Diamond Foods Inc - FORM 10-Q

Diamond Foods Inc - FORM 10-Q - December 9, 2015

Attached files

Attached files

Diamond Foods Inc Reports

file	filename
EX-10.14 - EXHIBIT 10.14 - Diamond Foods Inc	dmnd-q12016ex1014.htm
EX-32.01 - EXHIBIT 32.01 - Diamond Foods Inc	dmnd-q12016ex3201.htm
EX-31.02 - EXHIBIT 31.02 - Diamond Foods Inc	dmnd-q12016ex3102.htm
EX-10.13 - EXHIBIT 10.13 - Diamond Foods Inc	dmnd-q12016ex1013.htm
EX-31.01 - EXHIBIT 31.01 - Diamond Foods Inc	dmnd-q12016ex3101.htm

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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 October 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

(Registrant’s telephone number, including area code):

_____________________________

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):

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 December 4, 2015: 31,536,243

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TABLE OF CONTENTS



		Page

Item 1.	Cautionary Statement Regarding Forward-Looking Statements	3

Part I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	41

SIGNATURES		42
EXHIBIT INDEX		43

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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 the October 27, 2015 Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Snyder’s-Lance, Inc. (“Snyder’s-Lance”), Shark Acquisition Sub I, Inc., a wholly-owned subsidiary of Snyder’s-Lance, and Shark Acquisition Sub II, LLC, a wholly-owned subsidiary of Snyder’s-Lance, and the anticipated benefits of the proposed merger. 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”) and the registration statement on Form S-4 filed by Snyder’s-Lance on November 25, 2015. 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; energy and labor costs; price competition and industry consolidation; changes in top retail customer relationships; weather conditions (climate or otherwise); inability to implement price increases for our products if commodity prices rise; unexpected delays or increased costs in implementing our business strategies; failure to execute and accomplish strategy; changes in consumer preferences for snack and nut products; risks relating to our leverage, including the cost of our debt and its effect on our ability to respond to changes in our business, markets and industry; loss of key personnel; the dilutive impact of equity issuances; risks relating to litigation, including but not limited to merger-related litigation, and regulatory factors including changes in food safety, advertising and labeling laws and regulations; information technology infrastructure, security data breaches and inappropriate use of social media; political and economic conditions in other countries; uncertainties relating to our relations with growers; increasing competition and possible loss of key customers; operating costs and business disruption that may be greater than expected; marketing and advertising activities and contractual relationships; general economic and capital markets conditions and risks relating to the Merger Agreement and proposed merger, including but not limited to: the timing to complete the proposed merger; failure to receive necessary stockholder approvals; the risk that a condition to completion of the proposed merger may not be satisfied; the risk that a regulatory or other approval that may be required for the proposed merger is delayed, is not obtained or is obtained subject to conditions that are not anticipated or that may be burdensome; the anticipated benefits of the proposed merger to Snyder’s-Lance and Snyder’s-Lance’s ability to achieve the synergies and value creation projected to be realized following the completion of the proposed merger; Snyder’s-Lance’s ability to integrate Diamond’s business with its own promptly and effectively; the diversion of management and workforce time on merger-related issues, including activities of labor unions and the integration of Diamond employees into Snyder’s-Lance; changes in Snyder’s-Lance’s or Diamond’s businesses, future cash requirements, capital requirements, results of operations, revenues, financial condition and/or cash flow; changes in acquisition-related transaction costs, the amount of fees paid to advisors and the potential payments to Diamond executive officers in connection with the proposed merger; operating costs and business disruption that may be greater than expected; the ability to retain and hire key personnel and maintain relationships with customers, providers or other business partners pending completion of the proposed merger; effects of completion; and the risk that lawsuits challenging the proposed merger may result in adverse rulings that may impair or delay completion of the proposed merger.

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

TRADEMARKS IN THIS QUARTERLY REPORT ON FORM 10-Q

The Diamond Foods design logo, Diamond Foods^®, Kettle Brand^®, KETTLE^® Chips, Emerald^® and Pop Secret^® and other brands are our trademarks. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert our rights to these trademarks and trade names, to the fullest extent under applicable law.

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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)



	October 31, 2015			July 31, 2015			October 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	6,854		$	12,758		$	11,068
Trade receivables, net	111,267			95,005			119,326
Inventories, net	214,472			158,805			259,171
Deferred income taxes	4,910			4,133			2,962
Prepaid income taxes	766			458			—
Prepaid expenses and other current assets	14,925			12,070			10,796
Total current assets	353,194			283,229			403,323
Equity method investment	1,942			1,855			—
Property, plant and equipment, net	141,599			137,065			132,997
Goodwill	402,412			403,535			405,113
Other intangible assets, net	372,181			375,489			383,874
Other long-term assets	10,454			11,519			13,104
Total assets	$	1,281,782		$	1,212,692		$	1,338,411
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt, net	$	17,072		$	9,193		$	12,116
Accounts payable and accrued liabilities	113,207			117,181			132,461
Payable to growers	75,069			10,377			142,522
Total current liabilities	205,348			136,751			287,099
Long-term obligations, net	627,130			633,134			636,289
Deferred income taxes	115,886			114,715			112,871
Other liabilities	18,683			19,515			21,563
Total liabilities	967,047			904,115			1,057,822
Commitments and contingencies (Note 14)
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; 32,086,844, 32,004,979 and 31,854,719 shares issued, 31,533,102, 31,490,671 and 31,382,026 shares outstanding at October 31, 2015, July 31, 2015 and October 31, 2014, respectively	31			31			31
Treasury stock, at cost: 553,742, 514,308 and 472,693 shares at October 31, 2015, July 31, 2015 and October 31, 2014	(15,665		)	(14,427		)	(13,226		)
Additional paid-in capital	608,403			606,174			596,712
Accumulated other comprehensive income	3,211			5,823			11,431
Accumulated deficit	(281,245		)	(289,024		)	(314,359		)
Total stockholders’ equity	314,735			308,577			280,589
Total liabilities and stockholders’ equity	$	1,281,782		$	1,212,692		$	1,338,411

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 October 31,
	2015			2014
Net sales	$	224,849		$	246,621
Cost of sales	163,970			187,231
Gross profit	60,879			59,390
Operating expenses:
Selling, general and administrative	30,607			28,582
Advertising	11,886			11,816
Total operating expenses	42,493			40,398
Income from operations	18,386			18,992
Interest expense, net	10,026			10,236
Other income, net	(22		)	—
Income before income taxes	8,338			8,756
Income taxes	559			1,062
Net income	$	7,779		$	7,694

Earnings per share:
Basic	$	0.25		$	0.25
Diluted	$	0.24		$	0.24
Shares used to compute earnings per share:
Basic	31,279			31,042
Diluted	31,870			31,468

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 October 31,
	2015			2014
Net income	$	7,779		$	7,694
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax⁽¹⁾	(2,631		)	(12,196		)
Change in pension liabilities, net of tax⁽²⁾
Less: amortization of prior (gain) loss included in net periodic pension cost	19			(6		)
Other comprehensive income (loss), net of tax	(2,612		)	(12,202		)
Comprehensive income (loss)	$	5,167		$	(4,508	)


(1)	Net of tax benefit of $0.1 million and $0.7 million for the three months ended October 31, 2015 and October 31, 2014, respectively.


(2)	Net of tax effect of nil for the three months ended October 31, 2015 and October 31, 2014.

See notes to condensed consolidated financial statements.

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DIAMOND FOODS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Three Months Ended October 31,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	7,779		$	7,694
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,042			7,277
Deferred income taxes	358			669
Stock-based compensation	2,162			1,981
Original issue discount amortization, Term Loan Facility	403			403
Debt issuance costs amortization	1,076			1,049
Equity in earnings of investee, net of cash distributions	(85		)	—
Other, net	10			268
Changes in assets and liabilities:
Trade receivables, net	(16,750		)	(25,675		)
Inventories, net	(55,756		)	(135,276		)
Prepaid expenses and other current assets and income taxes	(3,182		)	3,787
Other assets	185			18
Accounts payable and accrued liabilities	(2,809		)	15,648
Payable to growers	64,692			136,738
Other liabilities	(51		)	3
Net cash provided by operating activities	5,074			14,584
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment	(10,359		)	(7,633		)
Net cash used in investing activities	(10,359		)	(7,633		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from revolving line of credit under the ABL Facility, net	12,000			2,000
Payments on long-term debt and notes payable	(11,423		)	(2,259		)
Purchase of treasury stock	(1,238		)	(807		)
Other, net	67			121
Net cash used in financing activities	(594		)	(945		)
Effect of exchange rate changes on cash	(25		)	(256		)
Net increase (decrease) in cash and cash equivalents	(5,904		)	5,750
Cash and cash equivalents:
Beginning of period	12,758			5,318
End of period	$	6,854		$	11,068
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest	$	12,929		$	14,054
Income taxes	457			(5,034		)
Non-cash investing activities:
Accrued capital expenditures	(450		)	2,124
Capital lease	95			142

See notes to condensed consolidated financial statements.

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DIAMOND FOODS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended October 31, 2015 and 2014

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

(Unaudited)

(1) Description of Business

Overview

Diamond Foods, Inc. (the “Company” or “Diamond”) is a snack food and culinary nut company focused on making innovative, convenient and delicious snacks as well as culinary nuts true to our 100-year plus heritage. 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 March 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 premium Kettle Brand and KETTLE Chips brandsto 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.

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, 2016, 2015, 2014 and 2013 as “fiscal 2016,” “fiscal 2015,” “fiscal 2014” and “fiscal 2013,” respectively.

Unless otherwise noted, forward-looking statements in this Quarterly Report on Form 10-Q are made without regard to the proposed merger discussed below.

Proposed Merger with Snyder's-Lance, Inc.

On October 27, 2015, Diamond entered into an Agreement and Plan of Merger and Reorganization (“Merger Agreement”) with Snyder’s-Lance, Inc. (“Snyder’s-Lance”), Shark Acquisition Sub I, Inc., a wholly-owned subsidiary of Snyder’s-Lance (“Merger Sub I”), and Shark Acquisition Sub II, LLC, also a wholly-owned subsidiary of Snyder’s-Lance (“Merger Sub II”). Pursuant to the terms of the Merger Agreement, and subject to the conditions thereof, Merger Sub I will merge with and into Diamond, with Diamond surviving as a wholly-owned subsidiary of Snyder’s-Lance (“First Merger”), and Diamond (as the surviving corporation of the First Merger) will subsequently merge with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned subsidiary of Snyder’s-Lance (“Second Merger” and, collectively with the First Merger, the “Merger”). Snyder’s-Lance agreed to acquire all of the issued and outstanding shares of common stock of Diamond, subject to the terms and conditions of the Merger Agreement. If the First Merger is consummated, Diamond stockholders will be entitled to receive $12.50 in cash and 0.775 shares of Snyder's-Lance common stock for each share of Diamond common stock owned by them as of the date of the First Merger.

The consummation of the First Merger is subject to certain conditions, including: (i) the adoption of the Merger Agreement by the Diamond stockholders; (ii) the approval by the Snyder’s-Lance stockholders of the issuance of shares of Snyder's-Lance common stock in connection with the First Merger; (iii) the expiration of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; (iv) the absence of any injunction or other order or any other law issued by any governmental authority prohibiting the consummation of the Merger; (v) the effectiveness of the registration statement for the offer and sale of shares of Snyder’s-Lance common stock to be issued in the First Merger, with no stop orders pending or threatened; (vi) the approval for listing on the Nasdaq Global Select Market of the shares of Snyder’s-Lance common stock to be issued in the First Merger; (vii) the accuracy of each party’s representations and warranties contained in the Merger Agreement, as further described in the Merger Agreement; and (viii) the performance of certain obligations under the Merger Agreement by each party, as further described in the Merger Agreement.

The Merger Agreement contains termination rights for both Diamond and Snyder’s-Lance, including the right of either party to terminate the Merger Agreement if the Merger has not been completed by May 27, 2016 (subject to a potential five-month extension if required to obtain regulatory approval), and further provides that, upon termination of the Merger Agreement under specified circumstances, Diamond could be required to pay a termination fee to Snyder’s-Lance of up to $54 million and Snyder’s-Lance could be required to pay a termination fee to Diamond of between $50.0 million and $100.0 million, depending on the circumstances of any such termination.

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Diamond has agreed to pay Credit Suisse Securities (USA) LLC for their services provided related to the proposed merger with Snyder’s-Lance. This future payment is contingent upon the closing of the proposed merger and the amount will be based on the fair market value of the consideration paid or payable in connection with merger on the closing date. As discussed in the Registration Statement on Form S-4 filed by Snyder's-Lance on November 25, 2015, the cash contingent consideration was estimated to be approximately $14.2 million. The actual contingent consideration will be determined on the completion date of the proposed merger. See “Proposed Merger with Snyder’s-Lance, Inc.” set forth in Part I, Item 2, of this report.

Diamond currently anticipates that the closing of the First Merger will occur in the first quarter of calendar 2016. For additional information related to the Merger and the Merger Agreement, please refer to our Current Report on Form 8-K filed October 28, 2015 and the Registration Statement on Form S-4 filed by Snyder's-Lance on November 25, 2015, which is the joint proxy statement/prospectus for the proposed Merger. The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement included as Exhibit 2.1 to our Current Report on Form 8-K filed October 28, 2015.

(2) Basis of Presentation and Recent Accounting Pronouncements

Basis of Presentation and Principles of Consolidation

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 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, 2015, 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 Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company uses the equity method to account for investments over which the Company exercises significant influence but does not control. The Condensed Consolidated Balance Sheet as of July 31, 2015 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 2015 Annual Report on Form 10-K. Operating results for the three months ended October 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.

Certain Risks and Concentrations

The Company’s revenues are principally derived from the sale of snack products and culinary, in-shell and ingredient nuts. Significant changes in customer buying behavior could adversely affect the Company’s operating results. Sales to the Company’s largest customer accounted for approximately 13.3% and 16.5% of total net sales for the three months ended October 31, 2015 and 2014, respectively. No other single customer accounted for more than 10% of our total net sales for the three months ended October 31, 2015 and 2014. As of October 31, 2015, July 31, 2015 and October 31, 2014, the Company’s largest customer accounted for 11.0%, 8.0% and 12.0%, respectively, of the Company’s accounts receivables.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “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. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date” to defer for one year the effective date of the new revenue standard and allow early adoption as of the original effective date which is for annual reports beginning after December 15, 2016. The Company does not expect to early adopt this guidance, 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.

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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 April 2015, the FASB issued ASU 2015-03, “Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.” This guidance requires debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance simplifies presentation of debt issuance costs but does not address presentation or subsequent measurement of debt issue costs related to line of credit arrangements. In August 2015, the FASB issued ASU 2015-15 “Interest-Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” which indicates the SEC staff would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-03 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 believes that the adoption of this guidance may have a material impact of approximately $11.0 million on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” The new guidance requires most inventory to be measured at the lower of cost and net realizable value, thereby simplifying the previous guidance under which an entity must measure inventory at the lower of cost or market. Market is defined as replacement cost, net realizable value (“NRV”), or NRV less a normal profit margin. The ASU will not apply to inventory that is measured using either the last-in, first-out method or the retail inventory method. The standard will be effective prospectively 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, 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 July 2015, the FASB issued ASU 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Benefit Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965),” a three-part update with the objective of simplifying benefit plan reporting to make the information presented more useful to the reader. Part I designates contract value as the only required measure for fully benefit-responsive investment contracts (“FBRIC”). A FBRIC is a guaranteed investment contract between the plan and an issuer in which the issuer agrees to pay a predetermined interest rate and principal for a set amount deposited with the issuer. Part II simplifies the investment disclosure requirements for employee benefit plans. Part III provides an alternative measurement date for fiscal periods that do not coincide with a month-end date. This guidance is effective for fiscal years beginning after December 15, 2015. The amendments in Parts I and II of this standard are effective retrospectively. 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 November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes.” This guidance eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified balance sheet. Instead, this guidance requires deferred tax liabilities, deferred tax assets and valuation allowances be classified as non-current in a classified balance sheet. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. Additionally, this guidance may be applied either prospectively or retrospectively to all periods presented. The Company has not determined when it will adopt the new reporting standard and the impact of the adoption of this guidance on its consolidated financial statements.

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(3) Investment in Unconsolidated Subsidiary

On February 3, 2015, the Company purchased 51% of the outstanding shares of Yellow Chips Holding B.V. (“Yellow Chips”), which produces vegetable chips and organic potato chips primarily for the Dutch and other European markets. The investment is accounted for under the equity method and had a carrying value at October 31, 2015 of $1.9 million at October 31, 2015 and July 31, 2015. The Company also had a loan receivable outstanding with Yellow Chips of $1.3 million at October 31, 2015 and July 31, 2015. The Company’s share of income from Yellow Chips was $0.1 million and nil for the three months ended October 31, 2015 and 2014, respectively, and is included in “Other income” on the Condensed Consolidated Statements of Operations.

Provided that Yellow Chips reaches an agreed upon EBITDA on or around January 1, 2016, the Company will pay an additional €0.5 million of cash consideration as deferred consideration for the purchase of the 51% interest as part of the agreement. The agreement also includes call and put options on the remaining 49% outstanding equity that the Company or the other shareholders can exercise if a certain EBITDA target is met after 2018 or under other circumstances as well as rights for the Company to sell its shareholding and require the remaining shareholders to sell their shareholdings to the same buyer in the event that the Company wants to sell its shares if the EBITDA threshold is not met, and similar rights for the other shareholders to sell their shares and require the Company to also sell its shares to the same buyer if the Company has not first exercised its right to initiate a sale. If the party initiating such a sale does not require the other shareholder(s) to sell, the other shareholder(s) can in any case choose to require the same buyer to also buy their shares.

(4) 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 because they have not been designated as hedging instruments. In addition to the 32 corn options sold during fiscal 2015, the Company sold 99 corn call option commodity derivatives during the first quarter of fiscal 2016 which resulted in an immaterial loss. As of October 31, 2015, the Company had 44 corn call option commodity derivatives outstanding. Commodity derivative gains and losses were not material to the Consolidated Statements of Operations for the three months ended October 31, 2015 and 2014.

The fair values of the Company’s derivative instruments were as follows:



Liability Derivatives	Balance Sheet Location	Fair Value
		October 31, 2015		July 31, 2015		October 31, 2014
Derivatives not designated as hedging instruments:
Commodity contracts	Prepaid and other current assets	$	4	$	117	$	1
Total		$	4	$	117	$	1

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

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.

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

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value was $240.2 million as of October 31, 2015 and $238.4 million as of July 31, 2015. The fair value of the Notes was not materially different than the carrying value as of October 31, 2015. 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 10 to the Consolidated Financial Statements for further discussion on the Notes.

(5) Stock-Based Compensation

Stock-Based Compensation Expense:

Stock-based compensation expense is included in the Condensed Consolidated Statements of Operations as a component of Selling, general and administrative expenses. The Company recorded the following stock-based compensation expense by award types for the three months ended October 31, 2015 and 2014.



	Three Months Ended October 31,
	2015		2014
Stock options	$	511	$	878
Restricted stock awards	434		573
Restricted stock units	774		451
Performance share units	443		79
Total	$	2,162	$	1,981

Grant Award Activities:

Stock Option Awards:

The following table summarizes stock option activity for the three months ended October 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, 2015	1,321		$	24.52
Granted	—		—
Exercised	(3	)	19.75
Canceled/Forfeited	(1	)	63.68
Outstanding at October 31, 2015	1,317		$	24.50	6.5	$	23,699

Exercisable at October 31, 2015	1,056		$	25.95	6.2	$	18,082
Vested and expected to vest at October 31, 2015	1,317		$	24.50	6.5	$	23,699

There were no options granted during the three months ended October 31, 2015 and 2014. The total intrinsic value of options exercised during the three months ended October 31, 2015 and 2014 was $46 thousand and $0.1 million, respectively. The total fair value of options vested during the three months ended October 31, 2015 and 2014 was $0.5 million and $1.0 million, respectively.

As of October 31, 2015, there was $2.1 million of unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted average period of 1.3 years. Cash received from option exercises was $67 thousand and $0.1 million for the three months ended October 31, 2015 and 2014.

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Restricted Stock Awards and Restricted Stock Units:

Restricted Stock Award (“RSA”) and Restricted Stock Unit (“RSU”) activities for the three months ended October 31, 2015 are summarized as follows:



	RSAs				RSUs
	Number of Shares (in thousands)		Weighted Average Grant Date Fair Value Per Share		Number of Shares (in thousands)		Weighted Average Grant Date Fair Value Per Share
Nonvested at July 31, 2015	237		$	18.78	416		$	24.49
Granted	—		—		199		31.45
Vested	(25	)	29.40		(81	)	26.29
Canceled/Forfeited	(3	)	64.19		(27	)	22.40
Nonvested at October 31, 2015	209		16.91		507		27.04

There were no RSAs granted during the three months ended October 31, 2015 and 2014. The total fair value of RSAs vested during the three months ended October 31, 2015 and 2014 was $0.8 million and $1.0 million, respectively.

The weighted average grant date fair value of RSUs granted during the three months ended October 31, 2015 and 2014 was $31.45 and $28.77, respectively. The total fair value of RSUs vested during the three months ended October 31, 2015 and 2014 was $2.6 million and $1.2 million, respectively.

As of October 31, 2015, there was $2.1 million of unrecognized compensation cost related to non-vested RSAs, which is expected to be recognized over a weighted average period of 1.3 years. As of October 31, 2015, there was $11.6 million of unrecognized compensation cost related to non-vested RSUs, which is expected to be recognized over a weighted average period of 2.9 years.

Performance Stock Units:

Assumptions used in the Monte-Carlo model for performance stock units (“PSUs”) granted during the three months ended October 31, 2015 and 2014 are presented below. Since the Company does not currently pay dividends, the dividend rate variable is zero.



	Three Months Ended October 31,
	2015		2014
Expected term, in years	2.81		2.81
Expected volatility	37.86	%	52.76	%
Risk-free interest rate	0.88	%	0.89	%
Dividend rate	0.00	%	0.00	%

The following table summarizes PSU activity for the three months ended October 31, 2015:



	Number of Shares (in thousands)		Weighted Average Grant Date Fair Value Per Share
Nonvested at July 31, 2015	120		$	32.44
Granted	131		35.09
Vested	—		—
Canceled/Forfeited	(4	)	32.44
Nonvested at October 31, 2015	247		33.84

The weighted average grant date fair value of PSUs granted during the three months ended October 31, 2015 and 2014 was $35.09 and $32.44, respectively. As of October 31, 2015, there was $6.5 million of unrecognized compensation expense related to nonvested PSUs, which is expected to be recognized over a weighted average period of 2.5 years.

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(6) 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”). Including these participating securities 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.

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



	Three Months Ended October 31,
	2015			2014

Net income	$	7,779		$	7,694
Less: income allocated to participating securities	(55		)	(83		)
Income attributable to common shareholders — basic	7,724			7,611
Add: undistributed income attributable to participating securities	55			83
Less: undistributed income reallocated to participating securities	(54		)	(82		)
Income attributable to common shareholders — diluted	$	7,725		$	7,612
Denominator:
Weighted average shares outstanding — basic	31,279			31,042
Dilutive shares — stock options, RSUs and PSUs	591			426
Weighted average shares outstanding — diluted	31,870			31,468
Income per share attributable to common shareholders⁽¹⁾:
Basic	$	0.25		$	0.25
Diluted	$	0.24		$	0.24


(1)	Computations may reflect rounding adjustments.

Options to purchase 67,743 and 228,037 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 for the three months ended October 31, 2015 and 2014 and therefore their effect would be antidilutive.

(7) Balance Sheet Items

Inventories, net consisted of the following:



	October 31, 2015		July 31, 2015		October 31, 2014
Raw materials and supplies	$	111,436	$	51,200	$	162,419
Work in process	23,291		42,707		32,094
Finished goods	79,745		64,898		64,658
Inventories, net	$	214,472	$	158,805	$	259,171

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Accounts payable and accrued liabilities consisted of the following:



	October 31, 2015		July 31, 2015		October 31, 2014
Accounts payable	$	58,192	$	58,806	$	82,309
Accrued salaries and benefits	10,751		13,720		10,615
Accrued promotions	30,534		28,065		25,934
Accrued taxes	3,473		3,690		4,942
Accrued interest	3,043		6,176		2,222
Accrued current lease obligations⁽¹⁾	3,018		2,853		2,661
Other	4,196		3,871		3,778
Total	$	113,207	$	117,181	$	132,461


(1)	Long-term portion of capital lease obligations is reflected in Other liabilities on the Condensed Consolidated Balance Sheets.

(8) Property, Plant and Equipment

Property, plant and equipment, net consisted of the following:



	October 31, 2015			July 31, 2015			October 31, 2014
Land and improvements	$	11,005		$	11,059		$	11,185
Buildings and improvements	63,878			60,052			59,659
Machinery, equipment and software	223,651			221,323			215,155
Construction in progress	32,730			29,872			21,955
Capital leases⁽¹⁾	16,719			16,684			16,539
Total	347,983			338,990			324,493
Less accumulated depreciation	(197,638		)	(193,841		)	(186,423		)
Less accumulated amortization	(8,746		)	(8,084		)	(5,073		)
Property, plant and equipment, net	$	141,599		$	137,065		$	132,997


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

Depreciation and amortization expense, excluding amortization expense for intangible assets, was $5.1 million and $5.3 million for the three months ended October 31, 2015 and 2014, respectively. For amortization expense of Other intangible assets, net, see Note 9 to the Condensed Consolidated Financial Statements.

(9) Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the three months ended October 31, 2015 and 2014 were as follows:



	Snacks			Nuts		Total
Goodwill at July 31, 2015	$	330,900		$	72,635	$	403,535
Translation adjustments	(1,123		)	—		(1,123		)
Goodwill at October 31, 2015	329,777			72,635		402,412



	Snacks			Nuts		Total
Goodwill at July 31, 2014	$	338,085		$	72,635	$	410,720
Translation adjustments	(5,607		)	—		(5,607		)
Goodwill at October 31, 2014	$	332,478		$	72,635	$	405,113

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Other intangible assets, net consisted of the following:



	October 31, 2015			July 31, 2015			October 31, 2014
Brand intangibles (not subject to amortization):	$	262,251		$	262,840		$	263,889
Intangible assets subject to amortization:
Customer contracts and related relationships	157,588			158,355			159,845
Total other intangible assets, gross⁽¹⁾	419,839			421,195			423,734
Less accumulated amortization on intangible assets:
Customer contracts and related relationships	(47,658		)	(45,706		)	(39,860		)
Total other intangible assets, net	$	372,181		$	375,489		$	383,874

(1)The change in the carrying amount of other intangible assets is the result of foreign currency translation adjustments.

Identifiable intangible assets amortization expense was $1.9 million and $2.0 million for the three months ended October 31, 2015 and 2014, respectively. Identifiable intangible asset amortization expense will amount to approximately $5.9 million for the remainder of fiscal 2016 and approximately $7.8 million for each of the next five fiscal years.

(10) Long-Term Debt

Long-term debt consisted of the following:



	October 31, 2015			July 31, 2015			October 31, 2014			Annual Contractual Interest Rate	Effective Interest Rate	Maturity Date
ABL Facility	$	17,000		$	5,000		$	8,000		LIBOR + Margin or Alternate Base Rate + Margin	1.92%	August 2018
Guaranteed Loan	5,395			5,997			7,760			4.95%	4.95%	December 2020
Notes	230,000			230,000			230,000			7.00%	7.00%	March 2019
Term Loan Facility	398,651			408,775			411,888			Eurodollar Rate + 3.25% or Base Rate + 2.25%	4.25%	August 2018
Total outstanding debt	651,046			649,772			657,648
Less: Unamortized debt discounts	(6,844		)	(7,445		)	(9,243		)
Total outstanding debt, net	644,202			642,327			648,405
Less: current portion of long-term debt, net	(17,072		)	(9,193		)	(12,116		)
Total long-term debt, net	$	627,130		$	633,134		$	636,289

Under the ABL Facility, the Company has a $20.0 million sublimit for the issuance of letters of credit. As of October 31, 2015, the Company had $6.2 million letters of credit outstanding related to normal business transactions.

As of October 31, 2015, the Company was in compliance with all of the covenants under its debt structure.

For the three months ended October 31, 2015 and 2014, the blended interest rate for the Company’s borrowings was 5.29% and 5.28%, respectively. For the three months ended October 31, 2015 and 2014, the blended interest rate for the Company’s short-term borrowings was 1.92% and 1.67%, respectively.

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Interest expense, net for the three months ended October 31, 2015 and 2014 was as follows:



	Three Months Ended October 31,
	2015			2014
Guaranteed Loan	$	72		$	101
ABL Facility	269			150
Notes	4,025			3,976
Term Loan Facility	4,390			4,527
Interest income	(20		)	—
Capitalized interest	(375		)	(190		)
Amortization of deferred financing costs and debt discount	1,479			1,452
Other	186			220
Interest expense, net	$	10,026		$	10,236

(11) Income Taxes

The Company's effective tax rate was approximately 6.7% for the three months ended October 31, 2015 compared to 12.1% for the three months ended October 31, 2014.

As new information is obtained throughout each period, 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 the Company operates, 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 the Company conducts business, may cause the Company’s effective tax rate to fluctuate.

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial statement 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 carrying value to an amount that the Company believes is more likely than not to be realized. When the Company establishes or reduces the valuation allowance against the deferred tax assets, the provision for income taxes will increase or decrease respectively in the period such determination is made.

The Company’s effective tax rates for the three months ended October 31, 2015 and October 31, 2014 were positively impacted by valuation allowances against deferred tax assets and were negatively impacted by changes in deferred taxes resulting from the amortization of long-lived intangibles and state income tax expense.

(12) Retirement Plans

Diamond provides retiree medical benefits and sponsors one defined benefit pension plan. The defined benefit pension plan is a qualified plan covering all bargaining unit employees. Plan assets are held in trust and primarily include mutual funds and money market accounts. Employees who joined the Company after January 15, 1999 are not entitled to retiree medical benefits. Diamond uses a July 31 measurement date for its plans.

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Components of net periodic benefit cost (income) for the three months ended October 31, 2015 and 2014 were as follows:



	Pension Benefits						Other Benefits
	Three Months Ended October 31,						Three Months Ended October 31,
	2015			2014			2015			2014
Service cost	$	—		$	—		$	10		$	11
Interest cost	258			256			16			17
Expected return on plan assets	(292		)	(292		)	—			—
Amortization of net (gain) loss	151			126			(132		)	(132		)
Net periodic benefit cost (income)	$	117		$	90		$	(106	)	$	(104	)

Defined Contribution Plan

The Company sponsors two defined contribution plans and recognized expenses of $0.4 million for the three months ended October 31, 2015 and 2014. The Company expects to contribute a total of approximately $1.7 million to the defined contribution plan during fiscal 2016.

(13) 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 by component, net of tax, for the three months ended October 31, 2015 and 2014 were as follows:



	Pension Liability Adjustment			Foreign Currency Translation Adjustment			Total
Balance as of July 31, 2015	$	(2,950	)	$	8,773		$	5,823
Other comprehensive income (loss) before reclassifications	—			(2,631		)	(2,631		)
Amounts reclassified from accumulated other comprehensive income:
Amortization of prior gain (loss) included in net periodic pension cost	19			—			19
Other comprehensive income (loss)	19			(2,631		)	(2,612		)
Balance as of October 31, 2015	$	(2,931	)	$	6,142		$	3,211



	Pension Liability Adjustment			Foreign Currency Translation Adjustment			Total
Balance as of July 31, 2014	$	(1,968	)	$	25,601		$	23,633
Other comprehensive income (loss) before reclassifications	—			(12,196		)	(12,196		)
Amounts reclassified from accumulated other comprehensive income:
Amortization of prior gain (loss) included in net periodic pension cost	(6		)	—			(6		)
Other comprehensive income (loss)	(6		)	(12,196		)	(12,202		)
Balance as of October 31, 2014	$	(1,974	)	$	13,405		$	11,431

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 three months ended October 31, 2015 and 2014.

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(14) 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. Depending on the ultimate outcome of the appeal, this matter 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 BrandChips 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 that this settlement 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 and on July 20, 2015 the court granted final approval of the settlement.

Merger Related Litigation

In connection with the announcement of the proposed merger with Snyder’s-Lance, Inc., beginning on November 10, 2015, the first of several putative class action complaints was filed on behalf of purported Diamond stockholders; three in the Superior Court of California, San Francisco County and one in the Court of Chancery of the State of Delaware. The complaints variously name as defendants Diamond, the members of the Diamond board of directors, Snyder’s-Lance, Merger Sub I and Merger Sub II. The complaints generally allege, among other things, that the members of the Diamond board of directors breached their fiduciary duties to Diamond stockholders in connection with negotiating, entering into and approving the proposed merger agreement, and that Diamond, Snyder’s-Lance, and the merger subsidiaries aided and abetted such breaches of fiduciary duties. The complaints seek, among other relief, injunctive relief, including to enjoin completion of the proposed merger, certain other declaratory and equitable relief, damages, and costs and fees.

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

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require substantial payments by us, which could have a material impact on Diamond’s financial position, results of operations and cash flows.

(15) Segment Reporting

The Company has five operating segments that it aggregates into two reportable segments based on similarities between: segment economic characteristics, nature of 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 reports results related primarily to products sold under Kettle Brand and KETTLE Chips and Pop Secret trade names. The Nuts reportable segment reports results related primarily to products sold under Emerald and Diamond of California brands.

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 chief operating decision maker does not receive or utilize asset information to evaluate performance of operating segments, accordingly, asset-related information has not been presented. The accounting policies of the Company’s segments are the same as those described in Note 2 to our Consolidated Financial Statements in our Form 10-K for the fiscal year ended July 31, 2015.

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



	Three Months Ended October 31,
	2015		2014
Net sales
Snacks	$	115,799	$	116,590
Nuts	109,050		130,031
Total	$	224,849	$	246,621
Gross profit
Snacks	$	42,307	$	42,956
Nuts	18,572		16,434
Total	$	60,879	$	59,390

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

Overview

We are a snack food and culinary nut company focused on making innovative, convenient and delicious snacks as well as culinary nuts true to our 100-year plus heritage. We sell our products under five different widely-recognized brand names: Diamond of California, Kettle Brand and KETTLE Chips, Emerald and Pop Secret. 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 and KETTLE Chips brands to our portfolio.

In general, we sell directly to retailers, particularly larger national grocery store and drug store chains, and indirectly through wholesale distributors to independent and small regional retail grocery store chains and convenience stores. We sell our 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, such as global ingredient nut customers.

Our business is seasonal. In sourcing walnuts, we typically contract directly with growers for their walnut crop for the contracted acres. We typically receive walnuts during the period from September to November, and we pay for the crop throughout the fiscal 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 are received throughout the fiscal year. The pecans are paid for over those periods based on the various vendor terms. 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 corn for our popcorn products in November, and approximately 50% in May. We contract for potatoes and oil annually and from time to time throughout the year and receive and pay for this supply throughout the year.

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, 2016, 2015, 2014 and 2013 as “fiscal 2016,” “fiscal 2015,” “fiscal 2014” and “fiscal 2013,” respectively.

Unless otherwise noted, forward-looking statements in this Quarterly Report on Form 10-Q are made without regard to the proposed merger discussed below.

Proposed Merger with Snyder's-Lance, Inc.

On October 27, 2015, we entered into an Agreement and Plan of Merger and Reorganization ("Merger Agreement") with Snyder's-Lance, Inc. ("Snyder's-Lance"), Shark Acquisition Sub I, Inc. ("Merger Sub I"), a wholly-owned subsidiary of Snyder's-Lance, and Shark Acquisition Sub II, LLC ("Merger Sub II"), also a wholly-owned subsidiary of Snyder's-Lance. Pursuant to the terms of the Merger Agreement, and subject to the conditions thereof, Merger Sub I will merge with and into Diamond with Diamond surviving as a wholly-owned subsidiary of Snyder's-Lance ("First Merger"), and Diamond (as the surviving corporation of the First Merger) will subsequently merge with and into Merger Sub II, with Merger Sub II surviving as a wholly-owned subsidiary of Snyder's-Lance ("Second Merger" and, collectively with the First Merger, the "Merger"). If the First Merger is consummated, Diamond stockholders will be entitled to receive $12.50 in cash and 0.775 shares of Snyder's-Lance common stock for each share of Diamond common stock owned by them as of the date of the First Merger.

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Agreement under specified circumstances, Diamond could be required to pay a termination fee to Snyder’s-Lance of up to $54.0 million and Snyder’s-Lance could be required to pay a termination fee to Diamond of between $50.0 million ad $100.0 million, depending on the circumstances of any such termination. See Note 1 to the condensed consolidated financial statements set forth in Part I, Item 1 of this report.

Financial Highlights

•

Net sales for the first quarter of fiscal 2016 decreased to $224.8 million compared to $246.6 million for the three months ended October 31, 2014. Nuts segment net sales were down $21.0 million. The prior year first quarter included $13.0 million of high-volume, low-margin nut SKUs that we exited. An additional $6.1 million decline in net sales was due primarily to lower net price realization in international walnuts. The adverse impact of foreign exchange rate changes versus prior year, related to sales of snacks in the U.K. and Canada, was $2.6 million.

•

Gross profit as a percentage of net sales was 27.1% for the first quarter of fiscal 2016 compared to 24.1% for the same period in fiscal 2015. This 300 basis point improvement over fiscal 2014 was primarily driven by increased net price realization in Diamond of California, Emerald and Kettle in the U.S., as well as favorable walnut costs. These were partially offset by lower net price realization in international walnuts, Kettle U.K. and Pop Secret, higher other tree nut costs and adverse foreign exchange rates.

Results of Operations

The following table sets forth certain financial data as a percentage of net sales for the three months ended October 31, 2015 and 2014:



	Three Months Ended October 31,
	2015		2014
Net sales	100.0	%	100.0	%
Cost of sales	72.9	%	75.9	%
Gross profit	27.1	%	24.1	%
Operating expenses:
Selling, general and administrative	13.6	%	11.6	%
Advertising	5.3	%	4.8	%
Total operating expenses	18.9	%	16.4	%
Income from operations	8.2	%	7.7	%
Interest expense, net	4.5	%	4.2	%
Other income, net	—	%	—	%
Income before income taxes	3.7	%	3.5	%
Income taxes	0.2	%	0.4	%
Net income	3.5	%	3.1	%

We aggregate our operating segments into two reportable segments, which are Snacks and Nuts. Results for the Snacks reportable segment relate primarily to products sold under the Kettle Brand, KETTLE Chips, and Pop Secret trade names. Results for the Nuts reportable segment relate primarily to products sold under the Emerald and Diamond of California brands.

We evaluate the performance of our segments based on net sales and gross profit for each segment. Gross profit is calculated as net sales less all cost of sales.

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Net sales and gross profit by segment were as follows (in thousands):



	Three Months Ended October 31,				% Change from 2014 to 2015
	2015		2014		% Change from 2014 to 2015
Net sales
Snacks	$	115,799	$	116,590	(0.7	)%
Nuts	109,050		130,031		(16.1	)%
Total	$	224,849	$	246,621	(8.8	)%
Gross profit
Snacks	$	42,307	$	42,956	(1.5	)%
Nuts	18,572		16,434		13.0	%
Total	$	60,879	$	59,390	2.5	%

Snacks segment net sales for the three months ended October 31, 2015 decreased to $115.8 million from $116.6 million for the same period in fiscal 2015. The decrease was primarily due to lower net price realization for Kettle in the U.K. and Pop Secret as well as $2.6 million of unfavorable foreign exchange impact. These decreases were partially offset by improved net price realization for Kettle in the U.S. and strong volume growth in Kettle in both the U.K. and U.S.

Nuts segment net sales for the three months ended October 31, 2015 decreased to $109.1 million from $130.0 million for the same period in fiscal 2015. The $21.0 million net sales decrease in the quarter was primarily due to the exit of certain high-volume, low-margin SKUs that amounted to $13.0 million of sales in the three months ended October 31, 2014. An additional $6.1 million decline in net sales was due primarily to lower net price realization in international walnuts. These decreases were partially offset by higher net price realization for Emerald products and the balance of the Diamond of California brand products.

Gross margin. Snacks segment gross profit as a percentage of Snacks net sales was 36.5% for the three months ended October 31, 2015 compared to 36.8% for the same period in fiscal 2015. This gross margin decrease was driven by the lower net price realization for Kettle U.K. and Pop Secret products, as well as adverse foreign exchange rates, partially offset by strong Kettle U.S. performance.

Nuts segment gross profit as a percentage of Nuts net sales was 17.0% for the three months ended October 31, 2015 compared to 12.6% for the same period in fiscal 2015. This gross margin increase was driven by higher net price realization for both the Diamond of California and Emerald brands and lower walnut costs, partially offset by higher other tree nut costs.

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 $30.6 million and $28.6 million, and 13.6% and 11.6% of net sales, for the three months ended October 31, 2015 and 2014, respectively. Selling, general and administrative expenses increased as a result of higher salary and fringe benefits and also increased consulting expenses. Selling, general and administrative expenses included nil and $1.8 million for the three months ended October 31, 2015 and 2014, respectively, associated with legal expenses related to matters stemming from our audit committee investigation and restatement. In addition, selling, general and administrative expense for the three months ended October 31, 2015 and 2014 included $2.9 million and nil, respectively, related to merger and acquisition related transaction costs, primarily related to our proposed merger and $0.2 million and $0.4 million, respectively, related to the Fishers plant closure and related costs.

Advertising. Advertising expenses were $11.9 million and $11.8 million, and 5.3% and 4.8% of net sales, for the three months ended October 31, 2015 and 2014, respectively.

Interest expense, net. Net interest expense was $10.0 million and $10.2 million, and 4.5% and 4.2% of net sales, for the three months ended October 31, 2015 and 2014, respectively. Approximately $1.5 million for each of the three months ended October 31, 2015 and 2014 of interest expense represented non-cash amortization of deferred charges incurred as a result of our debt refinancing in fiscal 2014. Interest expense, net decreased for the three months ended October 31, 2015 due to higher interest capitalization as a result of increased construction in progress.

Income taxes. Our effective tax rate was approximately 6.7% for the three months ended October 31, 2015 compared to approximately 12.1% for the three months ended October 31, 2014. The decrease in the effective tax rate for the three months ended October 31, 2015 as compared to the three months ended October 31, 2014 was due to an increase in pre-tax earnings in the U.S., the tax effect of which is significantly offset by valuation allowances against deferred tax assets.

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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.

Working capital and stockholders’ equity were $147.8 million and $314.7 million, respectively, at October 31, 2015, compared to $146.5 million and $308.6 million, respectively, at July 31, 2015, and $116.2 million and $280.6 million, respectively, at October 31, 2014. The increase in working capital between October 31, 2015 and October 31, 2014 is primarily due to decreased payable to growers which is a result of a decrease in walnut cost, partially offset by a decrease in inventories also due to lower walnut costs. Capitalized expenditures were $10.4 million for the three months ended October 31, 2015 and $7.6 million for the three months ended October 31, 2014. The largest capitalized expenditure is our investment in upgrading our company-wide information technology infrastructure.

We believe our cash and cash equivalents, cash generated from operations and borrowings available under our ABL Facility will be sufficient to fund our contractual commitments, repay obligations and fund our operational requirements over the next twelve months.

Cash Flows

Cash provided by operating activities was $5.1 million during the three months ended October 31, 2015 compared to $14.6 million for the same period in fiscal 2015. The decrease in cash provided by operating activities was primarily due to improved operating results offset by the cash flow impact of changes in certain working capital items, primarily a decrease in payable to growers, offset by a decrease in inventories and trade receivables.

Cash used in investing activities was $10.4 million during the three months ended October 31, 2015 compared to $7.6 million for the same period in fiscal 2015. The increase in cash used in 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 investment in upgrading our company-wide information technology infrastructure. Capital spending for fiscal 2016 is expected to approximate $35.0 million to $40.0 million and is expected to be funded by cash on hand and cash generated by operating activities. The largest capital spending is expected to be related to investment in production and equipment related to the Kettle U.S. business.

Cash used in financing activities was $0.6 million during the three months ended October 31, 2015 compared to $0.9 million for the same period in fiscal 2015. The decrease in cash used in financing activities is primarily due to the receipt of cash funds from borrowings under the ABL facility and an increased purchase of treasury stock (shares relinquished upon vesting by employees to pay tax withholdings) for the three months ended October 31, 2015. This decrease was largely offset by a $9.1 million mandatory principal prepayment on the Term Loan Facility which is based on consolidated excess cash flow. This mandatory principal prepayment was applied in direct order to the next four scheduled Term Loan Facility principal repayments. We are not required to make any further principal payments under the Term Loan Facility until the second quarter of fiscal 2017.

At October 31, 2015, we had a total of $6.9 million in cash and cash equivalents. Of this balance, $3.5 million was held outside the United States in foreign currencies, primarily pound sterling. Because we expect existing domestic cash and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments, and in order to ensure sufficient working capital and expand operations in the United Kingdom, it is our intention to indefinitely reinvest all current and future foreign earnings at these locations.

Debt

Guaranteed Loan

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 $5.4 million was outstanding as of October 31, 2015. Principal and interest payments are due monthly throughout the term of the loan. The Guaranteed Loan was used to purchase equipment for the Beloit, Wisconsin plant expansion. The Guaranteed Loan provides for customary affirmative and negative covenants related to financial reporting and operations.

Term Loan Facility and ABL Facility

The Term Loan Facility matures on August 20, 2018 and is amortized 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 currently permits us to increase the term loans, or add a separate tranche of term loans, by an amount not to exceed $100.0 million plus the maximum amount of additional term loans

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that we 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) $125.0 million and (b) the amount of the Borrowing Base, in each case, less customary reserves. Under the ABL Facility, we have a $20.0 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 Diamond’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 our eligible inventory in the U.S.; less (c) in each case, customary reserves. During the first quarter of fiscal 2016, we had average borrowing of $2.6 million under the ABL Facility with amount borrowed at any one time during the three months ended October 31, 2015 ranging from zero to $17.0 million. As of October 31, 2015, we had $17.0 million in loans outstanding under the ABL Facility, the amount of letters of credit issued under the ABL Facility was $6.2 million and the net availability under the ABL Facility was $101.3 million.

Under the ABL Facility, we 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. “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 one 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 five 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 Diamond under, and guarantors of, the ABL Facility. If we experience a change of control under the terms of the Term Loan or the ABL and the loans are not otherwise paid off in connection with the change of control, it would constitute an event of default. If any event of default occurs, the lenders would be able to terminate the loans and declare unpaid principal plus accrued and unpaid interest due immediately.

Notes

The Notes mature on March 15, 2019. 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 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. Without an equity offering and before March 15, 2016, we may redeem some or all of the Notes at a price equal to 103.50% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the redemption date and the make-whole premium. If we experience 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 our ability and our 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.

As of October 31, 2015, we were in compliance with all of the covenants under our debt arrangements.

For the three months ended October 31, 2015 and 2014, the blended interest rate for our borrowings was 5.29% and 5.28%, respectively. For the three months ended October 31, 2015 and 2014, the blended interest rate for our short-term borrowings was 1.92% and 1.67%, respectively.

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Contractual Obligations and Commitments

Contractual obligations and commitments at October 31, 2015 were as follows (in millions). For obligations under our pension and other post-retirement benefit plans, refer to Note 13 to our Consolidated Financial Statements in our Form 10-K for the fiscal year ended July 31, 2015.



	Payments Due by Period
	Total		FY 2016		FY 2017 - FY 2018		FY 2019 - FY 2020		Thereafter
ABL Facility	$	17.0	$	17.0	$	—	$	—	$	—
Long-term obligations	634.0		1.9		10.7		621.4		—
Interest on long-term obligations ⁽¹⁾	103.3		25.1		66.5		11.7		—
Capital leases	7.4		2.2		3.8		1.4		—
Interest on capital leases	0.8		0.3		0.4		0.1		—
Operating leases	33.5		3.5		9.4		8.6		12.0
Purchase commitments ⁽²⁾	84.6		68.4		7.4		8.5		0.3
Other long-term liabilities ⁽³⁾	4.6		0.9		2.5		1.2		—
Total ⁽⁴⁾⁽⁵⁾	$	885.2	$	119.3	$	100.7	$	652.9	$	12.3


(1)	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 October 31, 2015.


(2)	Amounts represent primarily commitments to purchase inventory and equipment. Excludes purchase commitments under Walnut Purchase Agreements due to uncertainty of pricing and quantity.


(3)	Excludes $0.5 million in deferred rent liabilities. Additionally, the liability for uncertain tax positions ($1.1 million at October 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.


(4)	In the above table, we did not include either the €0.5 million of deferred cash contingent consideration or the call and put options on the remaining 49% of Yellow Chips outstanding equity. See Note 3 to the Condensed Consolidated Financial Statements.

(5)

In the above table, we did not include the cash contingent consideration payable to Credit Suisse Securities (USA) LLC for their service provided related to the proposed merger with Snyder’s-Lance. This future payment is contingent upon the closing of the proposed merger and the amount will be based on the fair market value of the consideration paid or payable in connection with merger on the closing date. As discussed in the Registration Statement on Form S-4 filed by Snyder's-Lance on November 25, 2015, the cash contingent consideration was estimated to be approximately $14.2 million. The actual contingent consideration will be determined on the completion date of the proposed merger. See “Proposed Merger with Snyder’s-Lance, Inc.” and Note 1 to the Condensed Consolidated Financial Statements for further discussion of the proposed merger.

Off-balance Sheet Arrangements

As of October 31, 2015, we did not have any material off-balance sheet arrangements, as defined in Item 303(a) (4) (ii) of SEC Regulation S-K.

Effects of Inflation

There has been no material change in our exposure to inflation from that discussed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2015, as filed with the SEC on October 1, 2015.

Critical Accounting Policies

There have been no material changes to our critical accounting policies from those discussed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2015, as filed with the SEC on October 1, 2015.

Recent Accounting Pronouncements

See Note 2 to the Condensed Consolidated Financial Statements.

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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 Item 7A of our Annual Report on Form 10-K for the fiscal year ended July 31, 2015, as filed with the SEC on October 1, 2015.

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 Diamond is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer (our principal executive and principal financial officers) 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 Diamond’s disclosure controls and procedures were effective as of October 31, 2015.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended October 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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. Depending on the ultimate outcome of the appeal, this matter 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 Diamond in San Francisco Superior Court, alleging that certain ingredients contained in our 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 four years of the filing of the complaint.

Diamond 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 that this settlement 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.

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We 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 and on July 20, 2015 the court granted final approval of the settlement.

Merger Related Litigation

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 Diamond’s financial position, results of operations and cash flows.

Item 1A. Risk Factors

This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed or implied in such forward-looking statements due to many risks and uncertainties. Factors that may cause such a difference include, but are not limited to, those discussed below in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report.

Risks Related to Our Business

Raw materials that are necessary in the production and packaging of our products are subject to fluctuations in availability, quality and price that could adversely impact our business and financial results.

The availability, size, quality and cost of raw materials used in 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 supply fluctuations caused by changes in global supply and demand, weather conditions (whether caused by climate change or otherwise), natural disasters, crop disease, pests, government agricultural and energy programs, foreign currency exchange rates 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 in water availability, such as California where severe drought conditions are at historical levels, and fluctuations in the availability of water may reduce the availability of raw materials not only in a particular season but also over time.

We source walnuts primarily from California 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. To the extent contracted growers deliver greater supply than we expect or significantly greater supply than in prior years, we may need to find new outlets or channels to sell such walnuts, which may adversely impact our margins. If and to the extent we are unsuccessful in selling such additional supply, our cash flows and results of operations may be adversely impacted.

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 walnut purchase agreements, we finalize the price to be paid to growers by the end of the fiscal year. The price customers pay for walnuts fluctuates throughout the year depending on market forces. To the extent that we enter into contracts with our customers based on walnut cost estimates that ultimately prove to be below the final price we determine to

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pay to growers, our business and results of operations could be harmed. Additionally, to the extent that the price we pay growers ultimately proves to be higher than the market value of walnuts, we may be unable to compete effectively, have to sell our walnuts below cost or at lower margins than we desire, and need to impair the inventory value of our walnuts, so our business and results of operations could be harmed. Each year some of our walnut supply agreements are 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 issue 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 that 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.

Our markets are highly competitive and competition is generally based on product quality, price, brand recognition and loyalty. As a result, on an ongoing basis in the markets in which we operate, we face pricing pressure as well as new products, marketing efforts and brand campaigns by competitors , each of which create 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, maintain or stabilize our market share or sales. 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. Additionally, losing sales or failing to forecast sales accurately could result in increased inventories, which would adversely impact our liquidity.

Competition and customer pressures may restrict our ability to increase prices in response to commodity or other cost increases or may force us to decrease prices, in the event of commodity or other cost decreases or otherwise. We may also need to increase spending on marketing, advertising and new product innovation to stabilize, maintain or increase our market share or sales. Our marketing activities and contracts may commit us to expenses that may not provide the return on investment we expect, adversely affect our ability to establish other marketing programs, limit our ability to cut expenses or result in contractual or other disputes, any of which may adversely affect our business. 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. If we do not maintain good relationships with important suppliers or are unable to identify a replacement supplier or develop our own sourcing capabilities (at a reasonable cost or at all), our ability to manufacture our products may be harmed, which would result in interruptions in our business and harm our business and results of operations. 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 U.S. dollar, primarily the British pound and Canadian dollar. 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

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sales and operations, many of which factors are outside of our control, could have a material adverse impact on our business, financial condition and results of operations. During fiscal 2015, fiscal 2014, and fiscal 2013, sales outside the United States, primarily in the United Kingdom, Canada, South Korea, Japan, and Netherlands, accounted for approximately 25%, 25% and 24% of our net sales, respectively.

In addition to the other risks described in this “Risk Factors” section, there are risks specifically related to our international sales and operations that could adversely impact our business and results of operations. These include:


•	foreign exchange rates, foreign currency exchange and transfer restrictions, which may unpredictably and adversely impact our consolidated operating results, our asset and liability balances and our cash flow in our consolidated financial statements, 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;


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


•	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 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.

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. If we are unable to record and report financial information on a timely and accurate basis, we may have a material weakness or significant deficiency in our internal control over financial reporting.

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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. From time to time in the past, we have experienced control weaknesses that were material weaknesses, including a material weakness relating to our evaluation and review of complex and non-routine transactions and a material weakness related to our controls over journal entries.

Any future material weakness in our system of internal control over financial reporting may make it difficult for us to manage our business, harm our results of operations, impair our ability to report results accurately and on time, cause investors to lose faith in the reliability of our statements, and materially adversely impact the price of our securities.

We do not expect that our internal control 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 make it difficult for us to manage our business, 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, cause investors to lose faith in the reliability of our statements or cause the market price of our common stock and/or our notes to decline.

Pending and future litigation may lead us to incur significant costs and could adversely affect our business.

We are, or may become, party to various lawsuits and claims arising in the normal course of business, which may include lawsuits or claims relating to the marketing and labeling of products, intellectual property, contracts, product recalls, product liability, employment matters, environmental matters or other aspects of our business. For example, in 2014, we were sued by various parties alleging that certain ingredients contained in our Kettle Brand chips and TIAS Tortilla Chips are not natural. Even when not merited, the defense of lawsuits and claims may divert our management’s attention, and we may incur significant expenses in defending these lawsuits and claims.

Additionally, as set forth in “Legal Proceedings,” on September 23, 2013, a Notice of Appeal from the order granting final approval of our settlement of In re Diamond Foods, Inc. Shareholder Derivative Litigation was filed by a single stockholder. No date for this hearing on this appeal has been scheduled. Under Delaware law, our bylaws and certain indemnification agreements, we may have an obligation to indemnify former officers and directors in relation to this matter. 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 this matter. If appeals proceed in the shareholder derivative action, and particularly if the stockholder plaintiff succeeds in such appeal, our indemnity obligations could result in significant legal expenses or damages and our business, financial condition, results of operations and cash flow could suffer.

In connection with claims or litigation, we may be required to pay damage awards or settlements or become subject to injunctions or other equitable remedies, which could have a material adverse effect on our financial position, cash flows or results of operations. The outcome of litigation is often difficult to predict, and the outcome of pending or future litigation may have a material adverse effect on our financial position, cash flows or results of operations.

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, transportation, processing, product quality, packaging, storage, import, export, distribution and labeling of our products. There may be changes in the legal and regulatory environment, and governmental entities or agencies in jurisdictions where we operate may impose new manufacturing, transportation, processing, packaging, storage, import, export, distribution, labeling or other restrictions, any of which could increase our costs and affect our profitability. For example, in June 2015, the U.S. Food

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and Drug Administration (“FDA”) declared that the use of partially hydrogenated oils in food is no longer “generally recognized as safe” (often referred to as GRAS), effectively banning the use of partially hydrogenated oils in food, and established a transition period for companies to comply with the new regulations. Some of our products currently contain partially hydrogenated oils, and we are reformulating those products. Additionally, in September 2015, the FDA released major new food safety regulations governing the production and handling of food, and we may incur costs to comply with these new regulations. We have incurred and expect to continue to incur costs to comply with these new regulations. To the extent that consumer concerns about partially hydrogenated oils increase or reformulation efforts are not successful, our business and results of operations could also be harmed. In addition, 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. If consumer concerns about acrylamide increase or this or other substances are regulated further or not allowed in food products, demand for affected products could decline or we may be unable to sell some of our products and our revenues and business could be harmed. Efforts to reformulate products 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 as well as regulations relating to noise and odor. 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, could require us to change our methods of operations, and could require us to implement remediation plans, any of 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 have co-manufacturing agreements and co-pack arrangements with third parties. A temporary or extended interruption in operations at any of our facilities or at our co-packer facilities, whether due to technical or labor difficulties, delays or damage (including destruction) from fire, flood, severe weather or earthquake, infrastructure failures such as power or water shortages, raw material shortage, termination of a co-pack arrangement, dispute with a co-packer, 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.

Natural disasters can disrupt our operations, which could adversely affect our results of operations.

A natural disaster such as an earthquake, tornado, fire, drought, flood, or severe storm or other catastrophic event affecting our operating activities or major facilities, could cause an interruption or delay in our business and loss of inventory and/or data or render us unable to accept and fulfill customer orders in a timely manner, or at all. We are particularly susceptible to earthquakes as our executive offices and nut operations are located in California where earthquakes periodically occur. Additionally, our popcorn co-packer is located in Indiana, where tornados periodically occur. If operations are damaged by an earthquake, tornado or other disaster, we may be subject to supply interruptions, destruction of our facilities and products or other business disruptions, which could adversely affect our business and results of operations.

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 low in 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 or we may discontinue products and incur related write-downs, any of which could in turn cause our revenue and profitability to be lower.

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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 alleged adverse health impacts of consumption of various food products. The continuing global focus on health and wellness, including weight management, could adversely affect our sales or lead to stricter regulation, as well as increase our risk of litigation by governmental and private parties. For example, in June 2015, the FDA adopted new regulations effectively banning (subject to a transition period and an exemption application process) the use of partially hydrogenated oils in food, which certain of our products currently 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. These lawsuits can be expensive to defend. Moreover, adverse publicity about regulatory or legal action against us or adverse publicity about our products (including the resources needed to produce them) 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 or even if the adverse publicity regarding our products is unfounded.

Increased costs associated with product processing and transportation, such as water, electricity, natural gas, fuel and labor 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. Labor is also an important component of our production costs. 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 (including increases in minimum wage rates in the U.S., California and U.K.) 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 or material changes in their purchases 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 17%, 16% and 16% of our total net sales in fiscal 2015, 2014, and 2013, 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 and also put existing business relationships at risk. The loss of any major customers, or any other significant customer, or a material decrease in their purchases from us (whether as a result of customer inventory practices, a decrease in such customer’s business, a response to a price increase or otherwise), 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 fail to compete effectively with other manufacturers or with retailer brands, our business and results of operations could be negatively impacted.

Our branded products face competition from private label products (retailer brands) that 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

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to customers or consumers than ours or may sell branded products at lower price points. 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.

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 impairment charges related to our intangible assets and goodwill which would negatively impact our consolidated operating results and further reduce our stock price. At July 31, 2015, the carrying value of goodwill and other intangible assets totaled approximately $779.0 million, compared to total assets of approximately $1,212.7 million and total shareholders’ equity of approximately $308.6 million. At July 31, 2014, the carrying value of goodwill and other intangible assets totaled approximately $803.1 million, compared to total assets of approximately $1,192.8 million and total shareholders’ equity of approximately $283.8 million.

Our proprietary brands and packaging designs are essential to the value of our business, and the inability to protect our intellectual property, and costs associated with that protection, 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.

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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 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 2018. Strikes or work stoppages and interruptions could occur if we are unable to renew this agreement on satisfactory terms or if there are efforts to unionize our workforce in other locations. 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, or new agreements (if we are required to recognize a union in a new location), 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, security and data breaches, and inappropriate use of or negative exposure through social media 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 cyber attacks, 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, consumer, distributor or employee confidential information, or other technology breakdown 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. Furthermore, if a breach or other breakdown results in disclosure of confidential or personal information, we may suffer reputational, competitive and business harm. 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.

The inappropriate use of certain media vehicles could cause brand damage or information leakage. Negative posts or comments about us or our brands on any social networking web site could seriously damage our reputation or the reputation of our brands. In addition, the disclosure of non-public information through external media vehicles could lead to information loss and other issues. Identifying new points of entry as social media, and our use of social media, continues to expand presents new challenges. Any business interruptions, information loss or damage to our or our brands’ reputation could adversely impact our business, financial condition and operating results.

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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 plans to implement 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, 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.

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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 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


•	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, investment community or social media;


•	terrorist acts; and


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

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 pursuant to the exercise of an outstanding warrant issued to an entity managed by Oaktree, and the trading of those shares in the open market could cause the market price of our common stock to decline.

On February 19, 2014 an entity managed by Oaktree Capital Management, L.P. (“Oaktree”) exercised a warrant to purchase 4.42 million shares of our common stock, representing approximately 14% of our common stock. The volatility in the trading price of our common stock may increase if and when Oaktree decides to sell shares.

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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 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 ABL Facility, we have not made arrangements to obtain additional financing and lenders are not obligated to fund the “accordion” feature in our Term Loan Facility. 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.

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Risks Related to the Proposed Merger

Completion of our proposed merger with Snyder’s-Lance is subject to many conditions and if these conditions are not satisfied or waived, the proposed merger will not be completed.

We have agreed to be acquired in a proposed merger with Snyder’s-Lance, Inc., and the obligations of each party to consummate the proposed merger is conditioned on, among other things:


•	approval of the proposed merger by our stockholders;


•	approval of the issuance of shares of Snyder’s-Lance common stock in the merger by the Snyder’s-Lance stockholders;


•	expiration of any applicable waiting period under U.S. antitrust laws;


•	absence of any injunction or other order, or any other law, statute or regulation, issued by any governmental authority prohibiting the completion of the transaction;


•	effectiveness of the registration statement with respect to the offer and sale of Snyder’s-Lance common stock to be issued in the proposed merger,;


•	approval for listing on the Nasdaq Global Select Market of the shares of Snyder’s-Lance common stock to be issued in the proposed merger;


•	accuracy of each party’s respective representations and warranties that are contained in the merger agreement;


•	absence of a material adverse effect on us; and


•	delivery of a tax opinion from our tax counsel to the effect that the proposed merger will be a tax-free reorganization.

There can be no assurance that the conditions to closing of the proposed merger will be satisfied or waived or that the proposed merger will be completed.

We may have difficulty attracting, motivating and retaining executives and other key employees in light of the proposed merger with Snyder’s-Lance.

Uncertainty among our employees about their future roles after the completion of the proposed merger with Snyder’s-Lance may impair our ability to attract, retain and motivate key personnel. In addition, some of our key employees are entitled to accelerated vesting of outstanding equity awards as a result of the completion of the proposed merger, or to severance payments if they terminate their employment after the proposed merger as a result of specified circumstances, including changes in their duties, positions, compensation and benefits, or their primary office location. These factors may encourage some key employees to consider career changes, distracting them from performing their duties to our company. In addition, distractions for the workforce and management associated with activities of labor unions or with the process of integrating our employees into the Snyder’s-Lance workforce could arise in the time before completion of the proposed merger. Any of these issues could have an adverse effect on our business operations and financial performance.

The proposed merger is subject to the receipt of consents, approvals and non-objections from antitrust regulators, which may impose conditions on, jeopardize or delay the completion of the proposed merger, result in additional expenditures of our money and other resources or reduce the anticipated benefits of the proposed merger; alternatively, antitrust regulators may preclude the completion of the proposed merger altogether.

The completion of the proposed merger is conditioned upon filings with, and the receipt of required consents, orders, approvals, non-objections or clearances from antitrust regulators. We intend to pursue these consents, orders, approvals, non-objections and clearances in accordance with the merger agreement. There can be no assurance, however, that these consents, orders, approvals, non-objections and clearances will be obtained or, if they are obtained, that they will not impose conditions on, or require divestitures relating to, the divisions, operations or assets of Diamond. Any conditions or divestitures may jeopardize or delay the completion of the proposed merger, result in additional expenditures of money and resources or reduce the anticipated benefits of the proposed merger, or prevent the completion of the merger. Additionally, if the Federal Trade Commission or the Antitrust Division of the U.S. Department of Justice challenges the completion of the proposed merger, our stock price could be material adversely affected.

Our important business relationships may be disrupted due to uncertainties associated with the proposed merger, which could adversely affect our business.

Some of the parties with which we do business may be uncertain about their business relationships with us as a result of the proposed merger. For example, customers, distributors, suppliers, brokers, vendors and others may attempt to negotiate changes in their existing business relationships with us or they may consider entering into alternative business relationships

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with other parties. Some of our customers, distributors, suppliers, brokers, vendors and others may have rights to terminate contracts that are triggered upon completion of the proposed merger. These disruptions could have an adverse effect on our businesses, financial condition or results of operations, or the prospects of the combined business. Any delay in completion of the proposed merger, or termination of the merger agreement, could exacerbate these risks and adverse effects.

The merger agreement limits our ability to pursue alternatives to the proposed merger and may discourage other companies from trying to acquire us for more consideration than what Snyder’s-Lance has agreed to pay.

The merger agreement contains provisions that make it more difficult for us to sell our business to a party other than Snyder’s-Lance. These provisions include a prohibition, subject to some exceptions, on us soliciting acquisition proposals or offers for an alternative transaction. Further, there are only limited exceptions to our agreement that our board will not withdraw, qualify or modify, or publicly propose to withdraw, qualify or modify, the recommendation of the our board in favor of the adoption of the merger agreement. If Diamond were to withdraw its recommendation and terminate the merger agreement in accordance with its terms to accept an unsolicited alternative acquisition proposal, we would be required to pay a termination fee of $54 million to Snyder’s-Lance, and would still be required to submit the adoption of the proposed merger agreement to a vote of our stockholders.

Various lawsuits that have been filed challenging the proposed merger may prevent the proposed merger from being completed.

Lawsuits challenging the proposed merger have been filed and other similar lawsuits may be filed in the future. An adverse ruling in any such lawsuit may prevent the proposed merger from being completed. In connection with the proposed merger, two putative class action complaints were filed on behalf of purported Diamond stockholders in the Superior Court of California, San Francisco County, and one putative class action complaint was filed in the Court of Chancery of the State of Delaware. The complaints name as defendants Diamond, the members of the Diamond board of directors, Snyder’s-Lance, Merger Sub I and Merger Sub II. The complaints generally allege, among other things, that the members of our board of directors breached their fiduciary duties to our stockholders in connection with negotiating, entering into and approving the merger agreement, and that we, Snyder’s-Lance, Merger Sub I and Merger Sub II aided and abetted those breaches of fiduciary duties. The complaints seek, among other things, injunctive relief, including enjoining completion of the proposed merger, other declaratory and equitable relief, damages, and costs and fees.

One of the conditions to completion of the proposed merger is the absence of any applicable law or any order being in effect that prohibits completion of the proposed merger. Accordingly, if a plaintiff is successful in obtaining an order enjoining completion of the proposed merger, then such order may prevent the proposed merger from being completed, or from being completed within the expected time frame. In addition, we intend to defend the lawsuits vigorously, which may involve considerable expense.

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

During the three months ended October 31, 2015, we repurchased shares of our common stock as follows:



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
August 1 — August 31, 2015	363	$	32.19	—	$	—
September 1 — September 30, 2015	920	$	30.43	—	$	—
October 1 — October 31, 2015	38,151	$	31.42	—	$	—
Total	39,434	$	31.41	—	$	—

(1)

All of the shares in the table above were originally granted to employees as restricted stock awards and restricted stock units 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.

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Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

On December 9, 2015, Diamond amended its Senior Executive Incentive Plan and Annual Incentive Plan (together, “Plans”). Under the Plans, as amended, in the event the closing of Diamond’s proposed merger with Snyder’s-Lance, Inc. occurs prior to July 31, 2016 or on or after July 31, 2016 but before the determination of whether previously-established performance metrics have been satisfied, then:

•

performance metric achievement and funding under the Plans will be determined by comparing Diamond’s actual performance through the end of the month preceding the closing of the merger against the applicable gross profit and EBITDA targets under the Annual Incentive Plan and net sales target under the Senior Executive Incentive Plan established for the fiscal 2016 period up to and including such month-end (which, for the full fiscal 2016 period are the same target(s) as originally established for fiscal 2016);


•	individual performance metrics will be deemed 100% satisfied unless otherwise determined by the Compensation Committee of Diamond’s board of directors, or by Diamond’s Chief Executive Officer (except with respect to his own individual performance metrics);


•	target and maximum bonus figures will be based on the participant’s base salary through the closing of the merger (resulting in a prorated bonus payment);


•	payment will be made no later than the first to occur of (i) two and one-half months following the month-end used to calculate performance and (ii) October 15, 2016; and


•	if, after closing of the merger but before the payment of bonuses, a participant’s service is terminated without cause or due to a resignation for good reason (as defined in the Annual Incentive Plan), then such participant’s bonus will be payable when bonuses are generally paid to other participants under the Plans.

The applicable target under the Senior Executive Incentive Plan must be achieved for our executive officers to receive a fiscal 2016-related bonus payment with respect to the criteria established under the Annual Incentive Plan. Copies of the amended and restated Annual Incentive Plan and the amended and restated Senior Executive Incentive Plan are filed as exhibits to this report.

Item 6. Exhibits

The exhibits filed as part of this Quarterly Report on Form 10-Q are set forth on the Exhibit Index, which is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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:	December 9, 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 Report

Exhibit

Incorporated by Reference

Number

Exhibit Title

Form

File No.

Date Filed

10.13*

Annual Incentive Plan as amended and restated December 9, 2015

10.14*

Senior Executive Incentive Plan as amended and restated December 9, 2015

31.01

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.02

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.01

Section 1350 Certifications

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document



*	Indicates management contract or compensatory plan or arrangement.

All other schedules, which are included in the applicable accounting regulations of the Securities and Exchange Commission, are not required here because they are not applicable.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company