##### 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, 2008
 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, 17thFloor
    
    94111-2702San Francisco, California
    
    (Zip Code)(Address of Principal Executive Offices)
 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
 þ
  Large accelerated filer oAccelerated filer þNon-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
    
    
    12Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    12PART 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
    
    
    44Item 9A.
    
    Controls and Procedures
    
    
    44Item 9B.
    
    Other Information
    
    
    44PART IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    44Item 11.
    
    Executive Compensation
    
    
    45Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    45Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    45Item 14.
    
    Principal Accounting Fees and Services
    
    
    45PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    45Signatures
    
    
    47EXHIBIT 10.19EXHIBIT 23.01EXHIBIT 31.01EXHIBIT 31.02EXHIBIT 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 aisle 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 brand. 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 business from General Mills, Inc.
Microwave popcorn products are available in a variety of traditional flavors, as well as a
growing better-for-you product offering featuring 100-calorie packs.
    
    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.
    
    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.
 3




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##### Table of Contents



Year Ended July 31, 2008
    
    
    Year Ended July 31, 2007
    
    
    Year Ended July 31, 2006North
    
    
    Inter-
    
    
    
    
    
    
    North
    
    
    Inter-
    
    
    
    
    
    
    North
    
    
    Inter-America
    
    
    national
    
    
    Total
    
    
    America
    
    
    national
    
    
    Total
    
    
    America
    
    
    national
    
    
    TotalCulinary
    
    $
    239.9
    
    
    $
    8.5
    
    
    $
    248.4
    
    
    $
    207.0
    
    
    $
    9.0
    
    
    $
    216.0
    
    
    $
    189.4
    
    
    $
    12.1
    
    
    $
    201.5Snack
    
    
    88.6
    
    
    
    
    
    
    
    88.6
    
    
    
    79.6
    
    
    
    
    
    
    
    79.6
    
    
    
    40.7
    
    
    
    
    
    
    
    40.7In-shell
    
    
    41.9
    
    
    
    45.1
    
    
    
    87.0
    
    
    
    46.5
    
    
    
    34.7
    
    
    
    81.2
    
    
    
    44.7
    
    
    
    40.3
    
    
    
    85.0Total retail
    
    
    370.4
    
    
    
    53.6
    
    
    
    424.0
    
    
    
    333.1
    
    
    
    43.7
    
    
    
    376.8
    
    
    
    274.8
    
    
    
    52.4
    
    
    
    327.2Ingredient/Food Service
    
    
    56.9
    
    
    
    48.0
    
    
    
    104.9
    
    
    
    73.9
    
    
    
    69.1
    
    
    
    143.0
    
    
    
    84.5
    
    
    
    62.4
    
    
    
    146.9Other
    
    
    2.6
    
    
    
    
    
    
    
    2.6
    
    
    
    2.8
    
    
    
    
    
    
    
    2.8
    
    
    
    3.1
    
    
    
    
    
    
    
    3.1Total
    
    $
    429.9
    
    
    $
    101.6
    
    
    $
    531.5
    
    
    $
    409.8
    
    
    $
    112.8
    
    
    $
    522.6
    
    
    $
    362.4
    
    
    $
    114.8
    
    
    $
    477.2
  www.diamondfoods.com.
 Our Strategy
  Increase market share in the snack industry.
 Improve margins.
 Expand and improve our distribution channels.
 Pursue external growth opportunities.
 
    
    introduce new products that are complementary to our existing product lines and are
capable of being marketed through our existing production and distribution systems;
    
    build the value of our brands; and
    

    enhance our processing and distribution capabilities to lower our costs.
 4




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Principal Products
  Category
    
    
    
    Products
    
    
    
    Product FeaturesCulinary
    
    
    
    Shelled nuts
    
    
    
    Whole, sliced,
chopped and ground
nuts
    
    Pegboard nuts
    
    
    
    Recipe ready packages ranging from 2.25 to 4.0-ounce sizes
    
    Glazed nuts
    
    
    
    Whole nuts
    
    Harvest Reserve Premium nuts
    
    
    
    Premium specialty
nuts sold in stand-up
resealable bagsSnack
    
    
    
    Glazed nuts
    
    
    
    Patented glazing
process combined with
unique flavors
    
    Mixed nuts
    
    
    
    Package sizes
ranging from
2.5-ounce to 40-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-ounce
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
  Employees
  7




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Item 1A. Risk Factors
  Our raw materials are subject to fluctuations in availability and price.
    We face intense competition from national and regional competitors and snack food industry
competitors that could negatively affect our results of operations.
   8




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Sales to our top customer represented approximately 22% 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.
  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 will not be able to implement our business strategy
or operate our business effectively.
  We recently acquired a microwave popcorn business, and it is difficult to determine what the impact
of that acquisition on our financial results will be.
  9




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
    
    successful integration of Pop Secret microwave popcorn products with our other offerings
and business;
    
    growth in demand for microwave popcorn products and the degree of competition from other
companies that sell microwave popcorn;
    
    our ability to hire additional personnel that may be necessary for the management and
operation of the Pop Secret business;
    
    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 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.
  The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 could disrupt our
supply of imported nuts.
  10




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Government regulation could increase our costs of production and increase our legal and regulatory
expenditures.
  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;
    
    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.
  11




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Our business could be negatively impacted if we fail to maintain satisfactory labor relations.
  
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
   
 Item 3. Legal Proceedings
    
 Item 4. Submission of Matters to a Vote of Security Holders
  12




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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, 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
    
    
    $
    0.045Year Ended July 31, 2007:Fourth Quarter
    
    $
    18.20
    
    
    $
    15.25
    
    
    $
    0.03Third Quarter
    
    $
    19.64
    
    
    $
    15.00
    
    
    $
    0.03Second Quarter
    
    $
    19.93
    
    
    $
    15.90
    
    
    $
    0.03First Quarter
    
    $
    18.10
    
    
    $
    13.15
    
    
    $
    0.03
    Approximate DollarTotal number of
    
    value of sharesTotal number of
    
    
    
    
    
    shares repurchased
    
    that may yet beshares
    
    Average price paid
    
    as part of publicly
    
    purchased under thePeriod
    
    repurchased (1)
    
    per share
    
    announced plans
    
    plansRepurchases from May 1 through May 31, 2008
    
    
    4,152
    
    
    $
    20.37
    
    
    
    
    
    
    
    Repurchases from June 1 through June 30, 2008
    
    
    2,716
    
    
    $
    21.83
    
    
    
    
    
    
    
    Repurchases from July 1 through July 31, 2008
    
    
    56,501
    
    
    $
    24.91
    
    
    
    
    
    
    
    Total
    
    
    63,369
    
    
    $
    24.48
    
    
    
    
    
    
    
    
 
 (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. 13




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Item 6. Selected Financial Data
  Year Ended July 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(In thousands, except per share information)Statements of operations/Net proceeds data (2005 and 2004) (1):Net sales
    
    $
    531,492
    
    
    $
    522,585
    
    
    $
    477,205
    
    
    $
    462,548
    
    
    $
    359,683Patronage inventory at beginning of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (101,403
    )
    
    
    (94,701
    )Patronage inventory at end of period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,152
    
    
    
    101,403Total net sales/Gross marketing pool proceeds (2005 and 2004)
    
    
    531,492
    
    
    
    522,585
    
    
    
    477,205
    
    
    
    428,297
    
    
    
    366,385Total cost of sales
    
    
    443,490
    
    
    
    443,945
    
    
    
    411,809
    
    
    
    191,387
    
    
    
    142,592Gross profit/Proceeds before operating expenses (2005 and 2004)
    
    
    88,002
    
    
    
    78,640
    
    
    
    65,396
    
    
    
    236,910
    
    
    
    223,793Operating expenses:Selling, general and administrative
    
    
    43,613
    
    
    
    42,541
    
    
    
    37,046
    
    
    
    33,188
    
    
    
    28,169Advertising
    
    
    20,508
    
    
    
    20,445
    
    
    
    17,977
    
    
    
    22,153
    
    
    
    14,673Restructuring and other costs, net
    
    
    
    
    
    
    (15
    )
    
    
    3,442
    
    
    
    
    
    
    
    Loss on termination of defined benefit plan
    
    
    
    
    
    
    3,054
    
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    64,121
    
    
    
    66,025
    
    
    
    58,465
    
    
    
    55,341
    
    
    
    42,842Income from operations/Operating proceeds (2005 and 2004)
    
    
    23,881
    
    
    
    12,615
    
    
    
    6,931
    
    
    
    181,569
    
    
    
    180,951Interest expense, net
    
    
    1,040
    
    
    
    1,291
    
    
    
    295
    
    
    
    4,433
    
    
    
    3,403Conversion costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    697
    
    
    
    Early extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,028
    
    
    
    Other
    
    
    
    
    
    
    98
    
    
    
    310
    
    
    
    
    
    
    
    Income/Proceeds before income taxes
    
    
    22,841
    
    
    
    11,226
    
    
    
    6,326
    
    
    
    174,411
    
    
    
    177,548Income taxes (tax benefits)
    
    
    8,085
    
    
    
    2,793
    
    
    
    (1,010
    )
    
    
    (8,385
    )
    
    
    (43
    )Net income/Net proceeds (2005 and 2004)
    
    $
    14,756
    
    
    $
    8,433
    
    
    $
    7,336
    
    
    $
    182,796
    
    
    $
    177,591Earnings per shareBasic
    
    $
    0.92
    
    
    $
    0.53
    
    
    $
    0.47Diluted
    
    $
    0.91
    
    
    $
    0.53
    
    
    $
    0.47Shares used to compute earnings per shareBasic
    
    
    16,088
    
    
    
    15,786
    
    
    
    15,634Diluted
    
    
    16,152
    
    
    
    15,786
    
    
    
    15,653
 
 (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 data is presented for those years. Also see Note 1 of notes to consolidated financial statements. Year Ended July 31,2008
    
    2007
    
    2006
    
    2005
    
    2004(In thousands)Balance sheet data:Cash and cash equivalents
    
    $
    74,279
    
    
    $
    33,755
    
    
    $
    35,614
    
    
    $
    49,035
    
    
    $
    4,780Working capital
    
    
    121,516
    
    
    
    100,527
    
    
    
    87,689
    
    
    
    89,022
    
    
    
    72,556Total assets
    
    
    273,267
    
    
    
    236,403
    
    
    
    253,032
    
    
    
    252,028
    
    
    
    205,895Total debt, including short-term debt
    
    
    20,345
    
    
    
    20,507
    
    
    
    20,000
    
    
    
    22,119
    
    
    
    79,756Total stockholders/members equity
    
    
    146,223
    
    
    
    125,341
    
    
    
    110,826
    
    
    
    99,462
    
    
    
    59,214
 14




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Year Ended July 31,2008
    
    2007
    
    2006
    
    2005
    
    2004Other data (Unaudited):Walnuts sales as a percentage of total net sales
    
    
    60.2
    %
    
    
    59.8
    %
    
    
    67.0
    %
    
    
    71.4
    %
    
    
    71.7
    %
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Summary
     Critical Accounting Policies
  Revenue Recognition.
 15




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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, Accounting for Income Taxes
 Accounting for Stock-Based Compensation. Share-Based Payment
 16




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Results of Operations
 2008 Compared to 2007
  Year Ended July 31,
    
    
    % Change from2008
    
    
    2007
    
    
    2007 to 2008(In
thousands)North American Retail (1)
    
    $
    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.   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.
 17




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##### Table of Contents



2007 Compared to 2006
   Year Ended July 31,
    
    
    % Change from2007
    
    
    2006
    
    
    2006 to 2007North American Retail
    
    $
    333,117
    
    
    $
    274,879
    
    
    
    21.2
    %International
    
    
    112,830
    
    
    
    114,781
    
    
    
    -1.7
    %North American
Ingredient/Food Service
    
    
    73,822
    
    
    
    84,475
    
    
    
    -12.6
    %Other
    
    
    2,816
    
    
    
    3,070
    
    
    
    -8.3
    %Total
    
    $
    522,585
    
    
    $
    477,205
    
    
    
    9.5
    %
   Year Ended July 31,2007
    
    2006Walnuts
    
    
    59.8
    %
    
    
    67.0
    %Other nuts
    
    
    40.2
    %
    
    
    33.0
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
 Gross profit.
 Selling, general and administrative.
 Advertising.
 Restructuring and other costs, net.
  18




---



##### Table of Contents



Loss on termination of defined benefit plan.
 Interest.
 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 obligation (a)
    
    $
    20.3
    
    
    $
    0.1
    
    
    $
    8.2
    
    
    $
    8.0
    
    
    $
    4.0Interest on long-term obligations
    
    
    6.5
    
    
    
    1.5
    
    
    
    3.8
    
    
    
    1.1
    
    
    
    0.1Operating leases
    
    
    12.0
    
    
    
    2.0
    
    
    
    3.5
    
    
    
    2.2
    
    
    
    4.3Purchase commitments (b)
    
    
    0.5
    
    
    
    0.5
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities (c)
    
    
    7.0
    
    
    
    0.2
    
    
    
    0.5
    
    
    
    0.6
    
    
    
    5.7Total
    
    $
    46.3
    
    
    $
    4.3
    
    
    $
    16.0
    
    
    $
    11.9
    
    
    $
    14.1
 
 (a)
    
    Excludes $2.1 million in letters of credit outstanding related to normal business
transactions.(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. Off-Balance Sheet Arrangements
  Effects of Inflation
  Recent Accounting Pronouncements
 Fair Value Measurements
 20




---



##### Table of Contents



Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards
 Business Combinations Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51.
 Disclosures about Derivative Instruments and
Hedging Activities
 The Hierarchy of Generally Accepted Accounting
Principles The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles
 
 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




---



##### Table of Contents



DIAMOND FOODS, INC.
 CONSOLIDATED BALANCE SHEETS
 July 31,2008
    
    
    2007(In thousands, except share andper share information)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    74,279
    
    
    $
    33,755Trade receivables, net
    
    
    46,256
    
    
    
    50,662Inventories
    
    
    88,526
    
    
    
    90,619Deferred income taxes
    
    
    7,387
    
    
    
    4,805Prepaid income taxes
    
    
    
    
    
    
    1,854Prepaid expenses and other current assets
    
    
    4,261
    
    
    
    2,417Total current assets
    
    
    220,709
    
    
    
    184,112Property, plant and equipment, net
    
    
    34,606
    
    
    
    33,936Deferred income taxes
    
    
    5,802
    
    
    
    4,922Goodwill
    
    
    5,432
    
    
    
    5,432Other intangible assets, net
    
    
    3,473
    
    
    
    3,707Other long-term assets
    
    
    3,245
    
    
    
    4,294Total assets
    
    $
    273,267
    
    
    $
    236,403LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    42,251
    
    
    $
    26,468Payable to growers
    
    
    56,942
    
    
    
    57,117Total current liabilities
    
    
    99,193
    
    
    
    83,585Long-term obligations
    
    
    20,204
    
    
    
    20,345Other liabilities
    
    
    7,647
    
    
    
    7,132Commitments
and contingencies (Note 10)
    
    
    
    
    
    
    Stockholders 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; 16,340,076
and 15,848,717 shares issued and 16,180,771 and 15,764,647 shares outstanding
at July 31, 2008 and 2007, respectively
    
    
    16
    
    
    
    16Treasury stock, at cost: 159,305 and 84,070 shares at July 31, 2008 and 2007
    
    
    (3,203
    )
    
    
    (1,436
    )Additional paid-in capital
    
    
    112,550
    
    
    
    101,106Accumulated other comprehensive income
    
    
    1,584
    
    
    
    2,233Retained earnings
    
    
    35,276
    
    
    
    23,422Total stockholders equity
    
    
    146,223
    
    
    
    125,341Total liabilities and stockholders equity
    
    $
    273,267
    
    
    $
    236,403
  24




---



##### Table of Contents



DIAMOND FOODS, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Year Ended July 31,2008
    
    
    2007
    
    
    2006(In thousands, except per share information)Net sales
    
    $
    531,492
    
    
    $
    522,585
    
    
    $
    477,205Cost of sales
    
    
    443,490
    
    
    
    443,945
    
    
    
    409,039Cost of sales  NRV amount
    
    
    
    
    
    
    
    
    
    
    2,770Total cost of sales
    
    
    443,490
    
    
    
    443,945
    
    
    
    411,809Gross profit
    
    
    88,002
    
    
    
    78,640
    
    
    
    65,396Operating expenses:Selling, general and administrative
    
    
    43,613
    
    
    
    42,541
    
    
    
    37,046Advertising
    
    
    20,508
    
    
    
    20,445
    
    
    
    17,977Restructuring and other costs, net
    
    
    
    
    
    
    (15
    )
    
    
    3,442Loss on termination of defined benefit plan
    
    
    
    
    
    
    3,054
    
    
    
    Total operating expenses
    
    
    64,121
    
    
    
    66,025
    
    
    
    58,465Income from operations
    
    
    23,881
    
    
    
    12,615
    
    
    
    6,931Interest expense, net
    
    
    1,040
    
    
    
    1,291
    
    
    
    295Other
    
    
    
    
    
    
    98
    
    
    
    310Income before income taxes
    
    
    22,841
    
    
    
    11,226
    
    
    
    6,326Income taxes (tax benefit)
    
    
    8,085
    
    
    
    2,793
    
    
    
    (1,010
    )Net income
    
    $
    14,756
    
    
    $
    8,433
    
    
    $
    7,336Earnings per shareBasic
    
    $
    0.92
    
    
    $
    0.53
    
    
    $
    0.47Diluted
    
    $
    0.91
    
    
    $
    0.53
    
    
    $
    0.47Shares used to compute earnings per shareBasic
    
    
    16,088
    
    
    
    15,786
    
    
    
    15,634Diluted
    
    
    16,152
    
    
    
    15,786
    
    
    
    15,653
  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
    
    
    Loss
    
    
    Equity(In thousands, except share information)Balance, July 31, 2005
    
    
    15,555,506
    
    
    $
    16
    
    
    $
    
    
    
    $
    88,491
    
    
    $
    10,955
    
    
    $
    
    
    
    $
    99,462Shares issued under employee stock
purchase plan (ESPP)
    
    
    57,872
    
    
    
    
    
    
    
    
    
    
    
    802
    
    
    
    
    
    
    
    
    
    
    
    802Stock compensation expense
    
    
    123,816
    
    
    
    
    
    
    
    
    
    
    
    3,992
    
    
    
    
    
    
    
    
    
    
    
    3,992ESPP disqualifying dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    37Conversion of long-term incentive plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    640
    
    
    
    
    
    
    
    
    
    
    
    640Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,407
    )
    
    
    
    
    
    
    (1,407
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,336
    
    
    
    
    
    
    
    7,336Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    (36
    )Total comprehensive income:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,300Balance, 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
    
    
    
    
    
    
    
    
    
    
    
    6,893ESPP disqualifying dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    $
    146,223
  26




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##### Table of Contents



DIAMOND FOODS, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended July 31,2008
    
    
    2007
    
    
    2006(In thousands)CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    14,756
    
    
    $
    8,433
    
    
    $
    7,336Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    6,420
    
    
    
    7,561
    
    
    
    5,532Deferred income taxes
    
    
    (3,022
    )
    
    
    (1,874
    )
    
    
    (1,531
    )Loss on termination of defined benefit plan
    
    
    
    
    
    
    2,575
    
    
    
    Tax benefit related to stock-based compensation plans
    
    
    579
    
    
    
    81
    
    
    
    37Excess tax benefit from ESPP and stock option transactions
    
    
    (579
    )
    
    
    (81
    )
    
    
    (37
    )Stock-based compensation
    
    
    6,893
    
    
    
    5,859
    
    
    
    3,992Gain on sale of property held for sale
    
    
    
    
    
    
    (1,193
    )
    
    
    Other, net
    
    
    4
    
    
    
    56
    
    
    
    395Changes in assets and liabilities (net of effects of acquisition in 2006)Trade receivables
    
    
    4,406
    
    
    
    (1,048
    )
    
    
    (4,805
    )Inventories
    
    
    2,093
    
    
    
    8,077
    
    
    
    17,278Prepaid expenses and income taxes and other current assets
    
    
    10
    
    
    
    1,581
    
    
    
    (1,957
    )Other assets
    
    
    24
    
    
    
    454
    
    
    
    1,764Accounts payable and accrued liabilities
    
    
    15,475
    
    
    
    (1,871
    )
    
    
    (4,419
    )Payable to growers
    
    
    (175
    )
    
    
    (24,785
    )
    
    
    9,348Other liabilities
    
    
    192
    
    
    
    (11
    )
    
    
    1,027Net cash provided by operating activities
    
    
    47,076
    
    
    
    3,814
    
    
    
    33,960CASH FLOWS FROM INVESTING ACTIVITIES:Capital revolvement from CoBank
    
    
    299
    
    
    
    419
    
    
    
    126Net proceeds from sales of property, plant and equipment
    
    
    12
    
    
    
    2,941
    
    
    
    49Payment of Harmony acquisition costs
    
    
    
    
    
    
    (197
    )
    
    
    (19,186
    )Purchases of property, plant, and equipment
    
    
    (6,583
    )
    
    
    (6,790
    )
    
    
    (8,354
    )Net cash used in investing activities
    
    
    (6,272
    )
    
    
    (3,627
    )
    
    
    (27,365
    )CASH FLOWS FROM FINANCING ACTIVITIES:Notes payable repayments, net
    
    
    (162
    )
    
    
    
    
    
    
    (2,119
    )Payment to members of membership interest
    
    
    
    
    
    
    
    
    
    
    (17,329
    )Issuance of common stock under stock plans
    
    
    3,972
    
    
    
    1,204
    
    
    
    802Dividends paid
    
    
    (2,902
    )
    
    
    (1,895
    )
    
    
    (1,407
    )Excess tax benefit from ESPP and stock option transactions
    
    
    579
    
    
    
    81
    
    
    
    37Purchases of treasury stock
    
    
    (1,767
    )
    
    
    (1,436
    )
    
    
    Net cash used in financing activities
    
    
    (280
    )
    
    
    (2,046
    )
    
    
    (20,016
    )Net increase (decrease) in cash and cash equivalents
    
    
    40,524
    
    
    
    (1,859
    )
    
    
    (13,421
    )Cash and cash equivalents:Beginning of period
    
    
    33,755
    
    
    
    35,614
    
    
    
    49,035End of period
    
    $
    74,279
    
    
    $
    33,755
    
    
    $
    35,614Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    1,183
    
    
    $
    1,638
    
    
    $
    696Income taxes
    
    
    5,945
    
    
    
    3,878
    
    
    
    2,178Non-cash investing activities:Liabilities assumed in Harmony acquisition
    
    
    
    
    
    
    
    
    
    
    3,404Accrued capital expenditures
    
    
    391
    
    
    
    94
    
    
    
    380Non-cash financing activities:Accrued liability exchanged for options to acquire common stock
    
    
    
    
    
    
    
    
    
    
    640Capital Lease obligations incurred
    
    
    
    
    
    
    507
    
    
    
    
  27




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##### Table of Contents



DIAMOND FOODS, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2008, 2007 and 2006
(In thousands, except share and per share information)
 (1) Conversion and Initial Public Offering
  (2) Organization and Significant Accounting Policies
 Business
  Business Combinations.
 Basis of Presentation
  Use of Estimates
   Certain Risks and Concentrations
  28




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##### Table of Contents



Principles of Consolidation
  Cash and Cash Equivalents
  Inventories
  Investment in CoBank
  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,
  Revenue Recognition
  29




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##### Table of Contents



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
  Stock-Based Compensation
 Share-Based
Payment
 30




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##### Table of Contents



Recent Accounting Pronouncements
 Fair Value Measurements
 Fair Value Option for Financial Assets
and Financial Liabilities  Including an amendment of FASB Statement No. 115
 Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards
 Business Combinations Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51
 Disclosures about Derivative Instruments and
Hedging Activities
 The Hierarchy of Generally Accepted Accounting
Principles The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles
 (3) Stock-Based Compensation
   31




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##### Table of Contents



Accounting for Stock Issued to
Employees.
 Stock Option Awards:
 2008
    
    2007
    
    2006Average expected life, in years
    
    
    5
    
    
    
    6
    
    
    
    6Expected volatility
    
    
    32.57
    %
    
    
    30.00
    %
    
    
    27.50
    %Risk-free interest rate
    
    
    3.71
    %
    
    
    4.75
    %
    
    
    4.61
    %Dividend rate
    
    
    0.91
    %
    
    
    0.72
    %
    
    
    0.67
    %
 32




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##### Table of Contents



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, 2005
    
    
    1,123
    
    
    $
    17.00Granted
    
    
    657
    
    
    
    18.15Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (132
    )
    
    
    17.44Outstanding 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
    
    
    $
    9,979Exercisable at July 31, 2006
    
    
    341
    
    
    
    17.00
    
    
    
    9.0
    
    
    $
    Exercisable at July 31, 2007
    
    
    877
    
    
    
    17.18
    
    
    
    8.2
    
    
    $
    159Exercisable at July 31, 2008
    
    
    1,212
    
    
    
    17.32
    
    
    
    7.3
    
    
    $
    8,483
   Weighted AverageGrant Date FairNumber of Shares
    
    Value Per Share(In thousands)Nonvested at July 31, 2007
    
    
    744
    
    
    $
    5.89Granted
    
    
    140
    
    
    
    6.95Vested
    
    
    (548
    )
    
    
    5.70Cancelled
    
    
    (38
    )
    
    
    5.88Nonvested at July 31, 2008
    
    
    298
    
    
    
    6.74
  33




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##### Table of Contents



Restricted Stock Awards:
 WeightedAverage GrantNumber of
    
    Date Fair ValueShares
    
    Per Share(In thousands)Outstanding at July 31, 2005
    
    
    598
    
    
    $
    17.00Granted
    
    
    149
    
    
    
    18.94Vested
    
    
    (193
    )
    
    
    17.00Cancelled
    
    
    (25
    )
    
    
    17.65Outstanding 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
    
    
    
    17.74
   Employee Stock Purchase Plan:
 2008
    
    2007Average expected life, in years
    
    
    0.75
    
    
    
    0.75Expected volatility
    
    
    30.00
    %
    
    
    29.38
    %Risk-free interest rate
    
    
    4.53
    %
    
    
    4.84
    %Dividend rate
    
    
    0.78
    %
    
    
    0.68
    %
  Suspension of the ESPP Program:
 (4) Earnings Per Share
  34




---



##### Table of Contents



(5) Intangible Assets and Goodwill
  2008
    
    
    2007Goodwill
    
    $
    5,432
    
    
    $
    5,432Intangible assets subject to amortization:Customer contracts and related relationships
    
    
    2,400
    
    
    
    2,400Trademarks and trade names
    
    
    1,600
    
    
    
    1,6004,000
    
    
    
    4,000Total goodwill and intangible assets
    
    $
    9,432
    
    
    $
    9,432
  2008
    
    
    2007Goodwill
    
    $
    5,432
    
    
    $
    5,432Intangible assets subject to amortization:Customer contracts and related relationships, net of accumulated
amortization of $270 and $150, for 2008 and 2007, respectively
    
    
    2,130
    
    
    
    2,250Trademarks and trade names, net of accumulated amortization
of $257 and $143, for 2008 and 2007, respectively
    
    
    1,343
    
    
    
    1,4573,473
    
    
    
    3,707Total goodwill and intangible assets, net
    
    $
    8,905
    
    
    $
    9,139
    (6) Notes Payable and Long-Term Obligations
    35




---



##### Table of Contents



(7) Balance Sheet Items
  2008
    
    
    2007Raw materials and supplies
    
    $
    33,501
    
    
    $
    19,653Work in process
    
    
    19,084
    
    
    
    14,043Finished goods
    
    
    35,941
    
    
    
    56,923Total
    
    $
    88,526
    
    
    $
    90,619
  2008
    
    
    2007Investment in CoBank
    
    $
    1,480
    
    
    $
    1,774Other
    
    
    1,765
    
    
    
    2,520Total
    
    $
    3,245
    
    
    $
    4,294
  2008
    
    
    2007Accounts payable
    
    $
    21,848
    
    
    $
    15,151Accrued salaries and benefits
    
    
    7,886
    
    
    
    4,082Accrued promotion
    
    
    8,695
    
    
    
    5,882Other
    
    
    3,822
    
    
    
    1,353Total
    
    $
    42,251
    
    
    $
    26,468
 (8) Property, Plant and Equipment
  2008
    
    
    2007Land and improvements
    
    $
    1,569
    
    
    $
    1,569Buildings and improvements
    
    
    17,265
    
    
    
    16,975Machinery, equipment and software
    
    
    98,191
    
    
    
    95,037Construction in progress
    
    
    5,053
    
    
    
    4,221Total
    
    
    122,078
    
    
    
    117,802Less accumulated depreciation
    
    
    (87,472
    )
    
    
    (83,866
    )Property, plant and equipment, net
    
    $
    34,606
    
    
    $
    33,936
 36




---



##### Table of Contents



(9) Income Taxes
  2008
    
    
    2007
    
    
    2006CurrentFederal
    
    $
    10,711
    
    
    $
    4,449
    
    
    $
    688State
    
    
    947
    
    
    
    218
    
    
    
    (167
    )Deferred
    
    
    (3,573
    )
    
    
    (1,874
    )
    
    
    (1,531
    )Total
    
    $
    8,085
    
    
    $
    2,793
    
    
    $
    (1,010
    )
  2008
    
    
    2007
    
    
    2006Federal tax computed at the statutory rate
    
    $
    7,993
    
    
    $
    3,929
    
    
    $
    2,214Stock-based compensation
    
    
    264
    
    
    
    132
    
    
    
    114Change in valuation allowance
    
    
    
    
    
    
    (1,044
    )
    
    
    Domestic
production activities deduction
    
    
    (691
    )
    
    
    
    
    
    
    State taxes, net of federal impact
    
    
    244
    
    
    
    211
    
    
    
    (3,503
    )Other items, net
    
    
    275
    
    
    
    (435
    )
    
    
    165Income tax expense (tax benefit)
    
    $
    8,085
    
    
    $
    2,793
    
    
    $
    (1,010
    )
  2008
    
    
    2007Deferred tax assets:Current:Inventories
    
    $
    1,082
    
    
    $
    879Receivables
    
    
    179
    
    
    
    228Accruals
    
    
    5,057
    
    
    
    2,834Retirement benefits
    
    
    189
    
    
    
    260Net operating loss
    
    
    
    
    
    
    17Employee stock compensation benefits
    
    
    636
    
    
    
    587State taxes
    
    
    244
    
    
    
    Total current
    
    
    7,387
    
    
    
    4,805Non-current:State tax credits
    
    
    3,689
    
    
    
    3,608Retirement benefits
    
    
    4,578
    
    
    
    4,705Employee stock compensation benefits
    
    
    608
    
    
    
    Total non-current
    
    
    8,875
    
    
    
    8,313Deferred tax liabilities:Non-current:Retirement benefits
    
    
    2,251
    
    
    
    3,013Property, plant and equipment
    
    
    468
    
    
    
    28Intangibles
    
    
    354
    
    
    
    350Total non-current
    
    
    3,073
    
    
    
    3,391Total deferred income taxes, net
    
    $
    13,189
    
    
    $
    9,727Composed of:Net current deferred income taxes
    
    $
    7,387
    
    
    $
    4,805Net long-term deferred income taxes
    
    
    5,802
    
    
    
    4,922Total deferred income taxes, net
    
    $
    13,189
    
    
    $
    9,727
 37




---



##### Table of Contents



Accounting for
Uncertainty in Income Taxes Accounting for
Income Taxes
   (10) Commitments and Contingencies
       2009
    
    $
    1,9802010
    
    
    1,9722011
    
    
    1,4952012
    
    
    1,1452013
    
    
    1,115Thereafter
    
    
    4,339Total
    
    $
    12,046
 38




---



##### Table of Contents



(11) Segment Disclosures
  2008
    
    
    2007
    
    
    2006United States
    
    $
    412,522
    
    
    $
    389,230
    
    
    $
    342,369Europe
    
    
    42,787
    
    
    
    57,343
    
    
    
    57,734Other
    
    
    76,183
    
    
    
    76,012
    
    
    
    77,102Total
    
    $
    531,492
    
    
    $
    522,585
    
    
    $
    477,205
   2008
    
    
    2007
    
    
    2006North American Retail
    
    $
    370,411
    
    
    $
    333,117
    
    
    $
    274,879International
    
    
    101,640
    
    
    
    112,830
    
    
    
    114,781North American Ingredient/Food Service
    
    
    56,869
    
    
    
    73,822
    
    
    
    84,475Other
    
    
    2,572
    
    
    
    2,816
    
    
    
    3,070Total
    
    $
    531,492
    
    
    $
    522,585
    
    
    $
    477,205
 (12) Valuation Reserves and Qualifying Accounts
 AmountBeginning
    
    Charged to
    
    Charged to
    
    End ofof Period
    
    Expense
    
    Reserve
    
    PeriodAllowance for Doubtful AccountsYear ended July 31, 2006
    
    $
    515
    
    
    $
    204
    
    
    $
    (121
    )
    
    $
    598Year ended July 31, 2007
    
    
    598
    
    
    
    (228
    )
    
    
    (22
    )
    
    
    348Year ended July 31, 2008
    
    
    348
    
    
    
    150
    
    
    
    (57
    )
    
    
    441Deferred Tax Asset Valuation AllowanceYear ended July 31, 2006
    
    $
    1,044
    
    
    $
    
    
    
    $
    
    
    
    $
    1,044Year ended July 31, 2007
    
    
    1,044
    
    
    
    (1,044
    )
    
    
    
    
    
    
    Year ended July 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 (13) Retirement Plans
   Adoption of SFAS. No. 158
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans.
 39




---



##### Table of Contents



Pension Benefits
    
    
    Other BenefitsChange in Benefit Obligation
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Benefit obligation at beginning of year
    
    $
    15,198
    
    
    $
    32,581
    
    
    $
    4,452
    
    
    $
    5,279Service cost
    
    
    645
    
    
    
    1,209
    
    
    
    101
    
    
    
    114Interest cost
    
    
    961
    
    
    
    1,763
    
    
    
    279
    
    
    
    310Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    178Plan amendments
    
    
    
    
    
    
    81
    
    
    
    
    
    
    
    Curtailments
    
    
    
    
    
    
    (2,556
    )
    
    
    
    
    
    
    Settlements
    
    
    
    
    
    
    (3,191
    )
    
    
    
    
    
    
    Actuarial loss (gain)
    
    
    (831
    )
    
    
    107
    
    
    
    (516
    )
    
    
    (909
    )Benefits paid
    
    
    (307
    )
    
    
    (14,796
    )
    
    
    (343
    )
    
    
    (520
    )Benefit obligation at end of year
    
    $
    15,666
    
    
    $
    15,198
    
    
    $
    4,158
    
    
    $
    4,452
 Pension Benefits
    
    
    Other BenefitsChange in Plan Assets
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Fair value of plan assets at beginning of year
    
    $
    14,518
    
    
    $
    29,046
    
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    (787
    )
    
    
    3,114
    
    
    
    
    
    
    
    Employer contribution
    
    
    
    
    
    
    345
    
    
    
    158
    
    
    
    342Plan participants contributions
    
    
    
    
    
    
    
    
    
    
    185
    
    
    
    178Benefits paid
    
    
    (307
    )
    
    
    (14,796
    )
    
    
    (343
    )
    
    
    (520
    )Settlements
    
    
    
    
    
    
    (3,191
    )
    
    
    
    
    
    
    Fair value of plan assets at end of year
    
    $
    13,424
    
    
    $
    14,518
    
    
    $
    
    
    
    $
    Funded status at end of year
    
    $
    (2,242
    )
    
    $
    (680
    )
    
    $
    (4,158
    )
    
    $
    (4,452
    )
  Pension Benefits
    
    
    Other Benefits2008
    
    
    2007
    
    
    2008
    
    
    2007Noncurrent assets
    
    $
    815
    
    
    $
    1,792
    
    
    $
    
    
    
    $
    Current liabilities
    
    
    
    
    
    
    
    
    
    
    (214
    )
    
    
    (183
    )Noncurrent liabilities
    
    
    (3,057
    )
    
    
    (2,472
    )
    
    
    (3,944
    )
    
    
    (4,269
    )Total
    
    $
    (2,242
    )
    
    $
    (680
    )
    
    $
    (4,158
    )
    
    $
    (4,452
    )
  Pension
    
    
    OtherBenefits
    
    
    BenefitsNet loss (gain)
    
    $
    2,209
    
    
    $
    (5,047
    )Prior service cost (credit)
    
    
    157
    
    
    
    Total
    
    $
    2,366
    
    
    $
    (5,047
    )
  40




---



##### Table of Contents



2008
    
    2007Projected benefit obligation
    
    $
    3,058
    
    
    $
    2,472Accumulated benefit obligation
    
    
    1,941
    
    
    
    1,842Fair value of plan assets
    
    
    
    
    
    
    
  Pension Benefits
    
    
    Other Benefits2008
    
    
    2007
    
    
    2006
    
    
    2008
    
    
    2007
    
    
    2006Net Periodic Benefit Cost / (Income)Service cost
    
    $
    645
    
    
    $
    1,209
    
    
    $
    2,234
    
    
    $
    101
    
    
    $
    114
    
    
    $
    253Interest cost
    
    
    961
    
    
    
    1,763
    
    
    
    1,726
    
    
    
    279
    
    
    
    310
    
    
    
    543Expected return on plan assets
    
    
    (1,147
    )
    
    
    (2,236
    )
    
    
    (2,300
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of prior service cost
    
    
    26
    
    
    
    (57
    )
    
    
    (287
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of net (gain) loss
    
    
    5
    
    
    
    499
    
    
    
    809
    
    
    
    (530
    )
    
    
    (454
    )
    
    
    21Net periodic benefit cost / (income)
    
    
    490
    
    
    
    1,178
    
    
    
    2,182
    
    
    
    (150
    )
    
    
    (30
    )
    
    
    817Gain on curtailment of defined benefit plan
    
    
    
    
    
    
    (3,039
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on settlement of defined benefit plan (1)
    
    
    
    
    
    
    5,805
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total benefit cost / (income)
    
    $
    490
    
    
    $
    3,944
    
    
    $
    2,182
    
    
    $
    (150
    )
    
    $
    (30
    )
    
    $
    817
 
 (1)
    
    Excludes $288 of costs to terminate the plan.   Assumptions
  Pension Benefits
    
    Other Benefits2008
    
    2007
    
    2006
    
    2008
    
    2007
    
    2006Discount rate
    
    
    7.00
    %
    
    
    6.40
    %
    
    
    5.91
    %
    
    
    7.00
    %
    
    
    6.40
    %
    
    
    6.00
    %Rate of compensation increase
    
    
    5.50
    
    
    
    5.50
    
    
    
    5.50
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
  Pension Benefits
    
    Other Benefits2008
    
    2007
    
    2006
    
    2008
    
    2007
    
    2006Discount rate
    
    
    6.40
    %
    
    
    5.91
    %
    
    
    5.25
    %
    
    
    6.40
    %
    
    
    6.00
    %
    
    
    5.25
    %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
  41




---



##### Table of Contents



2008
    
    2007
    
    2006Health care cost trend rate assumed for next year
    
    
    10.5
    %
    
    
    11.0
    %
    
    
    8.0
    %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
    
    
    
    2013
   One
    
    OnePercentage
    
    PercentagePoint Increase
    
    Point DecreaseEffect on total of service and interest cost
    
    $
    64
    
    
    $
    (52
    )Effect on post-retirement benefit obligation
    
    
    533
    
    
    
    (446
    )
 Plan Assets
  2008
    
    2007
    
    2006Asset Category:Equity securities
    
    
    56.7
    %
    
    
    73.5
    %
    
    
    78.5
    %Debt securities
    
    
    42.7
    %
    
    
    24.3
    %
    
    
    20.7
    %Cash and equivalents
    
    
    0.6
    %
    
    
    2.2
    %
    
    
    0.8
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   Cash Flows
  PensionBenefits
    
    Other Benefits2009
    
    $
    398
    
    
    $
    2142010
    
    
    452
    
    
    
    2182011
    
    
    526
    
    
    
    2412012
    
    
    550
    
    
    
    2642013
    
    
    2,158
    
    
    
    2892014  2018
    
    
    4,123
    
    
    
    1,713
 42




---



##### Table of Contents



Defined Contribution Plan
  (14) Restructuring and Other Costs, Net
   (15) Quarterly Financial Information (unaudited)
 First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterYear ended July 31, 2008Net sales and other revenues
    
    $
    184,537
    
    
    $
    133,798
    
    
    $
    100,009
    
    
    $
    113,148Gross profit (1)
    
    
    29,549
    
    
    
    22,427
    
    
    
    17,324
    
    
    
    18,702Operating expenses
    
    
    15,744
    
    
    
    17,880
    
    
    
    15,237
    
    
    
    15,260Net income (loss)
    
    
    8,342
    
    
    
    2,674
    
    
    
    1,106
    
    
    
    2,634Diluted earnings per share
    
    
    0.52
    
    
    
    0.17
    
    
    
    0.07
    
    
    
    0.16Diluted shares (in thousands)
    
    
    15,994
    
    
    
    16,101
    
    
    
    16,120
    
    
    
    16,391Year ended July 31, 2007Net sales and other revenues
    
    $
    169,512
    
    
    $
    143,622
    
    
    $
    97,016
    
    
    $
    112,435Gross profit
    
    
    27,940
    
    
    
    20,341
    
    
    
    13,706
    
    
    
    16,653Operating expenses
    
    
    11,067
    
    
    
    16,439
    
    
    
    21,766
    
    
    
    16,753Net income (loss)
    
    
    9,641
    
    
    
    2,030
    
    
    
    (4,012
    )
    
    
    774Diluted earnings per share
    
    
    0.61
    
    
    
    0.13
    
    
    
    (0.25
    )
    
    
    0.05Diluted shares (in thousands)
    
    
    15,737
    
    
    
    15,772
    
    
    
    15,808
    
    
    
    15,826Year ended July 31, 2006Net sales and other revenues
    
    $
    178,060
    
    
    $
    124,157
    
    
    $
    67,798
    
    
    $
    107,190Gross profit
    
    
    22,811
    
    
    
    18,570
    
    
    
    8,428
    
    
    
    15,587Operating expenses
    
    
    15,784
    
    
    
    13,291
    
    
    
    13,567
    
    
    
    15,823Net income (loss)
    
    
    4,074
    
    
    
    3,077
    
    
    
    (3,175
    )
    
    
    3,360Diluted earnings per share
    
    
    0.26
    
    
    
    0.20
    
    
    
    (0.20
    )
    
    
    0.21Diluted shares (in thousands)
    
    
    15,634
    
    
    
    15,587
    
    
    
    15,668
    
    
    
    15,722
 
 (1)
    
    In the quarter ended April 30, 2008, Diamond made an adjustment of approximately $1.0 million
to increase cost of sales for walnut sales recognized during the first and second quarters of
fiscal year 2008 because the final purchase price, announced in March 2008 for walnuts from the
2007 crop, was higher than estimated. In the quarter ended January 31, 2008, Diamond made an
adjustment of approximately $2.7 million to increase cost of sales for walnut sales recognized
during the first quarter of fiscal year 2008 to reflect higher estimated walnut costs. 43




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##### Table of Contents



(16) Subsequent Events
    
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
   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 OfficerSeptember 25, 2008
 
 Item 9B. Other Information
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance
  44




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##### Table of Contents



Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 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, 2005
 45




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##### Table of Contents



Filed with
    
    Incorporated by ReferenceNumber
    
    Exhibit Title
    
    This Report
    
    Form
    
    File No.
    
    Date Filed3.02
    
    Restated Bylaws
    
    
    
    S-1
    
    333-123576
    
    March 25, 20054.01
    
    Form of Certificate for common stock
    
    
    
    S-1
    
    333-123576
    
    July 18, 200510.01
    
    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 Compensation Arrangement for Gary
K. Ford
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.10*
    
    Description of Director Compensation Arrangements
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.11
    
    Form of Walnut Purchase Agreement
    
    
    
    S-1
    
    333-123576
    
    May 3, 200510.12
    
    Trademark Agreement, dated July 1, 2002, between
Registrant and Blue Diamond Growers
    
    
    
    S-1
    
    333-123576
    
    March 25, 200510.13
    
    Rights Agreement, dated as of April 29, 2005, by
and between Registrant and EquiServe Trust
Company, N.A
    
    
    
    S-1
    
    333-123576
    
    May 3, 200510.14*
    
    Form of Change of Control and Retention
Agreement between Registrant and each of its
executive officers
    
    
    
    S-1
    
    333-123576
    
    May 3, 200510.15
    
    Amendment to Diamond Foods, Inc. Pension Plan
    
    
    
    8-K
    
    000-51439
    
    September 20, 200610.16*
    
    Form of Tax Withholding Agreement
    
    
    
    8-K
    
    000-51439
    
    July 20, 200710.17*
    
    Form of Stock Withholding Agreement
    
    
    
    8-K
    
    000-51439
    
    January 10, 200710.18*
    
    Offer Letter between Steven Neil and Diamond
Foods, Inc.
    
    
    
    10-Q
    
    000-51439
    
    March 11, 200810.19*
    
    Offer Letter between Lloyd Johnson and Diamond
Foods, Inc.
    
    X10.20
    
    Credit Agreement between Diamond Foods, Inc. and
Bank of America, N.A., dated September 15, 2008
    
    
    
    8-K
    
    000-51439
    
    September 17, 200823.01
    
    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  46




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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 25, 2008/s/ Steven M. Neil

Steven M. Neil
    
    Chief Financial and Administrative Officer and
Director
(principal financial officer and principal accounting
officer)
    
    September 25, 2008/s/ Laurence M. Baer

Laurence M. Baer
    
    Director
    
    September 25, 2008/s/ Edward A. Blechschmidt

Edward A. Blechschmidt
    
    Director
    
    September 25, 2008/s/ John J. Gilbert

John J. Gilbert
    
    Director
    
    September 25, 2008/s/ Robert M. Lea

Robert M. Lea
    
    Director
    
    September 25, 2008/s/ Dennis Mussell

Dennis Mussell
    
    Director
    
    September 25, 2008/s/ Joseph P. Silveira

Joseph P. Silveira
    
    Director
    
    September 25, 2008/s/ Glen C. Warren, Jr.

Glen C. Warren, Jr.
    
    Director
    
    September 25, 2008/s/ Robert J. Zollars

Robert J. Zollars
    
    Director
    
    September 25, 2008
 47




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit Description10.19
    
    Offer Letter between Lloyd Johnson 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
 48