david smith diamond foods final power point 4 23-14

Presented By: David F. Smith

Spalding University

April 23, 2014

http://thestockmarketbasics.com/2013/10/01/october-

1st-2013-financial-earnings-release-alerts/

Diamond Foods, Inc. (DMND)

• Founded in 1912 with a strong heritage under the Diamond of

California brand.

• Diamond Foods has five premium product lines: Potato Chips,

Popcorn, Snack Nuts, Inshell Nuts, & Culinary Nuts

• Brands include Kettle Brand® Chips, Emerald® snack nuts,

Pop Secret® popcorn, and Diamond of California® nuts.

• Approximately around 1,700 year round employees.

• Diamond Foods completed its initial public offering in July,

2005.

Introduction Part One

Introduction Part Two

(Diamond Foods Inc., 2013)

(2014) Balance Sheet Part One

Yahoo Finance

(2014) Balance Sheet Continued

(http://finance.yahoo.com/q/bs?s=DMND)

(5 Year) Stock Market Performance

• Purple line – DOW

• Red line – NASDAQ

• Green line – S&P 500 index

• Blue line – DMND (http://finance.yahoo.com/q/bc?s=DMND&t=5y&l=off&z=l&q=b&c=%5EGSPC%2C%5EIXIC%2C%5EDJI)


20 and 200 day moving average over a 2-year time horizon

(2014) Major Stock Holders

(http://finance.yahoo.com/q/mh?s=DMND+Major+Holders)

(2014) Major Stock Holders Part Two

(http://finance.yahoo.com/q/mh?s=DMND+Major+Holders)

DIAMOND FOODS STAKEHOLDERS

(http://ediscoverytimes.com/wp-content/uploads/2012/08/Presentation1.jpg)

Manufacturing Locations: -Guess What Location Is NOT Displayed & WHY

(file:///C:/Users/KASE/Downloads/April%202013%20Investor%20Presentation%20FINAL%20(2).pdf)

Employees for Diamond Foods

(https://www.comstocksmag.com/sites/default/files/0413_China_marketing_secondary.jpg)

Union Employees & Diamond Foods

(http://www.holtlaborlibrary.org/images/lg%20Walnuts.JPG )

“Diamond Walnut's displaced work force is 70 percent

women, 50 percent Hispanic, 15 percent black and 15

percent Indian or Pakistani, the Teamsters say.”(http://www.holtlaborlibrary.org/LaborButtons.html )

(http://www.compliancebuilding.com/wp-content/uploads/2009/11/goals-warning.png)

20 and 200 day moving average over a 2-year time horizon

The Man Who Wanted More Than Walnuts

(http://www.nasdaq.com/reference/200702/mo_020107a.jpg)

Diamond Foods CEO Michael Mendes presides over the Market Open

Thursday, February 1, 2007 at NASDAQ's MarketSite in New York City.(http://www.nasdaq.com/reference/200702/market_open_020107.stm)

WARNING Diamond Foods Ethical Fiasco

(http://www.replicals.com/product_info.php?manufacturers_id=15&products_id=726&osCsid=qe7aiha7vphl1s394a0n89r6s)

2

The Power of One Man’s Walnuts

CREDIT: REUTERS/ROBERT DURELL (UNITED STATES - TAGS: AGRICULTURE BUSINESS)

• Walnut grower Matt Conant stands in his walnut grove in Rio Oso, California

February 23, 2012. ''There's a lot of uncertainty right now,'' says Conant, a walnut

grower, former supplier to Diamond Foods and district director of the California

Farm Bureau Federation. An accounting scandal over the payments made by the

largest U.S. walnut processor Diamond Foods Inc to its growers has hurt their

confidence in the company.

• Picture taken February 23, 2012. (http://www.reuters.com/article/2012/03/19/us-diamond-tax idUSBRE82I0AQ20120319)

• “The case arose in September 2011, when Douglas

Barnhill, an accountant who is also a farmer of 75

acres of California walnut groves, got a mysterious

check for nearly $46,000 from Diamond. Barnhill

contacted Eric Heidman, the company’s director of

field operations, on whether the check was a final

payment for his 2010 crop or pre-payment for the

2011 harvest.” (http://www.ethicssage.com/2013/02/accounting-for-nuts.html)

How People Found Out

• “Diamond growers are paid in installments, with the final

payment for the prior fall’s crops coming late the following

year. Though it was September 2011, Barnhill was still

waiting for full payment for the walnuts he had sent

Diamond in 2010. Heidman told Barnhill that the payment

was for the 2010 crop, part of fiscal 2011, but that it would

be “budgeted into the next year.” (http://www.ethicssage.com/2013/02/accounting-for-

nuts.html)

How People Found Out Part Two

• “Nick Feakins, a forensic accountant, noted the relentless climb in Diamond’s profit margins including an increase in net income as a percent of sales from 1.5 percent in fiscal 2006 to more than 5 percent in fiscal 2011.” (http://www.ethicssage.com/2013/02/accounting-for-nuts.html)

• “According to Feakins, “no competitors were improving like that; even with rising Asian demand…it just doesn’t make sense.” Reuters did a review of 11 companies listed as comparable organizations in Diamond’s regulatory filings and found that only one, B&G Foods, which made multiple acquisitions, added earnings during the period.” (http://www.ethicssage.com/2013/02/accounting-for-nuts.html)

What They Did to Give It Away

• “Another red flag was that while net income growth is generally reflected in operating cash flow increases, at Diamond the cash generation was sluggish in fiscal 2010 when earnings were strong. This raises questions about the quality of earnings. Also, in September 2010 Mendes had promised earnings per share growth of 15 percent to 20 percent per year for the next five years.” (http://www.ethicssage.com/2013/02/accounting-for-nuts.html)

• “In fiscal 2009, 2010, and 2011, $2.6 million of Mendes’ $4.1 million in annual bonus was paid because Diamond beat its EPS goal, according to regulatory filings.”(http://www.ethicssage.com/2013/02/accounting-for-nuts.html)

They Made REALLY Big Promises

• “On November 14, 2012, Diamond Foods Inc. disclosed restated financial statements tied to an accounting scandal that reduced its earnings during the first three quarters of 2012 as it took significant charges related to improper accounting for payments to walnut growers.”

• “The restatements cut Diamond’s earnings by 57 percent for fiscal 2011 to $29.7 million and by 46 percent for fiscal 2010 to $23.2 million. By December 7, 2012, Diamond’s share price had declined 54 percent during 2012.”

• http://www.ethicssage.com/2013/02/accounting-for-nuts.html

• Blog posted by Steven Mintz, aka Ethics Sage, on February 18, 2013

When Diamond Foods Got Caught

• “An investigation by the audit committee in February 2012, found payments of $20 million to walnut growers in August 2010 and $60 million in September 2011 that were not recorded in the correct periods. The $20 million payments to growers in 2010 caught the eye of Diamond’s auditors, Deloitte & Touche.”

“However, it does not seem that the auditors lived up to their professional responsibilities in detecting and/or reporting the fraud.”

http://www.ethicssage.com/2013/02/accounting-for-nuts.html


What the Audit Found in 2012

• “The problem is under accounting rules you cannot legitimately record in a future fiscal year an amount for a prior year’s crop. That amount should have been estimated during 2010 and recorded as an expense against revenue from sale of walnuts.”



Diamond Made a Mix of It’s Nuts Payments

Why Diamond Foods Went Walnuts in 2011

http://www.pringles.com/content/dam/pringles-site/product_categories/Favorites.jpg

Pringles Deal with Diamond Foods would

have been worth at least $2.35 billion dollars

http://www.pringles.com/en_US/products/tortillas/truly-original.html

Recent Challenges and Concerns

• “In 2011, a number of accounting discrepancies revealed

that the company was struggling.

• A year later Diamond Foods had a net loss of

$86,336,000 and earnings (loss) per share of $3.98.

• During 2012 the company’s stock price experienced

volatility, dropping approximately 42 percent from its peak

of about $21.50 in early November to its lowest in six

years at $12.50 in late November.

• Since this large drop, the stock price has begun to

increase once more, hitting a value of $19.18 toward the

middle of 2013.”

http://danielsethics.mgt.unm.edu/pdf/diamonds.pdf

Daniels Fund Ethics Initiative

University of New Mexico

http://danielsethics.mgt.unm.edu

Recent Challenges and Concerns Part Two

• “Manipulating accounting results qualifies as a type of

fraud that misleads stakeholders.

• The three points of the fraud triangle are opportunity,

motivation, and rationalization.

• Using this model, it becomes clearer how the accounting

fraud at Diamond Foods was allowed to take place.

• For instance, employees were given the opportunity to

conduct fraud as internal controls were clearly not being

implemented.

• Furthermore, top management did not set an ethical tone

at the top, giving employees even more opportunity for

unethical behavior”





Several Factors Encouraged Unethical Behavior

• “Company required to take out loans to make

acquisitions possible. Diamond debt agreements

required certain performance standards to be met.

• The company had debt-to-earnings covenant in

one of its debt agreements, requiring the

company to have higher earnings.

• The debt-to-earnings covenant, increased

compensation for stakeholders for meeting higher

performance standards.

• All likely played a major role in Diamond Foods’

inaccurate financial reporting. ”






• “The snack food industry very competitive, but so was the company’s culture.”

• “The “bigger is better” ideology supported by then-CEO Michael Mendes”

• “Diamond Foods’ attempted acquisition of Pringles ideology led to large debts, as the company was

required to take out loans to make these acquisitions possible.”

• “Because of the loans, Diamond had debt agreements, which required certain performance

standards to be met.”

• “The company also had a debt-to-earnings covenant in one of its debt agreements, requiring the

company to have higher earnings. The debt-to-earnings covenant, increased compensation for

stakeholders for meeting higher performance standards, and the pressures to acquire Pringles likely

played a major role in Diamond Foods’ inaccurate financial reporting.”






• “Snack food industry very competitive, but

so was the company’s culture.”

• The “Bigger Is Better”-CEO Michael Mendes

• “Diamond Foods’ attempted acquisition of Pringles”





The Man Who Wanted More Than Walnuts

Photo: Paul Chinn, The Chronicle

Former Diamond Foods CEO Michael Mendes agreed

to pay $125,000 to settle a charge of negligence

stemming from his former company's accounting

practices.

The Consequence's of Bad Behaviour

http://www.geaugaconstitutionalcouncil.org/images/show_large_img.cfm?Unethical1.jpg

• “The ethical issues in this case are fairly obvious: misleading financial results; improper accounting; and a corporate governance system that did not work.

• The earnings projections raise questions whether auditors should include these projections in their audit work.

• In accounting, they are referred to as “forward-looking” statements and cautionary language is assigned to the amounts.

• However, this is insufficient to protect the public in an environment of capitalism run amok.”


Blog posted by Steven Mintz, aka Ethics Sage, on February 18, 2013

What the Ethical Issues Were

“Lessons Learned From Diamond’s Pringles Fiasco”

http://www.obligation.org/wp-content/uploads/2014/03/Screen-Shot-2014-03-13-at-1.41.29-PM.png

“Lessons Learned From Diamond’s Pringles Fiasco”

•“Don’t Run Before You Can Walk”

•“Expect Scrutiny”

•“Agreements Matter”

•“Sellers Need to Be Wary”

•“Short-Sellers Have a Purpose”

•“C.E.O. Hubris Can Kill a Company”

What the Future Means for Beyond 2014

file:///C:/Users/KASE/Downloads/April%202013%20Investor%20Presentation%

20FINAL%20(2).pdf

QUESTIONS ????

Source: http://bushwickdaily.com/

References

Diamond Foods Inc. (2013, April). Diamond foods building sustainable premium brands.

Retrieved from Diamond Foods:

file:///C:/Users/KASE/Downloads/April%202013%20Investor%20Presentation%

20FINAL%20(2).pdf

http://www.holtlaborlibrary.org/LaborButtons.html

http://www.nasdaq.com/reference/200702/market_open_020107.stm

http://www.reuters.com/article/2012/03/19/us-diamond-tax idUSBRE82I0AQ20120319


http://www.holtlaborlibrary.org/LaborButtons.html

http://www.nasdaq.com/reference/200702/market_open_020107.stm

http://www.reuters.com/article/2012/03/19/us-diamond-tax idUSBRE82I0AQ20120319

david smith diamond foods final power point 4 23-14

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