Diamond Reports Net Losses In Third Quarter Fiscal 2013

Diamond Foods, Inc., reported financial results for its fiscal 2013 third quarter, which ended April 30, 2013.

In the third quarter of fiscal 2013, Diamond's generally accepted account principles (GAAP) net loss was $15.6 million and its GAAP diluted loss per share (earnings per share - EPS) was $0.71. GAAP results for the quarter included $12.9 million of certain selling, general and administrative (SG&A) expenses and a $1.9 million non-cash charge related to a change in the fair value of the Oaktree warrant liability. Excluding these items, Diamond's non-GAAP net income for the third quarter of fiscal 2013 was $1.1 million and non-GAAP diluted EPS was $0.05.

"The progress we are making with our efforts to revitalize the company is reflected in our results this quarter," said Diamond's Chief Executive Officer Brian J. Driscoll, in a prepared statement. "The improvement in gross margins reflects both an increase in net price realization in our portfolio and results of our cost saving efforts that are materializing in our operations and supply chain. While we still have difficult and important challenges to tackle, we continue to track toward an operating model that is designed to create sustainable growth."

Consolidated net sales during the quarter decreased 11.0 percent, to $184.9 million, compared to the same quarter of the prior year. Gross profit was $43.4 million, or 23.4 percent of net sales, for the third quarter of fiscal 2013, compared to $34.2 million, or 16.5 percent of net sales, for the same quarter in the prior year.

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 Performance: Snacks net sales increased 1.6 percent, to $104.2 million driven by an increase in net price realization partially offset by a 5.5 percent decrease in volume. Snacks gross profit was $36.7 million, or 35.2 percent of net sales, for the third quarter of fiscal 2013, compared to $28.1 million, or 27.4 percent of net sales, for the same quarter in the prior year. This improvement in snacks gross profit as a percentage of net sales reflected an increase in net price realization and a reduction in unit processing costs.

Nuts Performance: Nuts net sales decreased 23.2 percent, to $80.7 million driven by a 40.3 percent decrease in volume. The primary drivers of the volume decline were planned reductions in SKUs and lower promotional spending associated with the Emerald brand and lower walnut supply. Nuts gross profit was $6.7 million, or 8.3 percent of net sales, in the third quarter of fiscal 2013, compared to $6.1 million, or 5.8 percent of net sales, for the same quarter in the prior year. This improvement in nuts gross profit as a percentage of net sales reflected an increase in net price realization, the elimination of lower performing SKUs, and cost savings initiatives, partially offset by an increase in certain commodity costs.

SG&A expense increased to $35.3 million for the third quarter of fiscal 2013, compared to $33.3 million for the same quarter in the prior year. Included in the third quarter of fiscal 2013 are $12.9 million of charges related to Fishers plant closure, impairment of an intangible asset, consulting fees and legal expenses. Included in the third quarter of fiscal 2012 are $8.3 million of charges that are related primarily to the audit committee investigation, restatement expenses and legal expenses.

Advertising expense was $8.0 million, or 4.3 percent of net sales, for the third quarter of fiscal 2013, compared to $7.2 million, or 3.5 percent of net sales, for the same quarter in the prior year. This increase in advertising expense was primarily due to support of the Pop Secret and Kettle brands.

The company recognized a $1.9 million loss on the Oaktree warrant liability in the quarter due to the change in the fair value of the warrant between Jan. 31, 2013 and April 30, 2013.

Net interest expense was $14.5 million in the third quarter of fiscal 2013 compared to $7.7 million in the same quarter in the prior year. The increase was primarily due to the Oaktree debt and the higher interest rate on the secured credit agreement.

The company's effective tax rate was 5.1 percent for the third quarter of fiscal 2013.

GAAP net loss was $15.6 million compared to a loss of $44.0 million in the prior year. On a non-GAAP basis, net income was $1.1 million compared to a net loss of $4.9 million in the prior year.

EPS for the third quarter of fiscal 2013 on a GAAP diluted basis was a loss of $0.71 compared to a loss of $2.02 in the prior year. Non-GAAP EPS on a diluted basis was earnings of $0.05 compared to a loss of $0.22 in the prior year.

The non-GAAP diluted EPS calculation includes 1.6 million and 1.7 million shares related to the Oaktree warrants based on the Treasury stock method for the third quarter and year-to-date periods, respectively.

Capital expenditures were $2.1 million for the third quarter of fiscal 2013.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $23.2 million, or 12.6 percent of net sales, in the third quarter of fiscal 2013, compared to$11.2 million, or 5.4 percent of net sales, in the prior year. Year-to-date adjusted EBITDA increased $19.6 million, to $77.2 million, compared to the prior year.

As of April 30, 2013, net debt outstanding was $577.8 million, including the Oaktree debt at its carrying value.

Cash and availability on Diamond's bank revolving line of credit on June 7, 2013 was approximately $96 million.

Outlook

Consistent with the outlook provided in the second quarter, net sales are expected to decline more in the back half of the fiscal year than the first half as compared to the prior year. Therefore, fourth quarter sales are expected to decline more than in the third quarter, driven primarily by the nuts segment. Fourth quarter gross margin is expected to be largely consistent with year-to-date performance. Advertising spending is expected to increase in the fourth quarter as compared to the third quarter and the prior year due largely to campaigns focused on Kettle and Pop Secret.

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