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Press release from GlobeNewswire (a Nasdaq OMX company)

Diamond Foods Reports Fourth Quarter and Fiscal Year 2013 Financial Results

Monday, September 30, 2013

Diamond Foods Reports Fourth Quarter and Fiscal Year 2013 Financial Results

13:01 EDT Monday, September 30, 2013

SAN FRANCISCO, Sept. 30, 2013 (GLOBE NEWSWIRE) -- Diamond Foods, Inc. (Nasdaq:DMND) ("Diamond") today reported financial results for its fiscal 2013 fourth quarter and year ended July 31, 2013.

Fourth Quarter Fiscal 2013 Highlights

  • Net sales decreased 10.8% to $199.8 million
  • Snacks sales increased 3.3% to $117.1 million and Nuts sales decreased 25.2% to $82.7 million
  • Gross margin was 26.6% compared to 18.9%
  • Net loss was $147.1 million and non-GAAP net income was $2.3 million*
  • Adjusted EBITDA increased 12.5% to $24.6 million

Fiscal 2013 Highlights

  • Net sales decreased 12.0% to $864.0 million
  • Snacks sales increased 3.0% to $438.0 million and Nuts sales decreased 23.4% to $426.1 million
  • Gross margin was 23.8% compared to 18.3%
  • Net loss was $163.2 million and non-GAAP net income was $9.7 million*
  • Adjusted EBITDA increased 28.2% to $101.7 million

(All comparisons above are to the fourth quarter and fiscal year 2012/* non-GAAP financial measures are reconciled in the table below)

"Our cost savings and net price realization strategies helped us generate improved results for the fourth quarter and fiscal year," said Brian Driscoll, President and CEO. "We remain intently focused on these productivity initiatives to help support our future brand innovation and to address potential commodity headwinds in fiscal 2014. In addition, we believe the proposed settlement of the securities class action lawsuit is an important first step in our ability to normalize our capital structure."

Fourth Quarter Fiscal 2013

Net sales decreased 10.8% to $199.8 million compared to $224.0 million in the prior year period and gross profit as a percent of net sales was 26.6% compared to 18.9% last year.

Net loss was $147.1 million, a loss of $6.71 per share on a fully diluted basis. During the quarter, Diamond incurred $96.1 million in expenses related to the settlement of the securities class action lawsuit, a $36.0 million non-cash impairment to Kettle U.S. other intangible assets, a $20.6 million charge related to a change in the fair value of the Oaktree warrant liability and $6.6 million for consulting and legal expenses. Excluding these charges, non-GAAP net income for the fourth quarter was $2.3 million and non-GAAP fully diluted earnings per share was $0.09. Adjusted EBITDA was $24.6 million compared to $21.8 million in the prior year period, an increase of 12.5%. EBITDA is a non-GAAP financial measure. Please refer to the tables in this press release for a reconciliation of all non-GAAP financial measures.

Fiscal 2013

Net sales decreased 12.0% to $864.0 million compared to $981.4 million in the prior fiscal year and gross profit as a percent of net sales was 23.8% compared to 18.3% last year.

Net loss was $163.2 million and fully diluted loss per share was $7.48. During the fiscal year, Diamond incurred $96.1 million in expenses to settle the securities class action lawsuit and $35.4 million of adjustments to SG&A expenses primarily including restatement and related legal costs. The Company also incurred $37.6 million in non-cash impairment charges and an $11.3 million charge as a result of the change in the fair value of the Oaktree warrant liability. Excluding these charges, non-GAAP net income was $9.7 million and non-GAAP fully diluted earnings per share was $0.40. Adjusted EBITDA was $101.7 million compared to $79.4 million in the prior fiscal year, an increase of 28.2%.

As of July 31, 2013, net debt outstanding was $585.1 million, including the Oaktree debt at its carrying value. Cash and availability on Diamond's bank revolving line of credit on July 31, 2013 was approximately $74.5 million.

In fiscal 2013, the Company remediated the material weaknesses first identified in Form 10-K/A filed on November 14, 2012. The Company currently has outstanding material weaknesses as to complex and non-routine transactions and IT system access rights for journal entries. Additional information regarding the Company's internal controls will be provided in its Annual Report on Form 10-K for fiscal 2013.

Segment Review

The Company has two reportable segments: Snacks and Nuts. The Snacks segment includes products sold under the Kettle U.S., Kettle U.K. and Pop Secret brands. The Nuts segment includes products sold under the Diamond of California and Emerald brands.

Snacks Segment: Net sales during the fourth quarter increased 3.3% to $117.1 million compared to prior year period. Gross profit during the fourth quarter was $42.3 million, 36.1% of net sales, compared to $36.6 million, 32.3% of net sales, in the prior year period.

Net sales for fiscal 2013 increased 3.0% to $438.0 million compared to the prior fiscal year. Gross profit for fiscal 2013 was $152.1 million, 34.7% of net sales, compared to $128.1 million, 30.1% of net sales, for the prior fiscal year.

Nuts Segment: Net sales during the fourth quarter decreased 25.2% to $82.7 million compared to the prior year period. Gross profit during the fourth quarter was $10.7 million, 13.0% of net sales, compared to $5.7 million, 5.1% of net sales, in the prior year period.

Net sales for fiscal 2013 decreased 23.4% to $426.1 million compared to the prior fiscal year. Gross profit for fiscal 2013 was $53.4 million, 12.5% of net sales, compared to $51.6 million, 9.3% of net sales, for the prior fiscal year.

Outlook

In the first quarter, the Company expects to face significant sales and contribution headwinds including costs associated with the Emerald re-launch and lower walnut supply. Despite expected increases in tree nut costs, fiscal 2014 is expected to be a year of earnings improvement as additional benefits from the execution of the multi-year turnaround strategy are realized.

Conference Call

The Company will host a conference call with members of the executive management team to discuss these results with additional comments and details. The conference call is scheduled to begin today at 4:30 p.m. ET. To participate on the live call listeners in North America may dial (888) 455-2263 and international listeners may dial (719) 325-2464.

In addition, the call will be broadcast live over the Internet hosted at the "Investor Relations" section of the Company's website at http://www.diamondfoods.com and will be archived online through October 14, 2013. A telephonic playback will be available from 7:30 p.m. ET, September 30, 2013, through October 14, 2013. North America listeners may dial (877) 870-5176 and international listeners may dial (858) 384-5517; the passcode is 9269722.

About Diamond Foods

Diamond Foods is an innovative packaged food company focused on building and energizing brands including Kettle® Chips, Emerald® snack nuts, Pop Secret® popcorn, and Diamond of California® nuts. Diamond's products are distributed in a wide range of stores where snacks and culinary nuts are sold. For more information, visit the Company's corporate web site: www.diamondfoods.com.

Note Regarding Forward-looking Statements

This press release includes forward-looking statements, including statements about our financial filings and results, future brand innovation, commodity headwinds, prospects for obtaining required approvals for the proposed class action lawsuit settlement, normalizing our capital structure, future sales, margin and earnings and execution of our turnaround strategy. These forward-looking statements are based on our assumptions, expectations and projections about future events only as of the date of this press release, and we make such forward-looking statements pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Many of our forward-looking statements include discussions of trends and anticipated developments under the "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" sections of the periodic reports that we file with the SEC. We use the words "anticipate," "believe," "estimate," "expect," "intend," "plan," "seek," "may" and other similar expressions to identify forward-looking statements that discuss our future expectations, contain projections of our results of operations or financial condition or state other "forward-looking" information. You also should carefully consider other cautionary statements elsewhere in this press release and in other documents we file from time to time with the SEC. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release. Actual results may differ materially from what we currently expect because of many risks and uncertainties, such as: failure to obtain necessary approvals for the securities class action litigation settlement, risks relating to our leverage and its effect on our ability to respond to changes in our business, markets and industry; increase in the cost of our debt; ability to raise additional capital and possible dilutive impact of raising such capital; risks relating to litigation and regulatory proceedings; uncertainties relating to relations with growers; availability and cost of walnuts and other raw materials; increasing competition and possible loss of key customers; and general economic and capital markets conditions.

Financial Summary

Summarized Statement of Operations:

  Three months ended Twelve months ended
  July 31, July 31,
(in thousands, except per share amounts) 2013 2012 2013 2012
Net sales $ 199,801 $ 223,989 $ 864,012  $ 981,418
Cost of sales 146,743  181,725 658,489 801,697
Gross profit 53,058 42,264 205,523  179,721
Operating expenses:        
Selling, general and administrative 129,152 33,580 233,373 130,599
Advertising 12,166 6,379 41,528 37,933
Acquisition and integration related expenses -- 693 -- 41,334
(Gain) loss on warrant liability 20,562 10,360 11,326 10,360
Asset Impairment 36,000 10,132 37,560 10,132
Total operating expenses 197,880 61,144 323,787 230,358
Income (loss) from operations (144,822) (18,800) (118,264) (50, 637)
Interest expense, net 15,240  14,043 57,925  33,976
Income (loss) before income taxes (160,062) (32,923) (176,189) (84,613)
Income taxes (benefit) (13,000) 13 (12,957) 1,723
Net (loss) $ (147,062) $ (32,936) $ (163,232) $ (86,336)
Earnings (loss) per share (EPS):        
Basic $ (6.71) $ (1.52) $ (7.48) $ (3.98)
Diluted $ (6.71) $ (1.52) $ (7.48) $ (3.98)
Shares used to compute EPS:        
Basic 21,905 21,733 21,813 21,692 
Diluted 21,905 21,733 21,813 21,692 

Segment Information:

  Three months ended % Change Twelve months ended % Change
  July, 31 From July 31, From
(in thousands) 2013 2012 2012 to 2013 2013 2012 2012 to 2013
Net sales            
Snacks $ 117,090 $ 113,371 3.3% $ 437,955 $ 425,175 3.0%
Nuts 82,711 110,618 -25.2% 426,057 556,243 -23.4%
Total 199,801 223,989 -10.8% 864,012 981,418 -12.0%
Gross profit            
Snacks 42,321 36,569 15.7% 152,133 128,122 18.7%
Nuts 10,737 5,695 88.5% 53,390 51,599 3.5%
Total $ 53,058 $ 42,264 25.5% $ 205,523 $ 179,721 14.4%

Summarized Balance Sheet Data:

  July 31,
(in thousands) 2013 2012
Total current assets $ 231,105 $ 278,196
Restricted cash -- 6,386
Property, plant and equipment, net 132,225 146,944
Goodwill 401,125 403,158
Other intangible assets, net 388,084 437,021
Other long-term assets 19,776 26,537
Total assets $ 1,172,315 $ 1,299,349
     
Total current liabilities $ 290,645 $ 216,609
Long-term obligations 585,077 599,598
Deferred income taxes 106,767 127,024
Other liabilities 23,106 31,324
Total stockholders' equity 166,720 324,794
Total liabilities and stockholders' equity $ 1,172,315 $ 1,299,349

Non-GAAP Financial Information

Reconciliation of Income (Loss) Before Income Taxes to Non-GAAP EPS:

  Three months ended Twelve months ended
  July 31, July 31,
(in thousands, except per share amounts) 2013 2012 2013 2012
GAAP income (loss) before income taxes $ (160,062) $ (32,923) $ (176,189) $ (84,613)
(Gain) Loss on warrant liability 20,562 10,360 11,326 10,360
Asset impairments 36,000 10,132 37,560 10,132
Reduction of liability due to lease assignment -- -- (1,319) --
Adjustment to exclude forbearance fee -- 438 -- 1,444
Adjustment to remove costs associated with acquisitions and integrations -- 694 -- 41,334
Retention stock-based compensation   613   1,059
Adjustments to SG&A expenses (1) 102,767  10,043 132,869  
 30,632
Non-GAAP income before income taxes (733) (643) 4,247 10,348
GAAP income taxes (benefit)  (13,000)  13 (12,957) 1,723
Tax effect of Non-GAAP adjustments 10,012 (1,691) 7,463 (4,111)
Non-GAAP income taxes (benefit) (2,988) (1,678) (5,494) (2,388)
Non-GAAP net income (loss) $ 2,255  $ 1,035 $ 9,741  $ 12,736
Non-GAAP EPS-diluted $ 0.09  $ 0.05  $ 0.40 $ 0.58
Shares used in computing Non-GAAP EPS-diluted  24,486  22,116 24,096  22,078
 
(1) Adjustments to SG&A expenses for fourth quarter of fiscal 2013 are related to the $96.1 million settlement of the private securities class action lawsuit, consulting and legal fees, and Fishers plant closure costs. Adjustments to SG&A expenses for the fourth quarter of fiscal 2012 are related to audit committee investigation, restatement, and related expenses, $0.4 million in forbearance fee, $2.1 million in stock-based compensation, of which, $0.6 million is retention stock-based compensation, and $0.7 million primarily due to the proposed acquisition of Pringles. Adjustments to SG&A expenses for the full year fiscal 2013 are related to the $96.1 million settlement of the private securities class action lawsuit, audit committee investigation, restatement-related expenses, legal investigation expenses, consulting fees, accrued contract termination expenses, retention and severance accruals, and Fishers plant closure costs. These expenses are partially offset by the clawback of bonuses paid to a former CEO and the reversal of certain previously recorded stock compensation expenses associated with former executives. Adjustments to SG&A expenses for full year fiscal 2012 are related to audit committee investigation, restatement, related expenses, $1.4 million in forbearance fee, $9.2 million in stock-based compensation, of which, $1.1 million is retention stock-based compensation, and $41.3 million primarily due to the integration of Kettle and the proposed acquisition of Pringles.   

Reconciliation of Net Income (Loss) to Adjusted EBITDA:  

  Three months ended Twelve months ended
  July 31, July 31,
(in thousands) 2013 2012 2013 2012
Net income (loss) $ (147,062) $ (32,936) $ (163,232) $ (86,336)
Income taxes (benefit) (13,000) 13 (12,957) 1,723
Income (loss) before income taxes (160,062) (32,923) (176,189) (84,613)
Interest expense, net 15,240 14,043 57,925 33,976
Income (loss) from operations (144,822)  (18,880)  
 (118,264)
(50,637)
Costs associated with acquisitions and integrations  -- 693 -- 41,334
Reduction of liability due to lease assignment -- -- (1,319) --
Asset impairments 36,000 10,132 37,560 10,132
(Gain) Loss on warrant liability 20,562 10,360 11,326 10,360
Adjustments to SG&A expenses (1) 102,767 10,043 134,664 30,632
Stock-based compensation expense (2) 1,742  2,064 4,229 9,206
Depreciation and amortization 8,315 7,423 33,525 28,347
Adjusted EBITDA $ 24,564 $ 21,835 $ 101,721 $ 79,374
 
(1) Fiscal 2013 SG&A expenses includes the $96.1 million to settle the private securities class action lawsuit which was recorded in Q4:13. The settlement included a cash amount of $11.0 million and a stock settlement valued at $85.1 million at the close of market on August 20, 2013 as set forth in the settlement preliminary approval motion. Other adjustments to SG&A are provided in footnote 1 to the Reconciliation of Income (Loss) Before Income Taxes to Non-GAAP EPS.  
(2) Stock-based compensation for fiscal 2013 included a $2.5 million reversal of certain previously recorded stock compensation expenses associated with former executives.

About Diamond's Non-GAAP Financial Measures

This release contains non-GAAP financial measures of Diamond's performance ("non-GAAP measures") for different periods. Non-GAAP financial measures should not be considered as a substitute for financial measures prepared in accordance with GAAP. Diamond's non-GAAP financial measures do not reflect a comprehensive system of accounting, and differ both from GAAP financial measures and from non-GAAP financial measures used by other companies. Diamond urges investors to review its reconciliation of non-GAAP financial measures to GAAP financial measures, and its financial statements to evaluate its business.

Diamond believes that its non-GAAP financial measures provide meaningful information regarding operating results because they do not include amounts that Diamond excludes when monitoring operating results and assessing performance of the business. Diamond believes that its non-GAAP financial measures also facilitate comparison of results for current periods and business outlook for future periods.

Adjusted EBITDA is used by management as a measure of operating performance. Adjusted EBITDA is defined as net income before interest expense, income taxes, stock-based compensation, depreciation, amortization, and other non-operating expenses, including the aforementioned expenses related to the proposed settlement of the private securities class action case , asset impairment expense, Oaktree warrant liability expenses, SG&A expenses primarily related to audit committee investigation, restatement and related expenses, and Kettle integration and Pringles acquisition expenses. We believe that Adjusted EBITDA is useful as an indicator of ongoing operating performance. As a result, some management reports feature Adjusted EBITDA, in conjunction with traditional GAAP measures, as part of our overall assessment of company performance.

Diamond's management uses non-GAAP financial measures in internal reports used to monitor and make decisions about its business, such as monthly financial reports prepared for management. The principal limitation of the non-GAAP measures is that they exclude significant expenses and other amounts required under GAAP. They also reflect the exercise of management's judgments about which adjustments are appropriately made. To mitigate this limitation, Diamond presents the non-GAAP measures in connection with GAAP results, and recommends that investors do not give undue weight to them. Diamond believes that non-GAAP measures provide useful information to investors by allowing them to view Diamond's business through the eyes of management, facilitating comparison of results across historical and future periods, and providing a focus on the underlying operating performance of the business.

CONTACT: Investors:
ICR
Katie Turner
Rohan Patkar
415-230-7952
Media:
ICR
Anton Nicholas
Jessica Liddell
415-445-7431

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