-Must know Accounting!-Must be Reliable Please!compute all the ratios for the formula attached as pdf. You are to use the financial statement figures found in the Annual Report (Item 8 to the Form 1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Diamond Foods, Inc.
San Francisco, California
We have audited the accompanying consolidated balance sheets of Diamond Foods, Inc. and subsidiaries (the “Company”) as of July 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2011. We also have audited the Company’s internal control over financial reporting as of July 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamond Foods, Inc. and subsidiaries as of July 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
San Francisco, California
September 15, 2011
27
Table of Contents
DIAMOND FOODS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
| |
|
| July 31, |
| ||||||
|
| 2011 |
|
| 2010 |
| |||
|
| (In thousands, except share and per share information) |
| ||||||
ASSETS |
|
|
|
|
|
|
|
| |
Current assets: |
|
|
|
|
|
|
|
| |
Cash and cash equivalents |
| 3,112 |
|
| 5,642 |
| |||
Trade receivables, net |
|
| 98,218 |
|
|
| 65,553 |
| |
Inventories |
|
| 145,575 |
|
|
| 143,405 |
| |
Deferred income taxes |
|
| 13,249 |
|
|
| 10,497 |
| |
Prepaid income taxes |
|
| 2,783 |
|
|
| 9,225 |
| |
Prepaid expenses and other current assets |
|
| 13,102 |
|
|
| 5,767 |
| |
|
|
|
|
|
|
|
|
| |
Total current assets |
|
| 276,039 |
|
|
| 240,089 |
| |
Restricted cash |
|
| 15,795 |
|
|
| — |
| |
Property, plant and equipment, net |
|
| 127,407 |
|
|
| 117,816 |
| |
Deferred income taxes |
|
| 3,870 |
|
|
| 13,625 |
| |
Goodwill |
|
| 407,587 |
|
|
| 396,788 |
| |
Other intangible assets, net |
|
| 450,855 |
|
|
| 449,018 |
| |
Other long-term assets |
|
| 6,842 |
|
|
| 8,536 |
| |
|
|
|
|
|
|
|
|
| |
Total assets |
| 1,288,395 |
|
| 1,225,872 |
| |||
|
|
|
|
|
|
|
|
| |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| |
Current liabilities: |
|
|
|
|
|
|
|
| |
Current portion of long-term debt |
| 41,700 |
|
| 40,000 |
| |||
Accounts payable and accrued liabilities |
|
| 144,060 |
|
|
| 127,921 |
| |
|
|
|
|
|
|
|
|
| |
Total current liabilities |
|
| 185,760 |
|
|
| 167,921 |
| |
Long-term obligations |
|
| 490,001 |
|
|
| 516,100 |
| |
Deferred income taxes |
|
| 131,870 |
|
|
| 144,755 |
| |
Other liabilities |
|
| 25,969 |
|
|
| 17,153 |
| |
Commitments and contingencies |
|
|
|
|
|
|
|
| |
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; 22,319,016 and 22,121,534 shares issued and 22,049,636 and 21,891,928 shares outstanding at July 31, 2011 and 2010, respectively |
|
| 22 |
|
|
| 22 |
| |
Treasury stock, at cost: 269,380 and 229,606 shares at July 31, 2011 and 2010 |
|
| (6,867 | ) |
|
| (5,050 | ) | |
Additional paid-in capital |
|
| 318,083 |
|
|
| 307,032 |
| |
Accumulated other comprehensive loss |
|
| 18,500 |
|
|
| (869 | ) | |
Retained earnings |
|
| 125,057 |
|
|
| 78,808 |
| |
|
|
|
|
|
|
|
|
| |
Total stockholders’ equity |
|
| 454,795 |
|
|
| 379,943 |
| |
|
|
|
|
|
|
|
|
| |
Total liabilities and stockholders’ equity |
| 1,288,395 |
|
| 1,225,872 |
| |||
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
28
Table of Contents
DIAMOND FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Year Ended July 31, |
| ||||||||||||
|
| 2011 |
|
| 2010 |
|
| 2009 |
| ||||||
|
| (In thousands, except per share information) |
| ||||||||||||
Net sales |
| 965,922 |
|
| 680,162 |
|
| 570,940 |
| ||||||
Cost of sales |
|
| 714,775 |
|
|
| 519,161 |
|
|
| 435,344 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Gross profit |
|
| 251,147 |
|
|
| 161,001 |
|
|
| 135,596 |
| |||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Selling, general and administrative |
|
| 96,960 |
|
|
| 64,301 |
|
|
| 60,971 |
| |||
Advertising |
|
| 44,415 |
|
|
| 32,962 |
|
|
| 28,785 |
| |||
Acquisition and integration related expenses |
|
| 16,792 |
|
|
| 11,508 |
|
|
| — |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total operating expenses |
|
| 158,167 |
|
|
| 108,771 |
|
|
| 89,756 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Income from operations |
|
| 92,980 |
|
|
| 52,230 |
|
|
| 45,840 |
| |||
Interest expense, net |
|
| 23,840 |
|
|
| 10,180 |
|
|
| 6,255 |
| |||
Other expense, net |
|
| — |
|
|
| 1,849 |
|
|
| 898 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Income before income taxes |
|
| 69,140 |
|
|
| 40,201 |
|
|
| 38,687 |
| |||
Income taxes |
|
| 18,929 |
|
|
| 13,990 |
|
|
| 14,944 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income |
| 50,211 |
|
| 26,211 |
|
| 23,743 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Basic |
| 2.28 |
|
| 1.40 |
|
| 1.45 |
| ||||||
Diluted |
| 2.22 |
|
| 1.36 |
|
| 1.42 |
| ||||||
|
|
|
| ||||||||||||
Shares used to compute earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Basic |
|
| 21,577 |
|
|
| 18,313 |
|
|
| 16,073 |
| |||
Diluted |
|
| 22,242 |
|
|
| 18,843 |
|
|
| 16,391 |
| |||
|
|
|
| ||||||||||||
Dividends declared per share |
| 0.18 |
|
| 0.18 |
|
| 0.18 |
|
See notes to consolidated financial statements.
29
Table of Contents
DIAMOND FOODS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||
|
| Common Stock
|
|
| Treasury Stock |
|
| Additional Paid-In Capital |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Total Stockholders’ Equity |
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| (In thousands, except share information) |
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, July 31, 2008 |
|
| 16,180,771 |
|
| 16 |
|
| (3,203 | ) |
| 112,550 |
|
| 35,276 |
|
| 1,584 |
|
| 146,223 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
Shares issued under ESPP and upon stock option exercises |
|
| 298,133 |
|
|
|
|
|
|
|
|
|
| 5,299 |
|
|
|
|
|
|
|
|
|
|
| 5,300 |
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
Stock compensation expense |
|
| 115,587 |
|
|
|
|
|
|
|
|
|
|
| 3,901 |
|
|
|
|
|
|
|
|
|
|
| 3,901 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Tax benefit from ESPP and stock option transactions |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,067 |
|
|
|
|
|
|
|
|
|
|
| 1,067 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Treasury stock repurchased |
|
| (42,472 | ) |
|
|
|
|
|
| (1,053 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,053 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,960 | ) |
|
|
|
|
|
| (2,960 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 23,743 |
|
|
|
|
|
|
| 23,743 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Change in pension liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,743 | ) |
|
| (2,743 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (137 | ) |
|
| (137 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Total comprehensive income: |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 20,863 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Balance, July 31, 2009 |
|
| 16,552,019 |
|
|
| 17 |
|
|
| (4,256 | ) |
|
| 122,817 |
|
|
| 56,059 |
|
|
| (1,296 | ) |
|
| 173,341 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Shares issued upon stock option exercises |
|
| 44,574 |
|
|
|
|
|
|
|
|
|
|
| 818 |
|
|
|
|
|
|
|
|
|
|
| 818 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Stock compensation expense |
|
| 148,164 |
|
|
|
|
|
|
|
|
|
|
| 3,231 |
|
|
|
|
|
|
|
|
|
|
| 3,231 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Tax benefit from stock option transactions |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 434 |
|
|
|
|
|
|
|
|
|
|
| 434 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Shares issued for equity offering |
|
| 5,175,000 |
|
|
|
|
|
|
|
|
|
| 191,470 |
|
|
|
|
|
|
|
|
|
|
| 191,475 |
|
|
|
| |||||||||||||||||||||||||||||||||||||||||
Equity offering costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11,738 | ) |
|
|
|
|
|
|
|
|
|
| (11,738 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Treasury stock repurchased |
|
| (27,829 | ) |
|
|
|
|
|
| (794 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (794 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3,462 | ) |
|
|
|
|
|
| (3,462 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 26,211 |
|
|
|
|
|
|
| 26,211 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Change in pension liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (773 | ) |
|
| (773 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,477 |
|
|
| 1,477 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (277 | ) |
|
| (277 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Total comprehensive income: |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 26,638 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Balance, July 31, 2010 |
|
| 21,891,928 |
|
|
| 22 |
|
|
| (5,050 | ) |
|
| 307,032 |
|
|
| 78,808 |
|
|
| (869 | ) |
|
| 379,943 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Shares issued upon stock option exercises |
|
| 96,924 |
|
|
|
|
|
|
|
|
|
|
| 1,803 |
|
|
|
|
|
|
|
|
|
|
| 1,803 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Stock compensation expense |
|
| 100,558 |
|
|
|
|
|
|
|
|
|
|
| 6,974 |
|
|
|
|
|
|
|
|
|
|
| 6,974 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Tax benefit from stock option transactions |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,274 |
|
|
|
|
|
|
|
|
|
|
| 2,274 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Treasury stock repurchased |
|
| (39,774 | ) |
|
|
|
|
|
| (1,817 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1,817 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (3,962 | ) |
|
|
|
|
|
| (3,962 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 50,211 |
|
|
|
|
|
|
| 50,211 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Change in pension liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (659 | ) |
|
| (659 | ) |
|
|
| ||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 19,930 |
|
|
| 19,930 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 98 |
|
|
| 98 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Total comprehensive income: |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 69,580 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Balance, July 31, 2011 |
|
| 22,049,636 |
|
| 22 |
|
| (6,867 | ) |
| 318,083 |
|
| 125,057 |
|
| 18,500 |
|
| 454,795 |
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
30
Table of Contents
DIAMOND FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Year Ended July 31, |
| ||||||||||||
|
| 2011 |
|
| 2010 |
|
| 2009 |
| ||||||
|
| (In thousands) |
| ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
| |||
Net income |
| 50,211 |
|
| 26,211 |
|
| 23,743 |
| ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Depreciation and amortization |
|
| 29,465 |
|
|
| 17,154 |
|
|
| 11,362 |
| |||
Deferred income taxes |
|
| (7,534 | ) |
|
| 7,072 |
|
|
| (2,800 | ) | |||
Excess tax benefit from stock option transactions |
|
| (2,274 | ) |
|
| (434 | ) |
|
| (1,067 | ) | |||
Stock-based compensation |
|
| 6,974 |
|
|
| 3,231 |
|
|
| 3,901 |
| |||
Other, net |
|
| 1,055 |
|
|
| 1,109 |
|
|
| 858 |
| |||
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Trade receivables |
|
| (32,665 | ) |
|
| (2,873 | ) |
|
| 12,764 |
| |||
Inventories |
|
| (2,170 | ) |
|
| (45,852 | ) |
|
| 10,316 |
| |||
Prepaid expenses and income taxes and other current assets |
|
| (893 | ) |
|
| (6,437 | ) |
|
| 1,053 |
| |||
Accounts payable and accrued liabilities |
|
| 17,577 |
|
|
| (5,462 | ) |
|
| (6,562 | ) | |||
Other, net |
|
| 5,921 |
|
|
| 4,693 |
|
|
| (200 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net cash provided by (used in) operating activities |
|
| 65,667 |
|
|
| (1,588 | ) |
|
| 53,368 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Purchases of property, plant and equipment |
|
| (27,703 | ) |
|
| (11,790 | ) |
|
| (7,994 | ) | |||
Deposits of restricted cash |
|
| (21,200 | ) |
|
| — |
|
|
| — |
| |||
Proceeds from restricted cash |
|
| 5,405 |
|
|
| — |
|
|
| — |
| |||
Acquisitions, net of cash acquired |
|
| — |
|
|
| (615,389 | ) |
|
| (190,224 | ) | |||
Other, net |
|
| 262 |
|
|
| 618 |
|
|
| 133 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net cash used in investing activities |
|
| (43,236 | ) |
|
| (626,561 | ) |
|
| (198,085 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Revolving line of credit borrowings under the Secured Credit Facility |
|
| — |
|
|
| 176,000 |
|
|
| — |
| |||
Repayment of revolving line of credit under the Secured Credit Facility |
|
| (4,800 | ) |
|
| (9,900 | ) |
|
| — |
| |||
Proceeds from issuance of long-term debt |
|
| 21,350 |
|
|
| 400,000 |
|
|
| 125,000 |
| |||
Debt issuance costs |
|
| — |
|
|
| (8,852 | ) |
|
| (1,973 | ) | |||
Payment of long-term debt and notes payable |
|
| (40,884 | ) |
|
| (125,119 | ) |
|
| (30,141 | ) | |||
Gross proceeds from equity offering |
|
| — |
|
|
| 191,475 |
|
|
| — |
| |||
Equity offering costs |
|
| — |
|
|
| (11,738 | ) |
|
| — |
| |||
Dividends paid |
|
| (3,962 | ) |
|
| (3,462 | ) |
|
| (2,960 | ) | |||
Excess tax benefit from stock option transactions |
|
| 2,274 |
|
|
| 434 |
|
|
| 1,067 |
| |||
Other, net |
|
| 940 |
|
|
| 24 |
|
|
| 4,247 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net cash (used in) provided by financing activities |
|
| (25,082 | ) |
|
| 608,862 |
|
|
| 95,240 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Effect of exchange rate changes on cash |
|
| 121 |
|
|
| 127 |
|
|
| — |
| |||
|
|
|
| ||||||||||||
Net decrease in cash and cash equivalents |
|
| (2,530 | ) |
|
| (19,160 | ) |
|
| (49,477 | ) | |||
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Beginning of period |
|
| 5,642 |
|
|
| 24,802 |
|
|
| 74,279 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
End of period |
| 3,112 |
|
| 5,642 |
|
| 24,802 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest |
| 21,998 |
|
| 9,088 |
|
| 5,989 |
| ||||||
Income taxes |
|
| 8,751 |
|
|
| 11,113 |
|
|
| 19,438 |
| |||
Non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
| |||
Accrued capital expenditures |
|
| 2,323 |
|
|
| 1,076 |
|
|
| 497 |
|
See notes to consolidated financial statements.
31
Table of Contents
DIAMOND FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011, 2010 and 2009
(In thousands, except share and per share information unless otherwise noted)
(1) Organization and Significant Accounting Policies
Business
Diamond Foods, Inc. (the “Company” or “Diamond”) is an innovative packaged food company focused on building, acquiring and energizing brands. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, Diamond complemented its strong heritage in the culinary nut market under the Diamond of California ® brand by launching a full line of snack nuts under the Emerald ® brand. In September 2008, Diamond acquired the Pop Secret ® brand of microwave popcorn products, which provided the Company with increased scale in the snack market, significant supply chain economies of scale and cross promotional opportunities with its existing brands. In March 2010, Diamond acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and United Kingdom, which added the complementary premium Kettle Brand ® to Diamond’s existing portfolio of leading brands in the snack industry. In April 2011, Diamond entered into a definitive agreement with Proctor & Gamble (“P&G”) to merge the Pringles business into Diamond. Diamond sells its products to global, national, regional and independent grocery, drug and convenience store chains, as well as to mass merchandisers, club stores and other retail channels.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”). Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to inventories, trade receivables, fair value of investments, useful lives of property, plant and equipment, intangible assets, goodwill and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for management’s judgments about the carrying values of assets and liabilities.
Certain Risks and Concentrations
The Company’s revenues are principally derived from the sale of snack, culinary, domestic in-shell, international and ingredient/food service nuts. Significant changes in customer buying behavior could adversely affect the Company’s operating results. Sales to the Company’s largest customer accounted for approximately 15%, 17% and 21% of net sales in 2011, 2010 and 2009, respectively. Sales to the second largest customer accounted for approximately 11%, 12% and 13% of net sales in 2011, 2010 and 2009, respectively.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
32
Table of Contents
Cash and Cash Equivalents
Cash and cash equivalents include investment of surplus cash in securities (primarily money market funds) with maturities at date of purchase of three months or less.
Inventories
All inventories are accounted for at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of assets ranging from 30 to 39 years for buildings and ranging from 3 to 15 years for equipment.
Slotting and Other Contractual Arrangements
In certain situations, the Company pays slotting fees to retail customers to acquire access to shelf space. These payments are recognized as a reduction of sales. In addition, the Company makes payments pursuant to contracts that stipulate the term of the agreement, the quantity and type of products to be sold and other requirements. Payments pursuant to these agreements are capitalized and included in other current and long-term assets, and are amortized on a straight-line basis over the term of the contract. The Company expenses payments if no written arrangement exists.
Impairment of Long-Lived and Intangible Assets and Goodwill
Management reviews long-lived assets and certain identifiable intangible assets with finite lives for impairment in accordance with ASC 360, “ Property, Plant, and Equipment .” Goodwill and intangible assets not subject to amortization are reviewed annually for impairment in accordance with ASC 350, “ Intangibles — Goodwill and Other, ” or more often if there are indications of possible impairment.
The analysis to determine whether or not an asset is impaired requires significant judgments that are dependent on internal forecasts, including estimated future cash flows, estimates of long-term growth rates for our business, the expected life over which cash flows will be realized, and assumed royalty and discount rates. Changes in these estimates and assumptions could materially affect the determination of fair value and any impairment charge. While the fair value of these assets exceeds their carrying value based on management’s current estimates and assumptions, materially different estimates and assumptions in the future in response to changing economic conditions, changes in the business or for other reasons could result in the recognition of impairment losses.
For assets to be held and used, including acquired intangible assets subject to amortization, the Company initiates a review whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Significant management judgment is required in this process.
The Company tests its brand intangible assets not subject to amortization for impairment annually, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. In testing brand intangibles for impairment, Diamond compares the fair value with the carrying value. The determination of fair value is based on a discounted cash flow analysis, using inputs such as forecasted future revenues attributable to the brand, assumed royalty rates, and a risk-adjusted discount rate that approximates our estimated cost of capital. If the carrying value exceeds the estimated fair value, the brand intangible asset is considered impaired, and an impairment loss will be recognized in an amount equal to the excess of the carrying value over the fair value of the brand intangible asset.
33
Table of Contents
The Company performs its annual goodwill impairment test required by ASC 350 as of June 30th of each year. In testing goodwill for impairment, Diamond initially compares the fair value of the Company’s single reporting unit with the net book value of the Company because it represents the carrying value of the reporting unit. Diamond has one operating and reportable segment. If fair value of the reporting unit is less than the carrying value of the reporting unit, we perform an additional step to determine the implied fair value of goodwill. The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all assets and liabilities and then computing the excess of the reporting units’ fair value over the amounts assigned to the assets and liabilities. If the carrying value of goodwill exceeds the implied fair value of goodwill, the excess represents the amount of goodwill impairment. Accordingly, the Company would recognize an impairment loss in the amount of such excess. The Company considers the estimated fair value of the reporting unit in relation to the Company’s market capitalization.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss has transferred to the buyer, price is fixed, delivery occurs and collection is reasonably assured. Revenues are recorded net of rebates, introductory or slotting payments, coupons, promotion and marketing allowances. The amount the Company accrues for promotion is based on an estimate of the level of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer and consumer participation, and sales and payment trends with similar previously offered programs. Customers have the right to return certain products. Product returns are estimated based upon historical results and are reflected as a reduction in sales.
Promotion and Advertising Costs
Promotional allowances, customer rebates, coupons and marketing allowances are recorded at the time the related revenue is recognized and are reflected as reductions of sales. Annual volume rebates, promotion, and marketing allowances are recorded based upon the terms of the arrangements. Coupon incentives are recorded at the time of distribution in amounts based on estimated redemption rates. The Company expenses advertising costs as incurred. Payments to reimburse customers for cooperative advertising programs are recorded in accordance with ASC 605-50, “ Revenue Recognition — Customer Payments and Incentives .”
Shipping and Handling Costs
Amounts billed to customers for shipping and handling costs are included in net sales. Shipping and handling costs are charged to cost of sales as incurred.
Acquisition and Integration Related Expenses
Acquisition and integration related expenses are costs incurred to effect a business combination and subsequently to integrate the acquired business into the Company. These expenses are shown as a separate line within operating expenses and are expensed as incurred. These expenses may include transaction related legal and consulting fees, as well as business and systems integration costs.
Income Taxes
Diamond accounts for income taxes in accordance with ASC 740, “Income Taxes.” which requires that deferred tax assets and liabilities be recognized for the tax effect of temporary differences between the financial statement and tax basis of recorded assets and liabilities at current tax rates. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The recoverability of deferred tax assets is based on both the historical and anticipated earnings levels and is reviewed periodically to determine if any additional valuation allowance is necessary when it is more likely than not that amounts will not be recovered.
34
Table of Contents
There are inherent uncertainties related to the interpretations of tax regulations in the jurisdictions in which the Company operates. Diamond may take tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. Tax positions are evaluated and liabilities are established in accordance with the guidance on uncertainty in income taxes. Diamond reviews these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjusts them accordingly.
Fair Value of Financial Instruments
The fair value of certain financial instruments, including cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate the amounts recorded in the balance sheet because of the relatively short term nature of these financial instruments. The fair value of notes payable and long-term obligations at the end of each fiscal period approximates the amounts recorded in the balance sheet based on information available to Diamond with respect to current interest rates and terms for similar financial instruments.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements, including stock option grants and restricted stock awards, in accordance with ASC 718, “ Compensation — Stock Compensation .” Under this guidance, compensation cost is recognized based on the fair value of equity awards on the date of grant. The compensation cost is then amortized on a straight-line basis over the vesting period. The Black-Scholes option pricing model is used to determine the fair value of stock options at the date of grant. This model requires the Company to make assumptions such as expected term, dividends, volatility, and forfeiture rates that determine the stock options fair value. These key assumptions are based on historical information and judgment regarding market factors and trends. If actual results are not consistent with the Company’s assumptions and judgments used in estimating these factors, the Company may be required to increase or decrease compensation expense, which could be material to its results of operations.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-29, “ Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations .” This guidance was issued to clarify that pro forma disclosures should be presented as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The disclosures should also be accompanied by a narrative description of the nature and amount of material, nonrecurring pro forma adjustments. This new guidance is effective prospectively for business combinations consummated on or after the annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ” This guidance changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This guidance requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income (OCI) in either a single continuous statement of comprehensive income or in two separate consecutive statements. The guidance does not change the components of OCI or when an item of OCI must be reclassified to net income, or the earnings per share calculation. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
35
Table of Contents
(2) Fair Value of Financial Instruments
The Company transacts business in foreign currencies and has international sales denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward contracts, generally with monthly maturities over twelve months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. The Company does not use foreign currency contracts for speculative or trading purposes. On the date a foreign currency forward contract is entered into, the Company designates the contract as a hedge, for a forecasted transaction, of the variability of cash flows to be received (“cash flow hedge”). The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to anticipated transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Effective changes in derivative contracts designated and qualifying as cash flow hedges of forecasted revenue are reported in other comprehensive income. These gains and losses are reclassified into interest income or expense, as a component of revenue, in the same period as the hedged revenue is recognized. The Company includes time value in the assessment of effectiveness of the foreign currency derivatives. The ineffective portion of the hedge is recorded in interest expense or income. No hedge ineffectiveness for foreign currency derivatives was recorded for the year ended July 31, 2011 . The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows associated with forecasted foreign currency transactions is less than twelve months. Within the next twelve months, amounts expected to be reclassified from other comprehensive income to revenue for foreign currency derivatives are nil.
In the three months ended July 31, 2010, the Company entered into three interest rate swap agreements in accordance with Company policy to mitigate the impact of LIBOR based interest expense fluctuations on Company profitability. These swap agreements, with a total hedged notional amount of $100 million were entered into to hedge future cash interest payments associated with a portion of the Company’s variable rate bank debt. The Company has designated these swaps as cash flow hedges of future cash flows associated with its variable rate debt. All effective changes in the fair value of the designated swaps are recorded in other comprehensive income (loss) and are released to interest income or expense on a monthly basis as the hedged debt payments are accrued. Ineffective changes, if any, are recognized in interest income or expense immediately. For the year ended July 31, 2011, the Company recognized other comprehensive income of $84 based on the change in fair value of the swap agreements; no hedge ineffectiveness for these swap agreements was recognized in interest income or expense over the same period. Other comprehensive loss of $581 is expected to be reclassified to interest expense within the next twelve months.
The fair values of the Company’s derivative instruments as of July 31 were as follows:
|
|
|
|
|
|
|
|
|
|
| |
Liability Derivatives |
| Balance Sheet Location |
| Fair Value |
| ||||||
|
|
|
| 2011 |
|
| 2010 |
| |||
Derivatives designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
|
|
| |
Interest rate contracts |
| Other current liabilities |
| (581 | ) |
| (668 | ) | |||
Interest rate contracts |
| Other non-current liabilities |
|
| (4 | ) |
|
| — |
| |
Foreign currency contracts |
| Accounts payable and accrued liabilities |
|
| — |
|
|
| (12 | ) | |
|
|
|
|
|
|
|
|
|
|
| |
Total derivatives designated as hedging instruments under ASC 815 |
|
|
| $ | (585 | ) |
| $ | (680 | ) | |
|
|
|
|
|
|
|
|
|
|
| |
Derivatives not designated as hedging instruments under ASC 815: |
|
|
|
|
|
|
|
|
|
| |
Foreign currency contracts |
| Accounts payable and accrued liabilities |
| (11 | ) |
| — |
| |||
|
|
|
|
|
|
|
|
|
|
| |
Total derivatives not designated as hedging instrument under ASC 815 |
|
|
| $ | (11 | ) |
| $ | — |
| |
|
|
|
|
|
|
|
|
|
|
| |
Total derivatives |
|
|
| $ | (596 | ) |
| $ | (680 | ) | |
|
|
|
|
|
|
|
|
|
|
|
36
Table of Contents
The effects of the Company’s derivative instruments on the Consolidated Statements of Operations for the years ended July 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Derivatives in ASC 815 Cash Flow Hedging Relationships |
| Amount of Loss Recognized in OCI on Derivative (Effective Portion) |
|
| Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion) |
| Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) |
|
| Location of Loss Recognized in Income on Derivative (Ineffective Portion) |
| Amount of Loss Recognized in Income on Derivative (Ineffective Portion) |
| ||||||||||||||||||||||||||||||||||||||||||||||
|
| 2011 |
|
| 2010 |
|
|
|
| 2011 |
|
| 2010 |
|
|
|
| 2011 |
|
| 2010 |
| |||||||||||||||||||||||||||||||||||||
Interest rate contracts |
| (643 | ) |
| (479 | ) |
| Interest expense |
| (728 | ) |
| (52 | ) |
| Interest expense |
| — |
|
| — |
| |||||||||||||||||||||||||||||||||||||
Foreign currency contracts |
|
| (182 | ) |
|
| (12 | ) |
| Net sales |
|
| (194 | ) |
|
| — |
|
| Net sales |
|
| — |
|
|
| — |
| |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Total |
| $ | (825 | ) |
| $ | (491 | ) |
|
|
| $ | (922 | ) |
| $ | (52 | ) |
|
|
| $ | — |
|
| $ | — |
| |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Derivatives Not Designated as Hedging Instruments under ASC 815 |
| Location of Loss Recognized in Income on Derivative |
| Amount of Loss Recognized in Income on Derivative |
| ||||||||||
|
|
|
| 2011 |
|
| 2010 |
| |||||||
Foreign currency contracts |
| Interest expense |
| (145 | ) |
| — |
| |||||||
|
|
|
|
|
|
|
|
|
|
| |||||
Total |
|
|
| $ | (145 | ) |
| $ | — |
| |||||
|
|
|
|
|
|
|
|
|
|
|
ASC 820 requires that assets and liabilities carried at fair value be measured using the following three levels of inputs:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company’s cash equivalents measured at fair value on a recurring basis was $586 as of July 31, 2010. These investments were classified as Level 1 based on quoted prices in active markets for identical assets, to value the cash equivalents. There were no cash equivalents as of July 31, 2011.
The Company’s derivative liabilities measured at fair value on a recurring basis were $596 and $680 as of July 31, 2011 and 2010. The Company has elected to use the income approach to value the derivative liabilities, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates). Mid-market pricing is used as a practical expedient for fair value measurements. Under Accounting Standards Codification (“ASC”) 820, “ Fair Value Measurements and Disclosures, ” the fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty’s creditworthiness when in an asset position and the Company’s creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments.
(3) Equity Offering and Stock-Based Compensation
In March 2010, the Company issued and sold 5,175,000 shares of its common stock for $37.00 per share. After deducting the underwriting discount and other related expenses, the Company received total net proceeds from the sale of its common stock of approximately $179.7 million. The proceeds from the equity offering were used to fund a portion of the purchase price for the Kettle Foods acquisition.
37
Table of Contents
The Company uses a broad based equity incentive plan to help align employee and director incentives with stockholders’ interests. The 2005 Equity Incentive Plan (the “Plan”) was approved in March 2005 and provides for the awarding of options, restricted stock, stock bonuses, restricted stock units, and stock appreciation rights. The Compensation Committee of the Board of Directors administers the Plan. A total of 2,500,000 shares of common stock were initially reserved for issuance under the Plan, and the number of shares available for issuance under the Plan is increased by an amount equal to 2% of the Company’s total outstanding shares as of July 31 each year.
In 2005, the Company began granting shares of restricted stock and stock options under the Plan. The shares of restricted stock vest over three, four or five-year periods. The stock options expire in ten years and vest over three, four or five years. As of July 31, 2011, options to purchase 1,771,253 shares of common stock were outstanding, of which 1,235,297 were exercisable. At July 31, 2011, the Company had 685,187 shares available for future grant under the Plan.
ASC 718, “Compensation — Stock Compensation,” requires the recognition of compensation expense in an amount equal to the fair value of share-based awards. Beginning with the Company’s adoption of ASC 718 in August 2005, the fair value of all stock options granted subsequent to August 1, 2005 is recognized as an expense in the Company’s statement of operations, typically over the related vesting period of the options. The guidance requires use of fair value computed at the date of grant to measure share-based awards. The fair value of restricted stock awards is recognized as stock-based compensation expense over the vesting period, generally three, four or five years from date of grant or award. The Company recorded total stock-based compensation expense of $6,974, $3,231, and $3,901 for the years ended July 31, 2011, 2010, and 2009, respectively.
Stock Option Awards: The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities were estimated based on the Company’s implied historical volatility. The expected term of options granted and forfeiture rates were based on assumptions and historical data to the extent it is available. The risk-free rates were based on U.S. Treasury yields in effect at the time of the grant. For purposes of this valuation model, dividends are based on the historical rate. Assumptions used in the Black-Scholes model are presented below (for the year ended July 31):
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| 2011 |
|
| 2010 |
|
| 2009 |
| ||||||||||
Average expected life, in years |
|
|
|
|
|
|
|
|
| ||||||||||
Expected volatility |
|
| 35.25 | % |
|
| 46.00 | % |
|
| 38.50 | % | |||||||
Risk-free interest rate |
|
| 2.10 | % |
|
| 3.04 | % |
|
| 3.23 | % | |||||||
Dividend rate |
|
| 0.34 | % |
|
| 0.50 | % |
|
| 0.70 | % |
38
Table of Contents
The following table summarizes option activity during the years ended July 31, 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| Number of Shares |
|
| Weighted Average Exercise Price Per Share |
|
| Average Remaining Contractual Life |
|
| Aggregate Intrinsic Value |
| |||||||||||
|
| (In thousands) |
|
|
|
|
| (In years) |
|
| (In thousands) |
| |||||||||||
Outstanding at July 31, 2008 |
|
| 1,510 |
|
|
| 17.74 |
|
|
| 7.5 |
|
| 9,979 |
| ||||||||
Granted |
|
| 128 |
|
|
| 26.06 |
|
|
|
|
|
|
|
|
| |||||||
Exercised |
|
| (294 | ) |
|
| 17.78 |
|
|
|
|
|
|
|
|
| |||||||
Cancelled |
|
| (12 | ) |
|
| 17.24 |
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Outstanding at July 31, 2009 |
|
| 1,332 |
|
|
| 18.54 |
|
|
| 6.9 |
|
| 12,871 |
| ||||||||
Granted |
|
| 191 |
|
|
| 40.79 |
|
|
|
|
|
|
|
|
| |||||||
Exercised |
|
| (45 | ) |
|
| 18.35 |
|
|
|
|
|
|
|
|
| |||||||
Cancelled |
|
| (26 | ) |
|
| 38.64 |
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Outstanding at July 31, 2010 |
|
| 1,452 |
|
|
| 21.11 |
|
|
| 6.4 |
|
| 34,027 |
| ||||||||
Granted |
|
| 442 |
|
|
| 46.59 |
|
|
|
|
|
|
|
|
| |||||||
Exercised |
|
| (97 | ) |
|
| 18.61 |
|
|
|
|
|
|
|
|
| |||||||
Cancelled |
|
| (26 | ) |
|
| 38.61 |
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Outstanding at July 31, 2011 |
|
| 1,771 |
|
|
| 27.34 |
|
|
| 6.3 |
|
| 78,551 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Exercisable at July 31, 2009 |
|
| 1,107 |
|
|
| 17.76 |
|
|
| 6.6 |
|
| 11,562 |
| ||||||||
Exercisable at July 31, 2010 |
|
| 1,218 |
|
|
| 18.32 |
|
|
| 5.9 |
|
| 31,939 |
| ||||||||
Exercisable at July 31, 2011 |
|
| 1,235 |
|
|
| 19.98 |
|
|
| 5.1 |
|
| 63,756 |
|
The weighted average fair value of options granted during 2011, 2010 and 2009 was $16.37, $18.18 and $10.67, respectively. The total intrinsic value of options exercised during 2011, 2010 and 2009 was $3,035, $829 and $2,816, respectively. The total fair value of options vested during 2011, 2010 and 2009 was $2,004, $1,378 and $1,402, respectively.
Changes in the Company’s nonvested options during 2011 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
| Number of Shares |
|
| Weighted Average Grant Date Fair Value |
| ||
|
| (In thousands) |
|
|
|
| ||
Nonvested at July 31, 2010 |
|
| 234 |
|
| 15.28 |
| |
Granted |
|
| 442 |
|
|
| 16.37 |
|
Vested |
|
| (130 | ) |
|
| 15.36 |
|
Cancelled |
|
| (10 | ) |
|
| 18.18 |
|
|
|
|
|
|
|
|
|
|
Nonvested at July 31, 2011 |
|
| 536 |
|
|
| 16.08 |
|
|
|
|
|
|
|
|
|
|
As of July 31, 2011, there was $7.2 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted average period of 2.2 years.
39
Table of Contents
Restricted Stock Awards: Restricted stock activity during 2011, 2010 and 2009 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
| Number of Shares |
|
| Weighted Average Grant Date Fair Value Per Share |
| ||
|
| (In thousands) |
|
|
|
| ||
Outstanding at July 31, 2008 |
|
| 332 |
|
| 17.74 |
| |
Granted |
|
| 194 |
|
|
| 25.80 |
|
Vested |
|
| (111 | ) |
|
| 18.02 |
|
Cancelled |
|
| (79 | ) |
|
| 19.94 |
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2009 |
|
| 336 |
|
|
| 21.79 |
|
Granted |
|
| 193 |
|
|
| 34.29 |
|
Vested |
|
| (76 | ) |
|
| 20.92 |
|
Cancelled |
|
| (45 | ) |
|
| 31.60 |
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2010 |
|
| 408 |
|
|
| 26.78 |
|
Granted |
|
| 115 |
|
|
| 47.04 |
|
Vested |
|
| (115 | ) |
|
| 24.51 |
|
Cancelled |
|
| (15 | ) |
|
| 38.44 |
|
|
|
|
|
|
|
|
|
|
Outstanding at July 31, 2011 |
|
| 393 |
|
|
| 32.96 |
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of restricted stock vested in 2011, 2010 and 2009 was $5,482, $2,192 and $2,771, respectively.
As of July 31, 2011, there was $9.9 million of unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of 2.2 years.
(4) Earnings Per Share
ASC 260-10, “Earnings Per Share” impacted the determination and reporting of earnings per share by requiring the inclusion of restricted stock as participating securities, since they have the right to share in dividends, if declared, equally with common shareholders. Participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (“the two-class method”). Including these shares in the Company’s earnings per share calculation during periods of net income has the effect of diluting both basic and diluted earnings per share.
The computations for basic and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
| Year Ended July 31, |
| |||||||||||||||||
|
| 2011 |
|
| 2010 |
|
| 2009 |
| |||||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
| 50,211 |
|
| 26,211 |
|
| 23,743 |
| |||||||||||
Less: income allocated to participating securities |
|
| (912 | ) |
|
| (520 | ) |
|
| (486 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income attributable to common shareholders — basic |
|
| 49,299 |
|
|
| 25,691 |
|
|
| 23,257 |
| ||||||||
Add: undistributed income attributable to participating securities |
|
| 843 |
|
|
| 505 |
|
|
| 469 |
| ||||||||
Less: undistributed income reallocated to participating securities |
|
| (818 | ) |
|
| (490 | ) |
|
| (460 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income attributable to common shareholders — diluted |
| 49,324 |
|
| 25,706 |
|
| 23,266 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average shares outstanding — basic |
|
| 21,577 |
|
|
| 18,313 |
|
|
| 16,073 |
| ||||||||
Dilutive shares — stock options |
|
| 665 |
|
|
| 530 |
|
|
| 318 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average shares outstanding — diluted |
|
| 22,242 |
|
|
| 18,843 |
|
|
| 16,391 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income per share attributable to common shareholders (1): |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic |
| 2.28 |
|
| 1.40 |
|
| 1.45 |
| |||||||||||
Diluted |
| 2.22 |
|
| 1.36 |
|
| 1.42 |
|
(1) | Computations may reflect rounding adjustments. |
40
Table of Contents
Options to purchase 1,771,253, 1,451,963 and 1,331,737 shares of common stock were outstanding at July 31, 2011, 2010 and 2009, respectively. Options to purchase 87,500, 156,000 and 48,000 shares of common stock were not included in the computation of diluted earnings per share for 2011, 2010 and 2009 because their exercise prices were greater than the average market price of Diamond’s common stock of $54.62, $36.43 and $25.87, and therefore their effect would be antidilutive.
(5) Acquisition and Pending Transaction
Pending Pringles Merger
On April 5, 2011, Diamond entered into a definitive agreement with P&G to merge P&G’s Pringles business into the Company. The value of the proposed transaction at April 5, 2011 was approximately $2.35 billion, consisting of $1.5 billion in Diamond common stock and the assumption of $850 million of Pringles debt. The parties have also agreed to a collar mechanism that would adjust the amount of debt assumed by Diamond based upon Diamond’s stock price during a trading period prior to the commencement of the Exchange Offer. The amount of debt to be assumed by Diamond could increase by up to $200 million or decrease by up to $150 million based on this adjustment mechanism. The purchase price will be represented by approximately 29.1 million shares of Diamond common stock.
The transaction, which is expected to be completed by the end of calendar 2011, is subject to approval by Diamond’s stockholders and satisfaction of customary closing conditions and regulatory approvals. The merger will be accounted for as a purchase business combination and for accounting purposes, Diamond will be treated as the acquiring entity.
Kettle Foods
In March 2010, Diamond completed its acquisition of Kettle Foods for a purchase price of approximately $616 million in cash. The acquisition was accounted for under the purchase method of accounting in accordance with ASC 805, “ Business Combinations .”
The total purchase price has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
|
|
|
|
|
Accounts receivable |
| 29,188 |
| |
Inventory |
|
| 12,526 |
|
Deferred tax asset |
|
| 2,119 |
|
Prepaid expenses and other assets |
|
| 3,617 |
|
Property, plant and equipment |
|
| 66,289 |
|
Brand intangibles |
|
| 235,000 |
|
Customer relationships |
|
| 120,000 |
|
Goodwill |
|
| 321,545 |
|
Assumed liabilities |
|
| (39,211 | ) |
Deferred tax liabilities |
|
| (134,851 | ) |
|
|
|
|
|
Purchase price |
| 616,222 |
| |
|
|
|
|
|
Goodwill associated with the Kettle Foods acquisition is not amortized and is not deductible for tax purposes.
Customer relationships of Kettle Foods will be amortized on a straight-line basis over an estimated life of 20 years. Brand intangibles relate to the “Kettle Foods” brand name, which has an indefinite life, and therefore is not amortizable.
41
Table of Contents
Pro Forma — Financial Information
The following reflects the unaudited pro forma combined results of operations of the Company and Kettle Foods as if the acquisition had taken place at the beginning of the fiscal years presented:
|
|
|
|
|
|
|
|
| |
|
| Year Ended July 31, |
| ||||||
|
| 2010 |
|
| 2009 |
| |||
Net sales |
| 854,579 |
|
| 828,863 |
| |||
Net income |
| 36,474 |
|
| 28,643 |
| |||
Diluted earnings per share |
| 1.63 |
|
| 1.31 |
|
The Company incurred a loss on extinguishment of debt of $1.8 million when Diamond replaced an existing credit facility with a new secured credit facility to fund the Kettle Foods acquisition. Additionally, the Company incurred acquisition and integration costs of $11.5 million during the year ended July 31, 2010. These amounts are included in the above pro forma results of operations for the twelve month periods for fiscal years 2010 and 2009.
The net sales and associated earnings Kettle Foods has contributed to Diamond’s results of operations are not determinable as certain operational and go-to-market activities of Kettle Foods have been integrated into Diamond.
(6) Intangible Assets and Goodwill
The changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
Balance as of July 31, 2009: |
| 76,076 |
| |
Pop Secret purchase price allocation changes |
|
| (833 | ) |
Acquisition of Kettle Foods |
|
| 321,545 |
|
|
|
|
|
|
Balance as of July 31, 2010: |
|
| 396,788 |
|
Translation adjustments |
|
| 10,799 |
|
|
|
|
|
|
Balance as of July 31, 2011: |
| 407,587 |
| |
|
|
|
|
|
Other intangible assets consisted of the following at July 31:
|
|
|
|
|
|
|
|
| |||
|
| 2011 |
|
| 2010 |
| |||||
Brand intangibles (not subject to amortization) |
| 301,148 |
|
| 297,500 |
| |||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
| |||
Customer contracts and related relationships |
|
| 163,786 |
|
|
| 157,300 |
| |||
|
|
|
|
|
|
|
|
| |||
Total other intangible assets, gross |
|
| 464,934 |
|
|
| 454,800 |
| |||
|
|
|
|
|
|
|
|
| |||
Less accumulated amortization on intangible assets: |
|
|
|
|
|
|
|
| |||
Customer contracts and related relationships |
|
| (14,079 | ) |
|
| (5,782 | ) | |||
|
|
|
|
|
|
|
|
| |||
Total other intangible assets, net |
| 450,855 |
|
| 449,018 |
| |||||
|
|
|
|
|
|
|
|
|
During the quarter ended July 31, 2009, the Company recorded a $1.2 million non-cash impairment charge to write off the unamortized balance of the Harmony/Homa trademark and trade names, since we no longer utilize them as primary trade dress and concluded that they have no future value. This amount was included in selling, general and administrative expenses on the Consolidated Statements of Operations.
Identifiable intangible asset amortization expense in each of the five succeeding years will amount to approximately $8,189.
42
Table of Contents
For the years ended July 31, 2011, 2010 and 2009, the amortization period for identifiable intangible assets was approximately 20 years with amortization expense of approximately $7,865 , $3,865 and $1,761 recognized, respectively.
The Company also performed its 2011 annual impairment test of goodwill and non-amortizing intangible assets required by ASC 350 as of June 30, 2011. There were no goodwill impairments during 2011, 2010 and 2009.
(7) Notes Payable and Long-Term Obligations
In February 2010, Diamond entered into an agreement to replace an existing credit facility with a new five-year $600 million secured credit facility (the “Secured Credit Facility”) with a syndicate of lenders. The Company used the borrowings under the Secured Credit Facility to fund a portion of the Kettle Foods acquisition and to fund ongoing operations.
Diamond’s Secured Credit Facility consists of a $235 million revolving credit facility, of which $161 million was outstanding as of July 31, 2011, and a $400 million term loan facility, of which $350 million was outstanding as of July 31, 2011. Scheduled principal payments on the term loan are $40 million for fiscal year 2011 and each of the succeeding three years (due quarterly), and $10 million for each of the first two quarters in fiscal year 2015, with the remaining principal balance and any outstanding loans under the revolving credit facility to be repaid on the fifth anniversary of initial funding. In March 2011, the syndicate of lenders approved Diamond’s request for an increase in its revolving credit facility by $35 million from $200 million, under the same terms. In August 2011, the syndicate of lenders approved Diamond’s request for an increase in its revolving credit facility by $50 million from $235 million to $285 million, under the same terms. Borrowings under the Secured Credit Facility will bear interest, at Diamond’s option, at either the agent’s base rate or the LIBOR rate, plus a margin for LIBOR loans ranging from 2.25% to 3.50%, based on the consolidated leverage ratio which is defined as the ratio of total debt to EBITDA. For the year ended July 31, 2011, the blended interest rate was 3.92% for the Company’s consolidated borrowings. Substantially all of the Company’s tangible and intangible assets are considered collateral security under the Secured Credit Facility.
The Secured Credit Facility also provides for customary affirmative and negative covenants, including a debt to EBITDA ratio and minimum fixed charge coverage ratio. As of July 31, 2011, the Company was in compliance with all applicable financial covenants under the Secured Credit Facility.
On December 20, 2010, Kettle Foods obtained, and Diamond guaranteed, a 10-year fixed rate loan (the “Guaranteed Loan”) in the principal amount of $21 million, of which $20 million was outstanding as of July 31, 2011. The principal and interest payments are due monthly throughout the term of the loan. The Guaranteed Loan will be used to purchase equipment for the Beloit, Wisconsin plant expansion. Borrowed funds have been placed in an interest-bearing escrow account and will be made available as expenditures are approved for reimbursement. As the cash will be used to purchase non-current assets, such restricted cash has been classified as non-current on the balance sheet. The Guaranteed Loan also provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility.
(8) Balance Sheet Items
Inventories consisted of the following at July 31:
|
|
|
|
|
|
|
|
| ||||
|
| 2011 |
|
| 2010 |
| ||||||
Raw materials and supplies |
| 63,775 |
|
| 64,660 |
| ||||||
Work in process |
|
| 20,798 |
|
|
| 23,768 |
| ||||
Finished goods |
|
| 61,002 |
|
|
| 54,977 |
| ||||
|
|
|
|
|
|
|
|
| ||||
Total |
| 145,575 |
|
| 143,405 |
| ||||||
|
|
|
|
|
|
|
|
|
43
Table of Contents
Accounts payable and accrued liabilities consisted of the following at July 31:
|
|
|
|
|
|
|
|
| ||||
|
| 2011 |
|
| 2010 |
| ||||||
Accounts payable |
| 66,245 |
|
| 42,784 |
| ||||||
Payable to growers |
|
| 15,186 |
|
|
| 35,755 |
| ||||
Accrued salaries and benefits |
|
| 17,050 |
|
|
| 17,587 |
| ||||
Accrued promotion |
|
| 29,360 |
|
|
| 22,787 |
| ||||
Accrued taxes |
|
| 8,703 |
|
|
| 1,482 |
| ||||
Other |
|
| 7,516 |
|
|
| 7,526 |
| ||||
|
|
|
|
|
|
|
|
| ||||
Total |
| 144,060 |
|
| 127,921 |
| ||||||
|
|
|
|
|
|
|
|
|
(9) Property, Plant and Equipment
Property, plant and equipment consisted of the following at July 31:
|
|
|
|
|
|
|
|
|
|
| 2011 |
|
| 2010 |
| ||
Land and improvements |
| 10,822 |
|
| 10,012 |
| ||
Buildings and improvements |
|
| 41,303 |
|
|
| 38,231 |
|
Machinery, equipment and software |
|
| 168,974 |
|
|
| 164,926 |
|
Construction in progress |
|
| 26,546 |
|
|
| 7,214 |
|
|
|
|
|
|
|
|
|
|
Total |
|
| 247,645 |
|
|
| 220,383 |
|
Less accumulated depreciation |
|
| (120,238 | ) |
|
| (102,567 | ) |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
| 127,407 |
|
| 117,816 |
| ||
|
|
|
|
|
|
|
|
|
(10) Income Taxes
Income tax expense consisted of the following for the year ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| 2011 |
|
| 2010 |
|
| 2009 |
| ||||
Current |
|
|
|
|
|
|
|
|
|
|
|
| |
Federal |
| 18,477 |
|
| 5,895 |
|
| 14,831 |
| ||||
State |
|
| 2,459 |
|
|
| (665 | ) |
|
| 2,913 |
| |
Foreign |
|
| 5,527 |
|
|
| 1,688 |
|
|
| — |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total current |
|
| 26,463 |
|
|
| 6,918 |
|
|
| 17,744 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deferred |
|
|
|
|
|
|
|
|
|
|
|
| |
Federal |
|
| (3,018 | ) |
|
| 7,324 |
|
|
| (2,830 | ) | |
State |
|
| (237 | ) |
|
| 1,216 |
|
|
| 30 |
| |
Foreign |
|
| (4,279 | ) |
|
| (1,468 | ) |
|
| — |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total deferred |
|
| (7,534 | ) |
|
| 7,072 |
|
|
| (2,800 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total tax provision |
| 18,929 |
|
| 13,990 |
|
| 14,944 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of earnings from continuing operations before income taxes, by tax jurisdiction, are as follows for the fiscal years ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| 2011 |
|
| 2010 |
|
| 2009 |
| ||||||||||
United States |
| 81,924 |
|
| 42,235 |
|
| 38,687 |
| ||||||||||
Foreign |
|
| (12,784 | ) |
|
| (2,034 | ) |
|
| — |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total |
| 69,140 |
|
| 40,201 |
|
| 38,687 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Table of Contents
A reconciliation of the statutory federal income tax rate of 35% to Diamond’s effective income tax rate is as follows for the year ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| 2011 |
|
| 2010 |
|
| 2009 |
| ||||||||||
Federal tax computed at the statutory rate |
| 24,199 |
|
| 14,071 |
|
| 13,540 |
| ||||||||||
Stock-based compensation |
|
| 162 |
|
|
| (16 | ) |
|
|
| ||||||||
Domestic production activities deduction |
|
| (1,685 | ) |
|
| (371 | ) |
|
| (894 | ) | |||||||
State taxes, net of federal impact |
|
| 1,476 |
|
|
| 361 |
|
|
| 1,908 |
| |||||||
Acquisition costs |
|
| — |
|
|
| 2,282 |
|
|
| — |
| |||||||
Foreign income tax rate differential |
|
| 1,276 |
|
|
|
|
|
| — |
| ||||||||
Changes in tax rates |
|
| (2,697 | ) |
|
| (1,271 | ) |
|
| — |
| |||||||
Net benefit of certain interest |
|
| (4,404 | ) |
|
| (1,547 | ) |
|
| — |
| |||||||
Other items, net |
|
| 602 |
|
|
| 474 |
|
|
| 387 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Income tax expense |
| 18,929 |
|
| 13,990 |
|
| 14,944 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable U.S. income taxes have not been provided on approximately $19,803 of undistributed earnings of certain foreign subsidiaries at July 31, 2011, because these earnings are considered indefinitely reinvested. The net federal income tax liability that would arise if these earnings were not indefinitely reinvested is approximately $6,931. Applicable U.S. income taxes are provided on these earnings in the periods in which they are no longer considered indefinitely reinvested.
With respect to the Company’s stock option plans, realized tax benefits in excess of tax benefits recognized in net earnings are recorded as increases to additional paid-in capital. Excess tax benefits of approximately $2,274, $434, and $1,067, were realized and recorded to additional paid-in capital for the fiscal years 2011, 2010 and 2009, respectively.
The tax effect of temporary differences and net operating losses which give rise to deferred tax assets and liabilities consist of the following as of July 31:
|
|
|
|
|
|
|
|
|
|
| 2011 |
|
| 2010 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
Inventories |
| 2,136 |
|
| 940 |
| ||
Receivables |
|
| 253 |
|
|
| 378 |
|
Accruals |
|
| 6,465 |
|
|
| 4,974 |
|
Compensation |
|
| 3,896 |
|
|
| 3,661 |
|
State tax |
|
| 499 |
|
|
| 258 |
|
Other |
|
| — |
|
|
| 380 |
|
|
|
|
|
|
|
|
|
|
Total current |
|
| 13,249 |
|
|
| 10,591 |
|
|
|
|
|
|
|
|
|
|
Non-current: |
|
|
|
|
|
|
|
|
State tax credits |
|
| 5,674 |
|
|
| 5,524 |
|
Retirement benefits |
|
| 3,938 |
|
|
| 4,341 |
|
Employee stock compensation benefits |
|
| 3,345 |
|
|
| 2,025 |
|
Acquisition costs |
|
| 4,848 |
|
|
| — |
|
Other |
|
| 3,578 |
|
|
| 2,706 |
|
|
|
|
|
|
|
|
|
|
Total non-current |
|
| 21,383 |
|
|
| 14,596 |
|
|
|
|
|
|
|
|
|
|
45
Table of Contents
|
|
|
|
|
|
|
|
| |
|
| 2011 |
|
| 2010 |
| |||
Deferred tax liabilities: |
|
|
|
|
|
|
|
| |
Current |
|
| — |
|
|
| 14 |
| |
Non-current: |
|
|
|
|
|
|
|
| |
Property, plant and equipment |
|
| 13,555 |
|
|
| 11,846 |
| |
Intangibles |
|
| 129,301 |
|
|
| 127,884 |
| |
Other |
|
| 6,527 |
|
|
| 6,076 |
| |
|
|
|
|
|
|
|
|
| |
Total non-current |
|
| 149,383 |
|
|
| 145,806 |
| |
|
|
|
|
|
|
|
|
| |
Total deferred taxes, net |
| (114,751 | ) |
| (120,633 | ) | |||
|
|
|
|
|
|
|
|
| |
Composed of: |
|
|
|
|
|
|
|
| |
Net current deferred taxes |
| 13,249 |
|
| 10,577 |
| |||
Net non-current deferred taxes |
|
| (128,000 | ) |
|
| (131,210 | ) | |
|
|
|
|
|
|
|
|
| |
Total deferred taxes, net |
| (114,751 | ) |
| (120,633 | ) | |||
|
|
|
|
|
|
|
|
|
Valuation allowances have been provided to reduce deferred tax assets to amounts considered recoverable. The Company’s valuation allowance was $613 as of July 31, 2011 and 2010.
As of July 31, 2011, the Company had no cumulative federal tax loss carryforwards and $12,657 of cumulative state tax loss carryforwards. State tax loss carryforwards will expire beginning fiscal 2017 through fiscal 2023. The Company also has a foreign net operating loss carryforward of $7,956 with no expiration period.
The state tax credits of $9,801 are California Enterprise Zone Credits, which have no expiration date.
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company had $65, $49 and $40, net of tax benefit, accrued for interest and $64, $12, and $1 accrued for penalties related to unrecognized tax benefits as of July 31, 2011, 2010 and 2009, respectively.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| 2011 |
|
| 2010 |
|
| 2009 |
| ||||||||||
Balance, beginning of year |
| 2,611 |
|
| 313 |
|
| 233 |
| ||||||||||
Tax position related to current year: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Additions |
|
| 7,348 |
|
|
| 2,586 |
|
|
| — |
| |||||||
Tax positions related to prior years: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Additions |
|
| 2,575 |
|
|
| 10 |
|
|
| 227 |
| |||||||
Reductions |
|
| (11 | ) |
|
| — |
|
|
| — |
| |||||||
Settlements |
|
| — |
|
|
| (269 | ) |
|
| (46 | ) | |||||||
Statute of limitations closures |
|
| — |
|
|
| (29 | ) |
|
| (101 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance, end of year |
| 12,523 |
|
| 2,611 |
|
| 313 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the balance of unrecognized tax benefits at July 31, 2011, July 31, 2010 and July 31, 2009, respectively, are potential benefits of $9,759 $2,611, and $313 respectively, that if recognized, would affect the effective tax rate on earnings.
In the twelve months succeeding July 31, 2011, audit resolutions, lapse of statute of limitations, and filing the amended returns could potentially reduce total unrecognized tax benefits by up to $11,132.
The Company files income tax returns in the U.S. federal and various states, local and foreign jurisdictions. The Company’s income tax returns for fiscal year 2006 through fiscal year 2011 remain open to examination.
46
Table of Contents
(11) Commitments and Contingencies
The Company is involved in various legal actions in the ordinary course of business. Such matters are subject to many uncertainties that make their ultimate outcomes unpredictable. However, in the opinion of management, resolution of all legal matters is not expected to have an adverse effect on the Company’s financial condition, operating results or cash flows.
At July 31, 2011, the Company had $2.6 million of letters of credit outstanding related to normal business transactions and commitments of $10.9 million to purchase new equipment.
Operating lease expense for the year ended July 31, 2011, 2010 and 2009 was $4.9 million, $3.2 million and $2.5 million, respectively.
At July 31, 2011, future minimum payments under non-cancelable operating leases (primarily for real property) were as follows:
|
|
|
|
|
2012 |
| 5,963 |
| |
2013 |
|
| 4,248 |
|
2014 |
|
| 2,914 |
|
2015 |
|
| 2,694 |
|
2016 |
|
| 2,117 |
|
Thereafter |
|
| 4,118 |
|
|
|
|
|
|
Total |
| 22,054 |
| |
|
|
|
|
|
(12) Segment Reporting
The Company operates in a single reportable segment: the processing, marketing, and distribution of culinary, in-shell and ingredient/food service nuts and snack products. The geographic presentation of net sales below is based on the destination of the sale. The “Europe” category consists primarily of United Kingdom, Germany, Netherlands, and Spain. The “Other” category consists primarily of Canada, South Korea, Japan, Turkey and China. The geographic distributions of the Company’s net sales were as follows for the year ended July 31:
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| 2011 |
|
| 2010 |
|
| 2009 |
| |||||
United States |
| 676,063 |
|
| 553,977 |
|
| 486,614 |
| |||||
Europe |
|
| 161,365 |
|
|
| 64,909 |
|
|
| 33,743 |
| ||
Other |
|
| 128,494 |
|
|
| 61,276 |
|
|
| 50,583 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total |
| 965,922 |
|
| 680,162 |
|
| 570,940 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
| |||||||||||
Net sales by channel: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2011 |
|
| 2010 |
|
| 2009 |
| |||
Snack |
| 553,165 |
|
| 321,422 |
|
| 188,900 |
| |||
Culinary and Retail In-shell |
|
| 262,906 |
|
|
| 248,994 |
|
|
| 276,226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail |
|
| 816,071 |
|
|
| 570,416 |
|
|
| 465,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International Non-Retail |
|
| 119,017 |
|
|
| 69,206 |
|
|
| 68,890 |
|
North American Ingredient/Food Service and Other |
|
| 30,834 |
|
|
| 40,540 |
|
|
| 36,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Non-Retail |
|
| 149,851 |
|
|
| 109,746 |
|
|
| 105,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Sales |
| 965,922 |
|
| 680,162 |
|
| 570,940 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Table of Contents
The Company does not segregate long-lived assets between geographies for internal reporting. Therefore, asset-related information has not been presented.
(13) Valuation Reserves and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Beginning of Period |
|
| Charged to Expense |
|
| Charged to Reserve |
|
| End of Period |
| |||||
Allowance for Doubtful Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Year ended July 31, 2009 |
| 441 |
|
| 269 |
|
| (210 | ) |
| 500 |
| |||||
Year ended July 31, 2010 |
|
| 500 |
|
|
| 106 |
|
|
| — |
|
|
| 606 |
| |
Year ended July 31, 2011 |
|
| 606 |
|
|
| 55 |
|
|
| (19 | ) |
|
| 642 |
|
(14) Retirement Plans
Diamond provides retiree medical benefits and sponsors two defined benefit pension plans. One of the defined benefit plans is a qualified plan covering all bargaining unit employees and the other is a nonqualified plan for certain salaried employees. The amounts shown for pension benefits are combined amounts for all plans. Diamond uses a July 31 measurement date for its plans. Plan assets are held in trust and primarily include mutual funds and money market accounts. Any employee who joined the Company after January 15, 1999 is not entitled to retiree medical benefits.
In March 2010, the Company determined that the defined benefit pension plan for the bargaining unit employees would be frozen at July 31, 2010 in conjunction with the execution of a new union contract. This amendment was accounted for in accordance with ASC 715, “ Compensation — Retirement Benefits .”
Obligations and funded status of the remaining benefit plans at July 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Pension Benefits |
|
| Other Benefits |
| ||||||||||||||||||||||||
Change in Benefit Obligation |
| 2011 |
|
| 2010 |
|
| 2011 |
|
| 2010 |
| ||||||||||||||||||
Benefit obligation at beginning of year |
| 24,186 |
|
| 20,832 |
|
| 2,204 |
|
| 2,360 |
| ||||||||||||||||||
Service cost |
|
| 79 |
|
|
| 728 |
|
|
| 65 |
|
|
| 63 |
| ||||||||||||||
Interest cost |
|
| 1,258 |
|
|
| 1,198 |
|
|
| 107 |
|
|
| 133 |
| ||||||||||||||
Plan participants’ contributions |
|
| — |
|
|
| — |
|
|
| 27 |
|
|
| 74 |
| ||||||||||||||
Plan amendments |
|
| — |
|
|
| (412 | ) |
|
| — |
|
|
| — |
| ||||||||||||||
Actuarial loss (gain) |
|
| 1,809 |
|
|
| 2,253 |
|
|
| 61 |
|
|
| (267 | ) | ||||||||||||||
Benefits paid |
|
| (464 | ) |
|
| (413 | ) |
|
| (195 | ) |
|
| (159 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Benefit obligation at end of year |
| 26,868 |
|
| 24,186 |
|
| 2,269 |
|
| 2,204 |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Pension Benefits |
|
| Other Benefits |
| ||||||||||||||||||||||||
Change in Plan Assets |
| 2011 |
|
| 2010 |
|
| 2011 |
|
| 2010 |
| ||||||||||||||||||
Fair value of plan assets at beginning of year |
| 13,144 |
|
| 12,120 |
|
| — |
|
| — |
| ||||||||||||||||||
Actual return on plan assets |
|
| 1,771 |
|
|
| 1,320 |
|
|
| — |
|
|
| — |
| ||||||||||||||
Employer contribution |
|
| — |
|
|
| 117 |
|
|
| 168 |
|
|
| 85 |
| ||||||||||||||
Plan participants’ contributions |
|
| — |
|
|
| — |
|
|
| 27 |
|
|
| 74 |
| ||||||||||||||
Benefits paid |
|
| (464 | ) |
|
| (413 | ) |
|
| (195 | ) |
|
| (159 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Fair value of plan assets at end of year |
| 14,451 |
|
| 13,144 |
|
| — |
|
| — |
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Funded status at end of year |
| (12,417 | ) |
| (11,042 | ) |
| (2,269 | ) |
| (2,204 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Table of Contents
Assets (liabilities) recognized in the consolidated balance sheets at July 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
| Pension Benefits |
|
| Other Benefits |
| ||||||||||||||||||||||||
|
| 2011 |
|
| 2010 |
|
| 2011 |
|
| 2010 |
| ||||||||||||||||||
Current liabilities |
| — |
|
| — |
|
| (114 | ) |
| (117 | ) | ||||||||||||||||||
Noncurrent liabilities |
|
| (12,417 | ) |
|
| (11,042 | ) |
|
| (2,155 | ) |
|
| (2,087 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Total |
| (12,417 | ) |
| (11,042 | ) |
| (2,269 | ) |
| (2,204 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income (pre-tax) as of July 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Pension Benefits |
|
| Other Benefits |
| |||||||||||||||||||||||
|
| 2011 |
|
| 2010 |
|
| 2011 |
|
| 2010 |
| |||||||||||||||||
Net loss (gain) |
| 9,545 |
|
| 9,120 |
|
| (5,086 | ) |
| (5,942 | ) | |||||||||||||||||
Prior service cost |
|
| 87 |
|
|
| 102 |
|
|
| — |
|
|
| — |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total |
| 9,632 |
|
| 9,222 |
|
| (5,086 | ) |
| (5,942 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for all defined benefit pension plans was $24,400 and $21,772 at July 31, 2011 and 2010.
Information for pension plans with an accumulated benefit obligation in excess of plan assets as of July 31 was as follows:
|
|
|
|
|
|
|
|
| ||||
|
| 2011 |
|
| 2010 |
| ||||||
Projected benefit obligation |
| 26,868 |
|
| 24,186 |
| ||||||
Accumulated benefit obligation |
|
| 24,400 |
|
|
| 21,772 |
| ||||
Fair value of plan assets |
|
| 14,451 |
|
|
| 13,144 |
|
Components of net periodic benefit cost for the year ended July 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| Pension Benefits |
|
| Other Benefits |
| ||||||||||||||||||||||||||||||||||||||
|
| 2011 |
|
| 2010 |
|
| 2009 |
|
| 2011 |
|
| 2010 |
|
| 2009 |
| ||||||||||||||||||||||||||
Net Periodic Benefit Cost / (Income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Service cost |
| 79 |
|
| 728 |
|
| 475 |
|
| 65 |
|
| 63 |
|
| 103 |
| ||||||||||||||||||||||||||
Interest cost |
|
| 1,258 |
|
|
| 1,198 |
|
|
| 1,062 |
|
|
| 107 |
|
|
| 133 |
|
|
| 284 |
| ||||||||||||||||||||
Expected return on plan assets |
|
| (1,031 | ) |
|
| (952 | ) |
|
| (1,059 | ) |
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
Amortization of prior service cost |
|
| 16 |
|
|
| 26 |
|
|
| 26 |
|
|
| — |
|
|
| — |
|
|
| — |
| ||||||||||||||||||||
Amortization of net (gain) loss |
|
| 643 |
|
|
| 517 |
|
|
| 37 |
|
|
| (795 | ) |
|
| (824 | ) |
|
| (539 | ) | ||||||||||||||||||||
Curtailment cost |
|
| — |
|
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Net periodic benefit cost / (income) |
| 965 |
|
| 1,520 |
|
| 541 |
|
| (623 | ) |
| (628 | ) |
| (152 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $792 and $16, respectively. The estimated net gain and prior service cost for the other defined benefit postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $771 and nil, respectively.
For calculation of retiree medical benefit cost, prior service cost is amortized on a straight-line basis over the average remaining years of service to full eligibility for benefits of the active plan participants. For calculation of net periodic pension cost, prior service cost is amortized on a straight-line basis over the average remaining years of service of the active plan participants.
49
Table of Contents
Assumptions
Weighted-average assumptions used to determine benefit obligations at July 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| Pension Benefits |
|
| Other Benefits |
| ||||||||||||||||||||||||||||||||||||||
|
| 2011 |
|
| 2010 |
|
| 2009 |
|
| 2011 |
|
| 2010 |
|
| 2009 |
| ||||||||||||||||||||||||||
Discount rate |
|
| 5.00 | % |
|
| 5.28 | % |
|
| 5.80 | % |
|
| 4.70 | % |
|
| 5.00 | % |
|
| 5.80 | % | ||||||||||||||||||||
Rate of compensation increase |
|
| 5.50 |
|
|
| 5.50 |
|
|
| 5.50 |
|
|
| N/A |
|
|
| N/A |
|
|
| N/A |
|
Weighted-average assumptions used to determine net periodic benefit cost for the year ended July 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| Pension Benefits |
|
| Other Benefits |
| ||||||||||||||||||||||||||||||||||||||
|
| 2011 |
|
| 2010 |
|
| 2009 |
|
| 2011 |
|
| 2010 |
|
| 2009 |
| ||||||||||||||||||||||||||
Discount rate |
|
| 5.28 | % |
|
| 5.80 | % |
|
| 7.00 | % |
|
| 5.00 | % |
|
| 5.80 | % |
|
| 7.00 | % | ||||||||||||||||||||
Expected long-term return on plan assets |
|
| 8.00 |
|
|
| 8.00 |
|
|
| 8.00 |
|
|
| N/A |
|
|
| N/A |
|
|
| N/A |
| ||||||||||||||||||||
Rate of compensation increase |
|
| 5.50 |
|
|
| 5.50 |
|
|
| 5.50 |
|
|
| N/A |
|
|
| N/A |
|
|
| N/A |
|
The expected long-term rate of return on plan assets is based on the established asset allocation.
Assumed trend rates for medical plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2011 |
|
| 2010 |
|
| 2009 |
| |||
Health care cost trend rate assumed for next year |
|
| 9.0 | % |
|
| 9.5 | % |
|
| 10.0 | % |
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 |
|
| 2028 |
|
|
| 2020 |
|
|
| 2020 |
|
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
| ||||
|
| One Percentage Point Increase |
|
| One Percentage Point Decrease |
| ||||||
Effect on total of service and interest cost |
| 24 |
|
| (20 | ) | ||||||
Effect on post-retirement benefit obligation |
|
| 250 |
|
|
| (215 | ) |
Plan Assets
Effective July 31, 2010, Diamond adopted the provisions of ASU No. 2010-06 on employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The fair values of the Company’s pension plan assets by asset category were as follows (see Note 2 for description of levels):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Fair Value Measurements at July 31, 2011 |
| ||||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
Asset Category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents |
| 419 |
|
| — |
|
| 419 |
|
| — |
| |||||
Mutual funds — equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Domestic |
|
| 5,681 |
|
|
| 5,681 |
|
|
| — |
|
|
| — |
| |
International |
|
| 2,180 |
|
|
| 2,180 |
|
|
| — |
|
|
| — |
| |
Mutual funds — debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Government |
|
| 1,909 |
|
|
| 1,909 |
|
|
| — |
|
|
| — |
| |
Corporate |
|
| 3,547 |
|
|
| 3,547 |
|
|
| — |
|
|
| — |
| |
Other |
|
| 715 |
|
|
| 715 |
|
|
| — |
|
|
| — |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total |
| $ | 14,451 |
|
| $ | 14,032 |
|
| $ | 419 |
|
| $ | — |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Fair Value Measurements at July 31, 2010 |
| ||||||||||||||
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
Asset Category: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents |
| 178 |
|
| — |
|
| 178 |
|
| — |
| |||||
Mutual funds — equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Domestic |
|
| 5,445 |
|
|
| — |
|
|
| 5,445 |
|
|
| — |
| |
International |
|
| 1,456 |
|
|
| — |
|
|
| 1,456 |
|
|
| — |
| |
Pooled Funds |
|
| 6,065 |
|
|
| — |
|
|
| 6,065 |
|
|
| — |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total |
| $ | 13,144 |
|
| $ | — |
|
| $ | 13,144 |
|
| $ | — |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension obligations and expenses are most sensitive to the expected return on pension plan assets and discount rate assumptions. Other post retirement benefit obligations and expenses are most sensitive to discount rate assumptions and health care cost trend rate. Diamond determines the expected return on pension plan assets based on an expectation of the average annual returns over an extended period of time. This expectation is based, in part, on the actual returns achieved by the Company’s pension plan in prior periods. The Company also considers the weighted average historical rates of return on securities with similar characteristics to those in which the Company’s pension assets are invested.
The investment objectives for the Diamond plans are to maximize total returns within reasonable and prudent levels of risk. The plan asset allocation is a key element in achieving the expected investment returns on plan assets. The current asset allocation strategy targets an allocation of 60% for equity securities and 40% for debt securities with adequate liquidity to meet expected cash flow needs. Actual asset allocation may fluctuate within acceptable ranges due to market value variability. If fluctuations cause an asset class to fall outside its strategic asset allocation range, the portfolio will be rebalanced as appropriate.
Cash Flows
Estimated future benefit payments, which reflect expected future service, as appropriate, expected to be paid are as follows:
|
|
|
|
|
|
|
|
| |
|
| Pension Benefits |
|
| Other Benefits |
| |||
2012 |
| 549 |
|
| 114 |
| |||
2013 |
|
| 4,515 |
|
|
| 126 |
| |
2014 |
|
| 648 |
|
|
| 155 |
| |
2015 |
|
| 738 |
|
|
| 162 |
| |
2016 |
|
| 753 |
|
|
| 159 |
| |
2017 — 2021 |
|
| 4,481 |
|
|
| 826 |
|
51
Table of Contents
Defined Contribution Plan
The Company also recognized defined contribution plan expenses of $1,151, $720 and $524 for the years ended July 31, 2011, 2010 and 2009, respectively.
(15) Quarterly Financial Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| First Quarter |
|
| Second Quarter |
|
| Third Quarter |
|
| Fourth Quarter |
| ||||
Year ended July 31, 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| 252,566 |
|
| 257,592 |
|
| 222,991 |
|
| 232,773 |
| ||||
Gross profit (1) |
|
| 63,596 |
|
|
| 70,856 |
|
|
| 59,588 |
|
|
| 57,107 |
|
Operating expenses (2) |
|
| 36,071 |
|
|
| 34,916 |
|
|
| 42,035 |
|
|
| 45,145 |
|
Net income |
|
| 14,214 |
|
|
| 19,720 |
|
|
| 7,733 |
|
|
| 8,544 |
|
Basic earnings per share |
|
| 0.65 |
|
|
| 0.90 |
|
|
| 0.35 |
|
|
| 0.39 |
|
Basic shares (in thousands) |
|
| 21,489 |
|
|
| 21,565 |
|
|
| 21,604 |
|
|
| 21,652 |
|
Diluted earnings per share |
|
| 0.64 |
|
|
| 0.87 |
|
|
| 0.34 |
|
|
| 0.37 |
|
Diluted shares (in thousands) |
|
| 21,947 |
|
|
| 22,221 |
|
|
| 22,341 |
|
|
| 22,577 |
|
Year ended July 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| 180,641 |
|
| 184,169 |
|
| 138,734 |
|
| 176,618 |
| ||||
Gross profit (3) |
|
| 45,491 |
|
|
| 40,578 |
|
|
| 31,093 |
|
|
| 43,839 |
|
Operating expenses (4) |
|
| 19,789 |
|
|
| 27,488 |
|
|
| 32,991 |
|
|
| 28,503 |
|
Net income (loss) |
|
| 14,930 |
|
|
| 8,814 |
|
|
| (4,273 | ) |
|
| 6,740 |
|
Basic earnings (loss) per share |
|
| 0.90 |
|
|
| 0.53 |
|
|
| (0.22 | ) |
|
| 0.31 |
|
Basic shares (in thousands) |
|
| 16,269 |
|
|
| 16,280 |
|
|
| 19,313 |
|
|
| 21,503 |
|
Diluted earnings (loss) per share |
|
| 0.88 |
|
|
| 0.52 |
|
|
| (0.22 | ) |
|
| 0.30 |
|
Diluted shares (in thousands) |
|
| 16,685 |
|
|
| 16,764 |
|
|
| 19,313 |
|
|
| 22,097 |
|
(1) | Diamond revised its estimate for expected commodity costs to reflect change in market conditions. Accordingly, cost of sales resulted in a pre-tax decrease of approximately $1.5 million and a pre-tax increase of approximately $1.2 million, in the quarters ended April 30, 2011 and January 31, 2011, respectively, reflecting the impact on sales recognized during the previous quarters of fiscal year 2011. There was no change in the quarter ended July 31, 2011. |
(2) | Includes acquisition and integration related expenses of $0.5 million, $0.9 million, $5.9 million and $9.5 million for the quarters ended October 30, 2010, January 31, 2011, April 30, 2011 and July 31, 2011, respectively. |
(3) | Diamond revised its estimate for expected commodity costs to reflect change in market conditions. Accordingly, cost of sales resulted in a pre-tax decrease of approximately $1.1 million and $2.6 million in the quarters ended April 30, 2010 and January 31, 2010, respectively, reflecting the impact on sales recognized during the previous quarters of fiscal year 2010. There was no change in the quarter ended July 31, 2010. |
(4) | Includes acquisition and integration related expenses of $10.2 million and $1.3 million for the quarters ended April 30, 2010 and July 31, 2010, respectively. |
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
We have established and currently maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that any material information relating to the Company is recorded, processed, summarized and reported to our principal officers to allow timely decisions regarding required disclosures.
We acquired Kettle Foods on March 31, 2010, and as a result, we updated our internal control over financial reporting (as defined in Rule 13a-15(f) under the 1934 Act) during our fiscal year ended July 31, 2011, to include specific controls for Kettle Foods. Otherwise, there were no changes in our internal control over financial reporting during the year ended July 31, 2011 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In conjunction with the close of each fiscal quarter, we conduct a review and evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial and Administrative Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our Chief Executive Officer and Chief Financial and Administrative Officer, based upon their evaluation as of July 31, 2011, the end of the fiscal quarter covered in this report, concluded that our disclosure controls and procedures were effective.
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