (24,785
    )Other liabilities
    
    
    (210
    )
    
    
    192
    
    
    
    (11
    )Net cash provided by operating activities
    
    
    53,368
    
    
    
    47,076
    
    
    
    3,814CASH FLOWS FROM INVESTING ACTIVITIES:Net proceeds from sale of property, plant and equipment
    
    
    129
    
    
    
    12
    
    
    
    2,941Purchases of property, plant, and equipment
    
    
    (7,994
    )
    
    
    (6,583
    )
    
    
    (6,790
    )Acquisition of Pop Secret business
    
    
    (190,224
    )
    
    
    
    
    
    
    Payment of Harmony acquisition costs
    
    
    
    
    
    
    
    
    
    
    (197
    )Other
    
    
    4
    
    
    
    299
    
    
    
    419Net cash used in investing activities
    
    
    (198,085
    )
    
    
    (6,272
    )
    
    
    (3,627
    )CASH FLOWS FROM FINANCING ACTIVITIES:Notes payable repayments
    
    
    (30,141
    )
    
    
    (162
    )
    
    
    Proceeds from issuance of long-term debt
    
    
    125,000
    
    
    
    
    
    
    
    Debt issuance costs
    
    
    (1,973
    )
    
    
    
    
    
    
    Issuance of common stock under stock plans
    
    
    5,300
    
    
    
    3,972
    
    
    
    1,204Dividends paid
    
    
    (2,960
    )
    
    
    (2,902
    )
    
    
    (1,895
    )Excess tax benefit from ESPP and stock option transactions
    
    
    1,067
    
    
    
    579
    
    
    
    81Purchases of treasury stock
    
    
    (1,053
    )
    
    
    (1,767
    )
    
    
    (1,436
    )Net cash provided by (used in) financing activities
    
    
    95,240
    
    
    
    (280
    )
    
    
    (2,046
    )Net increase (decrease) in cash and cash equivalents
    
    
    (49,477
    )
    
    
    40,524
    
    
    
    (1,859
    )Cash and cash equivalents:Beginning of period
    
    
    74,279
    
    
    
    33,755
    
    
    
    35,614End of period
    
    $
    24,802
    
    
    $
    74,279
    
    
    $
    33,755Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    5,989
    
    
    $
    1,183
    
    
    $
    1,638Income taxes
    
    
    19,438
    
    
    
    5,945
    
    
    
    3,878Non-cash investing activities:Liabilities related to Pop Secret acquisition
    
    
    1,660
    
    
    
    
    
    
    
    Accrued capital expenditures
    
    
    497
    
    
    
    391
    
    
    
    94Non-cash financing activities:Capital lease obligations incurred
    
    
    
    
    
    
    
    
    
    
    507
  27




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##### Table of Contents



DIAMOND FOODS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009, 2008 and 2007
(In thousands, except share and per share information)
 (1) Organization and Significant Accounting Policies
 Business
  Business Combinations.
 Basis of Presentation
  Use of Estimates
   Certain Risks and Concentrations
  Principles of Consolidation
  28




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##### Table of Contents



Cash and Cash Equivalents
  Inventories
  Property, Plant and Equipment
  Slotting and Other Contractual Arrangements
  Impairment of Long-Lived and Intangible Assets and Goodwill
 Accounting for the Impairment or Disposal of
Long-lived Assets Goodwill and Other Intangible Assets,
     29




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##### Table of Contents



Revenue Recognition
  Promotion and Advertising Costs
 Accounting for Consideration Given by a Vendor to a Customer.
 Shipping and Handling Costs
  Income Taxes
 Accounting for Income
Taxes, Accounting for Income Taxes
 Fair Value of Financial Instruments
  30




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##### Table of Contents



Stock-Based Compensation
 Share-Based
Payment
 Recent Accounting Pronouncements
   Employers Disclosures about
Postretirement Benefit Plan Assets
 Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities.
 (2) Fair Value of Financial Instruments
   Fair Value Measurements
 31




---



##### Table of Contents



The Effective Date of FASB Statement No. 157
  Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active
   Level 1
 Level 2
 Level 3
   (3) Stock-Based Compensation
  32




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##### Table of Contents



Stock Option Awards:
 2009
    
    2008
    
    2007Average expected life, in years
    
    
    6
    
    
    
    5
    
    
    
    6Expected volatility
    
    
    38.50
    %
    
    
    32.57
    %
    
    
    30.00
    %Risk-free interest rate
    
    
    3.23
    %
    
    
    3.71
    %
    
    
    4.75
    %Dividend rate
    
    
    0.70
    %
    
    
    0.91
    %
    
    
    0.72
    %
  Weighted Average
    
    Weighted AverageExercise Price Per
    
    Remaining
    
    Aggregate IntrinsicNumber of Shares
    
    Share
    
    Contractual Life
    
    Value(In thousands)
    
    
    
    
    
    (In years)
    
    (In thousands)Outstanding at July 31, 2006
    
    
    1,648
    
    
    $
    17.43
    
    
    
    9.2
    
    
    $
    Granted
    
    
    117
    
    
    
    16.93Exercised
    
    
    (35
    )
    
    
    16.97Cancelled
    
    
    (109
    )
    
    
    17.88Outstanding at July 31, 2007
    
    
    1,621
    
    
    
    17.37
    
    
    
    8.3
    
    
    $
    226Granted
    
    
    140
    
    
    
    21.43Exercised
    
    
    (207
    )
    
    
    17.31Cancelled
    
    
    (44
    )
    
    
    17.87Outstanding at July 31, 2008
    
    
    1,510
    
    
    
    17.74
    
    
    
    7.5
    
    
    $
    9,979Granted
    
    
    128
    
    
    
    26.06Exercised
    
    
    (294
    )
    
    
    17.78Cancelled
    
    
    (12
    )
    
    
    17.24Outstanding at July 31, 2009
    
    
    1,332
    
    
    
    18.54
    
    
    
    6.9
    
    
    $
    12,871Exercisable at July 31, 2007
    
    
    877
    
    
    
    17.18
    
    
    
    8.2
    
    
    $
    159Exercisable at July 31, 2008
    
    
    1,212
    
    
    
    17.32
    
    
    
    7.3
    
    
    $
    8,483Exercisable at July 31, 2009
    
    
    1,107
    
    
    
    17.76
    
    
    
    6.6
    
    
    $
    11,562
 33




---



##### Table of Contents



Weighted AverageGrant Date FairNumber of Shares
    
    Value Per Share(In thousands)Nonvested at July 31, 2008
    
    
    298
    
    
    $
    6.74Granted
    
    
    128
    
    
    
    10.67Vested
    
    
    (195
    )
    
    
    7.20Cancelled
    
    
    (6
    )
    
    
    5.79Nonvested at July 31, 2009
    
    
    225
    
    
    
    8.62
  Restricted Stock Awards:
 WeightedAverage GrantNumber of
    
    Date Fair ValueShares
    
    Per Share(In thousands)Outstanding at July 31, 2006
    
    
    529
    
    
    $
    17.52Granted
    
    
    27
    
    
    
    16.75Vested
    
    
    (242
    )
    
    
    17.37Cancelled
    
    
    (4
    )
    
    
    19.67Outstanding at July 31, 2007
    
    
    310
    
    
    
    17.50Granted
    
    
    318
    
    
    
    17.73Vested
    
    
    (235
    )
    
    
    17.33Cancelled
    
    
    (61
    )
    
    
    17.28Outstanding at July 31, 2008
    
    
    332
    
    
    
    17.74Granted
    
    
    194
    
    
    
    25.80Vested
    
    
    (111
    )
    
    
    18.02Cancelled
    
    
    (79
    )
    
    
    19.94Outstanding at July 31, 2009
    
    
    336
    
    
    
    21.78
   Employee Stock Purchase Plan:
 34




---



##### Table of Contents



2009
    
    2008
    
    2007Average expected life, in years
    
    
    0.75
    
    
    
    0.75
    
    
    
    0.75Expected volatility
    
    
    30.00
    %
    
    
    30.00
    %
    
    
    29.38
    %Risk-free interest rate
    
    
    4.01
    %
    
    
    4.53
    %
    
    
    4.84
    %Dividend rate
    
    
    0.90
    %
    
    
    0.78
    %
    
    
    0.68
    %
  Suspension of the ESPP Program:
 (4) Earnings Per Share
   Twelve MonthsEnded July 31,2009
    
    
    2008
    
    
    2007Net income
    
    $
    23,743
    
    
    $
    14,756
    
    
    $
    8,433Weighted average common shares outstanding:Basic
    
    
    16,022
    
    
    
    16,088
    
    
    
    15,786Effect of dilutive securities:Options to purchase common stock
    
    
    437
    
    
    
    64
    
    
    
    Diluted
    
    
    16,459
    
    
    
    16,152
    
    
    
    15,786Earnings Per Common Share (1):Basic
    
    $
    1.48
    
    
    $
    0.92
    
    
    $
    0.53Diluted
    
    $
    1.44
    
    
    $
    0.91
    
    
    $
    0.53
 
 (1)
    
    Certain computations may reflect rounding adjustments.  (5) Acquisition of Pop Secret
  35




---



##### Table of Contents



Business Combinations
  Inventory
    
    $
    6,817Property, plant and equipment
    
    
    17,023Brand intangibles
    
    
    62,500Customer relationships
    
    
    34,900Goodwill
    
    
    70,644Acquisition liabilities
    
    
    (1,660
    )Purchase price
    
    $
    190,224
   Pro Forma  Financial Information
  Year Ended July 312009
    
    2008Net sales
    
    $
    584,449
    
    
    $
    634,882Net income
    
    $
    24,702
    
    
    $
    17,869Diluted earnings per share
    
    $
    1.50
    
    
    $
    1.11
  (6) Intangible Assets and Goodwill
  Balance as of July 31, 2007:
    
    $
    5,432Acquisitions/other activities
    
    
    Balance as of July 31, 2008:
    
    $
    5,432Acquisition of Pop Secret
    
    
    70,644Balance as of July 31, 2009:
    
    $
    76,076
 36




---



##### Table of Contents



2009
    
    
    2008Brand intangibles (not subject to amortization)
    
    $
    62,500
    
    
    $
    Intangible assets subject to amortization:Customer contracts and related relationships
    
    
    37,300
    
    
    
    2,400Trademarks and trade names
    
    
    
    
    
    
    1,600Total intangible assets subject to amortization
    
    
    37,300
    
    
    
    4,000Total other intangible assets, gross
    
    
    99,800
    
    
    
    4,000Less accumulated amortization on intangible assets:Customer contracts and related relationships
    
    
    (1,917
    )
    
    
    (270
    )Trademarks and trade names
    
    
    
    
    
    
    (257
    )Total amortization
    
    
    (1,917
    )
    
    
    (527
    )Total other intangible assets, net
    
    $
    97,883
    
    
    $
    3,473
        (7) Notes Payable and Long-Term Obligations
   37




---



##### Table of Contents



(8) Balance Sheet Items
  2009
    
    
    2008Raw materials and supplies
    
    $
    25,678
    
    
    $
    33,501Work in process
    
    
    13,217
    
    
    
    19,084Finished goods
    
    
    46,132
    
    
    
    35,941Total
    
    $
    85,027
    
    
    $
    88,526
  2009
    
    
    2008Accounts payable
    
    $
    32,222
    
    
    $
    21,848Accrued salaries and benefits
    
    
    11,034
    
    
    
    7,886Accrued promotion
    
    
    19,511
    
    
    
    8,695Other
    
    
    1,686
    
    
    
    3,822Total
    
    $
    64,453
    
    
    $
    42,251
 (9) Property, Plant and Equipment
  2009
    
    
    2008Land and improvements
    
    $
    1,531
    
    
    $
    1,569Buildings and improvements
    
    
    19,518
    
    
    
    17,265Machinery, equipment and software
    
    
    115,211
    
    
    
    98,191Construction in progress
    
    
    7,294
    
    
    
    5,053Total
    
    
    143,554
    
    
    
    122,078Less accumulated depreciation
    
    
    (92,439
    )
    
    
    (87,472
    )Property, plant and equipment, net
    
    $
    51,115
    
    
    $
    34,606
 (10) Income Taxes
  2009
    
    
    2008
    
    
    2007CurrentFederal
    
    $
    14,831
    
    
    $
    10,711
    
    
    $
    4,449State
    
    
    2,913
    
    
    
    947
    
    
    
    218Deferred
    
    
    (2,800
    )
    
    
    (3,573
    )
    
    
    (1,874
    )Total
    
    $
    14,944
    
    
    $
    8,085
    
    
    $
    2,793
 38




---



##### Table of Contents



2009
    
    
    2008
    
    
    2007Federal tax computed at the statutory rate
    
    $
    13,540
    
    
    $
    7,993
    
    
    $
    3,929Stock-based compensation
    
    
    3
    
    
    
    264
    
    
    
    132Change in valuation allowance
    
    
    
    
    
    
    
    
    
    
    (1,044
    )Domestic production activities deduction
    
    
    (894
    )
    
    
    (691
    )
    
    
    State taxes, net of federal impact
    
    
    1,908
    
    
    
    244
    
    
    
    211Other items, net
    
    
    387
    
    
    
    275
    
    
    
    (435
    )Income tax expense
    
    $
    14,944
    
    
    $
    8,085
    
    
    $
    2,793
  2009
    
    
    2008Deferred tax assets:Current:Inventories
    
    $
    803
    
    
    $
    1,082Receivables
    
    
    203
    
    
    
    179Accruals
    
    
    7,702
    
    
    
    5,057Retirement benefits
    
    
    
    
    
    
    189Employee stock compensation benefits
    
    
    3,383
    
    
    
    636State tax
    
    
    943
    
    
    
    244Other
    
    
    75
    
    
    
    Total current
    
    
    13,109
    
    
    
    7,387Non-current:State tax credits
    
    
    3,723
    
    
    
    3,689Retirement benefits
    
    
    5,275
    
    
    
    4,578Employee stock compensation benefits
    
    
    1,498
    
    
    
    608Other
    
    
    168
    
    
    
    Total non-current
    
    
    10,664
    
    
    
    8,875Deferred tax liabilities:Non-current:Retirement benefits
    
    
    872
    
    
    
    2,251Property, plant and equipment
    
    
    1,291
    
    
    
    468Intangibles
    
    
    3,492
    
    
    
    354Total non-current
    
    
    5,655
    
    
    
    3,073Total deferred income taxes, net
    
    $
    18,118
    
    
    $
    13,189Composed of:Net current deferred income taxes
    
    $
    13,109
    
    
    $
    7,387Net long-term deferred income taxes
    
    
    5,009
    
    
    
    5,802Total deferred income taxes, net
    
    $
    18,118
    
    
    $
    13,189
  Accounting for
Uncertainty in Income Taxes Accounting for
Income Taxes
 39




---



##### Table of Contents



(11) Commitments and Contingencies
      2010
    
    $
    2,6502011
    
    
    2,5782012
    
    
    1,9582013
    
    
    1,8562014
    
    
    1,839Thereafter
    
    
    3,224Total
    
    $
    14,105
 (12) Segment Disclosures
  2009
    
    
    2008
    
    
    2007United States
    
    $
    486,614
    
    
    $
    412,522
    
    
    $
    389,230Europe
    
    
    33,743
    
    
    
    42,787
    
    
    
    57,343Other
    
    
    50,583
    
    
    
    76,183
    
    
    
    76,012Total
    
    $
    570,940
    
    
    $
    531,492
    
    
    $
    522,585
 40




---



##### Table of Contents



2009
    
    
    2008
    
    
    2007Culinary
    
    $
    241,893
    
    
    $
    239,897
    
    
    $
    207,015Snack
    
    
    188,900
    
    
    
    88,629
    
    
    
    79,642In-shell
    
    
    34,333
    
    
    
    41,885
    
    
    
    46,460Total North American Retail
    
    $
    465,126
    
    
    $
    370,411
    
    
    $
    333,117International
    
    
    68,890
    
    
    
    101,640
    
    
    
    112,830North American Ingredient/Food Service
    
    
    34,504
    
    
    
    56,869
    
    
    
    73,822Other
    
    
    2,420
    
    
    
    2,572
    
    
    
    2,816Total
    
    $
    570,940
    
    
    $
    531,492
    
    
    $
    522,585
  (13) Valuation Reserves and Qualifying Accounts
 AmountBeginning
    
    Charged to
    
    Charged to
    
    End ofof Period
    
    Expense
    
    Reserve
    
    PeriodAllowance for Doubtful AccountsYear ended July 31, 2007
    
    $
    598
    
    
    $
    (228
    )
    
    $
    (22
    )
    
    $
    348Year ended July 31, 2008
    
    
    348
    
    
    
    150
    
    
    
    (57
    )
    
    
    441Year ended July 31, 2009
    
    
    441
    
    
    
    269
    
    
    
    (210
    )
    
    
    500Deferred Tax Asset Valuation AllowanceYear ended July 31, 2007
    
    $
    1,044
    
    
    $
    (1,044
    )
    
    $
    
    
    
    $
    Year ended July 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Year ended July 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 (14) Retirement Plans
   Adoption of SFAS. No. 158
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans.
 41




---



##### Table of Contents



Pension Benefits
    
    
    Other BenefitsChange in Benefit Obligation
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Benefit obligation at beginning of year
    
    $
    15,666
    
    
    $
    15,198
    
    
    $
    4,158
    
    
    $
    4,452Service cost
    
    
    475
    
    
    
    645
    
    
    
    103
    
    
    
    101Interest cost
    
    
    1,062
    
    
    
    961
    
    
    
    284
    
    
    
    279Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    185Actuarial loss (gain)
    
    
    3,990
    
    
    
    (831
    )
    
    
    (1,991
    )
    
    
    (516
    )Benefits paid
    
    
    (361
    )
    
    
    (307
    )
    
    
    (289
    )
    
    
    (343
    )Benefit obligation at end of year
    
    $
    20,832
    
    
    $
    15,666
    
    
    $
    2,360
    
    
    $
    4,158
 Pension Benefits
    
    
    Other BenefitsChange in Plan Assets
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Fair value of plan assets at beginning of year
    
    $
    13,424
    
    
    $
    14,518
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    (943
    )
    
    
    (787
    )
    
    
    
    
    
    
    Employer contribution
    
    
    
    
    
    
    
    
    
    
    194
    
    
    
    158Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    185Benefits paid
    
    
    (361
    )
    
    
    (307
    )
    
    
    (289
    )
    
    
    (343
    )Fair value of plan assets at end of year
    
    $
    12,120
    
    
    $
    13,424
    
    
    $
    
    
    
    $
    Funded status at end of year
    
    $
    (8,712
    )
    
    $
    (2,242
    )
    
    $
    (2,360
    )
    
    $
    (4,158
    )
  Pension Benefits
    
    
    Other Benefits2009
    
    
    2008
    
    
    2009
    
    
    2008Noncurrent assets
    
    $
    
    
    
    $
    815
    
    
    $
    
    
    
    $
    Current liabilities
    
    
    
    
    
    
    
    
    
    
    (130
    )
    
    
    (214
    )Noncurrent liabilities
    
    
    (8,712
    )
    
    
    (3,057
    )
    
    
    (2,230
    )
    
    
    (3,944
    )Total
    
    $
    (8,712
    )
    
    $
    (2,242
    )
    
    $
    (2,360
    )
    
    $
    (4,158
    )
  Pension
    
    
    OtherBenefits
    
    
    BenefitsNet loss (gain)
    
    $
    8,164
    
    
    $
    (6,499
    )Prior service cost
    
    
    131
    
    
    
    Total
    
    $
    8,295
    
    
    $
    (6,499
    )
   2009
    
    2008Projected benefit obligation
    
    $
    20,832
    
    
    $
    3,058Accumulated benefit obligation
    
    
    18,333
    
    
    
    1,941Fair value of plan assets
    
    
    12,120
    
    
    
    
 42




---



##### Table of Contents



Pension Benefits
    
    
    Other Benefits2009
    
    
    2008
    
    
    2007
    
    
    2009
    
    
    2008
    
    
    2007Net Periodic Benefit Cost / (Income)Service cost
    
    $
    475
    
    
    $
    645
    
    
    $
    1,209
    
    
    $
    103
    
    
    $
    101
    
    
    $
    114Interest cost
    
    
    1,062
    
    
    
    961
    
    
    
    1,763
    
    
    
    284
    
    
    
    279
    
    
    
    310Expected return on plan assets
    
    
    (1,059
    )
    
    
    (1,147
    )
    
    
    (2,236
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    26
    
    
    
    26
    
    
    
    (57
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of net (gain) loss
    
    
    37
    
    
    
    5
    
    
    
    499
    
    
    
    (539
    )
    
    
    (530
    )
    
    
    (454
    )Net periodic benefit cost / (income)
    
    
    541
    
    
    
    490
    
    
    
    1,178
    
    
    
    (152
    )
    
    
    (150
    )
    
    
    (30
    )Gain on curtailment of defined benefit plan
    
    
    
    
    
    
    
    
    
    
    (3,039
    )
    
    
    
    
    
    
    
    
    
    
    Loss on settlement of defined benefit plan (1)
    
    
    
    
    
    
    
    
    
    
    5,805
    
    
    
    
    
    
    
    
    
    
    
    Total benefit cost / (income)
    
    $
    541
    
    
    $
    490
    
    
    $
    3,944
    
    
    $
    (152
    )
    
    $
    (150
    )
    
    $
    (30
    )
 
 (1)
    
    Excludes $288 of costs to terminate the plan.   Assumptions
  Pension Benefits
    
    Other Benefits2009
    
    2008
    
    2007
    
    2009
    
    2008
    
    2007Discount rate
    
    
    5.80
    %
    
    
    7.00
    %
    
    
    6.40
    %
    
    
    5.80
    %
    
    
    7.00
    %
    
    
    6.40
    %Rate of compensation increase
    
    
    5.50
    
    
    
    5.50
    
    
    
    5.50
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  Pension Benefits
    
    Other Benefits2009
    
    2008
    
    2007
    
    2009
    
    2008
    
    2007Discount rate
    
    
    7.00
    %
    
    
    6.40
    %
    
    
    5.91
    %
    
    
    7.00
    %
    
    
    6.40
    %
    
    
    6.00
    %Expected long-term return on plan assets
    
    
    8.00
    
    
    
    8.00
    
    
    
    8.00
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ARate of compensation increase
    
    
    5.50
    
    
    
    5.50
    
    
    
    5.50
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
   2009
    
    2008
    
    2007Health care cost trend rate assumed for next year
    
    
    10.0
    %
    
    
    10.5
    %
    
    
    11.0
    %Rate to which the cost trend rate assumed to decline (the ultimate trend rate)
    
    
    5.0
    %
    
    
    5.0
    %
    
    
    5.0
    %Year the rate reaches ultimate trend rate
    
    
    2020
    
    
    
    2020
    
    
    
    2020
 43




---



##### Table of Contents



One
    
    OnePercentage
    
    PercentagePoint
    
    PointIncrease
    
    DecreaseEffect on total of service and interest cost
    
    $
    58
    
    
    $
    (48
    )Effect on post-retirement benefit obligation
    
    
    272
    
    
    
    (231
    )
 Plan Assets
  2009
    
    2008
    
    2007Asset Category:Equity securities
    
    
    54.4
    %
    
    
    56.7
    %
    
    
    73.5
    %Debt securities
    
    
    44.8
    %
    
    
    42.7
    %
    
    
    24.3
    %Cash and equivalents
    
    
    0.8
    %
    
    
    0.6
    %
    
    
    2.2
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   Cash Flows
  Pension
    
    OtherBenefits
    
    Benefits2010
    
    $
    435
    
    
    $
    1302011
    
    
    508
    
    
    
    1442012
    
    
    530
    
    
    
    1602013
    
    
    3,118
    
    
    
    1752014
    
    
    634
    
    
    
    1922015 - 2018
    
    
    4,274
    
    
    
    946
 44




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##### Table of Contents



Defined Contribution Plan
  (15) Quarterly Financial Information (unaudited)
 First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterYear ended July 31, 2009Net sales and other revenues
    
    $
    195,526
    
    
    $
    150,588
    
    
    $
    111,010
    
    
    $
    113,816Gross profit (1)
    
    
    41,069
    
    
    
    33,966
    
    
    
    27,644
    
    
    
    32,917Operating expenses
    
    
    21,622
    
    
    
    22,124
    
    
    
    21,590
    
    
    
    24,420Net income
    
    
    10,696
    
    
    
    6,144
    
    
    
    2,700
    
    
    
    4,203Basic earnings per share
    
    
    0.66
    
    
    
    0.38
    
    
    
    0.16
    
    
    
    0.26Basic shares (in thousands)
    
    
    16,308
    
    
    
    16,377
    
    
    
    16,410
    
    
    
    16,187Diluted earnings per share
    
    
    0.64
    
    
    
    0.37
    
    
    
    0.16
    
    
    
    0.25Diluted shares (in thousands)
    
    
    16,656
    
    
    
    16,687
    
    
    
    16,733
    
    
    
    16,661Year ended July 31, 2008Net sales and other revenues
    
    $
    184,537
    
    
    $
    133,798
    
    
    $
    100,009
    
    
    $
    113,148Gross profit (2)
    
    
    29,549
    
    
    
    22,427
    
    
    
    17,324
    
    
    
    18,702Operating expenses
    
    
    15,744
    
    
    
    17,880
    
    
    
    15,237
    
    
    
    15,260Net income
    
    
    8,342
    
    
    
    2,674
    
    
    
    1,106
    
    
    
    2,634Basic earnings per share
    
    
    0.52
    
    
    
    0.17
    
    
    
    0.07
    
    
    
    0.16Basic shares (in thousands)
    
    
    15,994
    
    
    
    16,044
    
    
    
    16,111
    
    
    
    16,203Diluted earnings per share
    
    
    0.52
    
    
    
    0.17
    
    
    
    0.07
    
    
    
    0.16Diluted shares (in thousands)
    
    
    15,994
    
    
    
    16,101
    
    
    
    16,120
    
    
    
    16,391
 
 (1)
    
    Diamond adjusts certain other inventoried input costs to reflect changing market
conditions. Accordingly, cost of sales were reduced by approximately $10.2 million, $9.6
million and $2.5 million in the quarters ended July 31, 2009, April 30, 2009 and January 31,
2009, respectively, reflecting the impact primarily on walnut sales recognized during the
previous quarters of fiscal year 2009.(2)
    
    Diamond adjusts certain other inventoried input costs to reflect changing market conditions.
Accordingly, cost of sales were increased by approximately $1.0 million and $2.7 million in
the quarters ended April 30, 2008 and January 31, 2008, respectively, reflecting the impact
primarily on walnut sales recognized during the previous quarters of fiscal year 2008. 
 Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A.
    
    Controls and Procedures
   45




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
     /s/ Michael J. Mendes

President and Chief Executive Officer
    
    
    
    /s/ Steven M. Neil

Chief Financial and Administrative Officer
  
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  46




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions, and Director Independence
  
 Item 14. Principal Accounting Fees and Services
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
  Financial Statements.
       Financial Statement Schedules.
  Exhibits.
  Filed with
    
    Incorporated by ReferenceNumber
    
    Exhibit Title
    
    This Report
    
    Form
    
    File No.
    
    Date Filed2.01
    
    Form of Amended and Restated Agreement
and Plan of Conversion
    
    
    
    S-1
    
    333-123576
    
    July 18, 20052.02
    
    Asset Purchase Agreement, dated August
13, 2008, between Diamond Foods, Inc.
and General Mills, Inc.
    
    
    
    8-K
    
    000-51439
    
    September 17, 20083.01
    
    Certificate of Incorporation, as amended
    
    
    
    S-1
    
    333-123576
    
    July 15, 20053.02
    
    Restated Bylaws
    
    
    
    S-1
    
    333-123576
    
    March 25, 20054.01
    
    Form of Certificate for common stock
    
    
    
    S-1
    
    333-123576
    
    July 18, 2005
 47




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##### Table of Contents



Filed with
    
    Incorporated by ReferenceNumber
    
    Exhibit Title
    
    This Report
    
    Form
    
    File No.
    
    Date Filed10.01
    
    Form of Indemnity Agreement between
Registrant and each of its directors
and executive officers
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.02*
    
    2005 Equity Incentive Plan and forms of
stock option agreement, stock option
exercise agreement and restricted stock
purchase agreement
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.03*
    
    2005 Employee Stock Purchase Plan and
form of subscription agreement
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.04*
    
    Diamond Walnut Growers, Inc. 401(k) Plan
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.05*
    
    Diamond Walnut Growers, Inc. Retirement
Restoration Plan
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.06*
    
    Diamond of California Management
Pension Plan
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.07
    
    Diamond Walnut Growers, Inc. Pension
Plan, as restated
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.08*
    
    Employment Agreement, dated March 25,
1997, between Registrant and Michael J.
Mendes
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.09*
    
    Description of Director Compensation
Arrangements
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.10
    
    Form of Walnut Purchase Agreement
    
    
    
    S-1
    
    333-123576
    
    May 3, 200510.11
    
    Trademark Agreement, dated July 1,
2002, between Registrant and Blue
Diamond Growers
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.12
    
    Rights Agreement, dated as of April 29,
2005, by and between Registrant and
EquiServe Trust Company, N.A
    
    
    
    S-1
    
    333-123576
    
    May 3, 200510.13*
    
    Form of Change of Control and Retention
Agreement between Registrant and each
of its executive officers
    
    
    
    S-1
    
    333-123576
    
    May 3, 200510.14
    
    Amendment to Diamond Foods, Inc.
Pension Plan
    
    
    
    8-K
    
    000-51439
    
    September 20, 200610.15*
    
    Form of Tax Withholding Agreement
    
    
    
    8-K
    
    000-51439
    
    July 20, 200710.16*
    
    Form of Stock Withholding Agreement
    
    
    
    8-K
    
    000-51439
    
    January 10, 200710.17*
    
    Offer Letter between Steven Neil and
Diamond Foods, Inc.
    
    
    
    10-Q
    
    000-51439
    
    March 11, 200810.18*
    
    Offer Letter between Lloyd Johnson and
Diamond Foods, Inc.
    
    
    
    10-K
    
    000-51439
    
    July 31, 2008
 48




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##### Table of Contents



Filed with
    
    Incorporated by ReferenceNumber
    
    Exhibit Title
    
    This Report
    
    Form
    
    File No.
    
    Date Filed10.19
    
    Credit Agreement between Diamond Foods,
Inc. and Bank of America, N.A., dated
September 15, 2008
    
    
    
    8-K
    
    000-51439
    
    September 17, 200810.20*
    
    Offer Letter between Linda Segre and
Diamond Foods, Inc.
    
    X23.01
    
    Consent of Independent Registered
Public Accounting Firm
    
    X31.01
    
    Rule 13a-14(a)/15d-14(a) Certification
of Chief Executive Officer
    
    X31.02
    
    Rule 13a-14(a)/15d-14(a) Certification
of Chief Financial Officer
    
    X32.01
    
    Section 1350 Certifications of Chief
Executive Officer and Chief Financial
Officer
    
    X
 
 *
    
    Indicates management contract or compensatory plan or arrangement  49




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##### Table of Contents



SIGNATURES
  DIAMOND FOODS, INC.By:
    /s/ Steven M. NeilSteven M. NeilChief Financial and Administrative Officer  Name
    
    Title
    
    Signature Date/s/ Michael J. Mendes

Michael J. Mendes
    
    President and Chief Executive
Officer and Director(principal
executive officer)
    
    September 22, 2009/s/ Steven M. Neil

Steven M. Neil
    
    Chief Financial and Administrative Officer and
Director (principal financial officer and principal
accounting officer)
    
    September 22, 2009/s/ Laurence M. Baer

Laurence M. Baer
    
    Director
    
    September 22, 2009/s/ Edward A. Blechschmidt

Edward A. Blechschmidt
    
    Director
    
    September 22, 2009/s/ John J. Gilbert

John J. Gilbert
    
    Director
    
    September 22, 2009/s/ Robert M. Lea

Robert M. Lea
    
    Director
    
    September 22, 2009/s/ Dennis Mussell

Dennis Mussell
    
    Director
    
    September 22, 2009/s/ Joseph P. Silveira

Joseph P. Silveira
    
    Director
    
    September 22, 2009/s/ Glen C. Warren, Jr.

Glen C. Warren, Jr.
    
    Director
    
    September 22, 2009/s/ Robert J. Zollars

Robert J. Zollars
    
    Director
    
    September 22, 2009
 50




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit Description10.20
    
    Offer Letter between Linda Segre and Diamond Foods, Inc.23.01
    
    Consent of Independent Registered Public Accounting Firm31.01
    
    Certification of Chief Executive Officer31.02
    
    Certification of Chief Financial Officer32.01
    
    Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
 51