(15) Retirement Plans
Diamond provides retiree medical benefits and sponsors one defined benefit pension plan. The defined benefit plan is a qualified plan covering all bargaining unit employees. Diamond uses a July 31 measurement date for its plans. Plan assets are held in trust and primarily include mutual funds and money market accounts. Any employee who joined the Company after January 15, 1999 is not entitled to retiree medical benefits. The nonqualified plan was terminated in fiscal 2013 and all benefits were distributed in December 2012. There are no obligations as of July 31, 2013.
In March 2010, the Company determined that the defined benefit pension plan for the bargaining unit employees would be frozen at July 31, 2010 in conjunction with the execution of a new union contract. This amendment was accounted for in accordance with ASC 715, “Compensation—Retirement Benefits.”
Obligations and funded status of the remaining benefit plans at July 31 were:
| Pension Benefits | Other Benefits | |||||||||||||||
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Change in Benefit Obligation |
2013 | 2012 | 2013 | 2012 | ||||||||||||
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Benefit obligation at beginning of year |
$ | 30,637 | $ | 26,868 | $ | 1,996 | $ | 2,269 | ||||||||
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Service cost |
— | 97 | 63 | 62 | ||||||||||||
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Interest cost |
908 | 1,323 | 62 | 104 | ||||||||||||
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Plan participants’ contributions |
— | — | 13 | 19 | ||||||||||||
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Plan amendments |
— | — | — | — | ||||||||||||
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Actuarial loss (gain) |
(4,366 | ) | 2,838 | (296 | ) | (371 | ) | |||||||||
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Benefits paid |
(5,976 | ) | (489 | ) | (80 | ) | (87 | ) | ||||||||
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Benefit obligation at end of year |
$ | 21,203 | $ | 30,637 | $ | 1,758 | $ | 1,996 | ||||||||
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| Pension Benefits | Other Benefits | |||||||||||||||
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Change in Plan Assets |
2013 | 2012 | 2013 | 2012 | ||||||||||||
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Fair value of plan assets at beginning of year |
$ | 14,671 | $ | 14,451 | $ | — | $ | — | ||||||||
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Actual return on plan assets |
1,652 | 709 | — | — | ||||||||||||
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Employer contribution |
5,440 | — | 67 | 68 | ||||||||||||
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Plan participants’ contributions |
— | — | 13 | 19 | ||||||||||||
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Benefits paid |
(5,976 | ) | (489 | ) | (80 | ) | (87 | ) | ||||||||
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Fair value of plan assets at end of year |
$ | 15,787 | $ | 14,671 | $ | — | $ | — | ||||||||
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Funded status at end of year |
$ | (5,416 | ) | $ | (15,966 | ) | $ | (1,758 | ) | $ | (1,996 | ) | ||||
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Assets (liabilities) recognized in the consolidated balance sheet at July 31 consisted of:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
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Current liabilities |
$ | — | (5,865 | ) | $ | (146 | ) | $ | (106 | ) | ||||||
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Noncurrent liabilities |
(5,416 | ) | (10,101 | ) | (1,612 | ) | (1,890 | ) | ||||||||
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Total |
$ | (5,416 | ) | $ | (15,966 | ) | $ | (1,758 | ) | $ | (1,996 | ) | ||||
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Amounts recognized in accumulated other comprehensive income (pre-tax) as of July 31 consisted of:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2013 | 2012 | 2013 | 2012 | |||||||||||||
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Net loss (gain) |
$ | 5,771 | $ | 12,026 | $ | (4,270 | ) | $ | (4,686 | ) | ||||||
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Prior service cost |
— | — | — | — | ||||||||||||
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Total |
$ | 5,771 | $ | 12,026 | $ | (4,270 | ) | $ | (4,686 | ) | ||||||
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The accumulated benefit obligation for all defined benefit pension plans was $21.2 million and $30.6 million at July 31, 2013 and 2012.
Information for pension plans with an accumulated benefit obligation in excess of plan assets as of July 31 was as follows:
| 2013 | 2012 | |||||||
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Projected benefit obligation |
$ | 21,203 | $ | 30,637 | ||||
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Accumulated benefit obligation |
21,203 | 30,637 | ||||||
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Fair value of plan assets |
15,787 | 14,671 | ||||||
Components of net periodic benefit cost (income) for the fiscal years ended July 31 were as follows:
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
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Service cost |
$ | — | $ | 97 | $ | 79 | $ | 63 | $ | 62 | $ | 65 | ||||||||||||
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Interest cost |
908 | 1,323 | 1,258 | 62 | 104 | 107 | ||||||||||||||||||
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Expected return on plan assets |
(1,006 | ) | (1,134 | ) | (1,031 | ) | — | — | — | |||||||||||||||
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Amortization of prior service cost |
— | 16 | 16 | — | — | — | ||||||||||||||||||
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Amortization of net (gain) loss |
723 | 782 | 643 | (712 | ) | (771 | ) | (795 | ) | |||||||||||||||
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Settlement cost |
520 | — | — | — | — | — | ||||||||||||||||||
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Curtailment cost |
— | 71 | — | — | — | — | ||||||||||||||||||
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Net periodic benefit cost / (income) |
$ | 1,145 | $ | 1,155 | $ | 965 | $ | (587 | ) | $ | (605 | ) | $ | (623 | ) | |||||||||
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The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0 million and nil, respectively. The estimated net gain and prior service cost for the other defined benefit post-retirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0 million and nil, respectively.
For calculation of retiree medical benefit cost, prior service cost is amortized on a straight-line basis over the average remaining years of service to full eligibility for benefits of the active plan participants. For calculation of net periodic pension cost, prior service cost is amortized on a straight-line basis over the average remaining years of service of the active plan participants.
Assumptions
Weighted-average assumptions used to determine benefit obligations at July 31 were as follows:
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
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Discount rate |
4.70 | % | 3.09 | % | 5.00 | % | 4.00 | % | 3.20 | % | 4.70 | % | ||||||||||||
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Rate of compensation increase |
N/A | N/A | 5.50 | N/A | N/A | N/A | ||||||||||||||||||
Weighted-average assumptions used to determine net periodic benefit cost for the fiscal years ended July 31 were as follows:
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
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Discount rate |
3.09 | % | 5.00 | % | 5.28 | % | 3.20 | % | 4.70 | % | 5.00 | % | ||||||||||||
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Expected long-term return on plan assets |
7.00 | 8.00 | 8.00 | N/A | N/A | N/A | ||||||||||||||||||
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Rate of compensation increase |
N/A | 5.50 | 5.50 | N/A | N/A | N/A | ||||||||||||||||||
The expected long-term rate of return on plan assets is based on the established asset allocation.
Assumed trend rates for medical plans were as follows:
| 2013 | 2012 | 2011 | ||||||||||
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Health care cost trend rate assumed for next year |
8.50 | % | 8.75 | % | 9.00 | % | ||||||
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Rate to which the cost trend rate assumed to decline (the ultimate trend rate) |
5.0 | % | 5.0 | % | 5.0 | % | ||||||
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Year the rate reaches ultimate trend rate |
2028 | 2028 | 2028 | |||||||||
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| One Percentage Point Increase |
One Percentage Point Decrease |
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Effect on total of service and interest cost |
$ | 18 | $ | (15 | ) | |||
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Effect on post-retirement benefit obligation |
165 | (144 | ) | |||||
Plan Assets
Effective July 31, 2010, Diamond adopted the provisions of ASU No. 2010-06 on employer’s disclosures about plan assets of a defined benefit pension or other post-retirement plan. The fair values of the Company’s pension plan assets by asset category were as follows (refer to Note 2 to the Notes to the Consolidated Financial Statements for description of levels):
The fair value of pension plan assets by asset category are as follows:
| Fair Value Measurements at July 31, 2013 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
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Asset Category: |
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Cash and cash equivalents |
$ | 281 | $ | — | $ | 281 | $ | — | ||||||||
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Mutual funds — equity: |
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Domestic |
5,793 | 5,793 | — | — | ||||||||||||
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International |
2,185 | 2,185 | — | — | ||||||||||||
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Mutual funds — debt: |
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Government |
1,626 | 1,626 | — | — | ||||||||||||
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Corporate |
5,402 | 5,402 | — | — | ||||||||||||
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Other |
500 | 500 | — | — | ||||||||||||
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Total |
$ | 15,787 | $ | 15,506 | $ | 281 | $ | — | ||||||||
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| Fair Value Measurements at July 31, 2012 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
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Asset Category: |
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Cash and cash equivalents |
$ | 317 | $ | — | $ | 317 | $ | — | ||||||||
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Mutual funds — equity: |
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Domestic |
5,602 | 5,602 | — | — | ||||||||||||
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International |
1,978 | 1,978 | — | — | ||||||||||||
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Mutual funds — debt: |
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Government |
2,078 | 2,078 | — | — | ||||||||||||
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Corporate |
4,039 | 4,039 | — | — | ||||||||||||
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Other |
657 | 657 | — | — | ||||||||||||
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Total |
$ | 14,671 | $ | 14,354 | $ | 317 | $ | — | ||||||||
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Pension obligations and expenses are most sensitive to the expected return on pension plan assets and discount rate assumptions. Other post-retirement benefit obligations and expenses are most sensitive to discount rate assumptions and health care cost trend rate. Diamond determines the expected return on pension plan assets based on an expectation of the average annual returns over an extended period of time. This expectation is based, in part, on the actual returns achieved by the Company’s pension plan in prior periods. The Company also considers the weighted average historical rates of return on securities with similar characteristics to those in which the Company’s pension assets are invested.
The investment objectives for the Diamond plans are to maximize total returns within reasonable and prudent levels of risk. The plan asset allocation is a key element in achieving the expected investment returns on plan assets. The current asset allocation strategy targets an allocation of 60% for equity securities and 40% for debt securities with adequate liquidity to meet expected cash flow needs. Actual asset allocation may fluctuate within acceptable ranges due to market value variability. If fluctuations cause an asset class to fall outside its strategic asset allocation range, the portfolio will be rebalanced as appropriate.
Cash Flows
Estimated future benefit payments, which reflect expected future service, as appropriate, expected to be paid are as follows:
| Pension Benefits |
Other Benefits |
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2014 |
650 | 146 | ||||||
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2015 |
727 | 136 | ||||||
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2016 |
745 | 127 | ||||||
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2017 |
769 | 101 | ||||||
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2018 |
807 | 121 | ||||||
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2019 — 2023 |
5,026 | 707 | ||||||
On November 19, 2012, Michael Mendes, our former chief executive officer, formally resigned from the Company. The Company and Mr. Mendes entered into a Separation and Clawback Agreement, pursuant to which Mr. Mendes agreed to deliver to the Company a cash payment of $2.7 million (“Cash Clawback”), representing the total value of his fiscal 2010 and fiscal 2011 bonuses, and 6,665 shares of Diamond common stock, representing the vested shares awarded to Mr. Mendes after fiscal 2010. The Cash Clawback was deducted from the amount Diamond owed to Mr. Mendes pursuant to the Diamond Foods Retirement Restoration Plan (“SERP”). Mr. Mendes and Diamond have determined that prior to giving effect to the Cash Clawback, the retirement benefit due to Mr. Mendes in a lump sum under the SERP was approximately $5.4 million. The SERP amount, subject to applicable withholding taxes and after giving effect to the Cash Clawback, was paid in early December 2012. Expenses associated with the payout are included in selling, general and administrative expenses, the returned shares were classified as treasury stock, and a credit to stock compensation expense was recorded.
Defined Contribution Plan
The Company also recognized defined contribution plan expenses of $1.8 million, $1.8 million and $1.4 million for the fiscal 2013, 2012 and 2011, respectively.