Case Study Reference Information

Overview Statement from Diamond Foods Form 10-K

Diamond Foods, Inc. was incorporated in Delaware in 2005 as the successor to Diamond Walnut Growers, Inc., a member-owned California agricultural cooperative association. In July 2005, Diamond Walnut Growers, Inc. merged with and into Diamond Foods, Inc., converted from a cooperative association to a Delaware corporation and completed an initial public offering of Diamond Foods' common stock. The terms "Diamond Foods," "Diamond," "Company," "Registrant," "we," "us," and "our" mean Diamond Foods, Inc. and its subsidiaries unless the context indicates otherwise.

We are an innovative packaged food company focused on building, acquiring and energizing brands. We specialize in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, we complemented our strong heritage in the culinary nut market under the Diamond of California brand by launching a full line of snack nuts under the Emerald brand. In September 2008, we acquired the Pop Secret brand of microwave popcorn products, which provided us with increased scale in the snack market, significant supply chain economies of scale and cross promotional opportunities with our existing brands. In March 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 United Kingdom, which added the complementary premium Kettle Brand to our existing portfolio of leading brands in the snack industry. In April 2011, we announced that we entered into a definitive agreement with the Proctor& Gamble Company ("P&G") to merge P&G's Pringles business into our Company. We sell our products to global, national, regional and independent grocery, drug and convenience store chains, as well as to mass merchandisers, club stores and other retail channels.

Risk Factors from Diamond Foods Form 10-K

The following is an excerpt from "Risk Factors" section ofDiamond Foods Form 10-K:

If we do not complete our acquisition of Pringles, our business, reputation and financial condition will be adversely affected.

In April 2011, we entered into an agreement to acquire the Pringles snack business from The Procter& Gamble Company ("P&G"). The value of the proposed transaction at April 5, 2011 was approximately $2.35 billion, consisting of $1.5 billion of our common stock and the assumption of $850 million of Pringles debt. The number of shares of our common stock to be issued in the transaction was based on $1.5 billion divided by the average of 60 days of daily volume weighted average prices ("VWAP"), or 60-day VWAP, of our common stock for the period ended March 28, 2011 of $51.47, which amounted to approximately 29.1 million shares of our common stock to be issued to Pringles stockholders in connection with the transaction. As of September14, 2011, the value of the approximately 29.1 million shares of our common stock to be issued in the transaction was $2.2 billion. The transaction, which we expect to be completed by the end of 2011, is subject to approval by our stockholders and satisfaction of customary closing conditions and regulatory approvals. We cannot provide assurance that the acquisition of Pringles will be completed on schedule, or at all. If the acquisition is not completed, the share price of our common stock may drop to the extent that the market price of our stock reflects an assumption that a transaction will be completed. If we do not complete the Pringles acquisition, we will have incurred substantial expenses and diverted significant management time and resources from our ongoing business, without receiving any of the anticipated benefits of the acquisition. In addition, we could be required to pay P&G a termination fee of approximately $60 million. If the Pringles acquisition is not consummated, our business, reputation and financial condition will be adversely affected.

Impairment of Long-Lived and Intangible Assets and Goodwill

Excerpted from Diamond Foods' Form 10-K

Management reviews long-lived assets and certain identifiable intangible assets with finite lives for impairment in accordance with ASC 360, "Property, Plant, and Equipment." Goodwill and intangible assets not subject to amortization are reviewed annually for impairment in accordance with ASC 350, "Intangibles Goodwill and Other," or more often if there are indications of possible impairment.

The analysis to determine whether or not an asset is impaired requires significant judgments that are dependent on internal forecasts, including estimated future cash flows, estimates of long-term growth rates for our business, the expected life over which cash flows will be realized, and assumed royalty and discount rates. Changes in these estimates and assumptions could materially affect the determination of fair value and any impairment charge. While the fair value of these assets exceeds their carrying value based on management's current estimates and assumptions, materially different estimates and assumptions in the future in response to changing economic conditions, changes in the business or for other reasons could result in the recognition of impairment losses.

For assets to be held and used, including acquired intangible assets subject to amortization, the Company initiates a review whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Significant management judgment is required in this process.

The Company tests its brand intangible assets not subject to amortization for impairment annually, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. In testing brand intangibles for impairment, Diamond compares the fair value with the carrying value. The determination of fair value is based on a discounted cash flow analysis, using inputs such as forecasted future revenues attributable to the brand, assumed royalty rates, and a risk-adjusted discount rate that approximates our estimated cost of capital. If the carrying value exceeds the estimated fair value, the brand intangible asset is considered impaired, and an impairment loss will be recognized in an amount equal to the excess of the carrying value over the fair value of the brand intangible asset.

A.From a financial reporting and economic standpoint, why does Diamond Foods conduct annual "impairment tests" for intangible assets and goodwill?

B.Identify three events or conditions that could occur in the future and be classified as "indicators of impairment" as described above?

C.What is the impact on reported earnings per share of an impairment loss recorded by Diamond Foods in a period subsequent to the acquisition?Based solely on your answer and thinking about pertinent financial ratios, what do you believe the impact would be on Diamond Foods' stock price - why?

D.What is the impact on reported cash flows of an impairment loss recorded by Diamond Foods in a period subsequent to the acquisition?Based solely on your answer and thinking about how asset values are determined, what do you believe the impact would be on Diamond Foods' stock price - why?