• Diamond refiles last two annual accounts
  • Trims combined $56m from profits
  • Books loss for three quarters of current year
Diamond lowers outlook

Diamond lowers outlook

Shares in Kettle Chips owner Diamond Foods tumbled yesterday (15 November) after the US company posted lower earnings for 2010 and 2011 in restated accounts - and booked a loss for the first three quarters of its current financial year.

Diamond Foods, which had to refile its financial results for the last two years after an accounting scandal at the business, said the restatement meant its profits were US$56.5m lower in total.

Earlier this year, Diamond found it had incorrectly accounted for payments to walnut growers, which led to the departure of its CEO and CFO.

It also reported a net loss for the first three quarters to 30 April of $53.4m amid lower walnut supplies, the rising cost of the ingredient and expenses from its investigation into how growers were paid for walnuts.

Diamond Foods also booked $40.5m in costs from the end of its plans to buy Pringles in the wake of the scandal. Kellogg has since acquired Pringles.

"Clearly, the results for the first three quarters of 2012 demonstrate that Diamond faced challenges. However, we have a strong brand portfolio to build upon and have launched a new strategic direction with a focus on investing in innovation and brand building, significantly improving our cost structure and rebuilding our walnut supply," Diamond's current CEO Brian Driscoll said. Net sales for the three quarters were up 3.5% to $757.4m.

The filing of the results for the three quarters to 30 April follows a series of warnings from Nasdaq over the delays to publishing the accounts. "The company regrets the extended time investors had to wait for financial reports during the restatement process. The company has emerged from this process with strengthened financial discipline and rigorous commitment to enhancing internal controls and remediating material weaknesses," Driscoll said. "Today Diamond made an important first step in becoming current with our financial reporting and we look forward to completing our other required filings."

Diamond shares were down 21.23% at $15.36.

Show the press release

Diamond Foods Reports Financial Results for First Three Quarters of Fiscal 2012

Completes Fiscal 2010 and 2011 Restatement

SAN FRANCISCO, Nov. 14, 2012 (GLOBE NEWSWIRE) -- Diamond Foods, Inc. (Nasdaq:DMND) ("Diamond") today reported financial results for the first three quarters of its fiscal 2012 and filed with the Securities and Exchange Commission ("SEC") its restated consolidated financial statements for the fiscal years 2010 and 2011, and interim periods ended January 31, 2010, April 30, 2010, July 31, 2010, October 31, 2010, January 31, 2011, April 30, 2011 and July 31, 2011. The restatement resulted in reductions in income before taxes of $39.5 million in fiscal 2011 and $17.0 million in fiscal 2010 from amounts previously reported.

"Today Diamond made an important first step in becoming current with our financial reporting and we look forward to completing our other required filings," said Diamond's Chief Executive Officer Brian Driscoll, who joined the company on May 8, 2012. "Clearly, the results for the first three quarters of 2012 demonstrate that Diamond faced challenges. However, we have a strong brand portfolio to build upon and have launched a new strategic direction with a focus on investing in innovation and brand building, significantly improving our cost structure and rebuilding our walnut supply."

Q1 – Q3 Fiscal Year 2012 Financial Review

For the three quarters ended April 30, 2012, net sales were $757.4 million, up 3.5 percent over the prior year restated period. The increase was primarily due to an 11.0 percent increase in culinary/retail in-shell sales and a 10.0 percent increase in snack sales, offset by a 36.2 percent decrease in total non-retail sales. The decline in non-retail sales was primarily due to a significant drop in walnut crop deliveries to Diamond in the fall of 2011.

Gross profit as a percentage of net sales was 18.1 percent in the first three quarters of fiscal 2012, down from 22.9 percent in the prior year restated period. The greatest impact on gross margin was a substantial decline in walnut crop deliveries to Diamond and an increase in average walnut cost per pound of over 50 percent. Rising prices of other commodities and higher operating costs primarily due to excess plant capacity also contributed to the downward pressure on gross margin.

Selling, general and administrative expense (SG&A) was $97.0 million in the first three quarters of fiscal 2012, a 35.6 percent increase compared to $71.6 million in the prior year restated period. The increase in SG&A expense was primarily related to the audit committee investigation, restatement and related expenses. When adjusted for certain costs associated with the audit committee investigation, restatement, and related matters, SG&A was $76.0 million compared to $71.6 million in the prior year restated period. The increase was due primarily to an increase in selling related expenses.

Advertising expense was $31.6 million in the first three quarters of fiscal 2012 compared to $34.4 million in the prior year restated period, a decline of 8.2 percent. The decrease in advertising expenses was primarily due to the cancellation of programs during the third quarter of fiscal 2012 in an effort to reduce costs.

Acquisition and integration expenses were $40.6 million in the first three quarters of fiscal 2102 primarily related to the terminated Pringles acquisition, compared to $7.5 million in the prior year restated period primarily related to Kettle integration.

Interest expense was $19.9 million in the three quarters of fiscal 2012 compared to $18.1 million in the prior year restated period, an increase of 9.9% due primarily to the forbearance fee of 0.25% paid to our lenders.

Income tax expense was $1.7 million in the first three quarters of fiscal 2012, compared to $12.3 million in the prior year restated period. The tax benefits of the company's pre-tax loss of $51.7 million for the first three quarters of fiscal 2012 were offset by a $27.6 million charge to establish a valuation allowance against deferred tax assets. The valuation allowance charge was a result of recent net operating losses. Diamond also recognized a $5.6 million benefit in taxes in the first quarter of fiscal 2012 due to a favorable ruling with the U.K. tax authorities. Reversal of the valuation allowance in future periods is dependent on future taxable income and would result in income tax benefit in those periods.

The net loss for the first three quarters of fiscal 2012 was $53.4 million compared to net income of $23.7 million in the prior year restated period. The decrease was due primarily to the decline in gross profit, the significant increase in expenses related to the audit committee investigation, restatement, and Pringles integration planning, and the tax charge related to the valuation allowance against net deferred tax assets.

Non-GAAP income before income taxes for the first three quarters of fiscal 2012, which excludes acquisition and integration, audit committee investigation, restatement, legal and other related expenses, was $11.0 million compared to $43.6 million in the prior year restated period. The decrease was due primarily to the decline in gross profit. Please refer to the non-GAAP information table that follows.

GAAP EPS on a fully diluted basis for the first three quarters of fiscal 2012 was ($2.46) compared to $1.05 in the prior year restated period.

Non-GAAP EPS on a fully diluted basis for the first three quarters of fiscal 2012 was $0.53 compared to a restated non-GAAP EPS of $1.54 in the prior year restated period. Please refer to the non-GAAP information table that follows.

Capital expenditures were $40.6 million in the first three quarters of fiscal 2012, compared to $15.2 million in the prior year restated period. The increase was primarily due to the Kettle plant expansions in Beloit, Wisconsin and Norwich, England and for automation of Emerald's 'Breakfast on the Go' product line.

Adjusted EBITDA for the first three quarters of fiscal 2012 declined to $58.9 million from $89.6 million in the prior year primarily due to lower gross profit. Please refer to the reconciliation of net income to adjusted EBIDTA that follows.

As of July 31, 2012, cash and availability on Diamond's bank revolving line of credit was in excess of $70 million.

 

Restatement

Diamond today also filed its restated consolidated financial statements for fiscal years 2011 and 2010 and interim periods ended January 31, 2010, April 30, 2010, July 31, 2010, October 31, 2010, January 31, 2011, April 30, 2011 and July 31, 2011 with the SEC.

"The company regrets the extended time investors had to wait for financial reports during the restatement process," said Brian Driscoll, Diamond's President and CEO. "The company has emerged from this process with strengthened financial discipline and rigorous commitment to enhancing internal controls and remediating material weaknesses."

The Audit Committee and the company have determined that certain grower payments of $20.8 million and $61.5 million previously accounted for in fiscal 2011 and 2012, were not accounted for in the correct periods. Corrections were made to account for these payments in the appropriate periods of fiscal 2010 and 2011. The restatement also included corrections related to accounts payable and accrued expenses which were accounted for in incorrect periods; these adjustments decreased net income $3.5 million in 2011 and $0.1 million in 2010.

The restatement resulted in a reduction in fiscal 2011 income before income taxes of $39.5 million ($69.1 million previously reported compared to $29.7 million restated), and $17.0 million in fiscal 2010 ($40.2 million previously reported compared to $23.2 million restated). Please refer to the summarized GAAP Statement of Operations table that follows.

Diluted EPS for restated fiscal 2011 was $1.17 compared to $2.22 per share as previously reported and $0.82 for restated fiscal 2010 as compared to $1.36 per share as previously reported.

Non-GAAP diluted EPS for restated fiscal 2011 was $1.76 compared to $2.61 per share as previously reported and $1.29 for restated fiscal 2010 as compared to $1.91 per share as previously reported. Please refer to  the non-GAAP financial information table that follows.

Gross margin for restated fiscal 2011 was 22.4 percent compared to 26.0 percent as previously reported and 21.2 percent for restated fiscal 2010 as compared to 23.7 percent as previously reported. The decrease primarily was due to the correction of the walnut costs, which increased cost of goods sold in fiscal 2010 and 2011.

Adjusted EBITDA for restated fiscal 2011 was $111.5 million compared to $146.2 million as previously reported and $68.2 million for restated fiscal 2010 compared to $84.9 million as previously reported.

In connection with the Audit Committee investigation, management identified material weaknesses in internal control over financial reporting in three areas: control environment, walnut grower accounting, and accounts payable and accrued expenses. Numerous remediation steps have been implemented or are in progress to correct these weaknesses, including: enhanced oversight and controls, leadership changes, revised walnut cost estimation policy, enhanced documentation, oversight and monitoring of accounting policies related to walnut payments, and improved financial and operational reporting throughout the organization. For a list of remediation steps, please refer to the 10-K/A or supplemental presentation, both of which are available on the Diamond Foods website.

 

Original source: Diamond Foods