SAN FRANCISCO — Diamond Foods, Inc. has placed its chief executive officer and chief financial officer on administrative leave, the company said Feb. 8. The company added 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, determining that Diamond will need to restate its financials for fiscal 2010 and 2011.
As part of its investigation, the audit committee 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. Additionally, the audit committee said it identified material weaknesses in the company’s internal control over financial reporting.
The audit committee said the company will search for permanent replacements for the c.e.o. and c.f.o. positions, which previously were filled by Michael J. Mendes and Steven M. Neil, respectively.
Diamond Foods’ board of directors has named Rick Wolford as interim president and c.e.o., Michael Murphy as acting c.f.o., and Robert J. Zollars as chairman of the board. Mr. Wolford, a former c.e.o., president and chairman of Del Monte Foods, has been on Diamond’s board since April 2011. Mr. Murphy is a managing director with Alix Partners, L.L.P., and Mr. Zollars was lead independent director.
“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,” Mr. Zollars said. “As a result, the company will restate its fiscal years 2010 and 2011 financial statements. 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.”
Diamond Foods is also currently under investigation by the U.S. Department of Justice and the U.S. Securities Exchange Commission. Those investigations are ongoing and there was no indication how the audit committee’s actions may affect the federal efforts.
The announcement by Diamond Foods also has put its planned acquisition of the Pringles brand from Procter & Gamble, Cincinnati, in jeopardy. In April of 2011, Diamond Foods entered into an agreement with Procter & Gamble to acquire the Pringles brand for approximately $2.3 billion. The transaction was going to be largely financed with stock, with Procter & Gamble spinning off the Pringles business and then merging it with Diamond Foods.
In statement released shortly after Diamond Foods made its announcement, Procter & Gamble said, “This is breaking news for us and the information released by Diamond Foods is very disappointing. Pringles remains a valuable asset and it has attracted considerable interest from outside parties. We need to evaluate next steps and we are currently keeping all our options open.”