Diamond Foods Inc - FORM 10-Q

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EX-32.01 - EXHIBIT 32.01 - Diamond Foods Inc	dmnd-2015131x10qex3201.htm
EX-31.02 - EXHIBIT 31.02 - Diamond Foods Inc	dmnd-2015131x10qex3102.htm
EX-10.03 - EXHIBIT 10.03 - Diamond Foods Inc	dmnd-2015131x10qex1003.htm
EX-31.01 - EXHIBIT 31.01 - Diamond Foods Inc	dmnd-2015131x10qex3101.htm
EXCEL - IDEA: XBRL DOCUMENT - Diamond Foods Inc	Financial_Report.xls

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________________

FORM 10-Q

_____________________________

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2015



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-51439

_____________________________

DIAMOND FOODS, INC.

(Exact name of registrant as specified in its charter)

_____________________________



Delaware		20-2556965
(State of Incorporation)		(IRS Employer Identification No.)

600 Montgomery Street, 13th Floor San Francisco, California		94111-2702
(Address of Principal Executive Offices)		(Zip Code)

415-445-7444

(Telephone No.)

_____________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

Number of shares of common stock outstanding as of February 28, 2015: 31,457,228

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TABLE OF CONTENTS



	Page
Cautionary Statement Regarding Forward-Looking Statements	3

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	29

Part II. OTHER INFORMATION

Item 1. Legal Proceedings	30
Item 1A. Risk Factors	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3. Defaults Upon Senior Securities	41
Item 4. Mine Safety Disclosures	41
Item 5. Other Information	41
Item 6. Exhibits	41
SIGNATURES
EXHIBIT INDEX

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements, including statements about our future operating performance and results, business strategy, commodity prices, liquidity position and sufficiency, brand portfolio and performance, availability of raw materials, our position in the walnut industry, the effectiveness of internal controls and remediating material weaknesses. These forward-looking statements are based on our assumptions, expectations and projections about future events only as of the date of this report. 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 U.S. Securities and Exchange Commission (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 report 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 report. Actual results may differ materially from what we currently expect because of many risks and uncertainties such as: availability and cost of walnuts and other raw materials; inability to increase prices for our products if commodity prices rise; unexpected delays or increased costs in implementing our business strategies; upgrading our information technology infrastructure, including implementation of a new Enterprise Resource Planning software platform; changes in consumer preferences for snack and nut products; risks relating to our indebtedness, including the cost of our debt and its effect on our ability to respond to changes in our business, markets and industry; the dilutive impact of equity issuances; risks relating to litigation and regulatory factors including changes in food safety, advertising and labeling laws and regulations; uncertainties relating to our relations with growers; increasing competition and possible loss of key customers; risks associated with our operations outside the U.S.; including foreign currency fluctuations; and general economic and capital markets conditions.

As used in this Quarterly Report, the terms “Diamond Foods,” “Diamond,” “Company,” “registrant,” “we,” “us,” and “our” mean Diamond Foods, Inc. and its direct and indirect subsidiaries unless the context indicates otherwise.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

DIAMOND FOODS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share information)

(Unaudited)



	January 31, 2015			July 31, 2014			January 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	49,084		$	5,318		$	3,556
Trade receivables, net	92,351			95,505			86,132
Inventories, net	193,449			124,273			176,041
Deferred income taxes	4,741			4,154			—
Prepaid income taxes	—			5,196			21
Prepaid expenses and other current assets	13,175			9,425			14,305
Total current assets	352,800			243,871			280,055
Property, plant and equipment, net	131,747			131,891			130,112
Goodwill	400,089			410,720			408,089
Other intangible assets, net	375,181			392,358			393,099
Other long-term assets	12,175			13,994			17,402
Total assets	$	1,271,992		$	1,192,834		$	1,228,757
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt, net	$	4,173		$	10,088		$	5,916
Warrant liability	—			—			82,085
Accounts payable and accrued liabilities	110,263			117,677			227,492
Payable to growers	106,379			5,784			103,392
Total current liabilities	220,815			133,549			418,885
Long-term obligations, net	635,252			637,327			549,390
Deferred income taxes	111,979			115,902			107,317
Other liabilities	20,435			22,256			21,862
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares; no shares issued or outstanding	—			—			—
Common stock, $0.001 par value; Authorized: 100,000,000 shares; 31,951,449, 31,824,701 and 22,921,689 shares issued and 31,456,944, 31,380,758 and 22,496,794 shares outstanding at January 31, 2015, July 31, 2014, and January 31, 2014, respectively	31			31			23
Treasury stock, at cost: 494,505, 443,943 and 424,895 shares held at January 31, 2015, July 31, 2014, and January 31, 2014, respectively	(13,850		)	(12,418		)	(11,840		)
Additional paid-in capital	600,385			594,608			338,493
Accumulated other comprehensive income	128			23,633			19,199
Retained deficit	(303,183		)	(322,054		)	(214,572		)
Total stockholders’ equity	283,511			283,800			131,303
Total liabilities and stockholders’ equity	$	1,271,992		$	1,192,834		$	1,228,757

See notes to condensed consolidated financial statements.

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DIAMOND FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share information)

(Unaudited)



	Three Months Ended January 31,					Six Months Ended January 31,
	2015		2014			2015		2014
Net sales	$	229,667	$	220,577		$	476,288	$	455,245
Cost of sales	168,509		164,649			355,740		341,384
Gross profit	61,158		55,928			120,548		113,861
Operating expenses:
Selling, general and administrative	29,171		33,822			57,753		90,378
Advertising	9,708		13,129			21,524		23,787
Acquisition related expenses	633		—			633		—
Loss on warrant liability	—		6,962			—		23,938
Total operating expenses	39,512		53,913			79,910		138,103
Income (loss) from operations	21,646		2,015			40,638		(24,242		)
Interest expense, net	10,273		16,104			20,509		30,952
Income (loss) before income taxes	11,373		(14,089		)	20,129		(55,194		)
Income taxes	196		971			1,258		2,019
Net income (loss)	$	11,177	$	(15,060	)	$	18,871	$	(57,213	)
Income (loss) per share:
Basic	0.36		(0.68		)	$	0.60	$	(2.60	)
Diluted	0.35		(0.68		)	$	0.59	$	(2.60	)
Shares used to compute income (loss) per share:
Basic	31,127		22,052			31,075		22,019
Diluted	31,545		22,052			31,483		22,019

See notes to condensed consolidated financial statements.

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DIAMOND FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)



	Three Months Ended January 31,						Six Months Ended January 31,
	2015			2014			2015			2014
Net income (loss)	$	11,177		$	(15,060	)	$	18,871		$	(57,213	)
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax¹	(11,297		)	5,010			(23,493		)	15,376
Change in pension liabilities, net of tax²
Less: amortization of prior gain/(loss) included in net periodic pension cost	(6		)	(93		)	(12		)	(184		)
Other comprehensive income (loss):	(11,303		)	4,917			(23,505		)	15,192
Comprehensive loss	$	(126	)	$	(10,143	)	$	(4,634	)	$	(42,021	)


¹	Net of tax benefit of $0.7 million and $1.4 million for the three and six months ended January 31, 2015, respectively, and net of tax expense of nil, for the three and six months ended January 31, 2014.


²	Net of tax expense and benefit of nil for the three and six months ended January 31, 2015 and January 31, 2014, respectively.

See notes to condensed consolidated financial statements.

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DIAMOND FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six Months Ended January 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	18,871		$	(57,213	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	14,452			16,293
Deferred income taxes	1,000			1,715
Stock-based compensation	4,609			3,464
Acquisition and integration costs	444			—
Loss on warrant liability	—			23,938
Loss on securities settlement	—			32,173
Gain on shareholder derivative case	—			(1,600		)
Original issue discount amortization, Term Loan Facility	811			—
Debt issuance cost amortization	2,134			1,698
Payment-in-kind interest on debt	—			15,425
Other, net	380			2,064
Changes in assets and liabilities:
Trade receivables, net	(294		)	18,367
Inventories, net	(69,894		)	(60,201		)
Prepaid expenses and other current assets and income taxes	1,584			(5,126		)
Other assets	44			332
Accounts payable and accrued liabilities	(5,376		)	(26,681		)
Payable to growers	100,595			97,296
Other liabilities	(357		)	(181		)
Net cash provided by operating activities	69,003			61,763
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(13,818		)	(7,748		)
Proceeds from sale of property, plant and equipment and other	—			56
Net cash used in investing activities	(13,818		)	(7,692		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of revolving line of credit under the ABL Facility, net	(6,000		)	—
Repayments of revolving line of credit under the Secured Credit Facility, net	—			(49,613		)
Payments of long-term debt and notes payable	(4,520		)	(3,984		)
Purchase of treasury stock	(1,432		)	(821		)
Other, net	1,169			720
Net cash used in financing activities	(10,783		)	(53,698		)
Effect of exchange rate changes on cash	(636		)	(2,702		)
Net increase (decrease) in cash and cash equivalents	43,766			(2,329		)
Cash and cash equivalents:
Beginning of period	5,318			5,885
End of period	$	49,084		$	3,556
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest	$	18,931		$	11,922
Income taxes	(5,065		)	9
Non-cash investing activity:
Accrued capital expenditures	1,858			1,093
Capital lease	160			—

See notes to condensed consolidated financial statements.

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DIAMOND FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended January 31, 2015 and 2014

(In thousands, except share and per share information unless otherwise noted)

(Unaudited)

(1) Organization and Basis of Presentation

Diamond Foods, Inc. (the “Company” or “Diamond”) is an innovative packaged food company focused on building and energizing brands. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, Diamond complemented its strong heritage in the culinary nut market under the Diamond of California® brand by launching a line of snack nuts under the Emerald® brand. In 2008, Diamond acquired the Pop Secret® brand of microwave popcorn products, which provided the Company with increased scale in the snack market, significant supply chain economies of scale and cross promotional opportunities with its existing brands. In 2010, Diamond acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and the United Kingdom, which added the complementary premium Kettle Brand® to Diamond’s existing portfolio of leading brands in the snack industry. Diamond sells its products to global, national, regional and independent grocery, drug, and convenience store chains, as well as to mass merchandisers, club stores, other retail channels and non-retail channels.

The accompanying unaudited condensed consolidated financial statements of Diamond (“Condensed Consolidated Financial Statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required for annual financial statements. The accompanying Condensed Consolidated Financial Statements have been prepared on the same basis as the audited consolidated financial statements at and for the fiscal year ended July 31, 2014, and in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s Condensed Consolidated Financial Statements. The Condensed Consolidated Balance Sheet as of July 31, 2014,

included herein was derived from the audited consolidated financial statements as of that date but does not include all disclosures required by GAAP. Therefore, the Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2014 Annual Report on Form 10-K. Operating results for the three and six months ended January 31, 2015, are not necessarily indicative of the results that may be expected for any future periods.

Certain prior period amounts have been reclassified to conform to the current period presentation. There was no impact to net income or stockholders' equity for each prior period reclassification made.

Diamond reports its operating results on the basis of a fiscal year that starts August 1 and ends July 31. Diamond refers to the fiscal years ended July 31, 2015, 2014, 2013, 2012, as “fiscal 2015,” “fiscal 2014,” “fiscal 2013” and “fiscal 2012”, respectively.

(2) Recent Accounting Pronouncements

In January 2014, the FASB issued ASU 2014-8, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an entity.” The new guidance provides new criteria for reporting discontinued operations and specifically indicates a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on the Company’s operations and financial results. The new guidance also requires expanded disclosures for discontinued operations. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2014. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-9, “Revenue from Contracts with Customers (Topic 606).” The new guidance provides new criteria for recognizing revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance also requires expanded disclosures to provide greater insight into both revenue that has been recognized and revenue that is expected to be recognized in the future from existing contracts. Quantitative and qualitative information will be provided about the significant judgments and changes in those judgments that management made to determine the revenue that is recorded. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016.

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Early adoption is not permitted. The Company is currently assessing the provisions of the guidance and has not determined the impact of the adoption of this guidance on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation (Topic 718).” The new guidance provides new criteria for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40).” The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

(3) Financial Instruments

In January 2015, the Company purchased 175 corn call option commodity derivatives with a total notional amount of approximately $0.3 million. These purchases were in accordance with Company policy to mitigate the market price risk associated with the anticipated raw material purchase requirements, specifically future corn purchases expected to be made by the Company. The Company accounts for commodity derivatives as non-hedging derivatives.

The fair values of the Company’s derivative instruments as of January 31, 2015, July 31, 2014 and January 31, 2014, were as follows:



Asset & Liability Derivatives	Balance Sheet Location	Fair Value
		1/31/2015		7/31/2014		1/31/2014
Derivatives not designated as hedging instruments:
Commodity contracts	Prepaid and other current assets	$	308	$	11	$	316
Warrants	Warrant liability	—		—		(82,085		)
Total		$	308	$	11	$	(81,769	)

Commodity derivative gains and losses were not material to the Consolidated Statements of Operations for the three and six months ended January 31, 2015 and January 31, 2014.

A warrant was exercised in the third quarter of fiscal 2014, and accordingly, for the three and six months ended January 31, 2015, there were no effects of the Company's warrant liability on the Condensed Consolidated Statements of Operations. For the three and six months ended January 31, 2014, the Company recognized a loss of $7.0 million and $23.9 million, respectively, associated with the warrants in Loss on warrant liability on the Consolidated Statements of Operations.

Accounting Standards Codification (“ASC”) 820 requires that assets and liabilities carried at fair value be measured using the following three levels of inputs:

Level 1: Quoted market prices in active markets for identical assets or liabilities

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: Unobservable inputs that are not corroborated by market data

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company values the commodity derivatives using Level 2 inputs. The value of the commodity contracts is calculated utilizing the number of contracts, as measured in bushels, multiplied by the price of corn per bushel obtained from the Chicago Mercantile Exchange.

The Company performed a final re-measurement of its warrant liability on February 18, 2014 as a result of the Warrant Exercise Transaction, as described in Note 9 to the Notes to the Condensed Consolidated Financial Statements. The warrant liability measured at fair value on a recurring basis was $84.1 million as of February 18, 2014, nil as of January 31, 2015, nil as of July 31, 2014 and $82.1 million as of January 31, 2014. The Company had elected to use the income approach to value the warrant liability and used the Black-Scholes option valuation model. This valuation was considered Level 3 due to the use of certain unobservable inputs. Inputs into the Black-Scholes model include: remaining term, stock price, strike price, maturity date, risk-free rate, and expected volatility. The significant Level 3 unobservable inputs previously used in the valuation were expected volatility and the probability to exchange $75 million of the senior notes for convertible preferred stock upon achievement of certain profitability targets (the “Special Redemption”). The expected volatility used to measure the warrant liability at fair value was 45.0% as of February 18, 2014 and 47.5% as of January 31, 2014. As provided in certain agreements between Diamond and Oaktree Capital. L.P. (“Oaktree”), described in Note 9 to the Notes to the Condensed Consolidated Financial Statements, based on the Company’s operating results for the six months ended January 31, 2013, the Special Redemption did not occur. As such, the probability of Special Redemption was not applicable for the warrant liability valuation performed as of February 18, 2014 and January 31, 2014.

Assets and Liabilities Disclosed at Fair Value

The fair value of certain financial instruments, including cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate the amounts recorded in the balance sheet because of the relatively short term nature of these financial instruments. The fair value of notes payable and long-term obligations at the end of each fiscal period approximates the amounts recorded in the balance sheet based on information available to the Company with respect to current interest rates and terms for similar financial instruments, except for the 7.000% Senior Notes (the "Notes") issued during the third quarter of fiscal 2014. The Company measured the $230.0 million Notes based on Level 3 inputs, and determined the fair value was $232.8 million as of January 31, 2015, and $228.8 million as of July 31, 2014. The Notes were not outstanding as of January 31, 2014. The fair value was estimated using a discounted cash flow methodology with unobservable inputs including the market yield and redemption rate. The discounted cash flow used a risk adjusted yield to present value the contractual cash flows. Refer to Note 9 to the Notes to the Condensed Consolidated Financial Statements for further discussion on the Notes.

As a result of the fiscal 2014 debt refinancing, the total indebtedness outstanding under the $225 million of senior notes, including the $75 million subject to the Special Redemption (the "Oaktree Senior Notes"), was paid in full in the third quarter of fiscal 2014. The carrying value and fair value of the Oaktree Senior Notes, not including the senior notes subject to the Special Redemption, as of January 31, 2014 was $133.1 million and $204.6 million, respectively. The carrying value and fair value of the Oaktree Senior Notes subject to the Special Redemption as of January 31, 2014 was $94.7 million and $102.3 million, respectively. See Note 9 to the Notes to the Condensed Consolidated Financial Statements for further information regarding the refinancing transaction. The fair value of the Oaktree Senior Notes as of January 31, 2014 was estimated using a discounted cash flow approach. The discounted cash flow approach used a risk adjusted yield to present value the contractual cash flows of the notes. The fair value of these notes were classified as Level 3 within the fair value measurement hierarchy.

(4) Stock-Based Compensation

The 2015 Equity Incentive Plan (the “Plan”) was approved by the Company's stockholders in January 2015 and provides for the awarding of options, restricted stock awards, stock bonus awards, restricted stock units, stock appreciation rights, and performance awards. A total of 1,000,000 shares plus certain rollover shares from the Company's 2005 Equity Incentive Plan are reserved and available for grant and issuance pursuant to this Plan as of the date of approval of the Plan. The Compensation Committee of the Board of Directors administers the Plan.

The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation — Stock Compensation.” The fair value of all stock options granted is recognized as an expense in the Company’s Statements of Operations, typically over the related vesting period of the options. The guidance requires use of fair value computed at the date of grant to measure share-based awards. The fair value of restricted stock awards and performance stock unit awards are recognized as stock-based compensation expense over the vesting period. Equity awards may be granted to officers, other employees, consultants and directors.

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Stock-Based Compensation Expense: The Company recorded total stock-based compensation expense of $2.6 million and $4.6 million for the three and six months ended January 31, 2015, respectively, and $2.0 million and $3.5 million for the three and six months ended January 31, 2014, respectively.

The following table summarizes stock-based compensation expense:



	Three Months Ended January 31,				Six Months Ended January 31,
	2015		2014		2015		2014
Stock options	$	842	$	858	$	1,721	$	1,560
Restricted stock	615		673		1,187		1,175
Restricted stock units	787		456		1,238		729
Performance share units	384		—		463		—
Total	$	2,628	$	1,987	$	4,609	$	3,464

Stock Option Awards: The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities were estimated based on the Company’s implied historical volatility. The expected term of options granted was based on the simplified method due to the limited amount of historical Company information. Forfeiture rates were based on assumptions and historical data to the extent it is available. The risk-free rates were based on U.S. Treasury yields in effect at the time of the grant. For purposes of this valuation model, dividends are based on the historical rate.

For the three and six months ended January 31, 2015, assumptions used in the Black-Scholes model are presented below:



	Three Months Ended January 31,		Six Months Ended January 31,
	2015	2014	2015	2014
Average expected life, in years	5.50	5.50	5.50	5.50-6.06
Expected volatility	53.16%	55.78%	53.16%	55.78%-55.84%
Risk-free interest rate	1.82%	1.69%	1.82%	1.69%-1.70%
Dividend rate	0.00%	0.00%	0.00%	0.00%

The following table summarizes option activity during the six months ended January 31, 2015:



	Number of Shares (in thousands)		Weighted average exercise price per share		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Outstanding at July 31, 2014	1,496		$	24.79
Granted	10		30.11
Exercised	(69	)	16.84
Cancelled/Forfeited	(68	)	44.39
Outstanding at January 31, 2015	1,369		24.27		7.0	$	7,751
Exercisable at January 31, 2015	885		25.94		6.3	$	4,744



	Three Months Ended January 31,				Six Months Ended January 31,
	2015		2014		2015		2014
Total intrinsic value of stock options exercised	$	709	$	28	$	848	$	271
Cash received from stock option exercises	$	1,046	$	71	$	1,168	$	720

There were 10,000 stock options granted during the three and six months ended January 31, 2015, respectively, and 10,000 and 189,601 stock options granted during the three and six months ended January 31, 2014, respectively. The weighted average grant date fair value per share of stock options granted was $14.86 for the three and six months ended January 31, 2015, respectively. The weighted average grant date fair value per share of stock options granted was $12.53 and $11.21 during

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the three and six months ended January 31, 2014, respectively. The fair value per share of stock options vested was $10.74 and $11.15 during the three and six months ended January 31, 2015, respectively, and $9.23 and $10.61 for the three and six months ended January 31, 2014, respectively. There were 60,169 and 69,363 stock options exercised during the three and six months ended January 31, 2015, respectively, and 3,950 and 43,950 stock options exercised in the three and six months ended January 31, 2014, respectively.

The following table summarizes nonvested stock option activity during the six months ended January 31, 2015:



	Number of shares (in thousands)		Weighted average grant date fair value per share
Nonvested at July 31, 2014	660		$	10.81
Granted	10		14.86
Vested	(157	)	11.15
Cancelled/Forfeited	(29	)	12.80
Nonvested at January 31, 2015	484		10.66

As of January 31, 2015, approximately $4.0 million of total unrecognized compensation expense related to nonvested stock options is expected to be recognized over a weighted average period of 1.7 years.

Restricted Stock and Restricted Stock Unit Awards: Restricted stock and restricted stock unit activity during the six months ended January 31, 2015:



	Restricted Stock				Restricted Stock Units
	Number of shares (in thousands)		Weighted average grant date fair value per share		Number of units (in thousands)		Weighted average grant date fair value per share
Outstanding at July 31, 2014	366		$	20.47	310		$	19.72
Granted	—		—		225		28.64
Vested	(58	)	26.77		(78	)	19.24
Cancelled/Forfeited	(20	)	20.38		(22	)	20.26
Outstanding at January 31, 2015	288		19.22		435		24.39

There were no restricted stock awards granted during the three and six months ended January 31, 2015, and nil and 95,735 restricted stock awards granted during the three and six months ended January 31, 2014, respectively. The weighted average fair value per share at the grant date of restricted stock vested was $16.19 and $26.77 for the three and six months ended January 31, 2015. The weighted average fair value per share at the grant date of restricted stock vested was $16.43 and $30.34 for the three and six months ended January 31, 2014. The weighted average grant date fair value per share of restricted stock granted during the six months ended January 31, 2014 was $20.89. The total intrinsic value of restricted stock vested during the three and six months ended January 31, 2015 was $0.6 million and $1.6 million, respectively, and was $0.6 million and $1.2 million for the three and six months ended January 31, 2014, respectively. As of January 31, 2015, there was $3.8 million of unrecognized compensation expense related to nonvested restricted stock expected to be recognized over a weighted average period of 1.9 years.

There were 23,523 and 225,228 restricted stock units granted during the three and six months ended January 31, 2015, and 11,430 and 187,465 restricted stock units granted during the three and six months ended January 31, 2014. The weighted average grant date fair value per share of restricted stock units granted during the three and six months ended January 31, 2015 was $27.57 and $28.64, and was $24.93 and $21.12 during the three and six months ended January 31, 2014. The weighted average grant date fair value per share of restricted stock units vested was $14.81 and $19.24 for the three and six months ended January 31, 2015, and was $14.67 and$16.99 during the three and six months ended January 31, 2014. The total intrinsic value of restricted stock units vested during the three and six months ended January 31, 2015 was $1.0 million and $2.2 million, respectively, and was $1.1 million and $1.2 million for the three and six months ended January 31, 2014, respectively. As of January 31, 2015, there was $9.1 million of unrecognized compensation expense related to nonvested restricted stock units expected to be recognized over a weighted average period of 2.9 years.

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Performance Stock Units: In the first quarter of fiscal 2015, the Company began granting performance stock units under the 2005 Equity Incentive Plan. Each performance stock unit represents one equivalent share of the Company's common stock. The performance stock units cliff vest after three years based on the achievement of a performance based market condition, except that 40% of the October 2014 awards will vest after two years if the performance based market condition is achieved. The number of shares of common stock ultimately issued in connection with these performance share units is based on a measurement of the comparative performance of the Company's common stock against the total shareholder return of a selected group of peer companies. The number of shares of common stock ultimately issued will range from zero to two hundred percent of the granted performance stock units.

Compensation expense related to these performance stock units that are classified as market condition awards under GAAP is determined based on the grant-date fair value, the number of shares issuable pursuant to the award and is recognized over the vesting period. The fair value per performance share unit at the grant date was $32.44 which was measured using the Monte-Carlo model. The Monte-Carlo option-pricing model uses similar input assumptions as the Black-Scholes model; however, it also further incorporates into the fair-value determination the possibility that the performance based market condition may not be satisfied. Compensation costs related to awards with a market-based condition are recognized regardless of whether the market condition is satisfied. Compensation cost is not reversed if the achievement of the market condition does not occur.

There were no performance stock units for the three months ended January 31, 2015 and three and six months ended January 31, 2014. Assumptions used in the Monte-Carlo model for the six months ended January 31, 2015 are presented below:



	Six Months Ended January 31,
	2015	2014
Expected term, in years	2.81	N/A
Expected volatility	52.76%	N/A
Risk-free interest rate	0.89%	N/A
Dividend rate	0.00%	N/A

Performance stock unit activity during the six months ended January 31, 2015:



	Number of Units (in thousands)		Weighted average grant date fair value		Weighted average remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Outstanding at July 31, 2014	—		$	—
Granted	123		32.44
Vested	—		—
Cancelled/Forfeited	(3	)	32.44
Outstanding at January 31, 2015	120		32.44		2.7	$	2,954

There were nil and 122,787 performance stock units granted during the three and six months ended January 31, 2015, respectively. The weighted average grant date fair value per share of performance stock units granted during the six months ended January 31, 2015 was $32.44. As of January 31, 2015, there was $3.2 million of unrecognized compensation expense related to nonvested performance stock units expected to be recognized over a weighted average period of 2.7 years.

(5) Earnings Per Share

ASC 260, “Earnings Per Share,” impacts the determination and reporting of earnings (loss) per share by requiring the inclusion of participating securities, which have the right to share in dividends, if declared, equally with common shareholders. Participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (“the two-class method”). ASC 260 also impacts the determination and reporting of earnings (loss) per share by requiring inclusion of the impact of changes in fair value of warrant liabilities, such as the Oaktree warrant liability described in Note 9 of the Notes to Condensed Consolidated Financial Statements. Including these participating securities and changes in warrant liability in the Company’s earnings per share calculation has the effect of reducing earnings and increasing losses on both basic and diluted earnings (loss) per share.

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The computations for basic and diluted earnings (loss) per share are as follows:



	Three Months Ended January 31,						Six Months Ended January 31,
	2015			2014			2015			2014
Numerator:
Net income (loss)	$	11,177		$	(15,060	)	$	18,871		$	(57,213	)
Less: income allocated to participating securities	(106		)	—			(196		)	—
Income (loss) attributable to common shareholders - basic	11,071			(15,060		)	18,675			(57,213		)
Add: undistributed income attributable to participating securities	106			—			196			—
Less: undistributed income reallocated to participating securities	(104		)	—			(194		)	—
Income (loss) attributable to common shareholders - diluted	$	11,073		$	(15,060	)	$	18,677		$	(57,213	)
Denominator:
Weighted average shares outstanding - basic	31,127			22,052			31,075			22,019
Dilutive shares - stock options, RSU's, PSU's	418			—			408			—
Weighted average shares outstanding - diluted	31,545			22,052			31,483			22,019
Income (loss) per share attributable to common shareholders ⁽¹⁾:
Basic	$	0.36		$	(0.68	)	$	0.60		$	(2.60	)
Diluted	$	0.35		$	(0.68	)	$	0.59		$	(2.60	)


⁽¹⁾	Computations may reflect rounding adjustments.

The Company was in an income position for the three and six months ended January 31, 2015 and included stock options, restricted stock units, and performance share units in the diluted earnings per share calculation to the extent their effect was dilutive. Options to purchase 129,243 and 208,037 shares of common stock were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of Diamond’s common stock of $28.57 and $28.12 for the three and six months ended January 31, 2015 and therefore their effect would be antidilutive. For the three and six months ended January 31, 2014, the Company was in a loss position and, therefore, potential shares related to stock options and restricted stock units were excluded in the computation of diluted loss per share because their effect was antidilutive.

(6) Balance Sheet Items

Inventories consisted of the following:



	January 31, 2015		July 31, 2014		January 31, 2014
Raw materials and supplies	$	93,226	$	39,726	$	88,545
Work in process	39,670		24,946		28,400
Finished goods	60,553		59,601		59,096
Total	$	193,449	$	124,273	$	176,041

All inventories are accounted for on a lower of cost or market basis, with cost historically determined using a combination of first-in first-out ("FIFO") and weighted average cost. Beginning in the first fiscal quarter of 2015, the Company changed the inventory valuation method from FIFO to weighted average cost for certain inventories. The effect of this change was not material to the Company's Condensed Consolidated Financial Statements for the three and six months ended January 31, 2015.

In the second quarter of fiscal 2015, the Company revised its estimate for expected walnut costs which resulted in a pre-tax decrease in cost of sales of approximately $1.4 million for walnut sales recognized in the first three months of fiscal 2015.

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Accounts payable and accrued liabilities consisted of the following:



	January 31, 2015		July 31, 2014		January 31, 2014
Accounts payable	$	56,389	$	64,673	$	67,139
Securities settlement	—		—		117,302
Accrued promotions	27,841		22,638		21,025
Accrued salaries and benefits	11,690		13,364		10,577
Accrued taxes	3,500		4,706		7,118
Accrued interest	5,312		7,336		157
Accrued current lease obligations ⁽¹⁾	2,661		2,620		2,470
Other	2,870		2,340		1,704
Total	$	110,263	$	117,677	$	227,492


⁽¹⁾	Long term portion of capital leases are reflected in Other liabilities within the Condensed Consolidated Balance Sheets.

In fiscal 2014, the court issued an order granting final approval of the Securities Settlement on January 21, 2014 and the appeal period expired on February 20, 2014, at which time the Securities Settlement became effective. On February 21, 2014 the Company issued the 4.45 million shares to a settlement fund pursuant to the terms of the approved Securities Settlement. As of January 31, 2015, the Company no longer had a liability associated with the Securities Settlement.

During fiscal 2013, the Company announced a plan to consolidate its manufacturing operations within the Nuts reportable segment and to close its facility in Fishers, Indiana. In fiscal 2013, the Company also recorded a liability within Other liabilities associated with the Fishers facility future lease obligation. As of January 31, 2015, the Company has outstanding $3.6 million associated with the Fishers facility future lease obligation. In the first quarter of fiscal 2015, the Company revised the Fishers facility future lease obligation based on updated assumptions associated with utility contractual payments and increased the liability by $0.2 million with the corresponding expense recorded within Selling, general and administrative expenses. The liability extends through the lease term and will expire in 2019.

(7) Property, Plant and Equipment

Property, plant and equipment consisted of the following:



	January 31, 2015			July 31, 2014			January 31, 2014
Land and improvements	$	10,726		$	11,622		$	10,332
Buildings and improvements	58,887			59,260			57,448
Machinery, equipment and software	215,830			217,159			214,446
Construction in progress	23,625			16,368			9,356
Capital leases ⁽¹⁾	16,265			16,678			14,796
Total	325,333			321,087			306,378
Less: accumulated depreciation	(187,514		)	(184,088		)	(174,101		)
Less: accumulated amortization	(6,072		)	(5,108		)	(2,165		)
Property, plant and equipment, net	$	131,747		$	131,891		$	130,112

⁽¹⁾ Gross amounts of assets recorded under capital leases represent machinery, equipment and software as of January 31, 2015, July 31, 2014, and January 31, 2014.

For the three and six months ended January 31, 2015, depreciation expense was $5.2 million and $10.5 million, respectively. For the three and six months ended January 31, 2014, depreciation expense was $5.9 million and $12.3 million, respectively.

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(8) Intangible Assets and Goodwill

The changes in the carrying amount of goodwill were as follows:



	Snacks			Nuts		Total
Balance as of July 31, 2013
Goodwill	$	328,490		$	72,635	$	401,125
Accumulated impairment losses	—			—		—
	328,490			72,635		401,125
Goodwill acquired during the year	—			—		—
Translation adjustments	6,964			—		6,964
Balance as of January 31, 2014
Goodwill	335,454			72,635		408,089
	$	335,454		$	72,635	$	408,089
Balance as of July 31, 2014
Goodwill	$	338,085		$	72,635	$	410,720
Accumulated impairment losses	—			—		—
	338,085			72,635		410,720
Goodwill acquired during the year	—			—		—
Translation adjustments	(10,631		)	—		(10,631		)
Balance as of January 31, 2015
Goodwill	327,454			72,635		400,089
	$	327,454		$	72,635	$	400,089

Other intangible assets consisted of the following:



	January 31, 2015			July 31, 2014			January 31, 2014
Brand intangibles (not subject to amortization)	$	261,034		$	266,603		$	265,225
Intangible assets subject to amortization:
Customer contracts and related relationships	155,966			163,600			161,635
Total other intangible assets, gross	417,000			430,203			426,860
Less accumulated amortization on intangible assets:
Customer contracts and related relationships	(41,819		)	(37,845		)	(33,761		)
Less asset impairments:
Brand intangibles	—			—			—
Customer contracts and related relationships	—			—			—
Total other intangible assets, net	$	375,181		$	392,358		$	393,099

Identifiable intangible asset amortization expense was $2.0 million and $4.0 million for the three and six months ended January 31, 2015 and for the three and six months ended January 31, 2014, respectively. Identifiable intangible asset amortization expense will amount to approximately $4.0 million for the remainder of fiscal 2015 and approximately $8.0 million for each of the next five fiscal years.

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(9) Notes Payable and Long-Term Obligations

Long-term debt outstanding:



	January 31,			July 31,			January 31,
	2015			2014			2014
Secured Credit Facility	$	—		$	—		$	318,024
Oaktree Senior Notes	—			—			227,823
Guaranteed Loan	7,209			8,333			9,459
ABL Facility	—			6,000			—
Notes	230,000			230,000			—
Term Loan Facility, net	402,216			403,082			—
Total outstanding debt	639,425			647,415			555,306
Less: current portion	(4,173		)	(10,088		)	(5,916		)
Total long-term debt	$	635,252		$	637,327		$	549,390

As of January 31, 2015, the current portion of long-term debt is presented net of an unamortized discount of $0.5 million related to the Term Loan Facility’s stated original issue discount of $2.0 million. The non-current portion of long-term debt is presented net of an unamortized discount of $1.2 million.

In accordance with ASC 470-50-40-2 – Debt – "Modifications and Extinguishments," as a result of certain lenders that participated in the Company’s debt structure both prior to and after the refinancing, it was determined that a portion of the debt refinancing was considered to be a debt modification. Accordingly, the Company recorded approximately $3.6 million, of the Oaktree call premium that is associated with the modified debt (Term Loan Facility) as a contra-debt liability. As of January 31, 2015, the current portion of long-term debt is presented net of these unamortized creditor fees of $0.8 million and the non-current portion of long-term debt is presented net of these unamortized creditor fees of $2.1 million.

In accordance with the guidance, approximately $5.2 million related to the Company’s previous original issue discount on the Oaktree Notes was also determined to be associated with the modified debt (Term Loan Facility) as a contra-debt liability. As of January 31, 2015, the current portion of long-term debt is presented net of this unamortized discount of $1.2 million and the non-current portion of long-term debt is presented net of $3.0 million.

These balances are presented on the Company’s Condensed Consolidated Balance Sheets as a contra-debt liability and will be amortized within Interest expense, net, on the Company’s Condensed Consolidated Statements of Operations over the term of the Term Loan Facility.

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Net interest expense for the three and six months ended January 31, is as follows:



	Three Months Ended January 31,						Six Months Ended January 31,
	2015			2014			2015			2014
Secured Credit Facility	$	—		$	5,698		$	—		$	11,516
Oaktree Senior Notes	—			8,415			—			15,368
Guaranteed Loan	93			122			194			250
ABL Facility	137			—			287			—
Notes	4,025			—			8,001			—
Term Loan Facility	4,473			—			9,000			—
Interest income	—			(3		)	—			(3		)
Capitalized interest	(243		)	(26		)	(433		)	(40		)
Other	298			69			518			308
Amortization of deferred financing costs and debt discounts⁽¹⁾	1,490			1,829			2,942			3,553
Interest expense, net	$	10,273		$	16,104		$	20,509		$	30,952

⁽¹⁾ Represents non-cash amortization of deferred charges incurred as a result of debt refinancings.

Description of Refinancing

On February 19, 2014, we refinanced our debt capital structure. We entered into a 4.5 year senior secured term loan facility, (the "Term Loan Facility") in an aggregate principal amount of $415 million, a 4.5 year senior secured asset-based revolving credit facility (the “ABL Facility”) in an aggregate principal amount of $125 million and issued the Notes.

Debt After Refinancing

In December 2010, Kettle Foods obtained, and Diamond guaranteed, a 10-year fixed rate loan (the “Guaranteed Loan”) in the principal amount of $21.2 million, of which $7.2 million was outstanding as of January 31, 2015. Principal and interest payments were due monthly throughout the term of the loan. The Guaranteed Loan was being used to purchase equipment for the Beloit, Wisconsin plant expansion.

The Guaranteed Loan provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility, as defined below. The financial covenants within the Guaranteed Loan were reset to match those in the Waiver and Third Amendment to the Company's Secured Credit Facility, as described in more detail below.

Additionally, on February 19, 2014, Diamond closed a transaction under a warrant exercise agreement ("Warrant Exercise Agreement"), pursuant to which Oaktree agreed to exercise in full its warrant to purchase an aggregate of 4,420,859 shares of Diamond common stock, by paying in cash the exercise price of approximately $44.2 million; less a cash exercise and contractual modification inducement fee of $15.0 million ("Warrant Exercise Transaction"). The warrant was issued to Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (“Securities Purchase Agreement”), under which Diamond issued the Oaktree Senior Notes. The $15.0 million inducement fee was included within Warrant exercise fee on the Company’s Consolidated Statement of Operations in the 2014 Annual Report on Form 10-K.

The Warrant Exercise Agreement provided that so long as Oaktree and/or its affiliates hold at least 10% of Diamond’s outstanding common stock, Oaktree will have the right to nominate one member of Diamond’s Board of Directors. In addition, until the later of (a) twelve months after Oaktree no longer has the right to nominate a member of Diamond’s Board of Directors or (b) twelve months after any director nominated by Oaktree under the Warrant Exercise Agreement or the Securities Purchase Agreement no longer serves as a director, Oaktree and its affiliates agree not to: acquire or beneficially own more than 30% of the outstanding common stock of Diamond; commence or support any tender offer for Diamond common stock; make or participate in any solicitation of proxies to vote or seek to influence any person with respect to voting its Diamond common stock; publicly announce a proposal or offer concerning any extraordinary transaction with Diamond; form, join or participate in a group for the purpose of acquiring, holding, voting or disposing of any Diamond securities; take any actions that could reasonably be expected to require Diamond to make a public announcement regarding the possibility of such an acquisition, tender offer or proxy solicitation; enter into any agreements with a third party regarding any such prohibited actions; or request Diamond to amend or waive such provisions. Upon the closing of the transactions contemplated by the Warrant Exercise Agreement, the Securities Purchase Agreement, and Diamond’s obligations thereunder, terminated. The common stock issued

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upon exercise of the warrant was issued in a private placement pursuant to exemptions from the registration requirements of the Securities Act of 1933 and are covered by a Registration Rights Agreement entered into on May 29, 2012 in connection with the Securities Purchase Agreement.

The Term Loan Facility will mature on August 20, 2018 and will amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loan Facility with the balance payable on the maturity date of the Term Loan Facility. The Term Loan Facility permits the Company to increase the term loans, or add a separate tranche of term loans, by an amount not to exceed $100 million plus the maximum amount of additional term loans that the Company could incur without its senior secured leverage ratio exceeding 4.50 to 1.00 on a pro forma basis after giving effect to such increase or addition. Amounts outstanding bear interest at a rate per annum equal to: (i) the "Eurodollar Rate" (as defined in the Term Loan Facility and subject to a “floor” of 1.00%) plus the applicable margin or (ii) the Base Rate (as defined in the Term Loan Facility), which is the greatest of (a) Credit Suisse’s prime rate, (b) the federal funds effective rate plus 0.50% and (c) the Eurodollar Rate for an interest period of one month plus 1.00%, plus, in each case, the applicable margin to be agreed with the lenders party thereto.

Loans under the ABL facility are available up to a maximum amount outstanding at any one time equal to the lesser of (a) $125 million and (b) the amount of the Borrowing Base, in each case, less customary reserves. Under the ABL Facility, the Company has a $20 million sublimit for the issuance of letters of credit, and a Swing Line Facility of up to $12.5 million for same day borrowings. Borrowing Base is defined as (a) 85% of the amount of the Company’s eligible accounts receivable; plus (b) the lesser of (i) 70% of the book value of eligible inventory in the US and (ii) 85% times the net orderly liquidation value of Diamond’s eligible inventory in the U.S.; less (c) in each case, customary reserves.

Under the ABL Facility, Diamond may elect that the loans bear interest at a rate per annum equal to: (i) the LIBOR Rate plus the applicable margin; or (ii) the Base rate plus applicable margin. “LIBOR Rate” means the rate per annum equal to (i) the Intercontinental Exchange Benchmark Administration Ltd. LIBOR Rate (“ICE LIBOR”), at approximately 11:00 a.m., London time, two Business Days prior to the commencement of the requested Interest Period. “Base Rate” means the greatest of (a) the Federal Funds Rate plus 0.5%, (b) the LIBOR Rate (which rate shall be calculated based upon an interest period of 1 month and shall be determined on a daily basis), plus 1.00%, and (c) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its “prime rate”. The LIBOR Rate shall be available for interest periods of one week or, one, two, three or six months and, if all lenders agree, twelve months. “Applicable Margin” means, as of any date of determination and with respect to Base Rate Loans or LIBOR Rate Loans, as applicable, the applicable margin set forth in the following table that corresponds to the Average Daily Net Availability of Borrower for the most recently completed fiscal quarter period.

The Term Loan Facility and ABL Facility provide for customary affirmative and negative covenants. The Term Loan Facility has customary cross-default provisions and the ABL Facility contains cross-acceleration provisions, in each case that may be triggered if Diamond fails to comply with obligations under its other credit facilities or indebtedness. The Term Loan Facility has a first priority perfected lien on substantially all property, plant and equipment, capital stock, intangibles and second priority lien on the ABL Priority Collateral, subject to customary exceptions. The ABL Facility requires Diamond to maintain a minimum fixed charge coverage ratio of 1.1:1 if at any time excess availability is less than 10% of maximum availability; and requires Diamond to apply substantially all cash collections to reduce outstanding borrowings under the ABL Facility if excess availability falls below 12.5% of maximum availability for a period of 5 consecutive business days. The ABL Facility is secured by a first-priority lien on accounts receivable, inventory, cash and deposit accounts and a second-priority lien on all real estate, equipment and equity interests of the Company under, and guarantors of, the ABL Facility.

The Notes, which will mature on March 15, 2019, were offered only to (i) qualified institutional buyers in reliance on Rule 144A of the Securities Act of 1933, as amended (“Securities Act”), and (ii) to certain non-U.S. persons in offshore transactions in reliance on Regulation S of the Securities Act. The initial issuance and sale of the Notes were not registered under the Securities Act, and the Notes may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and the registration or qualification requirements of other applicable securities laws. The terms of the Notes do not provide for registration rights. Interest on the Notes is payable on March 15 and September 15 of each year, commencing September 15, 2014. On or after March 15, 2016, Diamond may redeem all or a part of the Notes at a price equal to 103.50% of the principal amount of the Notes, plus accrued and unpaid interest, with such optional redemption prices decreasing to 101.750% on and after March 15, 2017 and 100.000% on and after March 15, 2018. Before March 15, 2016, Diamond may redeem some or all of the Notes at a price equal to 100.000% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the redemption date and the make-whole premium. Before March 15, 2016, Diamond may redeem up to 35% of the Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.000% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of

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redemption. If Diamond experiences a change of control, Diamond must offer to purchase for cash all or any part of each holder’s Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any. The indenture pursuant to which the Notes were issued contains customary covenants that, among other things, limit Diamond’s ability and Diamond’s restricted subsidiaries’ ability to incur additional indebtedness, make restricted payments, enter into transactions with affiliates, create liens, pay dividends on or repurchase stock, make specified types of investments, and sell all or substantially all of their assets or merge with other companies. Each of the covenants is subject to a number of important exceptions and qualifications.

For the three and six months ended January 31, 2015 and January 31, 2014, the interest rate for the Company’s consolidated borrowings, and excluding the Oaktree Senior Notes, was 5.28% and 5.28% and 6.37% and 6.35%, respectively. For the three and six months ended January 31, 2015 and January 31, 2014, the blended interest rate for the Company’s consolidated short-term borrowings, excluding the Oaktree Senior Notes, was 1.64% and 1.65% and 6.25% and 6.26%, respectively. As of January 31, 2015, the Company was compliant with financial and reporting covenants under the new refinanced debt structure.

(10) Income Taxes

The Company's effective tax rate was approximately 1.7% and 6.2% for the three and six months ended January 31, 2015, respectively, compared with approximately (6.9%) and (3.7%) for the three and six months ended January 31, 2014, respectively.

Our effective tax rate may be subject to fluctuation during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as the mix of forecasted pre-tax earnings in the various jurisdictions in which we operate, valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business.

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and tax basis of assets and liabilities as well as net operating loss and tax credit carryovers. The Company records a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce the valuation allowance against our deferred tax assets, our provision for income taxes will increase or decrease respectively in the period such determination is made.

The effective tax rates for the three and six months ended January 31, 2015 were determined using an estimated annual effective tax rate adjusted for discrete items that occurred in a quarter. The Company’s effective tax rates in the three and six months periods in the current year are favorably impacted by valuation allowances against deferred tax assets and the mix of pretax income by jurisdiction. The rates are negatively impacted by changes in deferred taxes resulting from the amortization of long lived intangibles, and increased pretax income in the U.S.

The effective tax rates for the three and six months ended January 31, 2014 were determined by estimating the U.S. tax provision using the discrete method provided in ASC 740 and using an estimated annual effective tax rate for the U.K. tax provision. The discrete method was used in the U.S. because of unpredictable trends in the Company’s U.S. net income or loss position due to loss on debt extinguishment and expense associated with the shareholder derivative litigation, which we do not expect to be recurring. The Company’s effective tax rates in the three and six months periods in the prior year were negatively impacted by changes in deferred taxes resulting from the amortization of long lived intangibles, valuation allowances against deferred tax assets, and state income tax expense.

(11) Retirement Plans

Diamond provides retiree medical benefits and sponsors one defined benefit pension plan. Any employee who joined the Company after January 15, 1999 is not entitled to retiree medical benefits. The defined benefit plan is a qualified plan covering all bargaining unit employees. Diamond uses a July 31 measurement date for its plans. Plan assets are held in trust and primarily include mutual funds and money market accounts. Diamond previously sponsored a nonqualified plan that was terminated in fiscal 2013 and all benefits were distributed in December 2012. There are no obligations under the nonqualified plan as of January 31, 2015.

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Components of net periodic benefit cost (income) were as follows:



	Pension Benefits												Other Benefits
	Three Months Ended January 31,						Six Months Ended January 31,						Three Months Ended January 31,						Six Months Ended January 31,
	2015			2014			2015			2014			2015			2014			2015			2014
Service cost	$	—		$	—		$	—		$	—		$	11		$	10		22			19
Interest cost	255			247			511			492			17			17			34			34
Expected return on plan assets	(291		)	(271		)	(583		)	(541		)	—			—			—			—
Amortization of net loss / (gain)	125			84			251			169			(131		)	(177		)	(263		)	(353		)
Net periodic benefit cost / (income)	$	89		$	60		$	179		$	120		$	(103	)	$	(150	)	$	(207	)	$	(300	)

The Company sponsors two defined contribution plans and recognized expenses of $0.3 million and $0.7 million for the three and six months ended January 31, 2015, respectively, and $0.1 million and $0.4 million for the three and six months ended January 31, 2014, respectively. The Company expects to contribute a total of approximately $1.4 million to the defined contribution plan during fiscal 2015.

(12) Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) attributable to the Company are foreign currency translation adjustments and changes in pension liabilities.

Changes in accumulated other comprehensive income for the six months ended January 31, 2014 by component were as follows:



	Pension Liability Adjustment			Foreign Currency Translation Adjustment		Total
Balance as of August 1, 2013	$	522		$	3,485	$	4,007
Other comprehensive income (loss) before reclassifications	—			15,376		15,376
Amounts reclassified from accumulated other comprehensive income:
Amortization of prior gain/(loss) included in net periodic pension cost	(184		)	—		(184		)
Net other comprehensive income (loss)	(184		)	15,376		15,192
Balance as of January 31, 2014	$	338		$	18,861	$	19,199

Changes in accumulated other comprehensive income for the six months ended January 31, 2015 by component were as follows:



	Pension Liability Adjustment			Foreign Currency Translation Adjustment			Total
Balance as of August 1, 2014	$	(1,968	)	$	25,601		$	23,633
Other comprehensive income (loss) before reclassifications	—			(23,493		)	(23,493		)
Amounts reclassified from accumulated other comprehensive income:
Amortization of prior gain/(loss) included in net periodic pension cost	(12		)	—			(12		)
Net other comprehensive income (loss)	(12		)	(23,493		)	(23,505		)
Balance as of January 31, 2015	$	(1,980	)	$	2,108		$	128

The reclassifications out of accumulated other comprehensive income (loss) related to the pension liability are reflected in Selling, general and administrative expenses and Cost of goods sold in the Condensed Consolidated Statements of Operations for the six months ended January 31, 2015, and January 31, 2014, respectively.

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(13) Commitments and Contingencies

In re Diamond Foods Inc., Shareholder Derivative Litigation

In fiscal 2012, putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond and naming certain executive officers and the members of Diamond’s board of directors as individual defendants. These lawsuits, which related principally to the Company’s accounting for certain payments to walnut growers in fiscal 2010 and 2011, were subsequently consolidated as In re Diamond Foods Inc., Shareholder Derivative Litigation which purports to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement. Following mediation efforts, the parties agreed to terms of a proposed settlement and the court entered an order granting final approval of the settlement on August 19, 2013. On September 23, 2013, a Notice of Appeal from the order granting final approval was filed by a single stockholder. No date for this hearing on this appeal has been scheduled. The Company will continue to incur costs associated with this action, and, depending on the ultimate outcome, could continue to do so, and management’s attention may be diverted to this matter. This could have a material adverse effect on the Company’s business, financial condition and results of operations.

Labeling Class Action Cases

On January 3, 2014, Deena Klacko first filed a putative class action against Diamond in the Southern District of Florida, alleging that certain ingredients contained in the Company’s TIAS tortilla chip product were not natural and seeking damages and injunctive relief. The lawsuit alleged five causes of actions alleging violations of Florida’s Deceptive and Unfair Trade Practices Act, negligent misrepresentation, breach of implied warranty for particular purpose, breach of express warranty and the Magnuson-Warranty Act. The complaint seeks to certify a class of Florida consumers who purchased TIAS tortilla chips since January 3, 2010. On January 9, 2014, Dominika Surzyn brought a similar class action against Diamond relating to our TIAS tortilla chips in federal court for the Northern District of California. Surzyn purports to represent a class of California consumers who purchased said Kettle TIAS products since January 9, 2010.

On April 2, 2014, Richard Hall filed a putative class action against the Company in San Francisco Superior Court, alleging that certain ingredients contained in the Company’s Kettle Brand chips and TIAS Tortilla Chips are not natural and seeking damages and injunctive relief. The complaint purports to assert seven causes of action for alleged violations of California’s Business and Profession’s Code, California’s Consumer Legal Remedies Act and for restitution based on quasi-contract/unjust enrichment. Plaintiff purports to bring this action on his own behalf, as well as on behalf of all consumers in the United States, or alternatively, California, who purchased certain of Diamond’s Kettle Brand Chips or Kettle Brand TIAS tortilla chips within 4 years of the filing of the complaint.

The Company denies all allegations in these cases. Following mediation and settlement discussions among plaintiffs’ counsel in Klacko, Surzyn and Hall, the parties entered into a settlement agreement preliminarily approved by the court, and it is expected that they will resolve all claims on a nationwide basis and include: Diamond to take certain injunctive relief measures to confirm labeling compliance matters; establishment of a $3.0 million common fund for claims made available to the class and for the payment of class administration and attorneys’ fees; and any funds unclaimed by the class to be provided cy pres to a charity as a food donation. The Company recognized the related settlement charges within the consolidated financial statements for fiscal 2014. On October 30, 2014, the court granted preliminary approval of the settlement. On February 23, 2015, the plaintiffs filed a motion for final approval of the settlement. The settlement is subject to final court approval. The Company cannot predict with certainty the ultimate resolution of these lawsuits, and an unfavorable outcome in excess of amounts recognized as of July 31, 2014, with respect to one or more of these proceedings could have a material adverse effect on the Company’s results of operations for the periods in which a loss is recognized.

Other

Diamond is involved in various legal actions in the ordinary course of our business. The Company does not believe it is feasible to predict or determine the outcome or resolution of these litigation proceedings, or to estimate the amounts of, or potential range of, loss with respect to those proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or settlements that could require substantial payments by us, which could have a material impact on Diamond’s financial position, results of operations and cash flows.

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(14) Segment Reporting

The Company has five operating segments that it aggregates into two reportable segments based on similarities between: economic characteristics, nature of the products, production process, type of customer, methods of distribution, and regulatory environment. The Company’s two reportable segments are Snacks and Nuts. The Snacks reportable segment predominantly includes products sold under Kettle U.S., Kettle U.K. and Pop Secret. The Nuts reportable segment predominantly includes products sold under Emerald and Diamond of California.

The Company evaluates the performance of its segments based on net sales and gross profit. Gross profit is calculated as net sales less all cost of sales. The Company’s CODM does not receive or utilize asset information to evaluate performance of operating segments, so asset-related information has not been presented. The accounting policies of the Company’s segments are the same as those described in the summary of critical accounting policies set forth in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”

The Company’s net sales and gross profit by segment were as follows:



	Three Months Ended January 31,				Six Months Ended January 31,
	2015		2014		2015		2014
Net sales
Snacks	$	120,437	$	116,756	$	237,027	$	229,346
Nuts	109,230		103,821		239,261		225,899
Total	$	229,667	$	220,577	$	476,288	$	455,245
Gross profit
Snacks	$	41,767	$	42,538	$	84,723	$	81,961
Nuts	19,391		13,390		35,825		31,900
Total	$	61,158	$	55,928	$	120,548	$	113,861

(15) Subsequent Events

On February 3, 2015, the Company purchased 51% of the outstanding shares of Yellow Chips Holding B.V. ("Yellow Chips"), which through its wholly-owned subsidiary, Yellow Chips B.V., produces vegetable and organic potato chips primarily for the Dutch and other European markets. The cash consideration paid at the close of the transaction was $1.7 million.

The Company will account for this transaction as a business combination in accordance with ASC 805, "Business Combinations". The initial accounting will be recorded in the Company's quarterly report for the third quarter of fiscal 2015.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are an innovative packaged food company focused on building and energizing brands. We specialize in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, we complemented our strong heritage in the culinary nut market under the Diamond of California® brand by launching a line of snack nuts under the Emerald® brand. In 2008, we acquired the Pop Secret® brand of microwave popcorn products, which provided us with increased scale in the snack market. In 2010, we acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and the United Kingdom, adding the complementary premium Kettle Brand® to our existing portfolio.

Our business is seasonal. In sourcing walnuts, we contract directly with growers for their walnut crop. We typically receive walnuts during the period from September to November, and we pay for the crop throughout the year in accordance with our walnut purchase agreements with the growers. We typically receive in-shell pecans during the period from October to March, and shelled pecans throughout the fiscal year, and pay for them over those periods upon receipt. As a result of this seasonality, our personnel, working capital requirements and walnut inventories peak during the last four months of each calendar year. We experience seasonality in capacity utilization at our Stockton, California facility associated with the annual walnut harvest and seasonal in-shell and culinary product demand. Generally, we receive and pay for approximately 50% of the

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corn for popcorn in November and approximately 50% in April. We contract for potatoes and oil annually and at times throughout the year and receive and pay for this supply throughout the year.

The functional currency of our U.K. operations is the British pound. Due to fluctuations in the British pound for the three and six months ended January 31, 2015, there were significant impacts on translation adjustment as shown within our Condensed Consolidated Statements of Comprehensive Income(Loss).

We report our operating results on the basis of a fiscal year that starts August 1 and ends July 31. We refer to the fiscal years ended July 31, 2015, 2014, 2013, and 2012, as “fiscal 2015,” “fiscal 2014,” “fiscal 2013” and “fiscal 2012”, respectively.

Results of Operations

We aggregate our operating segments into two reportable segments, which are Snacks and Nuts. The Snacks reportable segment predominantly includes products sold under the Kettle Brand®, Kettle Chips®, and Pop Secret® trade names. The Nuts reportable segment predominantly includes products sold under the Emerald® and Diamond of California® trade names. The Company evaluates the performance of its segments based on net sales and gross profit for each segment. Gross profit is calculated as net sales less all cost of sales.

Our net sales and gross profit by segment for the periods identified below were as follows (in thousands):



	Three Months Ended January 31,				% Change from	Six Months Ended January 31,				% Change from
	2015		2014		2014 to 2015	2015		2014		2014 to 2015
Net sales
Snacks	$	120,437	$	116,756	3%	$	237,027	$	229,346	3%
Nuts	109,230		103,821		5%	239,261		225,899		6%
Total	$	229,667	$	220,577	4%	$	476,288	$	455,245	5%
Gross profit
Snacks	$	41,767	$	42,538	(2)%	$	84,723	$	81,961	3%
Nuts	19,391		13,390		45%	35,825		31,900		12%
Total	$	61,158	$	55,928	9%	$	120,548	$	113,861	6%

For the three and six months ended January 31, 2015, Snacks segment net sales increased to $120.4 million from $116.8 million and increased to $237.0 million from $229.3 million, respectively, primarily due to increases in volume of 9.4% and 6.9%, respectively. Net sales in our U.S. operations increased for the three and six months ended January 31, 2015, primarily due to increased points of distribution, increases in pricing and incremental promotional activity. This increase was partially offset by our U.K. operations that was impacted by a difficult trading environment, increased competition, loss of a private label contract, increased promotional activity and unfavorable changes in foreign exchange rates.

For the three and six months ended January 31, 2015, Nuts segment net sales increased to $109.2 million from $103.8 million and increased to $239.3 million from $225.9 million, respectively, primarily driven by increases in pricing in our Diamond of California and Emerald brands and favorable product mix. This was partially offset by decreases in volume of 8.2% and 4.7% for the three and six months ended January 31, 2015, respectively. Decreases in volume were partially attributable to the transition from canisters to small bags for the Emerald brand.

Sales to our largest customer, Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), represented approximately 19.2% and 17.8% of total net sales for the three and six months ended January 31, 2015, respectively, and 17.2% and 15.3% of total net sales for the three and six months ended January 31, 2014, respectively. No other customer accounted for 10% or more of our total net sales for those periods.

Gross margin. Snacks segment gross profit as a percentage of net sales was 34.7% and 35.7% for the three and six months ended January 31, 2015, respectively, and 36.4% and 35.7% for the three and six months ended January 31, 2014. For the three months ended January 31, 2015, gross margin decreased primarily due to increased promotional spending in the U.S. and U.K. Gross margin for the six months ended January 31, 2015 remained consistent as compared to prior year.

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Nuts segment gross profit as a percentage of net sales was 17.8% and 15.0% for the three and six months ended January 31, 2015 and 12.9% and 14.1% for the three and six months ended January 31, 2014. For the three and six months ended January 31, 2015, gross margin increased primarily due to improved net price realization and lower walnut costs, partially offset by higher other tree nut costs. As discussed in Item 1A. Risk Factors, our commodity costs are subject to fluctuations in availability and price that could adversely impact our business and financial results.

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 $29.2 million and 12.7% of net sales and $57.8 million and 12.1% of net sales for the three and six months ended January 31, 2015, respectively, and were $33.8 million and 15.3% of net sales and $90.4 million and 19.9% of net sales for the three and six months ended January 31, 2014, respectively. Selling, general and administrative expenses included $1.4 million and $3.3 million for the three and six months ended January 31, 2015, respectively, and $0.6 million and $2.3 million for the three and six months ended January 31, 2014, respectively, associated with certain legal expenses related to matters stemming from our audit committee investigation and restatement. In fiscal 2014, we obtained preliminary approval to settle the action In re Diamond Foods Inc., Securities Litigation ("Securities Settlement"). For the three and six months ended January 31, 2015, therefore, Selling, general and administrative expenses decreased as we no longer recorded changes in the fair value of the stock portion of the Securities Settlement. For the three and six months ended January 31, 2014 we recorded a $8.7 million and $32.2 million loss, respectively, associated with the change in fair value of the Securities Settlement. Additionally, in the first quarter of fiscal 2014, we recorded $5.0 million expense associated with the resolution of the SEC investigation.

Advertising. Advertising costs were $9.7 million and $21.5 million for the three and six months ended January 31, 2015, respectively, and $13.1 million and $23.8 million for the three and six months ended January 31, 2014, respectively. Advertising expenses as a percentage of net sales was 4.2% and 4.5% for the three and six months ended January 31, 2015, respectively, and 6.0% and 5.2% for the three and six months ended January 31, 2014, respectively. The decrease in advertising spend was due to strategic reinvestment into promotional programs.

Acquisition related expenses. In the third quarter of fiscal 2015, we purchased 51% of the outstanding shares of Yellow Chips Holding B.V. ("Yellow Chips"), which through its wholly-owned subsidiary, Yellow Chips B.V., produces vegetable and organic potato chips primarily for the Dutch and other European markets. Acquisition and integration related expenses were $0.6 million and 0.3% of net sales for the three months ended January 31, 2015. See Note 15 to the Notes to the Condensed Consolidated Financial Statements for further discussion of this acquisition.

Loss on warrant liability. The warrant liability was not outstanding for the three and six months ended January 31, 2015, respectively. For the three and six months ended January 31, 2014, the loss on warrant liability was $7.0 million and 3.2% of net sales and $23.9 million and 5.3% of net sales, respectively. The loss on warrant liability for the three and six months ended January 31, 2014 was due to the change in the fair value of the warrant liability associated with a warrant issued to a subsidiary of Oaktree Capital Management, L.P. ("Oaktree") in May 2012. The warrant was exercised in February 2014 in connection with a subsequent refinancing, and accordingly we no longer have a liability associated with the warrant as of January 31, 2015.

Interest expense, net. Interest expense, net was $10.3 million, and 4.5% of net sales and $20.5 million and 4.3% of net sales for the three and six months ended January 31, 2015, respectively, and was $16.1 million and 7.3% of net sales and $31.0 million and 6.8% of net sales for the three and six months ended January 31, 2014, respectively. For the three and six months ended January 31, 2015, approximately $1.5 million and $2.9 million, respectively, and for the three and six months ended January 31, 2014, approximately $1.8 million and $3.6 million, respectively, of Interest expense represented non-cash amortization of deferred charges incurred as a result of debt refinancings. Interest expense, net decreased for the three and six months ended January 31, 2015 primarily due to our refinanced debt structure which yields lower interest rates than our previously held debt obligations which included the payment-in-kind interest on the senior notes held by Oaktree, including $75 million of the senior notes subject to exchange for convertible preferred stock upon achievement of certain profitability targets ("Special Redemption") ( the "Oaktree Senior Notes").

Income taxes. Our effective tax rate was approximately 1.7% and 6.2% for the three and six months ended January 31, 2015, respectively, compared with approximately (6.9%) and(3.7%) for the three and six months ended January 31, 2014, respectively. The change in the effective tax rate for the three and six months ended January 31, 2015 as compared to 2014 was due to tax impacts of shifts in pretax income by jurisdiction, valuation allowances against deferred tax assets, and using the annualized effective rate in 2015 versus using the discrete method in computing the tax rates in 2014.

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Liquidity and Capital Resources

Our liquidity is dependent upon funds generated from operations and external sources of financing, including our ABL Facility discussed below.

Cash provided by operating activities was $69.0 million during the six months ended January 31, 2015, compared to $61.8 million cash provided by operating activities for the six months ended January 31, 2014. The increase in cash provided by operating activities was primarily due to improved operating results and the positive cash flow impact of changes in certain working capital items; primarily an increase in grower payables, offset by an increase in inventories. Cash used in investing activities was $13.8 million during the six months ended January 31, 2015, compared to cash used in investing activities of $7.7 million for the six months ended January 31, 2014. The change in cash used for investing activities primarily related to machinery and equipment additions associated with our standard business operations in the U.S. and U.K. and capitalizable costs associated with our financial system upgrade implementation. In addition, cash used in financing activities was $10.8 million during the six months ended January 31, 2015, compared to $53.7 million of cash used in financing activities during the six months ended January 31, 2014. The decrease in cash used by financing activities is primarily due to lower net repayments under our existing revolving line of credit for the six months ended January 31, 2015 versus larger net repayments being made under our previous revolving line of credit for the six months ended January 31, 2014.

Working capital and stockholders’ equity were $132.0 million and $283.5 million at January 31, 2015, compared to $110.3 million and $283.8 million at July 31, 2014, and ($138.8) million and $131.3 million at January 31, 2014. The increase in working capital between January 31, 2015 and January 31, 2014 was primarily due to the increase in cash on hand, extinguishment of the warrant liability and Securities Settlement liability in the third quarter of fiscal 2014, an increase in inventories, partially offset by an increase in grower payables as of the balance sheet date. Capitalized expenditures were $13.8 million for the six months ended January 31, 2015 and $7.7 million for the six months ended January 31, 2014.

Description of Refinancing

Debt After Refinancing

In December 2010, Kettle Foods obtained, and we guaranteed, a 10-year fixed rate loan (the “Guaranteed Loan”) in the principal amount of $21.2 million, of which $7.2 million was outstanding as of January 31, 2015. Principal and interest payments were due monthly throughout the term of the loan. The Guaranteed Loan was being used to purchase equipment for our Beloit, Wisconsin plant expansion.

The Guaranteed Loan provides for customary affirmative and negative covenants. The financial covenants within the Guaranteed Loan were reset to match those in the Waiver and Third Amendment to its Secured Credit Facility.

Additionally, on February 9, 2014, we entered into the Warrant Exercise Agreement pursuant to which Oaktree agreed to exercise in full its warrant to purchase an aggregate of 4,420,859 shares of our common stock, by paying in cash the exercise price of approximately $44.2 million; less a cash exercise and contractual modification inducement fee of $15.0 million. The warrant was issued to Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (“Securities Purchase Agreement”), under which we issued the Oaktree Senior Notes.

The Warrant Exercise Agreement provided that so long as Oaktree and/or its affiliates hold at least 10% of our outstanding common stock, Oaktree will have the right to nominate one member of our Board of Directors. In addition, until the later of (a) twelve months after Oaktree no longer has the right to nominate a member of our Board of Directors or (b) twelve months after any director nominated by Oaktree under the Warrant Exercise Agreement or the Securities Purchase Agreement no longer serves as a director, Oaktree and its affiliates agree not to: acquire or beneficially own more than 30% of the outstanding common stock of Diamond; commence or support any tender offer for our common stock; make or participate in any solicitation of proxies to vote or seek to influence any person with respect to voting its Diamond common stock; publicly announce a proposal or offer concerning any extraordinary transaction with us; form, join or participate in a group for the purpose of acquiring, holding, voting or disposing of any our securities; take any actions that could reasonably be expected to require us to make a public announcement regarding the possibility of such an acquisition, tender offer or proxy solicitation; enter into any agreements with a third party regarding any such prohibited actions; or request us to amend or waive such provisions. Upon the closing of the transactions contemplated by the Warrant Exercise Agreement, the Securities Purchase Agreement, and our obligations thereunder, terminated. The common stock issued upon exercise of the warrant were issued in a

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private placement pursuant to exemptions from the registration requirements of the Securities Act of 1933 and are covered by a Registration Rights Agreement entered into on May 29, 2012 in connection with the Securities Purchase Agreement.

The Term Loan Facility will mature on August 20, 2018 and will amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loan Facility with the balance payable on the maturity date of the Term Loan Facility. The Term Loan Facility permits us to increase the term loans, or add a separate tranche of term loans, by an amount not to exceed $100 million plus the maximum amount of additional term loans that we could incur without our senior secured leverage ratio exceeding 4.50 to 1.00 on a pro forma basis after giving effect to such increase or addition. Amounts outstanding bear interest at a rate per annum equal to: (i) the "Eurodollar Rate" (as defined in the Term Loan Facility and subject to a “floor” of 1.00%) plus the applicable margin or (ii) the Base Rate (as defined in the Term Loan Facility), which is the greatest of (a) Credit Suisse’s prime rate, (b) the federal funds effective rate plus 0.50% and (c) the Eurodollar Rate for an interest period of one month plus 1.00%, plus, in each case, the applicable margin to be agreed with the lenders party thereto.

Loans under the ABL Facility are available up to a maximum amount outstanding at any one time equal to the lesser of (a) $125 million and (b) the amount of the Borrowing Base, in each case, less customary reserves. Under the ABL Facility, we have a $20 million sub-limit for the issuance of letters of credit, and a Swing Line Facility of up to $12.5 million for same day borrowings. Borrowing Base is defined as (a) 85% of the amount of our eligible accounts receivable; plus (b) the lesser of (i) 70% of the book value of eligible inventory in the US and (ii) 85% times the net orderly liquidation value of our eligible inventory in the U.S.; less (c) in each case, customary reserves. As of January 31, 2015, there were no loans outstanding under the ABL Facility, the amount of letters of credit issued under the ABL Facility was $4.7 million and the net availability under the ABL Facility was $119.8 million. The maximum balance outstanding under the ABL Facility for the six months ended January 31, 2015 was $10.0 million.

Under the ABL Facility, we may elect that the loans bear interest at a rate per annum equal to: (i) the Base Rate plus the applicable margin; or (ii) the LIBOR Rate plus the applicable margin. “Base Rate” means the greatest of (a) the Federal Funds Rate plus 0.5%, (b) the LIBOR Rate (which rate shall be calculated based upon an interest period of 1 month and shall be determined on a daily basis), plus 1.00%, and (c) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its “prime rate.” The LIBOR Rate shall be available for interest periods of one week or, one, two, three or six months and, if all lenders agree, twelve months.

The Term Loan Facility and ABL Facility provide for customary affirmative and negative covenants. The Term Loan Facility has customary cross-default provisions and the ABL Facility contains cross-acceleration provisions, in each case that may be triggered if we fail to comply with obligations under our other credit facilities or indebtedness. The Term Loan Facility has a first priority perfected lien on substantially all property, plant and equipment, capital stock, intangibles and second priority lien on the ABL Priority Collateral, subject to customary exceptions. The ABL Facility requires us to maintain a minimum fixed charge coverage ratio of 1.1:1 if at any time excess availability is less than 10% of maximum availability; and requires us to apply substantially all cash collections to reduce outstanding borrowings under the ABL Facility if excess availability falls below 12.5% of maximum availability for a period of 5 consecutive business days. The ABL Facility is secured by a first-priority lien on accounts receivable, inventory, cash and deposit accounts and a second-priority lien on all real estate, equipment and equity interests of the Company under, and guarantors of, the ABL Facility.

The Notes, which will mature on March 15, 2019, were offered only to (i) qualified institutional buyers in reliance on Rule 144A of the Securities Act of 1933, as amended (“Securities Act”), and (ii) to certain non-U.S. persons in offshore transactions in reliance on Regulation S of the Securities Act. The initial issuance and sale of the Notes were not registered under the Securities Act, and the Notes may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and the registration or qualification requirements of other applicable securities laws. The terms of the Notes do not provide for registration rights. Interest on the Notes is payable on March 15 and September 15 of each year, commencing September 15, 2014. On or after March 15, 2016, we may redeem all or a part of the Notes at a price equal to 103.500% of the principal amount of the Notes, plus accrued and unpaid interest, with such optional redemption prices decreasing to 101.750% on and after March 15, 2017 and 100.000% on and after March 15, 2018. Before March 15, 2016, we may redeem some or all of the Notes at a price equal to 100.000% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the redemption date and the make-whole premium. Before March 15, 2016, we may redeem up to 35% of the Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.000% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of redemption. If we experience a change of control, we must offer to purchase for cash all or any part of each holder’s Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any. The indenture pursuant to which the Notes were issued contains customary covenants that, among other things, limit our ability and our restricted subsidiaries’ ability to incur additional indebtedness, make restricted payments, enter into transactions with affiliates, create liens, pay

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dividends on or repurchase stock, make specified types of investments, and sell all or substantially all of their assets or merge with other companies. Each of the covenants is subject to a number of important exceptions and qualifications.

For the three and six months ended January 31, 2015 and January 31, 2014, the blended interest rate for our consolidated borrowings, including obligations under the our refinanced debt capital structure and excluding the Oaktree Senior Notes, was 5.28% and 5.28% and 6.37% and 6.35%, respectively. For the three and six months ended January 31, 2015 and January 31, 2014, the blended interest rate for consolidated short-term borrowings, including obligations under the our refinanced debt capital structure and excluding the Oaktree Senior Notes, was 1.64% and 1.65% and 6.25% and 6.26%, respectively. As of January 31, 2015, we were compliant with financial and reporting covenants under the new refinanced debt structure.

Contractual Obligations and Commitments

Contractual obligations and commitments at January 31, 2015, were as follows (in millions):



	Payments Due by Period
	Total		FY2015		FY 2016- FY 2017		FY 2018- FY 2019		Thereafter
ABL Facility	$	—	$	—	$	—	$	—	$	—
Long-term obligations	648.0		3.3		13.3		631.4		—
Interest on long-term obligations (a)	130.8		17.0		67.9		45.9		—
Capital leases	9.7		1.3		5.7		2.1		0.6
Interest on capital leases	1.2		0.3		0.7		0.2		—
Operating leases	36.8		2.6		9.3		8.7		16.2
Purchase commitments (b)	43.1		41.2		1.9		—		—
Pension liability	9.0		0.4		1.5		1.7		5.4
Long-term deferred tax liabilities (c)	112.0		—		—		—		112.0
Other long-term liabilities (d)	5.8		0.7		2.8		1.5		0.8
Total	$	996.4	$	66.8	$	103.1	$	691.5	$	135.0


(a)	Amounts represent the expected cash interest payments on our long-term debt. Interest on our variable rate debt was forecasted using a LIBOR forward curve analysis as of January 31, 2015.


(b)	Commitments to purchase inventory and equipment. Excludes purchase commitments under Walnut Purchase Agreements as the price is not fixed within these contracts.


(c)	Primarily relates to the intangible assets of Kettle Foods.


(d)	Excludes $0.4 million in deferred rent liabilities. Additionally, the liability for uncertain tax positions ($1.5 million at January 31, 2015, excluding associated interest and penalties) has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined.

Effects of Inflation

There has been no material change in our exposure to inflation from that discussed in our 2014 Annual Report on Form 10-K.

Critical Accounting Policies

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

There have been no material changes to our critical accounting policies from those discussed in our 2014 Annual Report on Form 10-K except as described below:

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Inventories. All inventories are accounted for on a lower of cost or market basis, with cost historically determined using a combination of first-in first-out ("FIFO") and weighted average cost. Beginning in the first fiscal quarter of 2015, we have changed our inventory valuation method from FIFO to weighted average cost for certain of our inventories. The effect of this change was not material to our Condensed Consolidated Financial Statements for the three and six months ended January 31, 2015.

We have entered into walnut purchase agreements with growers, under which they deliver their walnut crop to us during the fall harvest season, and we determine the price for this inventory after receipt and by the end of the fiscal year. This purchase price is determined by us based on our discretion as provided in the agreements, taking into account market conditions, crop size and quality and nut varieties, among other relevant factors. Since the ultimate purchase price to be paid will be determined subsequent to receiving the walnut crop, we estimate the final purchase price for our interim financial statements. Those interim estimates may subsequently change due to changes in the factors described above and the effect of the change could be significant. Any such changes in estimates are accounted for in the period of change by adjusting inventory on hand or cost of goods sold if the inventory is sold through.

Recent Accounting Pronouncements

See Note 2 to the Notes to Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in our exposure to market risk from that discussed in our 2014 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that, due to the material weakness in our internal control over financial reporting described below, the Company’s disclosure controls and procedures were not effective as of January 31, 2015.

Changes in Internal Control Over Financial Reporting

There were changes in our internal control over financial reporting during the quarter ended January 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting to remediate the previously reported material weakness related to complex and non-routine transactions. We have enhanced our internal technical accounting capabilities and augmented those capabilities through the use of third party advisors, when necessary. We also developed a technical accounting training program to enhance awareness and understanding of standards and principles related to complex technical accounting topics.

Material Weakness Previously Identified

We previously identified and disclosed in our Annual Report on Form 10-K for the period ended July 31, 2014, a material weakness in our internal control over financial reporting over complex and non-routine transactions that still existed as of January 31, 2015. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness in our internal control over financial reporting:


•	Complex and Non-routine Transactions — We did not maintain effective controls over the accounting for complex and non-routine transactions. Specifically, we did not utilize sufficient technical accounting capabilities related to complex and non-routine transactions.

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This material weakness resulted in audit adjustments in prior periods related to currency translation associated with the allocation of goodwill to reporting units resulting from a change in segments, impairment of a long-lived intangible asset resulting from facility closure, classification of restricted cash on the consolidated statement of cash flows and the restatement of the Company’s condensed consolidated financial statements for the three and six months ended January 31, 2013 to correct diluted earnings (loss) per share. Additionally, this material weakness could result in misstatements of the condensed consolidated financial statements that would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.

Remediation Efforts

We developed certain remediation steps to address the previously disclosed material weaknesses discussed above and to improve our internal control over financial reporting. The Company and the Board take the control and integrity of the Company’s financial statements seriously and believe that the remediation steps described below are essential to maintaining a strong internal control environment. The following remediation steps are among the measures that are being implemented by the Company:

Complex and Non-routine Transactions


•	Continued evaluation and enhancement of internal technical accounting capabilities augmented by the use of third-party advisors and consultants to assist with areas requiring specialized technical accounting expertise and reviewed by management.


•	Develop and implement technical accounting training, led by appropriate technical accounting experts, to enhance awareness and understanding of standards and principles related to relevant complex technical accounting topics.

We believe that these remediation actions represent significant improvements to our internal controls. However, before management can conclude that the material weakness has been remediated, the control will need to be operating effectively and tested over a reasonable period of time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting. If not remediated, further remediation measures may be required, which may result in additional implementation time.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In re Diamond Foods Inc., Shareholder Derivative Litigation

In fiscal 2012, putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond and naming certain executive officers and the members of our board of directors as individual defendants. These lawsuits, which related principally to our accounting for certain payments to walnut growers in fiscal 2010 and 2011, were subsequently consolidated as In re Diamond Foods Inc., Shareholder Derivative Litigation which purports to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement. Following mediation efforts, the parties agreed to terms of a proposed settlement and the court entered an order granting final approval of the settlement on August 19, 2013. On September 23, 2013, a Notice of Appeal from the order granting final approval was filed by a single stockholder. No date for this hearing on this appeal has been scheduled. The Company will continue to incur costs associated with this action, and, depending on the ultimate outcome, could continue to do so, and management’s attention may be diverted to this matter. This could have a material adverse effect on our business, financial condition and results of operations.

Labeling Class Action Cases

On January 3, 2014, Deena Klacko first filed a putative class action against Diamond in the Southern District of Florida, alleging that certain ingredients contained in our TIAS tortilla chip product were not natural and seeking damages and injunctive relief. The lawsuit alleged five causes of actions alleging violations of Florida’s Deceptive and Unfair Trade Practices Act, negligent misrepresentation, breach of implied warranty for particular purpose, breach of express warranty and the Magnuson-Warranty Act. The complaint seeks to certify a class of Florida consumers who purchased TIAS tortilla chips since January 3, 2010. On January 9, 2014, Dominika Surzyn brought a similar class action against Diamond relating to our TIAS tortilla chips in federal court for the Northern District of California. Surzyn purports to represent a class of California consumers who purchased said Kettle TIAS products since January 9, 2010.

On April 2, 2014, Richard Hall filed a putative class action against the Company in San Francisco Superior Court, alleging that certain ingredients contained in our Kettle Brand chips and TIAS Tortilla Chips are not natural and seeking

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damages and injunctive relief. Plaintiff purports to bring this action on his own behalf, as well as on behalf of all consumers in the United States, or alternatively, California, who purchased certain of Diamond’s Kettle Brand Chips or Kettle Brand TIAS tortilla chips within four years of the filing of the complaint.

The Company denies all allegations in these cases. Following mediation and settlement discussions among plaintiffs’ counsel in Klacko, Surzyn and Hall, the parties entered into a settlement agreement, and it is expected to resolve all claims on a nationwide basis and include: Diamond to take certain injunctive relief measures to confirm labeling compliance matters; establishment of a $3.0 million common fund for claims made available to the class and for the payment of class administration and attorneys’ fees; and any funds unclaimed by the class to be provided cy pres to a charity as a food donation. The Company recognized the related settlement charges within the consolidated financial statements for fiscal 2014. On October 30, 2014, the court granted preliminary approval of the settlement. On February 23, 2015, the plaintiffs filed a motion for final approval of the settlement. The settlement is subject to final court approval. We cannot predict with certainty the ultimate resolution of these lawsuits, and an unfavorable outcome in excess of amounts recognized as of July 31, 2014, with respect to one or more of these proceedings could have a material adverse effect on our results of operations for the periods in which a loss is recognized.

Other

We are involved in various legal actions in the ordinary course of our business. We do not believe it is feasible to predict or determine the outcome or resolution of these litigation proceedings, or to estimate the amounts of, or potential range of, loss with respect to those proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or settlements that could require substantial payments by us, which could have a material impact on our financial position, results of operations and cash flows.

Item 1A. Risk Factors

You should consider carefully each of the risks described below, together with all of the information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended July 31, 2014, before deciding to invest in our common stock. The risks described herein are applicable to both our domestic and foreign operations. If any of the risks outlined herein occurs, our business, financial condition, or results of operations may suffer.

Risks Related to Our Business

Raw materials that are key ingredients to our products are subject to fluctuations in availability and price that could adversely impact our business and financial results.

The availability, size, quality and cost of raw materials for the production and packaging of our products, including nuts, potatoes, corn and corn products, cooking and vegetable oils, corrugate, resins and other commodities, are subject to price volatility and fluctuations in availability caused by changes in global supply and demand, weather conditions, governmental agricultural and energy programs, exchange rates for foreign currencies and consumer demand. In particular, the availability and cost of walnuts and other nuts are subject to supply contract renewals, crop size, quality, yield fluctuations, and changes in governmental regulation as well as other factors. Additionally, we rely on raw materials that come from regions that suffer from severe water scarcity or yearly fluctuations, such as California, and such conditions may affect the availability of raw materials not only in a particular season but also over time.

We source walnuts primarily from growers with whom we have entered into walnut purchase agreements. To the extent contracted growers deliver less supply than we expected or we are unable to renew enough walnut purchase agreements or enter into such agreements with new growers in any particular year, we may not have sufficient walnut supply under contract to satisfy our business requirements, which could have an adverse effect on our sales and our results of operations. To obtain sufficient walnut supply, which represents a significant portion of our cost of goods sold, we may be required to purchase walnuts from third parties at substantially higher prices or forgo sales to some market segments, which would reduce our profitability. If we forgo sales to such market segments, we may lose customers and may not be able to replace them later. Given our fixed costs from our manufacturing facilities, if we have a lower supply of walnuts or other raw materials, our unit costs will increase and our gross margin will decline.

We make estimates of the price we will pay for walnuts to growers under contract starting in the first quarter of our fiscal year and, pursuant to our accounting policies, finalize the price to be paid to growers by the end of the fiscal year. The selling price to customers for walnuts fluctuates throughout the year depending on market forces. To the extent that we underestimate the price to be paid for walnuts and enter into contracts with our customers for products including walnuts at prices prevailing at the market at that time and based on walnut cost estimates that ultimately prove to be below the final price we determine to pay to growers, our business and results of operations could be harmed. Each year some of our walnut supply agreements are

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up for renewal, and competition among walnut handlers makes renewal with us uncertain. Disruption in our walnut supply and inability to secure walnuts cost effectively may adversely impact our business and our financial results.

Our potato chip products are dependent on suppliers providing us with an adequate supply of quality potatoes on a timely basis. The failure of our suppliers to meet our specifications, quality standards or delivery schedules could have an adverse effect on our potato chip operations. In particular, a sudden scarcity, substantial price increase, quality issues or unavailability of ingredients could adversely affect our operating results. There can be no assurance that alternative ingredients would be available when needed on commercially attractive terms, if at all. In addition, high commodity prices could lead to unexpected costs and price increases of our products which might dampen growth of consumer demand for our products. If we are unable to increase productivity to offset these increased costs or increase our prices, this could substantially harm our business and results of operations.

If we are unable to compete effectively in the markets in which we operate, our sales and profitability would be negatively affected.

In general our markets are highly competitive and are based on product quality, price, brand recognition and loyalty. As a result, there are ongoing competitive product and pricing pressures in the markets in which we operate, as well as challenges in establishing and maintaining profit margins. Our products compete against food and snack products sold by many regional and national companies, some of which are substantially larger and have greater resources than we have. The greater scale and resources that may be available to our competitors could provide them with the ability to lower prices or increase their promotional or marketing spending to compete more effectively. To address these challenges, we must be able to successfully respond to competitive factors, including pricing, promotional incentives and trade terms. We may need to reduce our prices or increase promotional incentives in response to competition or to grow or maintain our market share. If we decide to reduce or eliminate promotional incentives to improve our profitability, we may not be able to compete effectively and we may lose distribution and market share, which could also lead to a decline in revenue.

Competition and customer pressures may restrict our ability to increase prices in response to commodity or other cost increases. We may also need to increase spending on marketing, advertising and new product innovation to maintain or increase our market share. If we are unable to compete effectively, we could be unable to increase the breadth of the distribution of our products or lose customers or distribution of products, which could have an adverse impact on our sales and profitability. In addition, if we are required to maintain high levels of promotional incentives or trade terms with respect to particular product lines, our margins and profitability would be adversely effected.

If the parties we depend upon for raw material supplies do not perform adequately, our ability to manufacture our products may be impaired, which could harm our business and results of operations.

We rely on third-party suppliers for the raw materials we use to manufacture our products, and our ability to manufacture our products depends on receiving adequate supplies on a timely basis, which may be difficult or uneconomical to procure. If we do not maintain good relationships with suppliers that are important to us or are unable to identify a replacement supplier or develop our own sourcing capabilities, our ability to manufacture our products may be harmed, which would result in interruptions in our business. In addition, even if we are able to find replacement suppliers when needed, we may not be able to enter into agreements with them on favorable terms and conditions, which could increase our costs of production. The occurrence of any of these risks could adversely affect our business and results of operations.

Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations, including foreign currency risks.

We conduct a substantial amount of business with vendors and customers located outside the United States. We hold assets and incur liabilities, earn revenue, and pay expenses in currencies other than the United States dollar, primarily the British pound. Our consolidated financial statements are presented in U.S. dollars and we must translate the assets, liabilities, revenue and expenses into U.S dollars for external reporting purposes. Many factors relating to our international sales and operations, many of which factors are outside of our control, could have a material negative impact on our business, financial condition and results of operations. During fiscal 2014, fiscal 2013, and fiscal 2012, sales outside the United States, primarily in the United Kingdom, Canada, South Korea, Japan, and Netherlands, accounted for approximately 25%, 24% and 23% of our net sales, respectively.

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Factors that could impact our international sales and operations include:


•	foreign currency, exchange and transfer restriction, which may unpredictably and adversely impact our consolidated operating results, our asset and liability balances and our cash flow in our consolidated financial statement, even if their value has not changed in their original currency;


•	negative economic developments in economies around the world and the instability of governments, including the threat of war, terrorist attacks, epidemic or civil unrest;


•	pandemics, such as the flu, which may adversely affect our workforce as well as our local suppliers and customers;


•	earthquakes, tsunamis, floods or other major disasters that may limit the supply of nuts or other products that we purchase abroad;


•	tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements imposed by governments;


•	foreign currency exchange and transfer restrictions;


•	increased costs, disruptions in shipping or reduced availability of freight transportation;


•	differing labor standards;


•	differing levels of protection of intellectual property;


•	difficulties and costs associated with complying with U.S. laws and regulations applicable to entities with overseas operations;


•	the threat that our operations or property could be subject to nationalization and expropriation;


•	varying regulatory, tax, judicial and administrative practices in the jurisdictions where we operate;


•	difficulties associated with operating under a wide variety of complex foreign laws, treaties and regulations; and


•	potentially burdensome taxation.

Any of these factors could have an adverse effect on our business, financial condition and results of operations.

We may be required to conduct product recalls, potentially triggering concerns with the safety and quality of our products, which could cause consumers to avoid our products and reduce our sales and net income.

The sale of food products for human consumption involves risk of injury to consumers. We face risks associated with product recalls and liability claims if our products become adulterated, mislabeled or misbranded, or cause injury, illness, or death. Our products may be subject to product tampering and to contamination and spoilage risks, such as mold, bacteria, insects and other pests, shell fragments, cross-contamination and off-flavor contamination. If any of our products were to be tampered with, or otherwise tainted and we were unable to detect it prior to shipment, our products could be subject to a recall. Recalls might also be required due to usage of raw materials provided by third-party ingredient suppliers. Such suppliers are required to supply material free of contamination, but may, on occasion, identify issues after selling material to Diamond manufacturing locations. Our ability to sell products could be reduced if governmental agencies conclude that our products have been tampered with, or that certain pesticides, herbicides or other chemicals used by growers have left harmful residues on portions of the crop or that the crop has been contaminated by aflatoxin or other agents. A significant product recall could cause our products to be unavailable for a period of time and reduce our sales. Adverse publicity could result in a loss of consumer confidence in our products, damage to our reputation and also reduce our sales for an extended period. Product recalls and product liability claims could increase our expenses and have an adverse effect on demand for our products and, consequently, reduce our sales, net income and liquidity.

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Material weaknesses can exist in our system of internal control over financial reporting, which could have a material impact on our business.

Our ability to implement our business plan and comply with regulations requires an effective planning and management process. We expect that we will need to improve existing operational and financial systems, procedures and controls, and implement new ones, to manage our future business effectively. Any implementation delays, or disruption in the transition to new or enhanced systems, procedures or controls, could harm our ability to forecast sales, manage our supply chain, and record and report financial and management information on a timely and accurate basis.

Furthermore, we are required to maintain internal control over financial reporting adequate to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with generally accepted accounting principles. In connection with the restatement of our Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2013, we determined that we had a material weakness as of July 31, 2013, namely that our controls over the evaluation and review of complex and non-routine transactions were not effective. In addition, we had determined that we had a material weakness as of July 31, 2013 relating to our controls over journal entries. As of July 31, 2014, the material weakness related to our controls over journal entries had been remediated. The material weakness related to the evaluation and review of complex and non-routine transactions, however, has not been remediated.

Because the material weakness over the evaluation and review of complex and non-routine transactions has not been remediated, we have concluded that as of January 31, 2015, our internal controls over financial reporting were not effective. Until the evaluation and review of complex and non-routine transactions material weakness is fully remediated, it may be difficult for us to manage our business, our results of operations could be harmed, our ability to report results accurately and on time could be impaired, investors may lose faith in the reliability of our statements, and the price of our securities may be materially impacted. We cannot assure you whether, or when, the remaining control deficiency that has been identified as a material weakness will be fully remediated.

We do not expect that our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. A material weakness means a deficiency, or combination of deficiencies, in internal control over financial reporting exists such that there is a reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis.

Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our consolidated financial statements. Any such failure could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting, cause us to incur unforeseen costs, negatively impact our results of operations, or cause the market price of our common stock and/or the notes to decline.

Diamond and some of our current and former officers and directors remain parties to lawsuits arising out of or related to Diamond’s restatement of its fiscal 2010 and fiscal 2011 consolidated financial statements, primarily resulting from our accounting for payments to walnut growers related to fiscal 2010 and fiscal 2011, and could result in additional legal expenses and damages, and cause our business, financial condition, results of operations and cash flows to suffer.

In fiscal 2012, putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond and naming certain executive officers and the members of our board of directors as individual defendants. These lawsuits, which related principally to our accounting for certain payments to walnut growers in fiscal 2010 and 2011, were subsequently consolidated as In re Diamond Foods, Inc. Shareholder Derivative Litigation which purports to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement. Following mediation efforts, the parties agreed to terms of a proposed settlement and the court entered an order granting final approval of the settlement on August 19, 2013. On September 23, 2013, a Notice of Appeal from the order granting final approval was filed by a single stockholder. No date for this hearing on this appeal has been scheduled. Former executive officers and members of our board of directors as individual defendants have been the subject of government investigations and lawsuits. Under Delaware law, our bylaws and certain indemnification agreements, we may have an

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obligation to indemnify former officers and directors in relation to these matters. Insurance funds from our director and officer liability policies were used in connection with the settlements of the shareholder derivative litigation and securities class action litigation and as a result, we will be required to fund indemnity obligations from claims relating to these matters. For example, if appeal proceeds in the shareholder derivative action, our indemnity obligations could result in significant legal expenses or damages and cause our business, financial condition, results of operations and cash flow to suffer.

Government regulations could increase our costs of production and our business could be adversely affected.

As a food company, we are subject to extensive government regulation, including regulation of the manufacturing, importation, transportation, exportation, processing, product quality, packaging, storage, distribution and labeling of our products. Furthermore, there may be changes in the legal and regulatory environment, and governmental entities or agencies in jurisdictions where we operate may impose new manufacturing, importation, transportation, exportation, processing, packaging, storage, distribution, labeling or other restrictions, which could increase our costs and affect our profitability. For example, various regulatory authorities and others have paid increasing attention to the effect on humans due to the consumption of acrylamide—a naturally-occurring chemical compound that is formed in the process of cooking many foods, including potato chips, and a potential carcinogen—and have imposed additional regulatory requirements. In the State of California, we are required to warn about the presence of acrylamide and other potential carcinogens in our products. In addition, the U.S. Food and Drug Administration is currently evaluating banning the use of partially hydrogenated oils in food, which some of our products contain. If consumer concerns about acrylamide or partially hydrogenated oils increase or these substances are regulated further or not allowed in food products, demand for affected products could decline or we may be unable to sell certain products and our revenues and business could be harmed. Efforts to reformulate may be expensive or unsuccessful or may fail to meet consumer expectations, in which event our revenues or business would be harmed. Our manufacturing operations are subject to various national, regional or state and local laws and regulations that require us to obtain licenses relating to customs, health and safety, building and land use and environmental protection. We are also subject to environmental regulations governing the discharge into the air, and the generation, handling, storage, transportation, treatment and disposal of waste materials. New or amended statutes and regulations, increased production at our existing facilities and our expansion into new operations and jurisdictions may require us to obtain new licenses and permits, and could require us to change our methods of operations, which could be costly. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as possible criminal sanctions, all of which could have an adverse effect on our business.

A disruption at any of our production facilities would significantly decrease production, which could increase our cost of sales and reduce our net sales and income from operations.

We process and package our products in several domestic and international facilities and also have co-manufacturing agreements and co-pack arrangements with third parties. A temporary or extended interruption in operations at any of our facilities, whether due to technical or labor difficulties, destruction or damage from fire, flood or earthquake, infrastructure failures such as power or water shortages, raw material shortage or any other reason, whether or not covered by insurance, could interrupt our manufacturing operations, disrupt communications with our customers and suppliers and cause us to lose sales and write off inventory. Any prolonged disruption in the operations of our facilities or our co-packer facilities would have a significant negative impact on our ability to manufacture and package our products on our own or have our products manufactured and packaged and may cause us to seek additional third-party arrangements, thereby increasing production costs. These third parties may not be as efficient as we are and may not have the capabilities to process and package some of our products, which could adversely affect sales or operating income. Further, current and potential customers might not purchase our products if they perceive our lack of alternate manufacturing facilities to be a risk to their continuing source of products.

Changes in the food industry, including changing dietary trends and consumer preferences and adverse publicity about Diamond and the health effects of consuming some products could reduce demand for our products.

Consumer tastes can change rapidly as a result of many factors, including shifting consumer preferences, dietary trends and purchasing patterns. To address consumer preferences, we invest significant resources in research and development of new products. Dietary trends, such as the consumption of food in low carbohydrate content, have in the past, and may in the future, harm our sales. If we fail to anticipate, identify or react to consumer trends, or if new products we develop do not achieve acceptance by retailers or consumers, demand for our products could decline, which would in turn cause our revenue and profitability to be lower.

In addition, some of our products contain sodium, preservatives and other ingredients, the health effects of which are the subject of increasing public scrutiny, including the suggestion that excessive consumption of these ingredients can lead to a variety of adverse health effects. In the United States and other countries, there is increasing consumer awareness of health risks, including obesity, associated with consumption of these ingredients, as well as increased consumer litigation based on

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alleged adverse health impacts of consumption of various food products. A continuing global focus on health and wellness, including weight management, and increasing media attention to the role of food marketing, could adversely affect our sales or lead to stricter regulations and greater scrutiny of food marketing practices. For example, the U.S. Food and Drug Administration is currently evaluating banning the use of partially hydrogenated oils in food, which certain of our products contain. Additionally, we believe consumers are looking increasingly for all natural products. From time to time we have been subject to lawsuits challenging our product labeling practices, including with respect to natural claims, and may be sued for such practices in the future, which suits can be expensive to defend. Moreover, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine consumer confidence or customer relations, and reduce demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.

Increased costs associated with product processing and transportation, such as water, electricity, natural gas and fuel costs, could increase our expenses and reduce our profitability.

We require a substantial amount of energy and water to make our products. Transportation costs, including fuel and labor, also represent a significant portion of the cost of our products, because we use third-party truck and rail companies to collect our raw materials and deliver our products to our distributors and customers. These costs fluctuate significantly over time due to factors that may be beyond our control, including increased fuel prices, adverse weather conditions or natural disasters, employee strikes or work slowdowns, regulation and increased export and import restrictions. We may not be able to pass on increased costs of production or transportation to our customers. In addition, from time to time, transportation service providers have a backlog of shipping requests, which could impact our ability to ship products in a timely fashion. Increases in the cost of water, electricity, natural gas, fuel or labor and failure to ship products on time, could increase our costs of production and adversely affect our profitability.

The loss of any major customer could decrease sales and adversely impact our net income.

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 Sam’s Club and Wal-Mart), represented approximately 16%, 16% and 18% of our total net sales in fiscal 2014, 2013, and 2012 respectively. Sales to our second largest customer, Costco Wholesale Corporation, represented approximately 9%, 9%, and 12% of our total net sales in fiscal 2014, 2013, and 2012, respectively. 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.

The consolidation of retail customers could adversely affect us.

Retail customers, such as supermarkets, warehouse clubs and food distributors, continue to consolidate, resulting in fewer customers on which we can rely for business. Consolidation also produces larger, more sophisticated retail customers that can resist price increases and demand lower pricing, increased promotional programs or specifically tailored products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. Further retail consolidation and increasing retail power could materially and adversely affect our product sales, financial condition and results of operations.

If we need to compete with other manufacturers or with retailer brands on the basis of price, our business and results of operations could be negatively impacted.

Our branded products face competition from private label products (retailer brands) that at times may be sold at lower price points. The impact of price gaps between our products and private label products may result in share erosion and harm our business. A number of our competitors have broader product lines, substantially greater financial and other resources and/or lower fixed costs than we have. Our competitors may succeed in developing new or enhanced products that are more attractive to customers or consumers than ours. These competitors may also prove to be more successful in marketing and selling their products than we are; and may be better able to increase prices to reflect cost pressures. We may not compete successfully with these other companies or maintain or grow the distribution of our products. We cannot predict the pricing, commodity costs, or promotional activities of our competitors or whether they will have a negative effect on us. Many of our competitors engage in aggressive pricing and promotional activities. There are competitive pressures and other factors which could cause our products to lose market share, decline in sales, or result in significant price or margin erosion, which would have a material effect on our business, financial condition and results of operations.

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A material impairment in the carrying value of acquired goodwill, other intangible assets or tangible assets could negatively affect our consolidated operating results and net worth.

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. 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 and other intangible assets has occurred and to calculate an impairment loss. If there are future changes in our stock price, or significant changes in the business climate or operating results of our reporting units, we may incur additional impairment charges related to the Kettle U.S. trade name or our other intangible assets and goodwill which would negatively impact our consolidated operating results and further reduce our stock price. At January 31, 2015, the carrying value of goodwill and other intangible assets totaled approximately $775.3 million, compared to total assets of approximately $1,272.0 million and total shareholders’ equity of approximately $283.5 million. At January 31, 2014, the carrying value of goodwill and other intangible assets totaled approximately $801.2 million, compared to total assets of approximately $1,228.8 million and total shareholders’ equity of approximately $131.3 million.

Our proprietary brands and packaging designs are essential to the value of our business, and the inability to protect, and costs associated with protecting, our intellectual property could harm the value of our brands and adversely affect our business and results of operations.

Our success depends significantly on our know-how and other intellectual property. We rely on a combination of trademarks, service marks, trade secrets, patents, copyrights and similar rights to protect our intellectual property. Our success also depends in large part on our continued ability to use existing trademarks and service marks in order to maintain and increase brand awareness and further develop our brands.

Our efforts to protect our intellectual property may not be adequate. Third parties may misappropriate or infringe on our intellectual property or develop more efficient and advanced technologies. Our patents expire over time and third parties may use such previously patented technology to compete against us; our third-party manufacturers and partners may also disclose our trade secrets. From time to time, we engage in litigation to protect our intellectual property, which could result in substantial costs as well as diversion of management attention. The occurrence of any of these risks could adversely affect our business and results of operations.

We depend on our key personnel and if we lose the services of any of these individuals, or fail to attract and retain additional key personnel, we may not be able to implement our business strategy or operate our business effectively.

Our future success largely depends on the contributions of our senior management team. We believe that these individuals’ expertise and knowledge about our industry, their respective fields and their relationships with other individuals in our industry are critical factors to our continued growth and success. We do not carry key person insurance. The loss of the services of any member of our senior management team and the failure to hire and retain qualified management and other key personnel could have an adverse effect on our business and prospects. Our success also depends upon our ability to attract and retain additional qualified sales, marketing and other personnel.

Economic downturns may adversely affect our business, financial condition and results of operations.

Unfavorable economic conditions may negatively affect our business and financial results. Poor economic conditions could negatively impact consumer demand for our products, the mix of our products’ sales, our ability to collect accounts receivable on a timely basis, the ability of suppliers to provide the materials required in our operations, and our ability to obtain financing or to otherwise access the capital markets. The occurrence of any of these risks could adversely affect our business, financial condition and results of operations.

The acquisition or divestiture of product lines or businesses could pose risks to our business and the market price of our common stock.

We may review acquisition prospects that we believe could complement our existing business. There is no assurance that we will be successful in identifying, negotiating or consummating any future acquisitions. Any such future acquisitions could result in accounting charges, potentially dilutive issuances of stock and increased debt and contingent liabilities, any of which could have a material effect on our business and the market price of our common stock. Acquisitions entail many financial, managerial and operational risks, including difficulties integrating the acquired operations, effective and immediate implementation of internal control over financial reporting, diversion of management attention during the negotiation and

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integration phases, uncertainty entering markets in which we have limited prior experience, and potential loss of key employees of acquired organizations. We may be unable to integrate product lines or businesses that we acquire, which could have a material effect on our business and on the market price of our common stock. We may evaluate the various components of our portfolio of businesses and may, as a result, explore divesting such products or businesses. Divestitures have inherent risks, including possible delays in closing transactions (including potential difficulties in obtaining regulatory approvals), the risk of lower-than-expected sales proceeds for the divested businesses, unexpected costs associated with the separation of the business to be sold from our integrated information technology systems and other operating systems and potential post-closing claims for indemnification. In addition, adverse economic or market conditions may result in fewer potential bidders and unsuccessful divestiture efforts. Transaction costs may be high, and expected cost savings, which are offset by revenue losses from divested businesses, may be difficult to achieve, and we may experience varying success in reducing costs or transferring liabilities previously associated with the divested businesses. In addition, acquisitions or divestitures may result in litigation that can be expensive and divert management’s attention and resources from our core business.

Our business and operations could be negatively impacted if we fail to maintain satisfactory labor relations.

The success of our business depends substantially upon our ability to maintain satisfactory relations with our employees. Our production workforce in one of our facilities is covered by a collective bargaining agreement which expires in March 2015. Strikes or work stoppages and interruptions could occur if we are unable to renew this agreement on satisfactory terms. If a work stoppage or slow down were to occur, it could adversely affect our business and disrupt our operations. The terms and conditions of existing or renegotiated agreements also could increase our costs or otherwise affect our ability to fully implement future operational changes to our business.

Unauthorized access to confidential information and data on our information technology systems and security and data breaches could materially adversely affect our business, financial condition and operating results.

As part of our operations, we rely on our computer systems, some of which are managed by third parties, to manage inventory, process transactions, and process, transmit and store electronic information, communicate with our suppliers and other third parties, and on continued and unimpeded access to secure network connections to use our computer systems. We have physical, technical and procedural safeguards in place that are designed to protect information and protect against security and data breaches as well as fraudulent transactions and other activities. Despite these safeguards and our other security processes and protections, we cannot be assured that all of our systems and processes, including those managed by third parties, are free from vulnerability to security breaches (through cyberattacks, which are evolving and becoming increasingly sophisticated, physical breach or other means) or inadvertent data disclosure by third parties or by us. A significant data security breach, including misappropriation of customer, distributor or employee confidential information, could cause us to incur significant costs, which may include potential cost of investigations, legal, forensic and consulting fees and expenses, costs and diversion of management attention required for investigation, remediation and litigation, substantial repair or replacement costs. We could also experience data losses either by us, or the third parties we rely on to manage certain computer systems, that would impair our ability to manage inventories or process transactions and the negative impact on our reputation and loss of confidence of our customers, distributors, suppliers and others, any of which could have a material adverse impact on our business, financial condition and operating results.

We are in the process of upgrading our information technology infrastructure; including implementing a new enterprise resource planning system and problems with the transition, design or implementation of this upgrade could interfere with our business and operations and adversely affect our financial condition.

We are in the process of upgrading our information technology infrastructure, including implementing a new enterprise resource planning (ERP) system and other complementary information technology systems. We have invested, and will continue to invest, significant capital and human resources in the upgrade, including but not limited to the transition, design and implementation of a new ERP system, which may be disruptive to our underlying business. Any disruptions, delays or deficiencies in the transition, design and implementation of the upgrade and new ERP system, particularly any disruptions, delays or deficiencies that impact our operations, could have a material adverse effect on the implementation of our overall information technology infrastructure. We may experience difficulties as we transition to these new upgraded systems and processes including loss of data, ability to process customer orders, ship products, provide services and support to our customers, bill and track our customers, fulfill contractual obligations, generally conduct financial reporting and file SEC reports in a timely manner and otherwise run our business. We may also experience decreases in productivity as our personnel implement and become familiar with new systems, increased costs and lost revenues. In addition, as we are dependent upon our ability to gather and promptly transmit accurate information to key decision makers, our business, results of operations and financial condition may be materially and adversely affected if our information technology infrastructure does not allow us to transmit accurate information, even for a short period of time. Even if we do not encounter these adverse effects, the transition,

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design and implementation of the upgrade and new ERP system may be much more costly than we anticipated. If we are unable to successfully design and implement the upgrade and new ERP system as planned, our financial position, results of operations and cash flows could be adversely impacted.

Risks Related to our Indebtedness

We are highly leveraged and have substantial debt service requirements that could adversely affect our ability to fulfill our debt obligations, place us at a competitive disadvantage in our industry and limit our ability to react to changes in the economy or our industry.

We have incurred and will continue to have a substantial amount of indebtedness. Our high debt-service requirements could adversely affect our ability to operate our business, and might limit our ability to take advantage of potential business opportunities. Our ability to make scheduled payments or to refinance our indebtedness depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business and other factors beyond our control. Our business may not generate cash flow in an amount sufficient to enable us to pay the principal of, or interest on, our indebtedness, or to fund our other liquidity needs, including working capital, capital expenditures, product development efforts and other general corporate requirements. We may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. This high degree of leverage could have other important consequences, including: making it more difficult to satisfy obligations with respect to the 7.000% Notes due 2019 (the “Notes”) and our other indebtedness, including restrictive covenants and borrowing conditions, which could result in an event of default under the indenture governing the Notes or the agreements governing our other indebtedness;


•	increasing our vulnerability to adverse economic, industry or competitive developments;


•	exposing us to the risk of increased interest rates because our debt arrangements will be at variable rates of interest;


•	restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;


•	limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and


•	placing us at a competitive disadvantage compared to competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from pursuing.

Our ability to satisfy our debt obligations, including our obligations under the Notes, will depend upon, among other things, our future operating performance and our ability to refinance indebtedness when necessary. Each of these factors is, to a large extent, dependent on economic, financial, competitive and other factors beyond our control. If, in the future, we cannot generate sufficient cash from operations to make scheduled payments on our debt obligations, we will need to refinance our debt, obtain additional financing, issue additional equity or sell assets. We cannot assure you that our business will generate cash flow or that we will be able to obtain funding sufficient to satisfy our debt service requirements.

Despite current indebtedness levels, we may still be able to incur substantially more debt, including secured debt. This could further increase the risks associated with our significant indebtedness.

We may be able to incur additional substantial indebtedness in the future. Although the terms of the agreements governing our existing indebtedness, the terms of our senior secured asset-based revolving credit facility and our senior secured term loan facility and the indenture governing the Notes contain restrictions on the incurrence of additional indebtedness, indebtedness incurred in compliance with these restrictions could be substantial. The incurrence of additional indebtedness could make it more likely that we will experience some or all of the risks associated with substantial indebtedness.

Our other debt agreements contain restrictions that may limit our flexibility in operating our business.

The agreements governing our debt arrangements contain various covenants that may limit our ability or the ability of our domestic subsidiaries to engage in specified types of transactions that may be in our long-term best interests. These covenants limit our ability, among other things to:


•	borrow money or guarantee debt;


•	create liens;


•	pay dividends on or redeem or repurchase stock;


•	make specified types of investments and acquisitions;


•	enter into or permit to exist contractual limits on the ability of our subsidiaries to pay dividends to us;


•	enter into transactions with affiliates; and

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•	sell assets or merge with other companies.

These covenants limit our operational flexibility and could prevent us from taking advantage of business opportunities as they arise. A breach of any of these covenants or other provisions in our debt agreements could result in an event of default that, if not cured or waived, could result in such debt becoming immediately due and payable. This, in turn, could cause our other debt to become due and payable as a result of cross-default or cross-acceleration provisions contained in the agreements governing such other debt. In the event that some or all of our debt is accelerated and becomes immediately due and payable, we may not have the funds to repay, or the ability to refinance, such debt.

Risks Related to Our Common Stock

The market price of our common stock is volatile and may result in investors selling shares of our common stock at a loss.

The trading price of our common stock is volatile and subject to fluctuations in price in response to various factors, many of which are beyond our control, including:


•	our operating performance and the performance of other similar companies;


•	changes in our revenues, earnings, prospects, or recommendations of securities analysts who follow our stock or our industry;


•	publication of research reports about us or our industry by any securities analysts who follow our stock or our industry;


•	speculation in the press or investment community;


•	terrorist acts;


•	general market conditions, including economic factors unrelated to our performance; and


•	the results and outcome of ongoing securities class action litigation and governmental investigations.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation against us could result in substantial costs and divert our management’s attention and resources from our core business.

We issued a substantial number of shares in connection with our securities litigation settlement and pursuant to the exercise of an outstanding warrant issued to Oaktree, and the trading of these shares in the open market could cause the market price of our common stock to decline.

In connection with an agreement that we entered into to settle a private securities class action against us and two of our former officers, in fiscal 2014 we paid a total of $11.0 million in cash and issued approximately 4.45 million shares of our common stock to a settlement fund. In mid-November, the escrow agent began notifying eligible class participants of their portion of the settlement fund. The shares were issued to eligible class participants on November 14, 2014. The volatility in the trading price of our common stock may increase as a result of our shares being sold after distribution. In addition, on February 19, 2014 Oaktree exercised a warrant to purchase 4,420,859 million shares of our common stock. As a result of the warrant exercise, the volatility in the trading price of our common stock may increase if and when Oaktree decides to sell shares.

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our strategy.

The timing and amount of our working capital and capital expenditure requirements may vary significantly as a result of many factors, including:


•	market acceptance of our products;


•	the need to make large capital expenditures to support and expand production capacity;


•	the existence of opportunities for expansion; and


•	access to and availability of sufficient management, technical, marketing and financial personnel.

If our capital resources are not sufficient to satisfy our liquidity needs, we may seek to sell additional equity or debt

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securities or obtain other debt financing. The sale of additional equity or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. With the exception of the secured credit facility, we have not made arrangements to obtain additional financing. We may not be able to obtain additional financing, if required, in amounts or on terms acceptable to us, or at all.

Anti-takeover provisions could make it more difficult for a third party to acquire us.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of our common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Further, some provisions of our charter documents, including provisions establishing a classified board of directors, eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or our management, which could have an adverse effect on the market price of our stock. Further, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which will prohibit an “interested stockholder” from engaging in a “business combination” with us for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. All of the foregoing could have the effect of delaying or preventing a change in control or management.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following are details of repurchases of common stock during the three months ended January 31, 2015:



Period	Total number of shares repurchased (1)	Average price paid per share		Total number of shares repurchased as part of publicly announced plans	Approximate Dollar value of shares that may yet be purchased under the plans
Repurchases from November 1 - November 30, 2014	336	$	30.11	—	$	—
Repurchases from December 1 - December 31, 2014	21,476	$	28.59	—	$	—
Repurchases from January 1 - January 31, 2015	—	$	—	—	$	—
Total	21,812	$	28.61	—	$	—

(1)

All of the shares in the table above were originally granted to employees as restricted stock pursuant to our 2005 Equity Incentive Plan (“EIP”). Pursuant to the EIP, all of the shares reflected above were relinquished by employees in exchange for Diamond’s agreement to pay federal and state withholding obligations resulting from the vesting of the restricted stock. The repurchases reflected above were not made pursuant to a publicly announced plan.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed as part of this report or are incorporated by reference to exhibits previously filed with the SEC.

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		Filed with this 10-Q	Incorporated by reference
Number	Exhibit Title	Filed with this 10-Q		Form	File No.	Date Filed

*10.01	2015 Equity Incentive Plan			S-8	333-201477	January 13, 2014

*10.02	Form of Board of Director RSU Agreement			S-8	333-201477	January 13, 2014

*10.03	Form of employee RSU Agreement	X

31.01	Rule 13a-14(a) and 15d-14(a) Certification of Chief Executive Officer	X

31.02	Rule 13a-14(a) and 15d-14(a) Certification of Chief Financial Officer	X

32.01	Section 1350 Certifications	X

101.INS	XBRL Instance Document	X

101.SCH	XBRL Taxonomy Extension Schema Document	X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	X

101.LAB	XBRL Taxonomy Extension Labels Linkbase Document	X

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X

*Indicates management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



	DIAMOND FOODS, INC.

Date: March 5, 2015	By:	/s/ Raymond P. Silcock
		Raymond P. Silcock
		Executive Vice President and Chief
		Financial Officer

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EXHIBIT INDEX



		Filed with this 10-Q	Incorporated by reference
Number	Exhibit Title	Filed with this 10-Q		Form	File No.	Date Filed

*10.01	2015 Equity Incentive Plan			S-8	333-201477	January 13, 2014

*10.02	Form of Board of Director RSU Agreement			S-8	333-201477	January 13, 2014

*10.03	Form of employee RSU Agreement	X

31.01	Rule 13a-14(a) and 15d-14(a) Certification of Chief Executive Officer	X

31.02	Rule 13a-14(a) and 15d-14(a) Certification of Chief Financial Officer	X

32.01	Section 1350 Certifications	X

101.INS	XBRL Instance Document	X

101.SCH	XBRL Taxonomy Extension Schema Document	X

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	X

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	X

101.LAB	XBRL Taxonomy Extension Labels Linkbase Document	X

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	X

*Indicates management contract or compensatory plan or arrangement.

Diamond Foods Inc - FORM 10-Q - March 5, 2015

Attached files

Diamond Foods Inc Reports