I wrote about the Diamond Foods (NASDAQ: DMND) back in November, noting the controversy surrounding the bizarre “momentum” payments ostensibly made to help walnut growers for the following season (though it was revealed many of the recipients would not be supplying DMND this year!). Making matters worse was the fact that this issue came to light while DMND was in the midst of acquiring Pringles from Proctor & Gamble (NYSE: PG) in a share swap. With the dramatic decline in DMND’s share price, I didn’t think the deal would go through.
Here was my conclusion from November:
…in analyzing DMND, one must consider two scenarios: one for the Pringles deal occurring and one for it being scuttled. In the event that the deal is scuttled, I don’t think even the current depressed purchase price is attractive on a free cash flow basis, even when not adjusting for the delayed payments. Furthermore, the company maintains an unattractive level of debt and its historical returns are lackluster at best. If the deal does go through and the high range of debt is assumed, based on the historical combined financials found in the proxy statement (which again paint an overly attractive picture given the shenanigans), I am also less than impressed.
So despite a dramatic decline in the company’s share price, I don’t find DMND to be an attractive purchase, even if the apparent shenanigans can be explained satisfactorily (which I doubt).
Yesterday DMND announced the results of its internal investigation. Below is a snippet of the announcement (emphasis added):
Diamond Foods Announces Audit Committee Investigation Findings
SAN FRANCISCO, CA, February 8, 2012 – Diamond Foods, Inc. (NASDAQ: DMND) today announced that the Audit Committee of its Board of Directors has substantially completed its investigation of the Company’s accounting for certain crop payments to walnut growers. The Audit Committee has concluded that the Company’s financial statements for the fiscal years 2010 and 2011 will need to be restated. Over the course of the last three months, the Audit Committee has carefully reviewed the accounting treatment of certain payments to walnut growers. The Audit Committee has concluded that a “continuity” payment made to growers in August 2010 of approximately $20 million and a “momentum” payment made to growers in September 2011 of approximately $60 million were not accounted for in the correct periods, and the Audit Committee identified material weaknesses in the Company’s internal control over financial reporting.
The Board of Directors is taking a number of corrective actions including the appointment of a new Chief Executive Officer and Chief Financial Officer. Effective immediately, the Board has appointed Director Rick Wolford to serve as Acting President and Chief Executive Officer and Michael Murphy, of Alix Partners, LLP, to serve as Acting Chief Financial Officer. The Company is commencing searches for permanent replacements for the CEO and CFO positions. The Board has also appointed Robert J. Zollars, who previously served as Lead Independent Director, to the position of Chairman of the Board. Michael J. Mendes and Steven M. Neil have been placed on administrative leave from the Company.
“After an extensive and thorough investigation, the Audit Committee concluded that the Company’s internal controls were inadequate and that certain grower payments for the 2011 and 2010 crops were not accounted for in the correct periods. As a result, the Company will restate its fiscal years 2010 and 2011 financial statements,” said Robert Zollars, Diamond Foods’ Chairman. “The Board takes the Company’s control and the integrity of its financial statements very seriously, and we are moving aggressively to implement corrective measures, including changes to the Company’s leadership.”
The market did not react well; shares fell another 41.68% after hours and are down 74.9% since the Wall Street Journal broke the story of the momentum payments in September.
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