US: Diamond Q2 sales, earnings miss Wall St forecasts

• Consolidated net sales were $220.8 million, down from $262.4 million
• Snacks segment net sales grew 7.2 percent and Nuts segment net sales declined 29.6 percent
• Gross profit was $50.6 million, up from $41.9 million
• Gross margin was 22.9 percent, up from 16.0 percent
• GAAP net income was $10.1 million, compared to a GAAP net loss of $20.2 million
• Adjusted EBITDA was $22.9 million, up from $16.6 million

SAN FRANCISCO, March 11, 2013 (GLOBE NEWSWIRE) -- Diamond Foods, Inc. (Nasdaq:DMND) ("Diamond") today reported financial results for its fiscal 2013 second quarter ended January 31, 2013.

In the second quarter of fiscal 2013, Diamond's GAAP net income was $10.1 million and GAAP diluted earnings per share (EPS) was $0.43. GAAP results for the quarter included $6.7 million of net charges primarily for audit committee investigation, restatement-related expenses, consulting fees, retention, severance and accrued contract termination expenses, offset in part by the clawback of bonuses previously paid to the former CEO and the reversal of certain previously recorded stock compensation expenses associated with former executives. GAAP results also included an $18.6 million gain related to a change in the fair value of the Oaktree warrant liability. Excluding these net charges and gain, Diamond's non-GAAP net income for the second quarter of fiscal 2013 was $1.1 million and non-GAAP diluted EPS was$0.05.

"Our second quarter results reflect continued progress against our key initiatives, which are aimed at driving margin expansion and a more sustainable topline growth profile over time," said Diamond's Chief Executive Officer Brian J. Driscoll.

Financial Review

During the second quarter of fiscal 2013, the Company changed its operating and reportable segments. While the Company previously had one operating and reportable segment, it now aggregates its operating segments into two reportable segments, which are Snacks and Nuts. The Snacks segment includes products sold under the Kettle U.S., Kettle U.K. and Pop Secret brands. The Nuts segment includes products sold under the Diamond of California and Emerald brands.

Consolidated net sales during the quarter decreased 15.8 percent, to $220.8 million, compared to the same quarter of the prior year, which was consistent with the Company's plan to reduce reliance on discounting over time and eliminate underperforming SKUs. Gross profit was $50.6 million, or 22.9 percent of net sales, for the second quarter of fiscal 2013, compared to $41.9 million and 16.0 percent of net sales for the same quarter in the prior year. 

Snacks Performance: Snacks net sales increased 7.2 percent, to $105.4 million, driven by an increase in net price realization on a 2 percent volume increase.  Snacks gross profit was $34.8 million, or 33.0 percent of net sales, for the second quarter of fiscal 2013, compared to $28.4 million, or 28.9 percent of net sales, for the same quarter in the prior year. Improvement in Snacks gross profit as a percentage of net sales reflects an increase in net price realization.

Nuts Performance: Nuts net sales decreased 29.6 percent, to $115.4 million, driven by a 37.1 percent volume decline. The primary drivers of the decline relate to lower walnut supply, planned reductions in SKUs and promotional spending associated with the Emerald brand.  Nuts gross profit was $15.7 million, or 13.6 percent of net sales, in the second quarter of fiscal 2013, compared to $13.5 million, or 8.2 percent of net sales, for the same quarter in the prior year. Improvement in Nuts gross profit as a percentage of net sales in the current quarter reflects a focus on increasing price realization, reducing lower performing SKUs and cost savings initiatives.

SG&A expense decreased to $32.3 million during the second quarter of fiscal 2013, compared to $34.3 million during the same quarter in the prior year. Included in the second quarter of fiscal 2013 are $6.7 million of certain SG&A items related primarily to restatement-related expenses, consulting fees, accrued contract termination expenses, retention and severance accruals, offset in part by the clawback of bonuses previously paid to the former CEO and the reversal of certain previously recorded stock compensation expenses associated with former executives. Included in the second quarter of fiscal 2012 are $10.7 millionof certain SG&A expenses related primarily to the audit committee investigation and walnut labeling settlement.  

Advertising expense was $12.3 million, or 5.6 percent of net sales, during the second quarter of fiscal 2013, compared to $11.6 million, or 4.4 percent of net sales, in the same quarter in the prior year. This increase in advertising expense was due to programs related to Pop Secret and the 100^th anniversary of the Diamond of California culinary nut brand. 

The Company recognized an $18.6 million gain on the Oaktree warrant liability in the quarter, primarily due to a decrease in the Company's stock price on January 31, 2013, as compared to October 31, 2012.  

Net interest expense was $14.2 million in the second quarter of fiscal 2013, compared to $6.5 million in the same quarter in the prior year. The increase was primarily due to the interest rate increase on the Secured Credit Agreement and the new Oaktree debt. 

The Company's effective tax rate was 2.5 percent for the second quarter of fiscal 2013.  

GAAP net income was $10.1 million compared to a loss of ($20.2) million in the same quarter last year. On a non-GAAP basis, net income was $1.1 million compared to $0.2 million last year. 

EPS for the second quarter of fiscal 2013 on a GAAP diluted basis was $0.43 compared to a loss of $0.93 in the prior year. Non-GAAP EPS on a diluted basis was $0.05 compared to $0.01 in the prior year. 

The non-GAAP fully diluted EPS calculation includes 1.4 million and 1.8 million shares related to the Oaktree warrants based on the Treasury stock method for the second quarter and year-to-date periods, respectively.  

Capital expenditures were $1.6 million for the second quarter of fiscal 2013. 

Adjusted EBITDA was $22.9 million, or 10.4 percent of net sales, in the second quarter of fiscal 2013, compared to $16.6 million, or 6.3 percent of net sales, in the same quarter in the prior year. Year-to-date adjusted EBITDA increased $7.6 million, to $54.0 million, compared to prior year. Please refer to the table in the back of this press release for a reconciliation of GAAP to non-GAAP information. 

As of January 31, 2013, net debt outstanding was $553.8 million, including the Oaktree debt at its carrying value, as described in Footnote 3 of the Notes to Consolidated Financial Statements included as a part of Diamond's Quarterly Report on Form 10-Q.  

Cash and availability on Diamond's bank revolving line of credit on March 8, 2013 was approximately$80 million. 

The Company expects to continue its strategy to seek improvements to net price realization through reductions in discounting and to rationalize Emerald SKUs. This continued strategic emphasis should result in consolidated net sales in the second half of fiscal 2013 to be down more on a year-over-year basis as compared to the first half of the fiscal year. The Company currently believes that its consolidated margin in the first half of fiscal 2013 represents a reasonable estimate for the remainder of fiscal year 2013, although it may fluctuate if brand development tactics change and/or walnut or other commodity costs increase. The Company also expects to continue investing in advertising across its brands as part of the focus on balancing promotional spending with consumer oriented activities.