Diamond Foods, Inc. has a market cap of $396.5 million; its shares were traded at around $19.86 with and P/S ratio of 0.4. Diamond Foods, Inc. had an annual average earning growth of 43.7% over the past 5 years.
Highlight of Business Operations:In February 2010, Diamond entered into an agreement with a syndicate of lenders to replace its prior credit facility with a five-year $600 million secured credit facility (the Secured Credit Facility). As of October 31, 2011, the Secured Credit Facility consisted of a $285 million revolving credit facility, of which $217 million was outstanding, and a $400 million term loan facility, of which $340 million was outstanding. Since the inception of the Secured Credit Facility, the syndicate of lenders has approved two requests to increase the revolving credit facility of the Secured Credit Facility: in March 2011, the revolving credit facility was increased from $200 million to $235 million to fund increased working capital requirements, and in August 2011, the revolving credit facility was increased from $235 million to $285 million to accommodate spending related to the proposed Pringles merger and to increase general liquidity. In both cases, the terms of the revolving credit facility were not changed. On the term loan, scheduled principal payments were $40 million for fiscal 2012 and each of the succeeding two years (due quarterly), and $10 million for each of the first two quarters in fiscal 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. As of October 31, 2011, borrowings under the Secured Credit Facility initially bear interest, at Diamonds option, at either a fluctuating rate per annum (the Base Rate) plus a margin of 2.50%, 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 earnings before interest, taxes, depreciation and amortization (EBITDA). For the three months ended October 31, 2011, the blended interest rate was 3.9% for the Companys consolidated borrowings. Substantially all of the Companys tangible and intangible assets are considered collateral security under the Secured Credit Facility.
Selling, general and administrative. Selling, general and administrative expenses consist principally of salaries and benefits for sales and administrative personnel, brokerage, professional services, travel, non-manufacturing depreciation and facility costs. Selling, general and administrative expenses were $29.5 million and $23.3 million, and 10.2% and 9.2% as a percentage of net sales, for the three months ended October 31, 2011 and 2010, respectively. The increase in expense was primarily due to increased variable selling expenses related to higher sales and $1.8 million in legal settlement accruals related to walnut labeling claims.
Income taxes. The effective tax rate for the three months ended October 31, 2011 and 2010 was approximately 381.3% and 32.0%, respectively. The higher effective tax rate for the three months ended October 31, 2011 was related to three amounts comprising the tax benefit of $14.6 million. A discrete tax benefit of $5.5 million resulting, primarily, from the conclusion of a tax ruling with the United Kingdom tax authorities and, consequently, the reversal of our unrecognized tax benefit related to this event. Second, during the quarter, we incurred acquisition and integration related expenses resulting in a tax benefit of $6.1 million. Third, the forecasted annual tax rate applied to profit before tax and acquisition and integration related expenses, resulting in a tax benefit of $3.0 million.
The Oaktree agreements provide that if we secure a specified minimum supply of walnuts from the 2012 crop and achieve profitability targets for our nut businesses for the six-month period ending January 31, 2013, all of the warrants will be cancelled and Oaktree may exchange $75 million of the senior notes for convertible preferred stock of Diamond (the Special Redemption). The convertible preferred stock would have an initial conversion price of $20.75, which represents a 3.5% discount to the closing price of Diamond common stock on April 25, 2012, the date that we entered into our commitment with Oaktree. The convertible preferred stock would pay a 10% dividend that would be paid in-kind for the first two years. Diamond does not currently anticipate that the Special Redemption will occur.
Working capital and stockholders equity were $91.1 million and $425.3 million at October 31, 2011, compared to $52.4 million and $420.5 million at July 31, 2011, and $78.0 million and $392.1 million at October 31, 2010. The increase in working capital was due to an increase in receivables attributable to increased sales and an increase in inventory due to the walnut harvest season, which were offset by an increase in accounts payable and accrued liabilities, partially attributable to acquisition expenses.
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