* Removes profit of $39.5 mln in 2011, $17 mln in 2010
* Adjusted 9-mth earnings 53 cents/shr vs year-ago $1.54
* Aiming to cut costs, streamline portfolio, reduce discounts
* Shares down nearly 20 percent in after-hours trade
Nov 14 (Reuters) - Diamond Foods Inc on Wednesday restated financial results for fiscal years 2010 and 2011, erasing $56.5 million in profit, and reported sharply lower earnings for the first three quarters of 2012, after an accounting scandal hurt its ability to do business.
Diamond shares fell nearly 20 percent in after-hours trading following the long-awaited report, even after it laid out a turnaround plan that includes cutting costs and streamlining its portfolio to focus on higher-priced offerings.
Diamond, which sells Emerald Nuts, Kettle Chips and Pop Secret popcorn, reported adjusted earnings of 53 cents per share for the nine months ended April 30, down from $1.54 in the year-earlier period.
Analysts were expecting earnings of 50 cents per share just for the third quarter, according to Thomson Reuters I/B/E/S. The adjusted figures exclude items such as acquisition and integration-related costs and expenses related to the restatement and investigation.
"Clearly the results for the first three quarters of 2012 demonstrate that Diamond faced challenges," said Brian Driscoll, Diamond's chief executive officer.
Diamond launched an internal probe after questions surfaced late last year about its accounting for payments to walnut growers. The probe found that it had accounted for certain payments in the wrong fiscal periods and that restatements were necessary.
Diamond had missed its restatement deadline and has been fighting for months to stay listed on the Nasdaq after its shares tumbled more than 80 percent in the wake of the accounting scandal, which claimed the jobs of top executives and ruined its plan to buy Pringles potato chips.
That purchase, for more than $2 billion, would have made Diamond the world's second-biggest snack food maker, behind PepsiCo's Frito-Lay.
Critics have said Diamond executives could have shifted the payments to artificially reduce costs and elevate profits and thus boost its stock price, especially at a time it was trying to buy Pringles using some of its stock.
Diamond said on Wednesday that its audit committee found insufficient evidence to conclude that executives had intentionally engaged in improper accounting.
Following reports of questionable payments, many California walnut farmers stopped selling their crops to Diamond. That drop in supply contributed to a 36.2 percent decrease in non-retail sales for Diamond's first three quarters of 2012. Net sales were $757.4 million for the period.
Earlier this year, Oaktree Capital Management invested in Diamond with $225 million of newly issued debt and warrants to buy 4.4 million shares of its stock. A feature was included whereby if Diamond secured a specified minimum supply of walnuts and met certain profitability targets, the warrants would be canceled and Oaktree would have been able to exchange $75 million of the debt for convertible preferred shares.
Diamond said on Wednesday that it did not meet the threshold required to trigger the Oaktree redemption feature. Regarding liquidity, Diamond said that after the Oaktree investment it had $70 million in cash and in its bank revolver at the end of July. That had reached $75 million as of Tuesday, it said.
For fiscal 2012, which ended over the summer, Diamond said it expects net sales of $975 million to $980 million with adjusted operating earnings of $78 million to $81 million.
Driscoll said it was too early to give a forecast for the future, saying the company was in the middle of a strategy change with a large number of initiatives under way.
"As I gain visibility into the progress of this change, we will be evaluating the appropriate time to provide guidance," he said.
Diamond's restatement erased $39.5 million of income before taxes in 2011, reducing total earnings to $29.7 million. It erased $17 million of income in 2010, bringing the restated figure to $23.2 million.
The company said it plans to turn around its business by cutting costs, improving its operating efficiency and driving sales more with brand-building rather than promotions, which hurt profit margins. In the Emerald business, the company plans to streamline its portfolio to focus on higher-priced offerings such as flavored nut mixes and 100-calorie packs.
Diamond shares fell to $16.06 in after-hours trade from their close at $19.50.