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

December 17, 2012 | About:
10qk

10qk

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Diamond Foods Inc. (DMND) filed Quarterly Report for the period ended 2012-10-31.

Diamond Foods, Inc. has a market cap of $327.6 million; its shares were traded at around $13.9 with a P/E ratio of 28.5 and P/S ratio of 0.3. Diamond Foods, Inc. had an annual average earning growth of 43.7% over the past 5 years.

Highlight of Business Operations:

The Oaktree agreements provide that if Diamond secures a specified minimum supply of walnuts from the 2012 crop and achieves profitability targets for its 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 the Company entered into its commitment with Oaktree. The convertible preferred stock would pay a 10% dividend that would be paid in-kind for the first two years. The warrant is accounted for as a derivative liability with gains or losses included in loss on warrant liability in the Companys statements of operations. Diamond does not currently anticipate that the Special Redemption will occur.

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 $38.2 million and $29.5 million, and 14.8% and 10.2% as a percentage of net sales, for the three months ended October 31, 2012 and 2011, respectively. The increase in expense was primarily due to costs incurred as a result of the Audit Committee investigation and related lawsuits of $2.0 million and consulting services and audit fees of $9.7 million.

Interest expense, net. Net interest expense was $13.9 million and $5.8 million, and 5.4% and 2.0% as a percentage of net sales, for the three months ended October 31, 2012 and 2011, respectively. The increase was primarily due to higher interest rates and the new Oaktree debt. Additionally, the Third Amendment, as described below, increased the interest rate on the Secured Credit Agreement. Please refer to Liquidity and Capital Resources.

The effective tax rate for the three months ended October 31, 2011 was higher than the statutory rate of 35%. The higher effective tax rate was related to a tax benefit of $14.6 million. The $14.6 million benefit was comprised of three items: 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 three months ended October 31, 2011, 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.

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