Bloomberg News

Diamond Foods Hires Adviser to Repair Balance Sheet

March 13, 2012

Diamond Foods Inc. (DMND) retained Dean Bradley Osborne Partners LLC as financial adviser to strengthen its balance sheet as a planned earnings restatement threatens to violate some of its debt agreements.

The company said it is making “substantial progress” in strengthening its financial reporting and restating earnings for its past two fiscal years. The restatement’s timing hasn’t been set, the San Francisco-based company said today in a statement.

Hiring Dean Bradley suggests that Diamond, the seller of Emerald snack nuts and Pop Secret popcorn, may soon work to restructure its debt. The earnings restatement probably will put the company in violation of its debt covenants, and Diamond will need to negotiate new terms with its banks, said Edward Aaron, an analyst with RBC Capital Markets Corp. in Denver.

“The banks are concerned about Diamond’s leverage situation,” Aaron said in a telephone interview. “They need to find ways to placate the lenders. The banks will want to be protected.”

Diamond rose 4.8 percent to $25.70 at the close in New York. The shares had declined 24 percent this year before today.

Diamond is working to repair its business after an internal investigation revealed that payments made to walnut growers were accounted for in the wrong periods, leading to the ouster of its chief executive officer and chief financial officer last month. Diamond’s bid to acquire the Pringles brand from Procter & Gamble Co. (PG) also collapsed, with Kellogg Co. (K) buying the unit a week after the probe’s results were announced.

‘Momentum’ Payments

In February, Diamond’s board said its three-month investigation, later taken up by the U.S. Securities and Exchange Commission, concluded that about $20 million in “continuity” payments made to walnut growers in August 2010 and about $60 million in “momentum” payments in September 2011 weren’t accounted for in the correct periods. The board also identified material weaknesses in the company’s financial reporting controls.

Director Rick Wolford is serving as CEO, and Alix Partners LP’s Michael Murphy is CFO while the company searches for permanent replacements. They replaced former CEO Michael Mendes and ex-CFO Steven M. Neil.

While the company is working to get its balance sheet and financial reporting in order, the company said sales for its snack lines are on the rise. Diamond said that for the 12 weeks ended Feb. 18, sales of Emerald snack nuts grew 29 percent compared with 3 percent for the entire snack nut market. In the same period, sales growth of the Pop-Secret Popcorn and Kettle chips also outpaced the overall market.

The results show the core businesses are fundamentally strong, Tim Ramey, senior analyst with D.A. Davidson & Co. wrote in a research report today.

“This has always been an exciting growth story, and it remains that,” the Lake Oswego, Oregon-based analyst wrote.

To contact the reporter on this story: David Welch in Detroit at dwelch12@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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