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Diamond Foods Inc. Reports Operating Results (10-K)

December 11, 2012 | About:
10qk

10qk

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Diamond Foods Inc. (DMND) filed Annual Report for the period ended 2012-07-31.

Diamond Foods, Inc. has a market cap of $314.9 million; its shares were traded at around $13.66 with a P/E ratio of 14 and P/S ratio of 0.3. The dividend yield of Diamond Foods, Inc. stocks is 0.6%. Diamond Foods, Inc. had an annual average earning growth of 43.7% over the past 5 years.

Highlight of Business Operations:

Sales to Wal-Mart Stores, Inc. (which includes sales to both Sams Club and Wal-Mart), accounted for approximately 18%, 15% and 17% of our net sales for fiscal 2012, 2011 and 2010, respectively. Sales to Costco Wholesale Corporation accounted for 12%, 11% and 12% of our net sales for fiscal 2012, 2011 and 2010, respectively. No other single customer accounted for more than 10% of our net sales.

We depend on a few significant customers for a large proportion of our net sales. This concentration has become more pronounced with the trend toward consolidation in the retail grocery store industry. Sales to our largest customer, Wal-Mart Stores, Inc. (which includes sales to both Sams Club and Wal-Mart), represented approximately 18%, 15%, and 17% of our total net sales in fiscal 2012, 2011, and 2010 respectively. Sales to our second largest customer, Costco Wholesale Corporation, represented approximately 12%, 11%, and 12% of our total net sales in fiscal 2012, 2011, and 2010. The success of our business is dependent on our ability to successfully manage relationships with these customers, or any other significant customer. Further, there is a continuing trend towards retail trade consolidation, which can create significant cost and margin pressure on our business. The loss of any major customers, or any other significant customer, or a material decrease in their purchases from us, could result in decreased sales and adversely impact our net income.

A significant portion of our assets are goodwill and other intangible assets, the majority of which are not amortized but are reviewed at least annually for impairment. If the carrying value of these assets exceeds the current fair value, the asset is considered impaired and is reduced to fair value resulting in a non-cash charge to earnings. Events and conditions that could result in impairment include a sustained drop in the market price of our common stock, increased competition or loss of market share, product innovation or obsolescence, or product claims that result in a significant loss of sales or profitability over the product life. For example, our stock price dropped from $71.48 on August 1, 2011 to $14.24 on November 30, 2012. To the extent our market capitalization, increased by a reasonable control premium, results in a fair value of our common stock that is below our net book value, or if other indicators of potential impairment are present, then we will be required to take further steps to determine if an impairment of goodwill has occurred and to calculate an impairment loss. At July 31, 2011, the carrying value of goodwill and other intangible assets totaled approximately $860.6 million, compared to total assets of approximately $1,322.9 million and total shareholders equity of approximately $420.5 million. At July 31, 2012, the carrying value of goodwill and other intangible assets totaled approximately $840.2 million, compared to total assets of approximately $1,299.3 million and total shareholders equity of approximately $324.8 million.

$130.6 million and $97.5 million, and 13.3% and 10.1% of net sales, for fiscal 2012 and fiscal 2011, respectively. The increase was primarily due to the costs incurred in fiscal 2012 as a result of the Audit Committee investigation and related lawsuits of $17.4 million, retention and severance plans of $2.6 million, and consulting services of $9.6 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.

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