Diamond Foods Inc. Reports Record Fourth Quarter And Full Year Results

Diamond Foods, Inc. reported record financial results for its fiscal 2011 fourth quarter and full year.

For the three months ended July 31, 2011, the first full comparable quarter since the acquisition of Kettle Foods, non-GAAP net income grew 58 percent to $11.9 million and non-GAAP fully diluted earnings per share (EPS) grew 53 percent over the prior year's quarter to $0.52. During the quarter, the company incurred $9.4 million in acquisition and integration costs related to the purchase of Kettle Foods in 2010 and the pending acquisition of Pringles. Including these charges, GAAP net income grew 27 percent to $8.5 million and GAAP fully diluted EPS was $0.37, up 23 percent.

For the twelve months ended July 31, 2011, non-GAAP net income grew 61 percent over the prior year period to $59.0 million and non-GAAP EPS grew 37 percent to $2.61. Including $16.8 million in acquisition and integration costs related to the purchase of Kettle Foods in 2010 and the pending acquisition of Pringles, GAAP earnings grew 92 percent to $50.2 million, and GAAP EPS grew 63 percent to $2.22.

"Our base Diamond business delivered record financial results this quarter, with our snack portfolio up a solid 16 percent on an organic basis," said Michael J. Mendes, chairman, president and CEO in a prepared statement. "We're particularly pleased that we could achieve such strong performance while effectively managing the Pringles integration."

In U.S. measured channels, Emerald snack nuts grew 16 percent while the category was up 3 percent, gaining 100 basis points of market share. Pop Secret grew 5 percent while the category was down 4 percent, gaining 210 basis points of market share.1 Kettle U.S. was up 11 percent while the category was up 2 percent, gaining 10 basis points of market share.2
Emerald's new Breakfast on the go! continued to gain distribution in the most recent 12 week period. Breakfast on the go! is currently scanning in 75 percent of the ACV in U.S. grocery and contributed 40 percent of the total convenient breakfast category growth during the period.3
In the U.K., Kettle retail sales grew 10 percent compared to category growth of 6 percent.4 Growth was driven by strong performance in the multi-pack segment and in the Kettle Ridge Crisp line.
Full year adjusted EBITDA grew 72 percent to $146 million.
On Aug. 3, 2011, the company received the last of its antitrust clearances required for its pending merger of the Pringles business into Diamond in a Reverse Morris Trust transaction. The transaction is expected to close in December of this year.
Significant progress on Pringles integration activities including go-to-market planning, preparing to onboard employees at close, day one readiness and transition services planning.
A quarterly dividend of $0.045 per share was paid on August 8, 2011 to shareholders of record as of August 1, 2011.

Net sales during the quarter grew 32 percent to $232.8 million as a result of the strong performance of the snack portfolio and an increase in non-retail sales. Total retail net sales grew 14 percent to $191.0 million, and snack sales grew 16 percent to $145.7 million in the quarter. Non-retail sales totaled $41.8 million for the quarter compared to $41.3 million in the third quarter and $8.7 million in the fourth quarter a year ago. Full fiscal year net sales grew 42 percent to $965.9 million, with retail net sales up 43 percent to $816.1 million. Snack sales grew 72 percent for the full year and reached $553.2 million.

Gross profit as a percentage of net sales was 24.5 percent for the quarter and 26 percent for the year. The lower gross margin in the quarter reflects the relatively large percentage of non-retail sales in the quarter.

Selling, general and administrative expense (SG&A) was $25.7 million during the quarter. For the full fiscal year SG&A was $97.0 million, or 10 percent of net sales.

Advertising expense was $10.1 million during the fourth quarter, up 45 percent over last year's comparable period. For the full fiscal year, advertising expense was $44.4 million or 5.4 percent of retail net sales, an increase of $11.5 million over last year.

The effective tax rate on a non-GAAP basis was 23.6 percent for the quarter and 31.3 percent for the year, reflecting favorable income mix within our tax jurisdictions. On a GAAP basis, the effective tax rate was (38.4) percent for the quarter and 27.4 percent for the year. The tax benefit in the quarter reflects a discrete benefit associated with the 2 percent U.K. rate reduction announced in July.

Capital expenditures for the year were $28 million. The Kettle capacity expansion in Salem was completed in April and the U.K. and Beloit, Wisconsin Kettle expansions are on schedule for completion in the fall of 2011 and spring of 2012, respectively.

As of July 31, 2011, net debt was $512.8 million, a decrease of $37 million from the prior quarter.