DARLING INGREDIENTS INC.
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
| (Mark One) | ||||||||
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE | |||||||
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SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
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| OR | ||||||||
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE | |||||||
|
SECURITIES EXCHANGE ACT OF 1934
|
||||||||
| For the transition period from _______ to _______ | ||||||||
Commission File Number
001-13323
(Exact name of registrant as specified in its charter)
|
|
|
||||||||||
| (State or other jurisdiction | (I.R.S. Employer | ||||||||||
| of incorporation or organization) | Identification Number) | ||||||||||
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(
972
)
717-0300
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |||||||||
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|
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(“NYSE”) | ||||||||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒
No
☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes
☒
No
☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
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☒ | Accelerated filer | ☐ | |||||||||||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company |
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|||||||||||||||||||||||||||||
| Emerging growth company |
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If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period
|
||||||||||||||||||||||||||||||||
| for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act. | ☐ | |||||||||||||||||||||||||||||||
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
No
☒
There were
160,371,671
shares of common stock, $0.01 par value, outstanding at August 4, 2022.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 2, 2022
TABLE OF CONTENTS
| Page No. | ||||||||
2
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 2, 2022 and January 1, 2022
(in thousands, except share data)
|
July 2,
2022 |
January 1,
2022 |
||||||||||
| ASSETS | (unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
|||||||
| Restricted cash |
|
|
|||||||||
|
Accounts receivable, less allowance for bad debts of $
July 2, 2022 and $
|
|
|
|||||||||
| Inventories |
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|||||||||
| Prepaid expenses |
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|||||||||
| Income taxes refundable |
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|||||||||
| Other current assets |
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|||||||||
| Total current assets |
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|||||||||
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Property, plant and equipment, less accumulated depreciation of $
July 2, 2022 and $
|
|
|
|||||||||
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Intangible assets, less accumulated amortization of $
July 2, 2022 and $
|
|
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|||||||||
| Goodwill |
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|||||||||
| Investment in unconsolidated subsidiaries |
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|||||||||
| Operating lease right-of-use assets |
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|||||||||
| Other assets |
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|||||||||
| Deferred income taxes |
|
|
|||||||||
| $ |
|
$ |
|
||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ |
|
$ |
|
|||||||
| Accounts payable, principally trade |
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|
|||||||||
| Income taxes payable |
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|
|||||||||
| Current operating lease liabilities |
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| Accrued expenses |
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| Total current liabilities |
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| Long-term debt, net of current portion |
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|||||||||
| Long-term operating lease liabilities |
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| Other non-current liabilities |
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|||||||||
| Deferred income taxes |
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|||||||||
| Total liabilities |
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|||||||||
| Commitments and contingencies |
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|||||||||
| Stockholders’ equity: | |||||||||||
|
Common stock, $
respectively
|
|
|
|||||||||
| Additional paid-in capital |
|
|
|||||||||
|
Treasury stock, at cost;
July 2, 2022 and January 1, 2022, respectively
|
(
|
(
|
|||||||||
| Accumulated other comprehensive loss |
(
|
(
|
|||||||||
| Retained earnings |
|
|
|||||||||
| Total Darling's stockholders’ equity |
|
|
|||||||||
| Noncontrolling interests |
|
|
|||||||||
| Total stockholders' equity |
|
|
|||||||||
| $ |
|
$ |
|
||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and six months ended July 2, 2022 and July 3, 2021
(in thousands, except per share data)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
|
July 2,
2022 |
July 3,
2021 |
July 2,
2022 |
July 3,
2021 |
||||||||||||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of sales and operating expenses |
|
|
|
|
|||||||||||||||||||
| Gain on sale of assets |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Selling, general and administrative expenses |
|
|
|
|
|||||||||||||||||||
| Restructuring and asset impairment charges |
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|
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|
|||||||||||||||||||
| Acquisition and integration costs |
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|
|
|||||||||||||||||||
| Depreciation and amortization |
|
|
|
|
|||||||||||||||||||
| Total costs and expenses |
|
|
|
|
|||||||||||||||||||
|
Equity in net income of Diamond Green Diesel
|
|
|
|
|
|||||||||||||||||||
| Operating income |
|
|
|
|
|||||||||||||||||||
| Other expense: | |||||||||||||||||||||||
| Interest expense |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Foreign currency loss |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Other expense, net |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Total other expense |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Equity in net income of other unconsolidated subsidiaries |
|
|
|
|
|||||||||||||||||||
| Income before income taxes |
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|||||||||||||||||||
| Income tax expense |
|
|
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|||||||||||||||||||
| Net income |
|
|
|
|
|||||||||||||||||||
| Net income attributable to noncontrolling interests |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Net income attributable to Darling | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Basic income per share | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Diluted income per share | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Three and six months ended July 2, 2022 and July 3, 2021
(in thousands)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | ||||||||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Other comprehensive income/(loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation |
(
|
|
(
|
(
|
|||||||||||||||||||
| Pension adjustments |
|
|
|
|
|||||||||||||||||||
| Soybean meal derivative adjustments |
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Corn option derivative adjustments |
|
(
|
|
(
|
|||||||||||||||||||
| Heating oil derivative adjustments |
|
(
|
|
|
|||||||||||||||||||
| Foreign exchange derivative adjustments |
(
|
|
|
|
|||||||||||||||||||
| Total other comprehensive income/(loss), net of tax |
(
|
|
(
|
(
|
|||||||||||||||||||
| Total comprehensive income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Comprehensive income attributable to noncontrolling interests
|
|
|
|
|
|||||||||||||||||||
| Comprehensive income attributable to Darling | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Six months ended July 2, 2022 and July 3, 2021
(in thousands, except share data)
(unaudited)
| Common Stock | |||||||||||||||||||||||||||||
| Number of Outstanding Shares |
$
|
Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Stockholders' equity attributable to Darling | Non-controlling Interests | Total Stockholders' Equity | |||||||||||||||||||||
| Balances at January 1, 2022 |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| Net income | — | — | — | — | — |
|
|
|
|
||||||||||||||||||||
|
Pension liability adjustments, net of tax
|
— | — | — | — |
|
— |
|
— |
|
||||||||||||||||||||
| Heating oil derivative adjustments, net of tax | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
| Corn option derivative adjustments, net of tax | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
| Soybean meal derivative adjustments, net of tax | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — |
|
— |
|
— |
|
||||||||||||||||||||
|
Foreign currency translation adjustments
|
— | — | — | — |
|
— |
|
|
|
||||||||||||||||||||
| Issuance of non-vested stock |
|
— |
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Stock-based compensation | — | — |
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Treasury stock |
(
|
— | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||
| Issuance of common stock |
|
|
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Balances at April 2, 2022 |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| Net income | — | — | — | — | — |
|
|
|
|
||||||||||||||||||||
|
Pension liability adjustments, net of tax
|
— | — | — | — |
|
— |
|
— |
|
||||||||||||||||||||
| Heating oil derivative adjustments, net of tax | — | — | — | — |
|
— |
|
— |
|
||||||||||||||||||||
| Corn option derivative adjustments, net of tax | — | — | — | — |
|
— |
|
— |
|
||||||||||||||||||||
| Soybean meal derivative adjustments, net of tax | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
|
Foreign currency translation adjustments
|
— | — | — | — |
(
|
— |
(
|
(
|
(
|
||||||||||||||||||||
| Issuance of non-vested stock | — | — |
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Stock-based compensation | — | — |
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Treasury stock |
(
|
— | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||
| Issuance of common stock |
|
|
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Balances at July 2, 2022 |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Six months ended July 2, 2022 and July 3, 2021
(in thousands, except share data)
(unaudited)
| Common Stock | |||||||||||||||||||||||||||||
| Number of Outstanding Shares |
$
|
Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Stockholders' equity attributable to Darling | Non-controlling Interests | Total Stockholders' Equity | |||||||||||||||||||||
| Balances at January 2, 2021 |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| Net income | — | — | — | — | — |
|
|
|
|
||||||||||||||||||||
|
Distribution of noncontrolling interest earnings
|
— | — | — | — | — | — | — |
(
|
(
|
||||||||||||||||||||
|
Pension liability adjustments, net of tax
|
— | — | — | — |
|
— |
|
— |
|
||||||||||||||||||||
|
Heating oil derivative adjustments, net of tax
|
— | — | — | — |
|
— |
|
|
|||||||||||||||||||||
| Corn option derivative adjustments, net of tax | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
| Soybean meal derivative adjustments, net of tax | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
|
Foreign currency translation adjustments
|
— | — | — | — |
(
|
— |
(
|
|
(
|
||||||||||||||||||||
| Issuance of non-vested stock | — | — |
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Stock-based compensation | — | — |
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Treasury stock |
(
|
— | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||
| Issuance of common stock |
|
|
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Balances at April 3, 2021 |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| Net income | — | — | — | — | — |
|
|
|
|
||||||||||||||||||||
|
Pension liability adjustments, net of tax
|
— | — | — | — |
|
— |
|
— |
|
||||||||||||||||||||
|
Heating oil derivative adjustments, net of tax
|
— | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
| Corn option derivative adjustments, net of tax | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
| Soybean meal derivative adjustments, net of tax | — | — | — | — |
(
|
— |
(
|
— |
(
|
||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — |
|
— |
|
— |
|
||||||||||||||||||||
|
Foreign currency translation adjustments
|
— | — | — | — |
|
— |
|
|
|
||||||||||||||||||||
| Issuance of non-vested stock | — | — |
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Stock-based compensation | — | — |
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Treasury stock |
(
|
— | — |
(
|
— | — |
(
|
— |
(
|
||||||||||||||||||||
| Issuance of common stock |
|
|
|
— | — | — |
|
— |
|
||||||||||||||||||||
| Balances at July 3, 2021 |
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended July 2, 2022 and July 3, 2021
(in thousands)
(unaudited)
|
July 2,
2022 |
July 3,
2021 |
||||||||||
| Cash flows from operating activities: | |||||||||||
| Net Income | $ |
|
$ |
|
|||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization |
|
|
|||||||||
| Gain on sale of assets |
(
|
(
|
|||||||||
| Asset impairment |
|
|
|||||||||
| Deferred taxes |
|
|
|||||||||
| Decrease in long-term pension liability |
(
|
(
|
|||||||||
| Stock-based compensation expense |
|
|
|||||||||
| Write-off deferred loan costs |
|
|
|||||||||
| Deferred loan cost amortization |
|
|
|||||||||
| Equity in net income of Diamond Green Diesel and other unconsolidated subsidiaries |
(
|
(
|
|||||||||
| Distributions of earnings from Diamond Green Diesel and other unconsolidated subsidiaries |
|
|
|||||||||
| Changes in operating assets and liabilities, net of effects from acquisitions: | |||||||||||
| Accounts receivable |
(
|
(
|
|||||||||
| Income taxes refundable/payable |
(
|
|
|||||||||
| Inventories and prepaid expenses |
(
|
(
|
|||||||||
| Accounts payable and accrued expenses |
|
|
|||||||||
| Other |
(
|
|
|||||||||
| Net cash provided by operating activities |
|
|
|||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures |
(
|
(
|
|||||||||
| Acquisitions, net of cash acquired |
(
|
(
|
|||||||||
| Investment in Diamond Green Diesel |
(
|
|
|||||||||
| Investment in other unconsolidated subsidiaries |
|
(
|
|||||||||
| Gross proceeds from disposal of property, plant and equipment and other assets |
|
|
|||||||||
| Payments related to routes and other intangibles |
(
|
(
|
|||||||||
| Net cash used in investing activities |
(
|
(
|
|||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from long-term debt |
|
|
|||||||||
| Payments on long-term debt |
(
|
(
|
|||||||||
| Borrowings from revolving credit facility |
|
|
|||||||||
| Payments on revolving credit facility |
(
|
(
|
|||||||||
| Net cash overdraft financing |
|
|
|||||||||
| Deferred loan costs |
(
|
|
|||||||||
| Issuance of common stock |
|
|
|||||||||
| Repurchase of common stock |
(
|
(
|
|||||||||
| Minimum withholding taxes paid on stock awards |
(
|
(
|
|||||||||
| Distributions to noncontrolling interests |
|
(
|
|||||||||
| Net cash provided/(used) in financing activities |
|
(
|
|||||||||
| Effect of exchange rate changes on cash |
(
|
(
|
|||||||||
| Net increase/(decrease) in cash, cash equivalents and restricted cash |
|
(
|
|||||||||
| Cash, cash equivalents and restricted cash at beginning of period |
|
|
|||||||||
| Cash, cash equivalents and restricted cash at end of period | $ |
|
$ |
|
|||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
DARLING INGREDIENTS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 2, 2022
(unaudited)
(1)
General
(2)
Summary of Significant Accounting Policies
(a)
Basis of Presentation
(b)
Fiscal Periods
(c)
Accounts Receivable Factoring
The Company has entered into agreements with third party banks to factor certain of the Company's trade receivables in order to enhance working capital by turning trade receivables into cash faster. Under these agreements, the Company sells certain selected customers’ trade receivables to third party banks without recourse for cash less a nominal fee. For the three months ended July 2, 2022 and July 3, 2021, the Company sold approximately $
145.0
million and $
106.3
million of its trade receivables and incurred approximately $
0.7
million and $
0.2
million in fees, which are recorded as interest expense, respectively. For the six months ended July 2, 2022 and July 3, 2021, the Company sold approximately $
271.3
million and $
213.2
million of its trade receivables and incurred approximately $
1.1
million and $
0.5
million in fees, which are recorded as interest expense, respectively.
(d)
Revenue Recognition
9
(e)
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
If it is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that exist at the date of the financial statements will change in the near term due to one or more future confirming events, and the effect of the change would be material to the financial statements, the Company will disclose the nature of the uncertainty and include an indication that it is at least reasonably possible that a change in the estimate will occur in the near term. If the estimate involves certain loss contingencies, the disclosure will also include an estimate of the probable loss or range of loss or state that an estimate cannot be made.
As a result of the continuing global COVID-19 pandemic, and related government-imposed movement restrictions and initiatives implemented to reduce the global transmission of COVID-19, as well as the Russia-Ukraine war, we have evaluated the potential impact to the Company's operations and for any indicators of potential triggering events that could indicate certain of the Company's assets may be impaired. Through the six months ended July 2, 2022, the Company has not observed any impairments of the Company's assets or a significant change in their fair value due to the COVID-19 pandemic or the Russia-Ukraine war.
(f)
Earnings Per Share
| Net Income per Common Share (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | ||||||||||||||||||||||||||||||||||
| Income | Shares | Per Share | Income | Shares | Per Share | ||||||||||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||||||||||||||
| Net Income attributable to Darling | $ |
|
|
$ |
|
$ |
|
|
$ |
|
|||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||||||||||||||
| Add: Option shares in the money and dilutive effect of non-vested stock awards |
|
|
|||||||||||||||||||||||||||||||||
| Less: Pro forma treasury shares |
(
|
(
|
|||||||||||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Net income attributable to Darling | $ |
|
|
$ |
|
$ |
|
|
$ |
|
|||||||||||||||||||||||||
10
| Net Income per Common Share (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | ||||||||||||||||||||||||||||||||||
| Income | Shares | Per Share | Income | Shares | Per Share | ||||||||||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||||||||||||||
| Net Income attributable to Darling | $ |
|
|
$ |
|
$ |
|
|
$ |
|
|||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||||||||||||||
| Add: Option shares in the money and dilutive effect of non-vested stock awards |
|
|
|||||||||||||||||||||||||||||||||
| Less: Pro forma treasury shares |
(
|
(
|
|||||||||||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Net income attributable to Darling | $ |
|
|
$ |
|
$ |
|
|
$ |
|
|||||||||||||||||||||||||
For the three months ended July 2, 2022 and July 3, 2021, respectively,
no
outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the three months ended July 2, 2022 and July 3, 2021, respectively,
249,564
and
259,281
shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.
For the six months ended July 2, 2022 and July 3, 2021, respectively,
no
outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the six months ended July 2, 2022 and July 3, 2021, respectively,
248,051
and
234,527
shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.
(3)
Investment in Unconsolidated Subsidiaries
On January 21, 2011, a wholly-owned subsidiary of Darling entered into a limited liability company agreement with a wholly-owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (“DGD” or the “DGD Joint Venture”). The DGD Joint Venture is owned
50
% /
50
% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant located adjacent to Valero's refinery in Norco, Louisiana. The DGD Joint Venture reached mechanical completion and began the production of renewable diesel in late June 2013. Effective May 1, 2019, the limited liability company agreement was amended and restated for the purpose of updating the agreement in certain respects, including to remove certain provisions that were no longer relevant and to add new provisions relating to the expansion of the existing facility.
Selected financial information for the Company's DGD Joint Venture is as follows (in thousands):
| (in thousands) | June 30, 2022 | December 31, 2021 | |||||||||
| Assets: | |||||||||||
| Total current assets | $ |
|
$ |
|
|||||||
| Property, plant and equipment, net |
|
|
|||||||||
| Other assets |
|
|
|||||||||
| Total assets | $ |
|
$ |
|
|||||||
| Liabilities and members' equity: | |||||||||||
| Total current portion of long term debt | $ |
|
$ |
|
|||||||
| Total other current liabilities |
|
|
|||||||||
| Total long term debt |
|
|
|||||||||
| Total other long term liabilities |
|
|
|||||||||
| Total members' equity |
|
|
|||||||||
| Total liabilities and members' equity | $ |
|
$ |
|
|||||||
11
| Three Months Ended | Six Months Ended | |||||||||||||||||||
| (in thousands) | June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Operating revenues | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
| Expenses: | ||||||||||||||||||||
|
Total costs and expenses less depreciation, amortization and accretion expense
|
|
|
|
|
||||||||||||||||
|
Depreciation, amortization and accretion expense
|
|
|
|
|
||||||||||||||||
| Total costs and expenses |
|
|
|
|
||||||||||||||||
| Operating income |
|
|
|
|
||||||||||||||||
| Other income |
|
|
|
|
||||||||||||||||
| Interest and debt expense, net |
(
|
(
|
(
|
(
|
||||||||||||||||
| Net income | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||
As of July 2, 2022, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $
1,702.2
million on the consolidated balance sheet. The Company has recorded equity in net income from the DGD Joint Venture of approximately $
73.7
million and $
125.8
million for the three months ended July 2, 2022 and July 3, 2021, respectively. The Company has recorded equity in net income from the DGD Joint Venture of approximately $
145.5
million and $
228.0
million for the six months ended July 2, 2022 and July 3, 2021, respectively. In December 2019, the blender tax credits were extended for calendar years 2020, 2021 and 2022. For the three months ended June 30, 2022 and June 30, 2021, the DGD Joint Venture recorded approximately $
198.4
million and $
83.9
million of blenders tax credits, respectively. For the six months ended June 30, 2022 and June 30, 2021, the DGD Joint Venture recorded approximately $
354.2
million and $
162.9
million of blenders tax credits, respectively. The blenders tax credits are recorded as a reduction of cost of sales by the DGD Joint Venture. In the six months ended July 2, 2022 and July 3, 2021, respectively, the Company made $
239.75
million and
no
capital contributions to the DGD Joint Venture. In the six months ended July 2, 2022 and July 3, 2021, the Company did not receive any dividend distributions from the DGD Joint Venture.
In addition to the DGD Joint Venture, the Company has investments in other unconsolidated subsidiaries that are insignificant to the Company.
(4)
Acquisitions
On May 2, 2022, the Company acquired all of the shares of Valley Proteins, pursuant to a stock purchase agreement dated December 28, 2021 (the “Valley Acquisition”). The Valley Acquisition includes a network of
18
major rendering plants and used cooking oil facilities throughout the southern, southeast and mid-Atlantic regions of the U.S. The Company initially paid approximately $
1.177
billion in cash for the Valley Acquisition, which is subject to various post-closing adjustments in accordance with the stock purchase agreement. The purchase price was financed by borrowing all of the Company's delayed draw term A-1 facility of $
400.0
million and delayed draw term A-2 facility of $
500.0
million, with the remainder coming through revolver borrowings under the Company's Amended Credit Agreement.
12
| Accounts receivable | $ |
|
|||
| Inventories |
|
||||
| Other current assets |
|
||||
| Property, plant and equipment |
|
||||
| Identifiable intangible assets |
|
||||
| Goodwill |
|
||||
| Operating lease right-of-use assets |
|
||||
| Other assets |
|
||||
| Accounts payable |
(
|
||||
| Current portion of long-term debt |
(
|
||||
| Current operating lease liabilities |
(
|
||||
| Accrued expenses |
(
|
||||
| Long-term debt, net of current portion |
(
|
||||
| Long-term operating lease liabilities |
(
|
||||
| Other noncurrent liabilities |
(
|
||||
| Purchase price, net of cash acquired | $ |
|
|||
The $
349.3
million of goodwill from the Valley Acquisition, arising from synergies expected to strengthen the Company's base business and expand its ability to provide additional carbon intensity feedstocks to fuel the growing demand for renewable diesel, was assigned to the Feed Ingredients segment and is expected to be deductible for tax purposes. The identifiable intangible assets include $
292.1
million in routes and $
97.1
million in permits with a weighted average life of approximately
15
years. The Company is still assessing the provisional amounts recorded for assets acquired and liabilities assumed including possible future purchase price adjustments related to working capital and tax benefit, thus the final determination of the value of assets acquired and liabilities assumed may result in retrospective adjustments to the values presented in the above table with a corresponding adjustment to goodwill.
The amount of revenue and income from the Valley Acquisition included in the Company's consolidated statement of operations for the three and six months ended July 2, 2022 were $
164.3
million and $
0.5
million, respectively. In addition, the Company incurred acquisition costs related to the Valley Acquisition for the three and six months ended July 2, 2022 of approximately $
3.3
million and $
4.9
million, respectively.
As a result of the Valley Acquisition, effective May 2, 2022, the Company began including the operations of the Valley Acquisition into the Company's consolidated financial statements. The following table presents selected pro forma information, for comparative purposes, assuming the Valley Acquisition had occurred on January 3, 2021 for the periods presented (unaudited) (in thousands):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | ||||||||||||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Net income |
|
|
|
|
|||||||||||||||||||
The Company notes that pro forma results of operations for the acquisitions discussed below have not been presented because the effect of each acquisition individually or in the aggregate is not deemed material to revenues, total assets and net income of the Company for any period presented.
On February 25, 2022, a wholly-owned international subsidiary of the Company acquired all of the shares of Group Op de Beeck, a Belgium digester, organic and industrial waste processing company, that is now included in our Fuel Ingredients segment, for an initially estimated purchase price of approximately $
91.7
million, plus or minus various closing adjustments in accordance with the stock purchase agreement. Initially, the Company paid approximately $
71.3
million in cash consideration. In the second quarter of fiscal 2022, the Company paid an additional $
4.2
million for purchase price adjustments related to working capital and estimated future construction costs for a total purchase price of approximately $
75.5
million. The Company recorded assets and liabilities consisting of property, plant and equipment of approximately $
28.1
million, intangible assets of approximately $
27.2
million, goodwill of approximately $
29.6
million and other net liabilities of approximately $(
9.4
) million including working capital and net debt. The Company is still assessing the provisional amounts recorded for assets acquired and liabilities assumed including possible future purchase price adjustments, thus the final determination of the value of assets acquired and liabilities assumed may result in retrospective adjustments to the values presented with a corresponding adjustment to
13
goodwill The Company does not expect material changes to these pending amounts. The identifiable intangibles have a weighted average life of
15
years.
Additionally, the Company completed other immaterial acquisitions in the first six months of fiscal 2022.
The Company incurred acquisition costs of approximately $
5.4
million and $
9.1
million for the three and six months ended July 2, 2022, respectively related to the above disclosed acquisitions, including the Valley Acquisition, and other announced and potential future acquisitions that have yet to close.
(5)
Inventories
A summary of inventories follows (in thousands):
| July 2, 2022 | January 1, 2022 | ||||||||||
| Finished product | $ |
|
$ |
|
|||||||
| Work in process |
|
|
|||||||||
| Raw material |
|
|
|||||||||
| Supplies and other |
|
|
|||||||||
| $ |
|
$ |
|
||||||||
(6)
Intangible Assets
The gross carrying amount of intangible assets not subject to amortization and intangible assets subject to amortization
is as follows (in thousands):
| July 2, 2022 | January 1, 2022 | ||||||||||
| Indefinite Lived Intangible Assets: | |||||||||||
| Trade names | $ |
|
$ |
|
|||||||
|
|
|
||||||||||
| Finite Lived Intangible Assets: | |||||||||||
| Routes |
|
|
|||||||||
| Permits |
|
|
|||||||||
| Non-compete agreements |
|
|
|||||||||
| Trade names |
|
|
|||||||||
| Royalty, consulting, land use rights and leasehold |
|
|
|||||||||
|
|
|
||||||||||
| Accumulated Amortization: | |||||||||||
| Routes |
(
|
(
|
|||||||||
| Permits |
(
|
(
|
|||||||||
| Non-compete agreements |
(
|
(
|
|||||||||
| Trade names |
(
|
(
|
|||||||||
| Royalty, consulting, land use rights and leasehold |
(
|
(
|
|||||||||
|
(
|
(
|
||||||||||
| Total Intangible assets, less accumulated amortization | $ |
|
$ |
|
|||||||
Gross intangible assets changed due to acquisitions in the first six months of fiscal 2022 by approximately $
417.3
million and the remaining change was from foreign currency translation, impairments and retirements. Amortization expense for the three months ended July 2, 2022 and July 3, 2021, was approximately $
21.0
million and $
17.0
million, respectively, and for the six months ended July 2, 2022 and July 3, 2021 was approximately $
37.5
million and $
34.0
million, respectively.
14
(7)
Goodwill
Changes in the carrying amount of goodwill (in thousands):
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Balance at January 1, 2022 | ||||||||||||||
| Goodwill | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Accumulated impairment losses |
(
|
(
|
(
|
(
|
||||||||||
|
|
|
|
|
|||||||||||
| Goodwill acquired during year |
|
|
|
|
||||||||||
| Foreign currency translation |
(
|
(
|
(
|
(
|
||||||||||
| Balance at July 2, 2022 | ||||||||||||||
| Goodwill |
|
|
|
|
||||||||||
| Accumulated impairment losses |
(
|
(
|
(
|
(
|
||||||||||
| $ |
|
$ |
|
$ |
|
$ |
|
|||||||
(8)
Accrued Expenses
Accrued expenses consist of the following (in thousands):
| July 2, 2022 | January 1, 2022 | ||||||||||
|
Compensation and benefits
|
$ |
|
$ |
|
|||||||
| Accrued ad valorem and franchise taxes |
|
|
|||||||||
|
Accrued operating expenses
|
|
|
|||||||||
|
Other accrued expense
|
|
|
|||||||||
| $ |
|
$ |
|
||||||||
15
(9)
Debt
Debt consists of the following (in thousands):
| July 2, 2022 | January 1, 2022 | ||||||||||
| Amended Credit Agreement: | |||||||||||
| Revolving Credit Facility | $ |
|
$ |
|
|||||||
| Term A-1 facility |
|
|
|||||||||
| Less unamortized deferred loan costs |
(
|
|
|||||||||
| Carrying value Term A-1 facility |
|
|
|||||||||
| Term A-2 facility |
|
|
|||||||||
| Less unamortized deferred loan costs |
(
|
|
|||||||||
| Carrying value Term A-2 facility |
|
|
|||||||||
|
Term Loan B
|
|
|
|||||||||
| Less unamortized deferred loan costs |
(
|
(
|
|||||||||
| Carrying value Term Loan B |
|
|
|||||||||
|
|
|
|
|||||||||
| Less unamortized deferred loan costs |
(
|
|
|||||||||
|
Carrying value
|
|
|
|||||||||
|
|
|
|
|||||||||
| Less unamortized deferred loan costs |
(
|
(
|
|||||||||
|
Carrying value
|
|
|
|||||||||
|
|
|
|
|||||||||
| Less unamortized deferred loan costs - Denominated in euro |
(
|
(
|
|||||||||
|
Carrying value
|
|
|
|||||||||
| Other Notes and Obligations |
|
|
|||||||||
|
|
|
||||||||||
| Less Current Maturities |
|
|
|||||||||
| $ |
|
$ |
|
||||||||
As of July 2, 2022, the Company had outstanding debt under the Company's
3.625
% Senior Notes due 2026 denominated in euros of €
515.0
million. In addition, at July 2, 2022, the Company had finance lease obligations denominated in euros of approximately €
4.2
million.
As of July 2, 2022, the Company had other notes and obligations of $
48.0
million that consist of various overdraft facilities of approximately $
0.1
million, a China working capital line of credit of approximately $
13.7
million and other debt of approximately $
34.2
million, including U.S. finance lease obligations of approximately $
6.1
million.
On January 6, 2014, Darling, Darling International Canada Inc. (“Darling Canada”) and Darling International NL Holdings B.V. (“Darling NL”) entered into a Second Amended and Restated Credit Agreement (as subsequently amended, the “Amended Credit Agreement”), restating its then existing Amended and Restated Credit Agreement dated September 27, 2013, with the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents from time to time party thereto. Effective March 2, 2022, the Company, and certain of its subsidiaries entered into an amendment (the "Eighth Amendment") with its lenders to the Amended Credit Agreement. Among other things, the Eighth Amendment (a) added a new delayed draw incremental term facility (the “term A-2 facility”) and new incremental Term Loans pursuant thereto, in an aggregate principal amount of up to $
500.0
million, which is available to the Company for general corporate purposes, including acquisitions and capital expenditures, and will mature on December 9, 2026 and (b) updated and modified certain other terms and provisions of the Amended Credit Agreement to reflect the addition of the term A-2 facility to the Amended Credit Agreement.
The interest rate applicable to any borrowings under the revolving loan facility will equal the adjusted term secured overnight financing rate (SOFR) for U.S. dollar borrowings or the adjusted euro interbank rate (EURIBOR) for euro borrowings or the adjusted daily simple Sterling overnight index average (SONIA) for British pound borrowings or
16
CDOR for Canadian dollar borrowings plus
1.25
% per annum or base rate or the adjusted term SOFR for U.S. dollar borrowings or Canadian prime rate for Canadian dollar borrowings or the adjusted daily simple European short term rate (ESTR) for euro borrowings or the adjusted daily SONIA rate for British pound borrowings plus
0.25
% per annum subject to certain step-ups or step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowing under the delayed draw term A-1 facility will equal the adjusted term SOFR plus a minimum of
1.50
% per annum subject to certain step-ups based on the Company's total leverage ratio. The interest rate applicable to any borrowing under the delayed draw term A-2 facility will equal the adjusted term SOFR plus
1.25
% per annum subject to certain step-ups or step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal the base rate plus
1.00
% or LIBOR plus
2.00
%.
As of July 2, 2022, the Company had (i) $
400.0
million outstanding under the term A-1 facility at SOFR plus a margin of
1.50
% per annum for a total of
3.1253
% per annum, (ii) $
500.0
million outstanding under the term A-2 facility at SOFR plus a margin of
1.25
% per annum for a total of
2.8753
% per annum and (iii) $
200.0
million outstanding under the term loan B facility at LIBOR plus a margin of
2.00
% per annum for a total of
3.12
% per annum. As of July 2, 2022, the Company had revolving loan facility availability of $
1,446.0
million under the Amended Credit Agreement taking into account amounts borrowed, ancillary facilities of $
50.1
million and letters of credit issued of $
3.9
million. The Company also had foreign bank guarantees of approximately $
11.2
million and U.S. bank guarantees of approximately $
10.9
million that are not part of the Company's Amended Credit Agreement at July 2, 2022. The Company capitalized approximately $
1.2
million of deferred loan costs as of July 2, 2022 in connection with the Eighth Amendment.
The
6
% Notes will mature on June 15, 2030. Darling will pay interest on the
6
% Notes on June 15 and December 15 of each year, commencing on December 15, 2022. Interest on the
6
% Notes accrues from June 9, 2022 at a rate of
6
% per annum and is payable in cash. The
6
% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than foreign subsidiaries) that are borrowers under or that guarantee the Senior Secured Credit Facilities (collectively, the “
6
% Guarantors”). The
6
% Notes and the guarantees thereof are senior unsecured obligations of Darling and the
6
% Guarantors and rank equally in right of payment to all of Darling's and the
6
% Guarantors' existing and future senior unsecured indebtedness. The
6
% Indenture contains covenants limiting Darling's ability and the ability of its restricted subsidiaries to grant liens to secure indebtedness and merge with or into other companies or otherwise dispose of all or substantially all of Darling's assets. The Company capitalized approximately $
9.5
million of deferred loan costs as of July 2, 2022 in connection with the
6
% Notes.
Other than for extraordinary events such as change of control and defined assets sales, Darling is not required to make mandatory redemption or sinking fund payments on the
6
% Notes. The
6
% Notes are redeemable, in whole or in part, at any time on or after June 15, 2025 at the redemption prices specified in the
6
% Indenture. Darling may redeem the
6
% Notes in whole, but not in part, at any time prior to June 15, 2025, at a redemption price equal to 100% of the principal amount of the
6
% Notes redeemed, plus accrued and unpaid interest to the redemption date and an Applicable Premium as specified in the
6
% Indenture and all additional amounts (if any) then due or which will become due on the redemption date as a result of the redemption or otherwise (subject to the rights of holders on the relevant record dates to receive interest due on the relevant interest payment date and additional amounts (if any) in respect thereof).
As of July 2, 2022, the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the
6
% Senior Notes due 2030, the
5.25
% Senior Notes due 2027 and the
3.625
% Senior Notes due 2026.
(10)
Income Taxes
17
Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. As of July 2, 2022 and July 3, 2021, the Company had $
12.1
million and $
6.5
million, respectively of gross unrecognized tax benefits and $
1.2
million and $
0.7
million, respectively of related accrued interest and penalties. The Company's gross unrecognized tax benefits are not expected to decrease significantly within the next twelve months.
(11)
Other Comprehensive Income/(Loss)
The components of other comprehensive income/(loss) and the related tax impacts for the three and six months ended July 2, 2022 and July 3, 2021 are as follows (in thousands):
| Three Months Ended | ||||||||||||||||||||
| Before-Tax | Tax (Expense) | Net-of-Tax | ||||||||||||||||||
| Amount | or Benefit | Amount | ||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||
| Defined benefit pension plans | ||||||||||||||||||||
|
Amortization of prior service (cost)/benefit
|
|
|
(
|
(
|
|
|
||||||||||||||
| Amortization of actuarial loss |
|
|
(
|
(
|
|
|
||||||||||||||
| Total defined benefit pension plans |
|
|
(
|
(
|
|
|
||||||||||||||
| Soybean meal option derivatives | ||||||||||||||||||||
| Reclassified to earnings |
|
|
(
|
(
|
|
|
||||||||||||||
| Activity recognized in other comprehensive income/(loss) |
(
|
(
|
|
|
(
|
(
|
||||||||||||||
| Total soybean meal option derivatives |
(
|
(
|
|
|
(
|
(
|
||||||||||||||
| Corn option derivatives | ||||||||||||||||||||
| Reclassified to earnings |
|
|
(
|
(
|
|
|
||||||||||||||
| Activity recognized in other comprehensive income/(loss) |
|
(
|
(
|
|
|
(
|
||||||||||||||
| Total corn option derivatives |
|
(
|
(
|
|
|
(
|
||||||||||||||
| Heating oil derivatives | ||||||||||||||||||||
| Activity recognized in other comprehensive income/(loss) |
|
(
|
(
|
|
|
(
|
||||||||||||||
| Total heating oil derivatives |
|
(
|
(
|
|
|
(
|
||||||||||||||
| Foreign exchange derivatives | ||||||||||||||||||||
| Reclassified to earnings |
(
|
(
|
|
|
(
|
(
|
||||||||||||||
| Activity recognized in other comprehensive income/(loss) |
(
|
|
|
(
|
(
|
|
||||||||||||||
| Total foreign exchange derivatives |
(
|
|
|
(
|
(
|
|
||||||||||||||
| Foreign currency translation |
(
|
|
|
(
|
(
|
|
||||||||||||||
| Other comprehensive income/(loss) | $ |
(
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
||||||||
18
| Six Months Ended | ||||||||||||||||||||
| Before-Tax | Tax (Expense) | Net-of-Tax | ||||||||||||||||||
| Amount | or Benefit | Amount | ||||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | |||||||||||||||
| Defined benefit pension plans | ||||||||||||||||||||
|
Amortization of prior service (cost)/benefit
|
$ |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
$ |
|
||||||||
| Amortization of actuarial loss |
|
|
(
|
(
|
|
|
||||||||||||||
| Total defined benefit pension plans |
|
|
(
|
(
|
|
|
||||||||||||||
| Soybean meal option derivatives | ||||||||||||||||||||
| Reclassified to earnings |
(
|
(
|
|
|
(
|
(
|
||||||||||||||
| Activity recognized in other comprehensive income/(loss) |
(
|
(
|
|
|
(
|
(
|
||||||||||||||
| Total soybean meal option derivatives |
(
|
(
|
|
|
(
|
(
|
||||||||||||||
| Corn option derivatives | ||||||||||||||||||||
| Reclassified to earnings |
|
|
(
|
(
|
|
|
||||||||||||||
| Activity recognized in other comprehensive income/(loss) |
(
|
(
|
|
|
(
|
(
|
||||||||||||||
| Total corn option derivatives |
|
(
|
(
|
|
|
(
|
||||||||||||||
| Heating oil derivatives | ||||||||||||||||||||
| Activity recognized in other comprehensive income/(loss) |
|
|
(
|
(
|
|
|
||||||||||||||
| Total heating oil derivatives |
|
|
(
|
(
|
|
|
||||||||||||||
| Foreign exchange derivatives | ||||||||||||||||||||
| Reclassified to earnings |
(
|
(
|
|
|
(
|
(
|
||||||||||||||
| Activity recognized in other comprehensive income/(loss) |
|
|
(
|
(
|
|
|
||||||||||||||
| Total foreign exchange derivatives |
|
|
(
|
(
|
|
|
||||||||||||||
| Foreign currency translation |
(
|
(
|
|
|
(
|
(
|
||||||||||||||
| Other comprehensive income/(loss) | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
$ |
(
|
$ |
(
|
||||||||
The following table presents the amounts reclassified out of each component of other comprehensive income/(loss), net of tax for the three and six months ended July 2, 2022 and July 3, 2021 as follows (in thousands):
| Three Months Ended | Six Months Ended | ||||||||||||||||
| July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | Statement of Operations Classification | |||||||||||||
| Derivative instruments | |||||||||||||||||
| Soybean meal derivatives | $ |
(
|
$ |
(
|
$ |
|
$ |
|
Net sales | ||||||||
| Foreign exchange contracts |
|
|
|
|
Net sales | ||||||||||||
| Corn option derivatives |
(
|
(
|
(
|
(
|
Cost of sales and operating expenses | ||||||||||||
|
(
|
(
|
(
|
(
|
Total before tax | |||||||||||||
|
(
|
|
|
|
Income taxes | |||||||||||||
|
(
|
(
|
(
|
(
|
Net of tax | |||||||||||||
| Defined benefit pension plans | |||||||||||||||||
|
Amortization of prior service cost
|
$ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
(a) | ||||||||
|
Amortization of actuarial loss
|
(
|
(
|
(
|
(
|
(a) | ||||||||||||
|
(
|
(
|
(
|
(
|
Total before tax | |||||||||||||
|
|
|
|
|
Income taxes | |||||||||||||
|
(
|
(
|
(
|
(
|
Net of tax | |||||||||||||
| Total reclassifications | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
Net of tax | ||||||||
(a)
These items are included in the computation of net periodic pension cost. See Note 13 (Employee Benefit Plans) to the Company's Consolidated Financial Statement included herein for additional information.
19
The following table presents changes in each component of accumulated other comprehensive income/(loss) as of July 2, 2022 as follows (in thousands):
| Six Months Ended July 2, 2022 | |||||||||||||||||
| Foreign Currency | Derivative | Defined Benefit | |||||||||||||||
| Translation | Instruments | Pension Plans | Total | ||||||||||||||
| Accumulated Other Comprehensive loss January 1, 2022, attributable to Darling, net of tax | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||
| Other comprehensive loss before reclassifications |
(
|
|
|
(
|
|||||||||||||
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
|
|
|||||||||||||
| Net current-period other comprehensive income/(loss) |
(
|
|
|
(
|
|||||||||||||
|
Noncontrolling interest
|
|
|
|
|
|||||||||||||
| Accumulated Other Comprehensive loss July 2, 2022, attributable to Darling, net of tax | $ |
(
|
$ |
|
$ |
(
|
$ |
(
|
|||||||||
(12)
Stockholders' Equity
(13)
Employee Benefit Plans
Net pension cost for the three and six months months ended July 2, 2022 and July 3, 2021 includes the following components (in thousands):
| Pension Benefits | Pension Benefits | ||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||
|
July 2,
2022 |
July 3,
2021 |
July 2,
2022 |
July 3,
2021 |
||||||||||||||
| Service cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||
| Interest cost |
|
|
|
|
|||||||||||||
| Expected return on plan assets |
(
|
(
|
(
|
(
|
|||||||||||||
| Amortization of prior service cost |
|
|
|
|
|||||||||||||
| Amortization of actuarial loss |
|
|
|
|
|||||||||||||
| Net pension cost | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||
Based on actuarial estimates at July 2, 2022, the Company expects to contribute approximately $
3.7
million to its pension plans to meet funding requirements during the next twelve months. Additionally, the Company has made tax deductible discretionary and required contributions to its pension plans for the six months ended July 2, 2022 and July 3, 2021 of approximately $
1.5
million and $
1.8
million, respectively.
20
The Company participates in various multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants. The Company's contributions to each multiemployer plan represent less than
5
% of the total contributions to each plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities on
two
of the plans in which the Company currently participates could be material to the Company, with
one
of these material plans certified as critical or red zone. With respect to the other multiemployer pension plans in which the Company participates and which are not individually significant,
five
plans have certified as critical or red zone and
one
plan has certified as endangered as defined by the Pension Protection Act of 2006.
The Company currently has withdrawal liabilities recorded on
three
U.S. multiemployer plans in which it participated. As of July 2, 2022, the Company has an aggregate accrued liability of approximately $
3.9
million representing the present value of scheduled withdrawal liability payments on the multiemployer plans that have given notice of withdrawal. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require
additional funding under the Pension Protection Act of 2006, the amounts could be material.
(14)
Derivatives
The Company’s operations are exposed to market risks relating to commodity prices that affect the Company’s cost of raw materials, finished product prices, energy costs and the risk of changes in interest rates and foreign currency exchange rates.
The Company makes limited use of derivative instruments to manage cash flow risks related to natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Soybean meal options are entered into with the intent of managing the impact of changing prices for poultry meal sales. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of bakery by-products (“BBP”) by reducing the impact of changing prices. Foreign currency forward and option contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency.
At July 2, 2022, the Company had corn option contracts, soybean meal forward contracts and foreign exchange forward and option contracts outstanding that qualified and were designated for hedge accounting as well as corn forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.
Cash Flow Hedges
In fiscal 2021, the Company entered into corn option contracts on the Chicago Board of Trade that are designated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the fourth quarter of fiscal 2022. At July 2, 2022 and January 1, 2022, the aggregate fair value of these corn option contracts was approximately $
2.4
million and $
2.8
million, respectively. These amounts are included in accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss. The Company may enter into corn option contracts in the future from time to time.
In fiscal 2021 and fiscal 2022, the Company entered into foreign exchange forward and option contracts that are designated as cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2023. At July 2, 2022 and January 1, 2022, the aggregate fair value of these foreign exchange contracts was approximately $
10.5
million and $
0.6
million, respectively. These amounts are included in other current assets, noncurrent assets, accrued expense and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
21
In fiscal 2021 and fiscal 2022, the Company entered into soybean meal forward contracts to hedge a portion of its forecasted poultry meal sales into the fourth quarter of fiscal 2022. At July 2, 2022 and January 1, 2022, the aggregate fair value of the soybean meal contracts was $
0.1
million and $
0.1
million, respectively. These amounts are included in other current assets and accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
As of July 2, 2022, the Company had the following designated and non-designated outstanding forward and option contract amounts that were entered into to hedge foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency
(in thousands):
| Functional Currency | Contract Currency | |||||||||||||
| Type | Amount | Type | Amount | |||||||||||
| Brazilian real |
|
Euro |
|
|||||||||||
| Brazilian real |
|
U.S. dollar |
|
|||||||||||
| Euro |
|
U.S. dollar |
|
|||||||||||
| Euro |
|
Polish zloty |
|
|||||||||||
| Euro |
|
Japanese yen |
|
|||||||||||
| Euro |
|
Chinese renminbi |
|
|||||||||||
| Euro |
|
Australian dollar |
|
|||||||||||
| Euro |
|
British pound |
|
|||||||||||
| Euro |
|
Canadian dollar |
|
|||||||||||
| Euro |
|
Brazilian real |
|
|||||||||||
| Polish zloty |
|
U.S. dollar |
|
|||||||||||
| Polish zloty |
|
Euro |
|
|||||||||||
| British pound |
|
Euro |
|
|||||||||||
| Japanese yen |
|
U.S. dollar |
|
|||||||||||
| U.S. dollar |
|
Japanese yen |
|
|||||||||||
| U.S. dollar |
|
Euro |
|
|||||||||||
| Australian dollar |
|
Euro |
|
|||||||||||
| Australian dollar |
|
U.S. dollar |
|
|||||||||||
The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at July 2, 2022 into earnings over the next 12 months will be approximately $
6.1
million. As of July 2, 2022,
no
amounts have been reclassified into earnings as a result of the discontinuance of cash flow hedges.
The table below summarizes the effect of derivatives not designated as hedges on the Company's consolidated statements of operations for the three and six months ended July 2, 2022 and July 3, 2021 (in thousands):
| Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges | |||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Location | July 2, 2022 | July 3, 2021 | July 2, 2022 | July 3, 2021 | ||||||||||||||||||
| Foreign exchange | Foreign currency loss | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||
| Foreign exchange |
Net sales
|
|
(
|
|
|
||||||||||||||||||
| Foreign exchange |
Cost of sales and operating expenses
|
(
|
|
(
|
(
|
||||||||||||||||||
| Foreign exchange | Selling, general and administrative expenses |
|
(
|
(
|
(
|
||||||||||||||||||
| Corn options and futures | Net sales |
|
(
|
(
|
(
|
||||||||||||||||||
| Corn options and futures |
Cost of sales and operating expenses
|
(
|
|
|
|
||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
At July 2, 2022, the Company had forward purchase agreements in place for purchases of approximately $
185.0
million of natural gas and diesel fuel. The Company intends to take physical delivery of the commodities under the
22
(15)
Fair Value Measurements
FASB authoritative guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The following table presents the Company’s financial instruments that are measured at fair value on a recurring and nonrecurring basis as of July 2, 2022 and are categorized using the fair value hierarchy under FASB authoritative guidance.
The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value.
| Fair Value Measurements at July 2, 2022 Using | ||||||||||||||
|
Quoted Prices in
Active Markets for Identical Assets |
Significant Other
Observable Inputs |
Significant
Unobservable Inputs |
||||||||||||
| (In thousands of dollars) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||
| Assets: | ||||||||||||||
| Derivative instruments | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Total Assets | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Liabilities: | ||||||||||||||
| Derivative instruments | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| 6% Senior notes |
|
|
|
|
||||||||||
| 5.25% Senior notes |
|
|
|
|
||||||||||
| 3.625% Senior notes |
|
|
|
|
||||||||||
| Term loan A-1 |
|
|
|
|
||||||||||
| Term loan A-2 |
|
|
|
|
||||||||||
| Term loan B |
|
|
|
|
||||||||||
| Total Liabilities | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Fair Value Measurements at January 1, 2022 Using | ||||||||||||||
|
Quoted Prices in
Active Markets for Identical Assets |
Significant Other
Observable Inputs |
Significant
Unobservable Inputs |
||||||||||||
| (In thousands of dollars) | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||
| Assets: | ||||||||||||||
| Derivative instruments | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Total Assets | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Liabilities: | ||||||||||||||
| Derivative instruments | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| 5.25% Senior notes |
|
|
|
|
||||||||||
| 3.625% Senior notes |
|
|
|
|
||||||||||
| Term loan B |
|
|
|
|
||||||||||
| Revolver debt |
|
|
|
|
||||||||||
| Total Liabilities | $ |
|
$ |
|
$ |
|
$ |
|
||||||
Derivative assets and liabilities consist of the Company’s corn option and future contracts, foreign currency forward and option contracts and soybean meal forward contracts which represent the difference between observable market rates of commonly quoted intervals for similar assets and liabilities in active markets and the fixed swap rate considering the instruments term, notional amount and credit risk. See Note 14 (Derivatives) to the Company's Consolidated Financial Statements included herein for discussion on the Company's derivatives.
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments and as such have been excluded from the table above. The carrying amount of the Company's other debt is not deemed to be significantly different from the fair value and all other instruments have been recorded at fair value.
23
(16)
Restructuring and Asset Impairment Charges
In the second quarter of fiscal 2022, the Company lost a large raw material customer at a plant location in Canada that resulted in an asset impairment charge to the Company's intangible assets of approximately $
8.6
million. The Company has recorded this in the restructuring and asset impairment charges line on the consolidated statement of operations.
In December 2020, due to unfavorable economics in the biodiesel industry, the Company made the decision to shut down processing operations at its biodiesel facilities located in the United States and Canada, and there are no current plans to resume biodiesel production at these facilities in the future. In addition to charges incurred in fiscal 2020, the Company incurred additional restructuring and asset impairment charges in the first quarter of fiscal 2021 related to the biodiesel facilities of approximately $
0.8
million, with approximately $
0.4
million of this amount being employee termination costs in Canada and the remainder representing charges to long-lived assets and other charges.
(17)
Contingencies
The Company is a party to various lawsuits, claims and loss contingencies arising in the ordinary course of its business, including insured worker's compensation, auto, and general liability claims, assertions by certain regulatory and governmental agencies related to permitting requirements and environmental matters, including air, wastewater and storm water discharges from the Company’s processing facilities, litigation involving tort, contract, statutory, labor, employment, and other claims, and tax matters.
The Company’s workers compensation, auto and general liability policies contain significant deductibles or self-insured retentions. The Company estimates and accrues its expected ultimate claim costs related to accidents occurring during each fiscal year under these insurance policies and carries this accrual until these claims are paid by the Company.
As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental, litigation and tax contingencies. At July 2, 2022 and January 1, 2022, the reserves for insurance, environmental, litigation and tax contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities were approximately $
107.5
million and $
78.4
million, respectively. The Company has insurance recovery receivables of approximately $
45.9
million and $
31.8
million as of July 2, 2022 and January 1, 2022, respectively, related to the insurance contingencies. The Company's management believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these contingencies will not exceed current estimates. The Company believes that the likelihood is remote that any additional liability from the lawsuits and claims that may not be covered by insurance would have a material effect on the Company's financial position, results of operations or cash flows.
Lower Passaic River Area
. In December 2009, the Company, along with numerous other entities, received notice from the United States Environmental Protection Agency (“EPA”) that the Company (as alleged successor-in-interest to The Standard Tallow Corporation) is considered a potentially responsible party (a “PRP”) with respect to alleged contamination in the lower 17-mile stretch of the Passaic River (the “Lower Passaic River”) which is part of the Diamond Alkali Superfund Site located in Newark, New Jersey. The Company’s designation as a PRP is based upon the operation of former plant sites located in Newark and Kearny, New Jersey by The Standard Tallow Corporation, an entity that the Company acquired in 1996. In March 2016, the Company received another letter from EPA notifying the Company that it had issued a Record of Decision (the “ROD”) selecting a remedy for the lower
8.3
miles of the Lower Passaic River area at an estimated cost of $
1.38
billion. The EPA letter made no demand on the Company and laid out a framework for remedial design/remedial action implementation in which the EPA will first seek funding from major PRPs. The letter indicates that the EPA has sent the letter to over
100
parties, which include large chemical and refining companies, manufacturing companies, foundries, plastic companies, pharmaceutical companies and food and consumer product companies. The Company asserts that it is not responsible for any liabilities of its former subsidiary The Standard Tallow Corporation, which was legally dissolved in 2000, and that, in any event, The Standard Tallow Corporation did not discharge any of the
eight
contaminants of concern identified in the ROD (the “COCs”). Subsequently, the EPA conducted a settlement analysis using a third-party allocator and offered early cash out settlements to those PRPs for whom the third-party allocator determined did not discharge any of the COCs. The Company participated in this allocation process, and in November 2019, received a cash out settlement offer from the
24
EPA in the amount of $
0.6
million ($
0.3
million for each of the former plant sites in question) for liabilities relating to the lower
8.3
miles of the Lower Passaic River area. The Company accepted this settlement offer, and the settlement became effective on April 16, 2021 following the completion of the EPA's administrative approval process. In September 2021, the EPA relaeased a ROD selecting an interim remedy for the upper nine miles of the Lower Passaic River at an expected additional cost of $
441
million On September 30, 2016, Occidental Chemical Corporation (“OCC”) entered into an agreement with the EPA to perform the remedial design for the cleanup plan for the lower
8.3
miles of the Lower Passaic River. On June 30, 2018, OCC filed a complaint in the United States District Court for the District of New Jersey against over
100
companies, including the Company, seeking cost recovery or contribution for costs under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) relating to various investigations and cleanups OCC has conducted or is conducting in connection with the Lower Passaic River. According to the complaint, OCC has incurred or is incurring costs which include the estimated cost to complete the remedial design for the cleanup plan for the lower
8.3
miles of the Lower Passaic River. OCC is also seeking a declaratory judgment to hold the defendants liable for their proper shares of future response costs, including the remedial action for the lower
8.3
miles of the Lower Passaic River. The Company, along with
40
of the other defendants, had previously received a release from OCC of its CERCLA contribution claim of $
165
million associated with the costs to design the remedy for the lower
8.3
miles of the Lower Passaic River. Furthermore, the Company's settlement with the EPA described above could preclude certain of the claims alleged by OCC against the Company. The Company's ultimate liability, if any, for investigatory costs, remedial costs and/or natural resource damages in connection with the Lower Passaic River area cannot be determined at this time; however, as of the date of this report, the Company has found no definitive evidence that the former Standard Tallow Corporation plant sites contributed any of the COCs to the Passaic River and, therefore, there is nothing that leads the Company to believe that this matter will have a material effect on the Company's financial position, results of operations or cash flows.
State of Maryland Department of the Environment (MDE), et al. v. Valley Proteins, Inc.
, Circuit Court, Dorchester County (Civil Action No. C-09-CV-22-000022). The Company acquired Valley Proteins on May 2, 2022. On February 2, 2022, the MDE filed suit against Valley Proteins seeking injunctive relief, remediation and penalties for various alleged air and waste regulation and permitting violations at Valley Proteins' animal by-product processing facility in Linkwood, Maryland. Since the completion of the Valley Proteins acquisition, the Company has been working with MDE to resolve this matter, the resolution of which may result in the payment of a civil penalty of $
300,000
or more. The Company is also working to resolve the claims of three non-governmental organizations that intervened in this matter. Even though we expect this matter will have no material effect on our financial position, results of operations or liquidity, we are reporting this proceeding to comply with SEC regulations, which require us to disclose certain information about proceedings arising under federal, state, or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings may result in monetary sanctions of $
300,000
or more.
(18)
Business Segments
The Company sells its products domestically and internationally, operating within
three
industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients. The measure of segment income (loss) includes all revenues, operating expenses (excluding certain amortization of intangibles), and selling, general and administrative expenses incurred at all operating locations and excludes corporate activities.
Included in corporate activities are general corporate expenses and the amortization of certain intangibles. Assets of corporate activities include cash, unallocated prepaid expenses, deferred tax assets, prepaid pension, and miscellaneous other assets.
Feed Ingredients
Feed Ingredients consists principally of (i) the Company's U.S. ingredients business, including the Company's fats and proteins, used cooking oil, trap grease, Darling Canada, and the ingredients and specialty products businesses conducted by Darling Ingredients International under the Sonac name (proteins, fats, and blood products) and (ii) the Company's bakery residuals business. Feed Ingredients operations process animal by-products and used cooking oil into fats, proteins and hides.
Food Ingredients
Food Ingredients consists principally of (i) the collagen business conducted by Darling Ingredients International under the Rousselot name, (ii) the natural casings and meat-by-products business conducted by Darling Ingredients International under the CTH name and (iii) certain specialty products businesses conducted by Darling Ingredients International under the Sonac name.
25
Fuel Ingredients
The Company's Fuel Ingredients segment consists of (i) the Company's investment in the DGD Joint Venture and (ii) the bioenergy business conducted by Darling Ingredients International under the Ecoson and Rendac names.
Business Segments (in thousands):
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |||||||||||||
| Three Months Ended July 2, 2022 | |||||||||||||||||
| Net Sales | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||
| Cost of sales and operating expenses |
|
|
|
|
|
||||||||||||
| Gross Margin |
|
|
|
|
|
||||||||||||
| Gain on sale of assets |
(
|
(
|
(
|
|
(
|
||||||||||||
| Selling, general and administrative expenses |
|
|
|
|
|
||||||||||||
| Restructuring and asset impairment charges |
|
|
|
|
|
||||||||||||
| Acquisition and integration costs |
|
|
|
|
|
||||||||||||
| Depreciation and amortization |
|
|
|
|
|
||||||||||||
|
Equity in net income of Diamond Green Diesel
|
|
|
|
|
|
||||||||||||
| Segment operating income/(loss) |
|
|
|
(
|
|
||||||||||||
|
Equity in net income of other unconsolidated subsidiaries
|
|
|
|
|
|
||||||||||||
| Segment income/(loss) |
|
|
|
(
|
|
||||||||||||
| Total other expense |
(
|
||||||||||||||||
| Income before income taxes | $ |
|
|||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |||||||||||||
| Three Months Ended July 3, 2021 | |||||||||||||||||
| Net Sales | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||
| Cost of sales and operating expenses |
|
|
|
|
|
||||||||||||
| Gross Margin |
|
|
|
|
|
||||||||||||
| Gain on sale of assets |
(
|
(
|
(
|
|
(
|
||||||||||||
| Selling, general and administrative expenses |
|
|
|
|
|
||||||||||||
| Depreciation and amortization |
|
|
|
|
|
||||||||||||
|
Equity in net income of Diamond Green Diesel
|
|
|
|
|
|
||||||||||||
| Segment operating income/(loss) |
|
|
|
(
|
|
||||||||||||
| Equity in net income of other unconsolidated subsidiaries |
|
|
|
|
|
||||||||||||
| Segment income/(loss) |
|
|
|
(
|
|
||||||||||||
| Total other expense |
(
|
||||||||||||||||
| Income before income taxes | $ |
|
|||||||||||||||
26
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |||||||||||||
| Six Months Ended July 2, 2022 | |||||||||||||||||
| Net Sales | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||
| Cost of sales and operating expenses |
|
|
|
|
|
||||||||||||
| Gross Margin |
|
|
|
|
|
||||||||||||
| Gain on sale of assets |
(
|
(
|
(
|
|
(
|
||||||||||||
| Selling, general and administrative expenses |
|
|
|
|
|
||||||||||||
| Restructuring and asset impairment charges |
|
|
|
|
|
||||||||||||
| Acquisition and integration costs |
|
|
|
|
|
||||||||||||
| Depreciation and amortization |
|
|
|
|
|
||||||||||||
|
Equity in net income of Diamond Green Diesel
|
|
|
|
|
|
||||||||||||
| Segment operating income/(loss) |
|
|
|
(
|
|
||||||||||||
|
Equity in net income of other unconsolidated subsidiaries
|
|
|
|
|
|
||||||||||||
| Segment income/(loss) |
|
|
|
(
|
|
||||||||||||
| Total other expense |
(
|
||||||||||||||||
| Income before income taxes | $ |
|
|||||||||||||||
| Segment assets at July 2, 2022 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |||||||||||||
| Six Months Ended July 3, 2021 | |||||||||||||||||
| Net Sales | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||
| Cost of sales and operating expenses |
|
|
|
|
|
||||||||||||
| Gross Margin |
|
|
|
|
|
||||||||||||
| Loss/(gain) on sale of assets |
(
|
|
(
|
|
(
|
||||||||||||
| Selling, general and administrative expenses |
|
|
|
|
|
||||||||||||
| Restructuring and asset impairment charges |
|
|
|
|
|
||||||||||||
| Depreciation and amortization |
|
|
|
|
|
||||||||||||
|
Equity in net income of Diamond Green Diesel
|
|
|
|
|
|
||||||||||||
| Segment operating income/(loss) |
|
|
|
(
|
|
||||||||||||
| Equity in net income of other unconsolidated subsidiaries |
|
|
|
|
|
||||||||||||
| Segment income/(loss) |
|
|
|
(
|
|
||||||||||||
| Total other expense |
(
|
||||||||||||||||
| Income before income taxes | $ |
|
|||||||||||||||
| Segment assets at January 1, 2022 | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||
(19)
Revenue
The Company extends payment terms to its customers based on commercially acceptable practices. The term between invoicing and payment due date is not significant. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring finished products or performing services, which is generally based on an executed agreement or purchase order.
Most of the Company's products are shipped based on the customer specifications. Customer returns are infrequent and not material to the Company. Adjustments to net sales for sales deductions are generally recognized in the same period as the sale or when known. Customers in certain industries or countries may be required to prepay prior to shipment in order to maintain payment protection. These represent short-term prepayment from customers and are not material to the Company. The Company elected to treat shipping and handling as fulfilment costs, which will result in
27
billed freight recorded in cost of sales and netted against freight costs. Sales, value-add, and other taxes collected concurrently with revenue-producing activities are excluded from revenue and booked on a net basis.
The following tables present the Company revenues disaggregated by geographic area and major product types by reportable segment for the three months ended July 2, 2022 and July 3, 2021 (in thousands):
| Three Months Ended July 2, 2022 | ||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Geographic Area | ||||||||||||||
| North America | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Europe |
|
|
|
|
||||||||||
| China |
|
|
|
|
||||||||||
| South America |
|
|
|
|
||||||||||
| Other |
|
|
|
|
||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Major product types | ||||||||||||||
| Fats | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Used cooking oil |
|
|
|
|
||||||||||
| Proteins |
|
|
|
|
||||||||||
| Bakery |
|
|
|
|
||||||||||
| Other rendering |
|
|
|
|
||||||||||
| Food ingredients |
|
|
|
|
||||||||||
| Bioenergy |
|
|
|
|
||||||||||
| Other |
|
|
|
|
||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Six Months Ended July 2, 2022 | ||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Geographic Area | ||||||||||||||
| North America | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Europe |
|
|
|
|
||||||||||
| China |
|
|
|
|
||||||||||
| South America |
|
|
|
|
||||||||||
| Other |
|
|
|
|
||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Major product types | ||||||||||||||
| Fats | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Used cooking oil |
|
|
|
|
||||||||||
| Proteins |
|
|
|
|
||||||||||
| Bakery |
|
|
|
|
||||||||||
| Other rendering |
|
|
|
|
||||||||||
| Food ingredients |
|
|
|
|
||||||||||
| Bioenergy |
|
|
|
|
||||||||||
| Biofuels |
|
|
|
|
||||||||||
| Other |
|
|
|
|
||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
||||||
28
| Three Months Ended July 3, 2021 | ||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Geographic Area | ||||||||||||||
| North America | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Europe |
|
|
|
|
||||||||||
| China |
|
|
|
|
||||||||||
| South America |
|
|
|
|
||||||||||
| Other |
|
|
|
|
||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Major product types | ||||||||||||||
| Fats | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Used cooking oil |
|
|
|
|
||||||||||
| Proteins |
|
|
|
|
||||||||||
| Bakery |
|
|
|
|
||||||||||
| Other rendering |
|
|
|
|
||||||||||
| Food ingredients |
|
|
|
|
||||||||||
| Bioenergy |
|
|
|
|
||||||||||
| Biofuels |
|
|
|
|
||||||||||
| Other |
|
|
|
|
||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Six Months Ended July 3, 2021 | ||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Geographic Area | ||||||||||||||
| North America | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Europe |
|
|
|
|
||||||||||
| China |
|
|
|
|
||||||||||
| South America |
|
|
|
|
||||||||||
| Other |
|
|
|
|
||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Major product types | ||||||||||||||
| Fats | $ |
|
$ |
|
$ |
|
$ |
|
||||||
| Used cooking oil |
|
|
|
|
||||||||||
| Proteins |
|
|
|
|
||||||||||
| Bakery |
|
|
|
|
||||||||||
| Other rendering |
|
|
|
|
||||||||||
| Food ingredients |
|
|
|
|
||||||||||
| Bioenergy |
|
|
|
|
||||||||||
| Biofuels |
|
|
|
|
||||||||||
| Other |
|
|
|
|
||||||||||
| Net sales | $ |
|
$ |
|
$ |
|
$ |
|
||||||
Long-Term Performance Obligations
. The Company from time to time enters into long-term contracts to supply certain volumes of finished products to certain customers. Revenue recognized to date in 2022 under these long-term supply contracts was approximately $
73.4
million, with the remaining performance obligations to be recognized in future periods (generally
5
years) of approximately $
1.17
billion.
(20)
Related Party Transactions
Raw Material Agreement
The Company entered into a Raw Material Agreement with the DGD Joint Venture in May 2011 pursuant to which the Company will offer to supply certain animal fats and used cooking oil at market prices, but the DGD Joint Venture is not obligated to purchase the raw material offered by the Company. Additionally, the Company may offer other feedstocks to the DGD Joint Venture, such as inedible corn oil, purchased on a resale basis. For the three months
29
ended July 2, 2022 and July 3, 2021, the Company recorded sales to the DGD Joint Venture of approximately $
295.7
million and $
109.8
million, respectively. For the six months ended July 2, 2022 and July 3, 2021, the Company recorded sales to the DGD Joint Venture of approximately $
510.1
million and $
198.8
million, respectively. At July 2, 2022 and January 1, 2022, the Company has $
37.7
million and $
43.8
million in outstanding receivables due from the DGD Joint Venture, respectively. In addition, the Company has eliminated approximately $
38.5
million and $
9.8
million of additional sales for the six months ended July 2, 2022 and July 3, 2021, respectively to defer the Company's portion of profit of approximately $
10.1
million and $
2.4
million on those sales relating to inventory assets remaining on the DGD Joint Venture's balance sheet at July 2, 2022 and July 3, 2021, respectively.
Revolving Loan Agreement
On May 1, 2019, Darling through its wholly owned subsidiary Darling Green Energy LLC, (“Darling Green”), and Diamond Alternative Energy, LLC, a wholly owned subsidiary of Valero (“Diamond Alternative” and together with Darling Green, the “DGD Lenders”), entered into a revolving loan agreement (the “DGD Loan Agreement”) with the DGD Joint Venture. The DGD Lenders have committed to making loans available to the DGD Joint Venture in the total amount of $
50.0
million with each lender committed to $
25.0
million of the total commitment. Any borrowings by the DGD Joint Venture under the DGD Loan Agreement are at the applicable annum rate equal to the sum of (a) the LIBO Rate (meaning Reuters BBA Libor Rates Page 3750) on such day plus (b)
2.50
%. The DGD Loan Agreement matures on April 29, 2023, unless extended by agreement of the parties. During the fourth quarter of fiscal 2021, the DGD Joint Venture borrowed all $
50.0
million available under the DGD Loan Agreement, including the Company's full $
25.0
million commitment and paid interest to the Company for the three and six months ended July 2, 2022 of approximately $
0.2
million and $
0.4
million, respectively. As of July 2, 2022, $
25.0
million was owed to Darling Green under the DGD Loan Agreement. The note receivable amount is included in other current assets on the consolidated balance sheet.
Guarantee Agreements
In February 2020, in connection with the DGD Joint Venture’s expansion project at its Norco, LA facility, it entered into
two
agreements (the “IMTT Terminaling Agreements”) with International-Matex Tank Terminals (“IMTT”), pursuant to which the DGD Joint Venture will move raw material and finished product to and from the IMTT terminal facility by pipeline, thereby providing better logistical capabilities. As a condition to entering into the IMTT Terminaling Agreements, IMTT required that the Company and Valero guarantee their proportionate share, up to a maximum of approximately $
50
million each, of the DGD Joint Venture’s obligations under the IMTT Terminaling Agreements (the “IMTT Guarantee”), subject to the conditions provided for in the IMTT Terminaling Agreements. The Company has not recorded any liability as a result of the IMTT Guarantee, as the Company believes the likelihood of having to make any payments under the IMTT Guarantee is remote.
In April 2021, in connection with the DGD Joint Venture’s expansion project at its Port Arthur, TX facility, it entered into
two
agreements (the “GTL Terminaling Agreements”) with GT Logistics, LLC (“GTL”), pursuant to which the DGD Joint Venture will move raw material and finished product to and from the GTL terminal facility by pipeline, thereby providing better logistical capabilities. As a condition to entering into the GTL Terminaling Agreements, GLT required that the Company and Valero guarantee their proportionate share, up to a maximum of approximately $
160
million each, of the DGD Joint Venture’s obligations under the GTL Terminaling Agreements (the “
GTL Guarantee
”), subject to the conditions provided for in the GTL Terminaling Agreements. The maximum amount of the GTL Guarantee is reduced over the
20-year
initial term of the GTL Terminaling Agreements as the termination fee under such agreements declines. The Company has not recorded any liability as a result of the GTL Guarantee, as the Company believes the likelihood of having to make any payments under the GTL Guarantee is remote.
30
(21)
Cash Flow Information
The following table sets forth supplemental cash flow information and non-cash transactions (in thousands):
| Six Months Ended | |||||||||||
| July 2, 2022 | July 3, 2021 | ||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Change in accrued capital expenditures | $ |
(
|
$ |
|
|||||||
| Cash paid during the period for: | |||||||||||
| Interest, net of capitalized interest | $ |
|
$ |
|
|||||||
| Income taxes, net of refunds | $ |
|
$ |
|
|||||||
| Non-cash operating activities | |||||||||||
| Operating lease right of use asset obtained in exchange for new lease liabilities | $ |
|
$ |
|
|||||||
| Non-cash financing activities | |||||||||||
| Debt issued for assets | $ |
|
$ |
|
|||||||
(22)
New Accounting Pronouncements
(23)
Subsequent Events
Subsequent to July 2, 2022, the Company repurchased approximately $
29.3
million, including commissions, of its common stock in the open market.
On July 29, 2022, the DGD Joint Venture repaid all $
50.0
million outstanding under the DGD Loan Agreement including the Company's full $
25.0
million commitment together with interest.
On August 1, 2022, the Company paid approximately R$
2.9
billion Brazilian Real in cash (approximately $
562.6
million USD at the exchange rate in effect on the closing date) for all the shares of the FASA Group, the largest independent rendering company in Brazil, subject to post closing adjustments and a contingent payment based on future earnings growth. The Company financed this transaction by borrowing approximately $
515.0
million of revolver borrowings under the Company's Amended Credit Agreement with the remainder coming from cash on hand.
On August 5, 2022, the Company received a dividend distribution of approximately $
90.5
million from the DGD Joint Venture.
31
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below under the heading “Forward Looking Statements” and elsewhere in this report, and under the heading “Risk Factors” in Part I, Item 1A in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022, filed with the SEC on March 1, 2022 and in the Company's other public filings with the SEC.
The following discussion should be read in conjunction with the unaudited consolidated financial statements and related notes thereto contained in this report.
Overview
Darling Ingredients Inc. (“Darling”, and together with its subsidiaries, the “Company” or “we,” “us” or “our”) is a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, feed, industrial, fuel, bioenergy and fertilizer industries. With operations on five continents, the Company collects and transforms all aspects of animal by-product streams into useable and specialty ingredients, such as collagen, edible fats, feed-grade fats, animal proteins and meals, plasma, pet food ingredients, organic fertilizers, yellow grease, fuel feedstocks, green energy, natural casings and hides. The Company also recovers and converts recycled oils (used cooking oil and animal fats) into valuable feed and collects and processes residual bakery products into feed ingredients. In addition, the Company provides environmental services, such as grease trap collection and disposal services to food service establishments. The Company sells its products domestically and internationally and operates within three industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients.
The Feed Ingredients operating segment includes the Company's global activities related to (i) the collection and processing of beef, poultry and pork animal by-products in North America and Europe into non-food grade oils and protein meals, (ii) the collection and processing of bakery residuals in North America into Cookie Meal®, which is predominantly used in poultry and swine rations, (iii) the collection and processing of used cooking oil in North America into non-food grade fats, (iv) the collection and processing of porcine and bovine blood in China, Europe, North America and Australia into blood plasma powder and hemoglobin, (v) the processing of selected portions of slaughtered animals into a variety of meat products for use in pet food in Europe and North America, (vi) the processing of cattle hides and hog skins in North America, (vii) the production of organic fertilizers using protein produced from the Company’s animal by-products processing activities in North America and Europe, (viii) the rearing and processing of black soldier fly larvae into specialty proteins for use in animal feed and pet food in North America, and (ix) the provision of grease trap services to food service establishments in North America. Non-food grade oils and fats produced and marketed by the Company are principally sold to third parties to be used as ingredients in animal feed and pet food, as an ingredient for the production of renewable diesel and biodiesel, or to the oleo-chemical industry to be used as an ingredient in a wide variety of industrial applications. Protein meals, blood plasma powder and hemoglobin produced and marketed by the Company are sold to third parties to be used as ingredients in animal feed, pet food and aquaculture.
The Food Ingredients operating segment includes the Company's global activities related to (i) the purchase and processing of beef and pork bone chips, beef hides, pig skins, and fish skins into collagen in Europe, China, South America and North America, (ii) the collection and processing of porcine and bovine intestines into natural casings in Europe, China and North America, (iii) the extraction and processing of porcine mucosa into crude heparin in Europe, (iv) the collection and refining of animal fat into food grade fat in Europe, and (v) the processing of bones to bone chips for the collagen industry and bone ash in Europe. Collagens produced and marketed by the Company are sold to third parties to be used as ingredients in the pharmaceutical, nutraceutical, food, pet food and technical (e.g., photographic) industries. Natural casings produced and marketed by the Company are sold to third parties to be used as an ingredient in the production of sausages and other similar food products.
The Fuel Ingredients operating segment includes the Company's global activities related to (i) the Company’s share of the results of its equity investment in Diamond Green Diesel Holdings LLC, a joint venture with Valero Energy Corporation (“Valero”) to convert animal fats, recycled greases, used cooking oil, inedible corn oil, soybean oil, or other feedstocks that become economically and commercially viable into renewable diesel (“DGD” or the “DGD Joint Venture”) as described in Note 3 (Investment in Unconsolidated Subsidiaries) to the Company's Consolidated Financial Statements for the period ended July 2, 2022 included herein, (ii) the conversion of organic sludge and food waste into biogas in
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Europe, (iii) the collection and conversion of fallen stock and certain animal by-products pursuant to applicable E.U. regulations into low-grade energy sources to be used in industrial applications, and (iv) the processing of manure into natural bio-phosphate in Europe.
Corporate Activities principally include unallocated corporate overhead expenses, acquisition-related expenses, interest expense net of interest income, and other non-operating income and expenses.
Economic Conditions and Uncertainties
Global Economic Conditions
We operate globally and have operations in numerous countries. As such, we are exposed to, and impacted by global macroeconomic factors, U.S. and foreign government policies and foreign exchange fluctuations. Global economic conditions continue to be highly volatile due to, among other things, the conflict in Ukraine and its impact on volatility in energy and other commodity prices, cost and supply chain pressures and availability, and disruption in banking systems and capital markets. Disturbances in world financial, credit, commodities and stock markets, including inflationary, deflationary and recessionary conditions, could have a negative impact on the Company’s results of operations. Any such disturbances or disruptions may also magnify the impact of other risks described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, as filed with the SEC on March 1, 2022.
Energy Policies of U.S. and Foreign Governments
Prices for our finished products, including those of DGD, may be impacted by worldwide government policies relating to renewable fuels and greenhouse gas emissions (“GHG”). Programs like the National Renewable Fuel Standard Program (“RFS”) and low carbon fuel standards (“LCFS”) (such as in the state of California) and tax credits for biofuels both in the United States and abroad may positively impact the demand for our finished products. Legal challenges or changes to, a failure to enforce, reductions in the mandated volumes under, or discontinuing or suspension of any of these programs could have a negative impact on our business and results of operations. However, such rules and the regulatory environment are continuing to evolve and change, and we cannot predict the ultimate effect that such changes may have on our business.
Climate Change
There is a growing global concern that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency of extreme weather and natural disasters. We are subject to physical, operational, transitional and financial risks associated with climate change and global, regional and local weather conditions, as well as legal, regulatory and market responses to climate change. Certain jurisdictions in which we operate have either imposed, or are considering imposing, new or increasingly stringent legal and regulatory requirements to reduce or mitigate the potential effects of climate change, including regulation and reduction of GHG and potential carbon pricing programs. These new or increasingly stringent legal or regulatory requirements could result in significantly increased costs of compliance and additional investments in facilities and equipment. While we assess climate related regulatory risks as part of our risk management process, we are unable to predict the scope, nature and timing of any new or increasingly stringent environmental laws and regulations and therefore cannot predict the ultimate impact of such laws and regulations on our business or financial results. We continue to monitor existing and proposed laws and regulations in the jurisdictions in which we operate and to consider actions we may take to potentially mitigate the unfavorable impact, if any, of such laws or regulations. Furthermore, there has been increased focus from our stakeholders, including consumers, employees and investors, on corporate environmental, social, and governance (“ESG”) practices, including practices related to the causes and impacts of climate change. We expect that stakeholder expectations with respect to ESG expectations will continue to evolve rapidly, which may necessitate additional resources to monitor, report on, and adjust our operations.
COVID-19
Our global operations continue to expose us to risks associated with the COVID-19 pandemic as the potential impacts of COVID-19 resurgences and variants have resulted in continued uncertainty as to the pandemic’s further duration and scope. Various measures have been implemented at various times around the world to try to reduce the spread of the virus, including travel bans and restrictions, quarantines, curfews, stay-at-home restrictions and other public health and safety measures. The health and well-being of our employees continues to be a priority for us, and we will continue, as appropriate, to implement operational guidelines in our organization consistent with the applicable governmental and
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regulatory policies in the geographies we operate intended to protect our employees and prevent the spread of the virus. The extent to which COVID-19 impacts the Company’s and DGD's business and financial results will depend on future developments, which are highly uncertain and cannot be predicted and may vary by jurisdiction and market, including the duration and scope of the pandemic, the emergence and spread of new variants of the virus, such as the omicron and delta variants, the likelihood of a resurgence of positive cases, the development, availability and acceptance of effective treatments and vaccines, the speed at which such vaccines are administered, the efficacy of current vaccines against evolving strains or variants of the virus, global economic conditions during and after the pandemic and governmental actions that have been taken or may be taken in the future in response to the pandemic, among others.
For additional information on risk factors that could impact our results, please refer to “Risk Factors” in Part I, Item 1A of the Company's Form 10-K for the fiscal year ended January 1, 2022, as filed with the SEC on March 1, 2022.
Operating Performance Indicators
The Company monitors the performance of its business segments using key financial metrics such as results of operations, non-GAAP measurements (Adjusted EBITDA), segment operating income, raw material processed, gross margin percentage, foreign currency translation, and corporate activities. The Company’s operating results can vary significantly due to changes in factors such as the fluctuation in commodity prices and energy prices, weather conditions, crop harvests, government policies and programs, changes in global demand, changes in standards of living, protein consumption, and global production of competing ingredients. Due to these unpredictable factors that are beyond the control of the Company, forward-looking financial or operational estimates are not provided. The Company is exposed to certain risks associated with a business that is influenced by agricultural-based commodities. These risks are further described in Item 1A of Part I, “Risk Factors” included in the Company’s Form 10-K for the fiscal year ended January 1, 2022.
The Company’s Feed Ingredients segment animal by-products, bakery residuals, used cooking oil recovery, and blood operations are each influenced by prices for agricultural-based alternative ingredients such as corn oil, soybean oil, soybean meal, and palm oil. In these operations, the costs of the Company's raw materials change with, or in certain cases are indexed to, the selling price or the anticipated selling price of the finished goods produced from the acquired raw materials and/or in some cases, the price spread between various types of finished products. The Company believes that this methodology of procuring raw materials generally establishes a relatively stable gross margin upon the acquisition of the raw material. Although the costs of raw materials for the Feed Ingredients segment are generally based upon actual or anticipated finished goods selling prices, rapid and material changes in finished goods prices, including competing agricultural-based alternative ingredients, generally have an immediate, and often times, material impact on the Company’s gross margin and profitability resulting from the brief lapse of time between the procurement of the raw materials and the sale of the finished goods. In addition, the volume of raw material acquired, which has a direct impact on the amount of finished goods produced, can also have a material effect on the gross margin reported, as the Company has a substantial amount of fixed operating costs.
The Company’s Food Ingredients segment collagen and natural casings products are influenced by other competing ingredients including plant-based and synthetic hydrocolloids and artificial casings. In the collagen operation, the cost of the Company's animal-based raw material moves in relationship to the selling price of the finished goods. The processing time for the Food Ingredients segment collagen and casings is generally 30 to 60 days, which is substantially longer than the Company's Feed Ingredients segment animal by-products operations. Consequently, the Company’s gross margin and profitability in this segment can be influenced by the movement of finished goods prices from the time the raw materials were procured until the finished goods are sold.
The Company’s Fuel Ingredients segment converts fats into renewable diesel, organic sludge and food waste into biogas, and fallen stock into low-grade energy sources. The Company's gross margin and profitability in this segment are impacted by world energy prices for oil, electricity, natural gas and governmental subsidies.
The reporting currency for the Company's financial statements is the U.S. dollar. The Company operates in over 15 countries and therefore, certain of the Company's assets, liabilities, revenues and expenses are denominated in functional currencies other than the U.S. dollar, primarily in the Euro, Brazilian real, Chinese renminbi, Canadian dollar and Polish zloty. To prepare the Company's consolidated financial statements, assets, liabilities, revenues, and expenses must be translated into U.S. dollars at the applicable exchange rate. As a result, increases or decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items recorded in the Company's consolidated financial statements, even if their value has not changed in the functional currency. This could have a significant impact on
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the Company's results, if such increase or decrease in the value of the U.S. dollar relative to these other currencies is substantial.
Results of Operations
Three Months Ended July 2, 2022 Compared to Three Months Ended July 3, 2021
Operating Performance Metrics
Operating performance metrics which management routinely monitors as an indicator of operating performance include:
•
Finished product commodity prices
•
Segment results
•
Foreign currency exchange
•
Corporate activities
•
Non-U.S. GAAP measures
These indicators and their importance are discussed below.
Finished Product Commodity Prices
Prices for finished product commodities that the Company produces in the Feed Ingredients segment are reported each business day on the Jacobsen Index (the “Jacobsen”), an established North American trading exchange price publisher. The Jacobsen reports industry sales from the prior day's activity by product. Included on the Jacobsen are reported prices for finished products such as protein (primarily meat and bone meal (“MBM”), poultry meal (“PM”) and feather meal (“FM”)), hides, fats (primarily bleachable fancy tallow (“BFT”) and yellow grease (“YG”)) and corn, which is a substitute commodity for the Company's bakery by-product (“BBP”) as well as a range of other branded and value-added products, which are products of the Company's Feed Ingredients segment. In the United States, the Company regularly monitors the Jacobsen for MBM, PM, FM, BFT, YG and corn because it provides a daily indication of the Company's U.S. revenue performance against business plan benchmarks. In Europe, the Company regularly monitors Thomson Reuters (“Reuters”) to track the competing commodities palm oil and soy meal.
Although the Jacobsen and Reuters provide useful metrics of performance, the Company's finished products are commodities that compete with other commodities such as corn, soybean oil, palm oil complex, soybean meal and heating oil on nutritional and functional values. Therefore, actual pricing for the Company's finished products, as well as competing products, can be quite volatile. In addition, neither the Jacobsen nor Reuters provides forward or future period pricing for the Company's commodities. The Jacobsen and Reuters prices quoted below are for delivery of the finished product at a specified location. Although the Company's prices generally move in concert with reported Jacobsen and Reuters prices, the Company's actual sales prices for its finished products may vary significantly from the Jacobsen and Reuters because of production and delivery timing differences and because the Company's finished products are delivered to multiple locations in different geographic regions which utilize alternative price indexes. In addition, certain of the Company's premium branded finished products may sell at prices that may be higher than the closest product on the related Jacobsen or Reuters index. During the second quarter of fiscal 2022, the Company's actual sales prices by product trended with the disclosed Jacobsen and Reuters prices.
Average Jacobsen and Reuters prices (at the specified delivery point) for the second quarter of fiscal 2022, compared to average Jacobsen and Reuters prices for the second quarter of fiscal 2021 are as follows:
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|
Avg. Price
2nd Quarter 2022 |
Avg. Price
2nd Quarter 2021 |
Increase/(Decrease) |
%
Increase/(Decrease) |
|||||||||||
| Jacobsen: | ||||||||||||||
| MBM (Illinois) | $ 366.62/ton | $ 408.63/ton | $ (42.01)/ton | (10.3) | % | |||||||||
| Feed Grade PM (Mid-South) | $ 385.83/ton | $ 339.31/ton | $ 46.52/ton | 13.7 | % | |||||||||
| Pet Food PM (Mid-South) | $ 801.37/ton | $ 823.18/ton | $ (21.81)/ton | (2.6) | % | |||||||||
| Feather meal (Mid-South) | $ 571.58/ton | $ 465.50/ton | $ 106.08/ton | 22.8 | % | |||||||||
| BFT (Chicago) | $ 79.51/cwt | $ 56.60/cwt | $ 22.91/cwt | 40.5 | % | |||||||||
| YG (Illinois) | $ 60.11/cwt | $ 42.47/cwt | $ 17.64/cwt | 41.5 | % | |||||||||
| Corn (Illinois) | $ 8.20/bushel | $ 6.84/bushel | $ 1.36/bushel | 19.9 | % | |||||||||
| Reuters: | ||||||||||||||
| Palm Oil (CIF Rotterdam) | $ 1,662.00/MT | $ 1,168.00/MT | $ 494.00/MT | 42.3 | % | |||||||||
| Soy meal (CIF Rotterdam) | $ 550.00/MT | $ 473.00/MT | $ 77.00/MT | 16.3 | % | |||||||||
The following table shows the average Jacobsen and Reuters prices for the second quarter of fiscal 2022, compared to average Jacobsen and Reuters prices for the first quarter of fiscal 2022.
|
Avg. Price
2nd Quarter 2022 |
Avg. Price
1st Quarter 2022 |
Increase/(Decrease) |
%
Increase/(Decrease) |
|||||||||||
| Jacobsen: | ||||||||||||||
| MBM (Illinois) | $ 366.62/ton | $ 317.22/ton | $ 49.40/ton | 15.6 | % | |||||||||
| Feed Grade PM (Mid-South) | $ 385.83/ton | $ 367.03/ton | $ 18.80/ton | 5.1 | % | |||||||||
| Pet Food PM (Mid-South) | $ 801.37/ton | $ 761.69/ton | $ 39.68/ton | 5.2 | % | |||||||||
| Feather meal (Mid-South) | $ 571.58/ton | $ 525.32/ton | $ 46.26/ton | 8.8 | % | |||||||||
| BFT (Chicago) | $ 79.51/cwt | $ 71.39/cwt | $ 8.12/cwt | 11.4 | % | |||||||||
| YG (Illinois) | $ 60.11/cwt | $ 53.91/cwt | $ 6.20/cwt | 11.5 | % | |||||||||
| Corn (Illinois) | $ 8.20/bushel | $ 6.90/bushel | $ 1.30/bushel | 18.8 | % | |||||||||
| Reuters: | ||||||||||||||
| Palm Oil (CIF Rotterdam) | $ 1,662.00/MT | $ 1,555.00/MT | $ 107.00/MT | 6.9 | % | |||||||||
| Soy meal (CIF Rotterdam) | $ 550.00/MT | $ 576.00/MT | $ (26.00)/MT | (4.5) | % | |||||||||
Segment Results
Segment operating income for the three months ended July 2, 2022 was $278.6 million, which reflects an increase of $10.3 million or 3.8% as compared to the three months ended July 3, 2021.
| (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | ||||||||||||
| Three Months Ended July 2, 2022 | |||||||||||||||||
| Net Sales | $ | 1,170,347 | $ | 369,181 | $ | 110,660 | $ | — | $ | 1,650,188 | |||||||
| Cost of sales and operating expenses | 864,306 | 280,964 | 86,237 | — | 1,231,507 | ||||||||||||
| Gross Margin | 306,041 | 88,217 | 24,423 | — | 418,681 | ||||||||||||
| Gross Margin % | 26.1 | % | 23.9 | % | 22.1 | % | — | % | 25.4 | % | |||||||
| Gain on sale of assets | (964) | (73) | (18) | — | (1,055) | ||||||||||||
| Selling, general and administrative expenses | 64,863 | 22,855 | 4,277 | 15,781 | 107,776 | ||||||||||||
| Restructuring and asset impairment charges | 8,557 | — | — | — | 8,557 | ||||||||||||
| Acquisition and integration costs | — | — | — | 5,358 | 5,358 | ||||||||||||
| Depreciation and amortization | 68,938 | 14,449 | 6,936 | 2,790 | 93,113 | ||||||||||||
|
Equity in net income of Diamond Green Diesel
|
— | — | 73,680 | — | 73,680 | ||||||||||||
| Segment operating income/(loss) | 164,647 | 50,986 | 86,908 | (23,929) | 278,612 | ||||||||||||
|
Equity in net income of other unconsolidated subsidiaries
|
2,272 | — | — | — | 2,272 | ||||||||||||
| Segment income/(loss) | 166,919 | 50,986 | 86,908 | (23,929) | 280,884 | ||||||||||||
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| (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | ||||||||||||
| Three Months Ended July 3, 2021 | |||||||||||||||||
| Net Sales | $ | 771,932 | $ | 317,031 | $ | 109,706 | $ | — | $ | 1,198,669 | |||||||
| Cost of sales and operating expenses | 556,424 | 238,539 | 83,110 | — | 878,073 | ||||||||||||
| Gross Margin | 215,508 | 78,492 | 26,596 | — | 320,596 | ||||||||||||
| Gross Margin % | 27.9 | % | 24.8 | % | 24.2 | % | — | % | 26.7 | % | |||||||
| Gain on sale of assets | (122) | (48) | (58) | — | (228) | ||||||||||||
| Selling, general and administrative expenses | 54,977 | 25,542 | 4,474 | 14,139 | 99,132 | ||||||||||||
| Depreciation and amortization | 53,971 | 15,850 | 6,698 | 2,703 | 79,222 | ||||||||||||
|
Equity in net income of Diamond Green Diesel
|
— | — | 125,788 | — | 125,788 | ||||||||||||
| Segment operating income/(loss) | 106,682 | 37,148 | 141,270 | (16,842) | 268,258 | ||||||||||||
| Equity in net income of other unconsolidated subsidiaries | 1,940 | — | — | — | 1,940 | ||||||||||||
| Segment income/(loss) | 108,622 | 37,148 | 141,270 | (16,842) | 270,198 | ||||||||||||
Feed Ingredients Segment
Raw material volume.
In the three months ended July 2, 2022, the raw material processed by the Company's Feed Ingredients segment totaled approximately 2.70 million metric tons. Compared to the three months ended July 3, 2021, overall raw material volume processed in the Feed Ingredients segment increased approximately 23.3%. The increase was primarily due to the Valley Acquisition.
Sales.
The increase in net sales for the Feed Ingredients segment was primarily due to the following (in millions of dollars):
| Fats | Proteins | Other Rendering | Total Rendering | Used Cooking Oil | Bakery | Other | Total | |||||||||||||||||||
| Net sales three months ended July 3, 2021 | $ | 292.5 | $ | 258.4 | $ | 45.4 | $ | 596.3 | $ | 86.4 | $ | 79.3 | $ | 9.9 | $ | 771.9 | ||||||||||
| Increase in sales volumes | 52.1 | 60.9 | — | 113.0 | 11.7 | 2.6 | — | 127.3 | ||||||||||||||||||
| Increase in finished product prices | 161.7 | 45.5 | — | 207.2 | 55.2 | 7.8 | — | 270.2 | ||||||||||||||||||
| Decrease due to currency exchange rates | (7.5) | (13.7) | (1.6) | (22.8) | (0.7) | — | — | (23.5) | ||||||||||||||||||
| Other change | — | — | 20.4 | 20.4 | — | — | 4.0 | 24.4 | ||||||||||||||||||
| Total change | 206.3 | 92.7 | 18.8 | 317.8 | 66.2 | 10.4 | 4.0 | 398.4 | ||||||||||||||||||
| Net sales three months ended July 2, 2022 | $ | 498.8 | $ | 351.1 | $ | 64.2 | $ | 914.1 | $ | 152.6 | $ | 89.7 | $ | 13.9 | $ | 1,170.3 | ||||||||||
Margins.
In the Feed Ingredients segment for the three months ended July 2, 2022, the gross margin percentage decreased to 26.1% as compared to 27.9% for the comparable period of fiscal 2021. The decrease in margin is primarily due to lower overall margins from the Valley Acquisition and higher overall energy prices as compared to fiscal 2021.
Segment operating incom
e. Feed Ingredients operating income for the three months ended July 2, 2022 was $164.6 million, an increase of $57.9 million or 54.3% as compared to the three months ended July 3, 2021. The increase is due to higher overall fat finished product prices and higher raw material volumes notwithstanding an asset impairment charge as compared to fiscal 2021.
Food Ingredients Segment
Raw material volume.
In the three months ended July 2, 2022, the raw material processed by the Company's Food Ingredients segment totaled approximately 272,000 metric tons. Compared to the three months ended July 3, 2021, overall raw material volume processed in the Food Ingredients segment decreased approximately 0.7%.
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Sales.
Net sales increased in the Food Ingredients segment primarily due to higher sales prices and sales volumes in the collagen and edible fat sales markets.
Margins.
In the Food Ingredients segment for the three months ended July 2, 2022, the gross margin percentage decreased to 23.9% as compared to 24.8% for the comparable period of fiscal 2021. The decrease in margin is primarily due to higher overall energy prices as compared to fiscal 2021.
Segment operating income
. Food Ingredients operating income was $51.0 million for the three months ended July 2, 2022, an increase of $13.9 million or 37.5% as compared to the three months ended July 3, 2021. The increase is primarily due to higher sales prices and sales volumes in collagen markets that more than offset higher energy prices as compared to fiscal 2021.
Fuel Ingredients Segment
Raw material volume.
In the three months ended July 2, 2022, the raw material processed by the Company's Fuel Ingredients segment totaled approximately 351,000 metric tons. Compared to the three months ended July 3, 2021, overall raw material volume processed in the Fuel Ingredients segment increased approximately 11.4%. The increase was primarily due to the acquisition of Group Op de Beeck.
Sales.
Net sales increased in the Fuel Ingredients segment primarily due to higher sales prices and volumes in Europe, which were offset by foreign currency losses.
Margins.
In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the three months ended July 2, 2022, the gross margin percentage decreased to 22.1% as compared to 24.2% for the comparable period of fiscal 2021. The decrease is primarily due to higher raw material costs and higher energy prices as compared to fiscal 2021.
Segment operating income
. The Company's Fuel Ingredients segment operating income (inclusive of the equity contribution from the DGD Joint Venture) for the three months ended July 2, 2022 was $86.9 million, a decrease of $54.4 million or (38.5)% as compared to the same period in fiscal 2021. The decrease is primarily attributed to higher raw material costs at DGD, lower values for LCFS credits and Renewable Identification Number (“RIN”) prices that more than offset higher blenders tax credits and higher fuel prices as compared to the same period in fiscal 2021.
Foreign Currency Exchange
During the second quarter of fiscal 2022, the euro and Canadian dollar weakened against the U.S. dollar as compared to the same period in fiscal 2021. Using actual results for the three months ended July 2, 2022 and using the prior year's average currency rate for the three months ended July 3, 2021, foreign currency translation would result in an increase in operating income of approximately $15.9 million. The average rate assumptions used in this calculation were the actual fiscal average rates for the three months ended July 2, 2022 of €1.00:$1.06 and C$1.00:$0.78 as compared to the average rates for the three months ended July 3, 2021 of €1.00:$1.21 and C$1.00:$0.81, respectively.
Corporate Activities
Selling, General and Administrative Expenses.
Selling, general and administrative expenses were approximately $15.8 million during the three months ended July 2, 2022, compared to approximately $14.1 million during the three months ended July 3, 2021, an increase of $1.7 million. The increase is primarily due to higher costs for legal, corporate related benefits, information technology and travel that more than offset a decrease in other overall costs.
Acquisition and Integration costs.
Acquisition and integration costs were approximately $5.4 million during the three months ended July 2, 2022 as compared to no costs for the same period in fiscal 2021. These include costs related to the Company's acquisition of Valley Proteins, Group Op de Beeck and the FASA Group as well as other potential future acquisitions.
Depreciation and Amortization.
Depreciation and amortization charges were approximately $2.8 million during the three months ended July 2, 2022, as compared to approximately $2.7 million for the same period in fiscal 2021.
Interest Expense.
Interest expense was $24.0 million during the three months ended July 2, 2022, compared to $15.3 million during the three months ended July 3, 2021, an increase of $8.7 million. The increase in interest expense is primarily due to an increase in debt outstanding including increased interest expense from the issuance of the 6% Senior
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Notes due 2030, the borrowing of all amounts under the term A-1 and term A-2 facilities and higher borrowings under the revolving credit facility as compared to the same period in fiscal 2021.
Foreign Currency Loss.
Foreign currency losses were $4.4 million for the three months ended July 2, 2022 as compared to foreign currency losses of $0.7 million for the three months ended July 3, 2021. The increase in currency losses is due primarily to increased losses on derivatives offset by the revaluation of non-functional currency assets and liabilities as compared to the same period in fiscal 2021.
Other Expense, net.
Other expense was $0.3 million in the three months ended July 2, 2022, compared to other expense of $1.2 million for the three months ended July 3, 2021. The decrease in other expense was primarily due to a decrease in the non-service component of pension expense and an increase in interest income as compared to the same period in fiscal 2021.
Equity in Net Income in Investment of Other Unconsolidated Subsidiaries.
The change in this line item is not significant and primarily represents the Company's pro rata share of the net income from foreign unconsolidated subsidiaries.
Income Taxes.
The Company recorded income tax expense of $47.3 million for the three months ended July 2, 2022, compared to $55.0 million recorded in the three months ended July 3, 2021, a decrease of $7.7 million, which is primarily due to an increase in the amount of biofuel tax incentives during the three months ended July 2, 2022. The effective tax rate for the three months ended July 2, 2022 and July 3, 2021 is 18.8% and 21.7%, respectively. The effective tax rate for the three months ended July 2, 2022 differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, and discrete items, including excess tax benefits from stock-based compensation. The effective tax rate for the three months ended July 3, 2021 differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, certain taxable income inclusion items in the U.S. based on foreign earnings and discrete items, including
favorable settlements with tax authorities.. The Company's effective tax rate excluding biofuel tax incentives and discrete items is 26.6% for the three months ended July 2, 2022, compared to 27.7% for the three months ended July 3, 2021.
Non-U.S. GAAP Measures
Adjusted EBITDA is not a recognized accounting measurement under GAAP; it should not be considered as an alternative to net income, as a measure of operating results, or as an alternative to cash flow as a measure of liquidity. It is presented here not as an alternative to net income, but rather as a measure of the Company's operating performance. Since EBITDA (generally, net income plus interest expense, taxes, depreciation and amortization) is not calculated identically by all companies, the presentation in this report may not be comparable to EBITDA or Adjusted EBITDA presentations disclosed by other companies. Adjusted EBITDA is calculated below and represents for any relevant period, net income/(loss) plus depreciation and amortization, restructuring, acquisition and integration costs, goodwill and long-lived asset impairment, interest expense, (income)/loss from discontinued operations, net of tax, income tax provision, other income/(expense) and equity in net (income)/loss of unconsolidated subsidiary. Management believes that Adjusted EBITDA is useful in evaluating the Company's operating performance compared to that of other companies in its industry because the calculation of Adjusted EBITDA generally eliminates the effects of financing, income taxes and certain non-cash and other items that may vary for different companies for reasons unrelated to overall operating performance.
The Company’s management uses Adjusted EBITDA as a measure to evaluate performance and for other discretionary purposes. In addition to the foregoing, management also uses or will use Adjusted EBITDA to measure compliance with certain financial covenants under the Company’s Senior Secured Credit Facilities, 6% Notes, 5.25% Notes and 3.625% Notes that were outstanding at July 2, 2022. However, the amounts shown below for Adjusted EBITDA differ from the amounts calculated under similarly titled definitions in the Company’s Senior Secured Credit Facilities, 6% Notes, 5.25% Notes and 3.625% Notes, as those definitions permit further adjustments to reflect certain other non-recurring costs, non-cash charges and cash dividends from the DGD Joint Venture. Additionally, the Company evaluates the impact of foreign exchange on operating cash flow, which is defined as segment operating income (loss) plus depreciation and amortization.
39
Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA and (Non-GAAP) Pro Forma Adjusted EBITDA
Second Quarter 2022 As Compared to Second Quarter 2021
| Three Months Ended | ||||||||
| (dollars in thousands) |
July 2,
2022 |
July 3,
2021 |
||||||
| Net income attributable to Darling | $ | 201,996 | $ | 196,582 | ||||
| Depreciation and amortization | 93,113 | 79,222 | ||||||
| Interest expense | 24,008 | 15,268 | ||||||
| Income tax expense | 47,333 | 54,979 | ||||||
| Restructuring and asset impairment charges | 8,557 | — | ||||||
| Acquisition and integration costs | 5,358 | — | ||||||
| Foreign currency loss | 4,412 | 684 | ||||||
| Other expense, net | 302 | 1,198 | ||||||
| Equity in net income of Diamond Green Diesel | (73,680) | (125,788) | ||||||
| Equity in net income of other unconsolidated subsidiaries | (2,272) | (1,940) | ||||||
| Net income attributable to non-controlling interests | 2,833 | 1,487 | ||||||
| Darling's Adjusted EBITDA | $ | 311,960 | $ | 221,692 | ||||
| Foreign currency exchange impact (1) | 15,928 | — | ||||||
| Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) | $ | 327,888 | $ | 221,692 | ||||
| DGD Joint Venture Adjusted EBITDA (Darling's Share) | $ | 90,611 | $ | 132,001 | ||||
| Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA | $ | 402,571 | $ | 353,693 | ||||
(1) The average rates assumption used in this calculation was the actual fiscal average rate for the three months ended July 2, 2022 of €1.00:$1.06 and C$1.00:$0.78 as compared to the average rate for the three months ended July 3, 2021 of €1.00:$1.21 and C$1.00:$0.81, respectively.
Six Months Ended July 2, 2022 Compared to Six Months Ended July 3, 2021
Operating Performance Metrics
Operating performance metrics which management routinely monitors as an indicator of operating performance include:
•
Finished product commodity prices
•
Segment results
•
Foreign currency exchange
•
Corporate activities
•
Non-U.S. GAAP measures
These indicators and their importance are discussed below.
Finished Product Commodity Prices
During the first six months of fiscal 2022, the Company's actual sales prices by product trended with the disclosed Jacobsen and Reuters prices.
Average Jacobsen and Reuters prices (at the specified delivery point) for the first six months of fiscal 2022, compared to average Jacobsen and Reuters prices for the first six months of fiscal 2021 are as follows:
40
|
Avg. Price
First Six Months 2022 |
Avg. Price
First Six Months 2021 |
Increase/(Decrease) |
%
Increase/(Decrease) |
|||||||||||
| Jacobsen: | ||||||||||||||
| MBM (Illinois) | $ 341.92/ton | $ 397.80/ton | $ (55.88)/ton | (14.0) | % | |||||||||
| Feed Grade PM (Mid-South) | $ 376.43/ton | $ 348.55/ton | $ 27.88/ton | 8.0 | % | |||||||||
| Pet Food PM (Mid-South) | $ 781.53/ton | $ 834.13/ton | $ (52.60)/ton | (6.3) | % | |||||||||
| Feather meal (Mid-South) | $ 548.45/ton | $ 502.26/ton | $ 46.19/ton | 9.2 | % | |||||||||
| BFT (Chicago) | $ 75.45/cwt | $ 51.51/cwt | $ 23.94/cwt | 46.5 | % | |||||||||
| YG (Illinois) | $ 57.01/cwt | $ 38.46/cwt | $ 18.55/cwt | 48.2 | % | |||||||||
| Corn (Illinois) | $ 7.55/bushel | $ 6.20/bushel | $ 1.35/bushel | 21.8 | % | |||||||||
| Reuters: | ||||||||||||||
| Palm Oil (CIF Rotterdam) | $ 1,608.00/MT | $ 1,126.00/MT | $ 482.00/MT | 42.8 | % | |||||||||
| Soy meal (CIF Rotterdam) | $ 563.00/MT | $ 504.00/MT | $ 59.00/MT | 11.7 | % | |||||||||
Segment Results
Segment operating income for the six months ended July 2, 2022 was $511.5 million, which reflects an increase of $43.7 million or 9.3% as compared to the six months ended July 3, 2021.
| (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | ||||||||||||
| Six Months Ended July 2, 2022 | |||||||||||||||||
| Net Sales | $ | 2,049,785 | $ | 723,995 | $ | 242,742 | $ | — | $ | 3,016,522 | |||||||
| Cost of sales and operating expenses | 1,509,829 | 551,276 | 190,979 | — | 2,252,084 | ||||||||||||
| Gross Margin | 539,956 | 172,719 | 51,763 | — | 764,438 | ||||||||||||
| Gross Margin % | 26.3 | % | 23.9 | % | 21.3 | % | — | % | 25.3 | % | |||||||
| Gain on sale of assets | (1,305) | (82) | (57) | — | (1,444) | ||||||||||||
| Selling, general and administrative expenses | 121,072 | 49,699 | 8,197 | 30,840 | 209,808 | ||||||||||||
| Restructuring and asset impairment charges | 8,557 | — | — | — | 8,557 | ||||||||||||
| Acquisition and integration costs | — | — | — | 9,131 | 9,131 | ||||||||||||
| Depreciation and amortization | 123,288 | 29,899 | 13,610 | 5,562 | 172,359 | ||||||||||||
|
Equity in net income of Diamond Green Diesel
|
— | — | 145,484 | — | 145,484 | ||||||||||||
| Segment operating income/(loss) | 288,344 | 93,203 | 175,497 | (45,533) | 511,511 | ||||||||||||
|
Equity in net income of other unconsolidated subsidiaries
|
3,632 | — | — | — | 3,632 | ||||||||||||
| Segment income/(loss) | 291,976 | 93,203 | 175,497 | (45,533) | 515,143 | ||||||||||||
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| (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | ||||||||||||
| Six Months Ended July 3, 2021 | |||||||||||||||||
| Net Sales | $ | 1,423,376 | $ | 615,096 | $ | 206,913 | $ | — | $ | 2,245,385 | |||||||
| Cost of sales and operating expenses | 1,031,005 | 464,952 | 154,900 | — | 1,650,857 | ||||||||||||
| Gross Margin | 392,371 | 150,144 | 52,013 | — | 594,528 | ||||||||||||
| Gross Margin % | 27.6 | % | 24.4 | % | 25.1 | % | — | % | 26.5 | % | |||||||
| Loss/(gain) on sale of assets | (261) | 7 | (38) | — | (292) | ||||||||||||
| Selling, general and administrative expenses | 107,597 | 50,733 | 9,341 | 28,859 | 196,530 | ||||||||||||
| Restructuring and asset impairment charges | — | — | 778 | — | 778 | ||||||||||||
| Depreciation and amortization | 108,580 | 30,733 | 12,853 | 5,590 | 157,756 | ||||||||||||
|
Equity in net income of Diamond Green Diesel
|
— | — | 228,013 | — | 228,013 | ||||||||||||
| Segment operating income/(loss) | 176,455 | 68,671 | 257,092 | (34,449) | 467,769 | ||||||||||||
| Equity in net income of other unconsolidated subsidiaries | 2,552 | — | — | — | 2,552 | ||||||||||||
| Segment income/(loss) | 179,007 | 68,671 | 257,092 | (34,449) | 470,321 | ||||||||||||
Feed Ingredients Segment
Raw material volume.
In the six months ended July 2, 2022, the raw material processed by the Company's Feed Ingredients segment totaled approximately 5.0 million metric tons. Compared to the six months ended July 3, 2021, overall raw material volume processed in the Feed Ingredients segment increased approximately 12.9%. The increase is primarily due to the Valley Acquisition.
Sales.
The increase in net sales for the Feed Ingredients segment was primarily due to the following (in millions of dollars):
| Fats | Proteins | Other Rendering | Total Rendering | Used Cooking Oil | Bakery | Other | Total | |||||||||||||||||||
| Net sales six months ended July 3, 2021 | 521.6 | 513.9 | 88.4 | $ | 1,123.9 | 137.5 | 142.3 | 19.7 | $ | 1,423.4 | ||||||||||||||||
| Increase in sales volumes | 55.8 | 65.0 | — | 120.8 | 16.1 | 5.5 | — | 142.4 | ||||||||||||||||||
| Increase in finished product prices | 300.6 | 62.6 | — | 363.2 | 94.7 | 20.3 | — | 478.2 | ||||||||||||||||||
| Decrease due to currency exchange rates | (10.7) | (20.2) | (2.0) | (32.9) | (0.7) | — | — | (33.6) | ||||||||||||||||||
| Other change | — | — | 35.3 | 35.3 | — | — | 4.1 | 39.4 | ||||||||||||||||||
| Total change | 345.7 | 107.4 | 33.3 | 486.4 | 110.1 | 25.8 | 4.1 | 626.4 | ||||||||||||||||||
| Net sales six months ended July 2, 2022 | $ | 867.3 | $ | 621.3 | $ | 121.7 | $ | 1,610.3 | $ | 247.6 | $ | 168.1 | $ | 23.8 | $ | 2,049.8 | ||||||||||
Margins.
In the Feed Ingredients segment for the six months ended July 2, 2022, the gross margin percentage decreased to 26.3% as compared to 27.6% for the comparable period of fiscal 2021. The decrease in margin is primarily due to lower overall margins from the Valley Acquisition and higher overall energy prices as compared to fiscal 2021.
Segment operating incom
e. Feed Ingredients operating income for the six months ended July 2, 2022 was $288.3 million, an increase of $111.8 million or 63.3% as compared to the six months ended July 3, 2021. The increase is due to higher overall fat finished product prices and higher raw material volumes notwithstanding an asset impairment charge as compared to fiscal 2021.
Food Ingredients Segment
Raw material volume.
In the six months ended July 2, 2022, the raw material processed by the Company's Food Ingredients segment totaled approximately 550,000 metric tons. Compared to the six months ended July 3, 2021, overall raw material volume processed in the Food Ingredients segment increased approximately 0.4%.
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Sales.
Net sales increased in the Food Ingredients segment primarily due to higher sales prices and sales volumes in the collagen and edible fat sales markets.
Margins.
In the Food Ingredients segment for the six months ended July 2, 2022, the gross margin percentage decreased to 23.9% as compared to 24.4% for the comparable period of fiscal 2021. The decrease in margin is primarily due to higher overall energy prices as compared to fiscal 2021.
Segment operating income
. Food Ingredients operating income was $93.2 million for the six months ended July 2, 2022, an increase of $24.5 million or 35.7% as compared to the six months ended July 3, 2021. The increase is primarily due to higher sales prices and sales volumes in collagen markets that more than offset higher energy prices as compared to fiscal 2021.
Fuel Ingredients Segment
Raw material volume.
In the six months ended July 2, 2022, the raw material processed by the Company's Fuel Ingredients segment totaled approximately 692,000 metric tons. Compared to the six months ended July 3, 2021, overall raw material volume processed in the Fuel Ingredients segment increased approximately 7.8%. The increase is primarily due to the acquisition of Group Op de Beeck.
Sales.
Net sales increased in the Fuel Ingredients segment primarily due to higher sales prices and volumes in Europe, which were offset by foreign currency losses.
Margins.
In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the six months ended July 2, 2022, the gross margin percentage decreased to 21.3% as compared to 25.1% for the comparable period of fiscal 2021. The decrease is primarily due to higher raw material costs and higher energy prices as compared to fiscal 2021.
Segment operating income
. The Company's Fuel Ingredients segment operating income (inclusive of the equity contribution from the DGD Joint Venture) for the six months ended July 2, 2022 was $175.5 million, a decrease of $81.6 million or (31.7)% as compared to the same period in fiscal 2021. The decrease is primarily attributed to higher raw material costs at DGD, a catalyst turnaround at DGD during the first quarter of fiscal 2022 and also due to lower values for LCFS credits that more than offset higher blenders tax credits and higher fuel and RIN prices as compared to the same period in fiscal 2021.
Foreign Currency Exchange
During the first six months of fiscal 2022, the euro and Canadian dollar weakened against the U.S. dollar as compared to the same period in fiscal 2021. Using actual results for the six months ended July 2, 2022 and using the prior year's average currency rate for the six months ended July 3, 2021, foreign currency translation would result in an increase in operating income of approximately $23.2 million. The average rate assumptions used in this calculation were the actual fiscal average rates for the six months ended July 2, 2022 of €1.00:$1.09 and C$1.00:$0.79 as compared to the average rates for the six months ended July 3, 2021 of €1.00:$1.20 and C$1.00:$0.80, respectively.
Corporate Activities
Selling, General and Administrative Expenses.
Selling, general and administrative expenses were approximately $30.8 million during the six months ended July 2, 2022, compared to approximately $28.9 million during the six months ended July 3, 2021, an increase of $1.9 million. The increase is primarily due to higher costs for information technology, legal, and travel that more than offset a decrease in corporate related benefits.
Acquisition and Integration costs.
Acquisition and integration costs were approximately $9.1 million during the six months ended July 2, 2022 as compared to no costs for the same period in fiscal 2021. These include costs related to the Company's acquisition of Valley Proteins, Group Op de Beeck and the FASA Group as well as other potential future acquisitions.
Depreciation and Amortization.
Depreciation and amortization charges were approximately $5.6 million during both the six months ended July 2, 2022 and July 3, 2021.
Interest Expense.
Interest expense was $39.6 million during the six months ended July 2, 2022, compared to $31.7 million during the six months ended July 3, 2021, an increase of $7.9 million. The increase in interest expense is primarily due to an increase in debt outstanding including increased interest expense from the issuance of the 6% Senior Notes due
43
2030, the borrowing of all amounts under the term A-1 and term A-2 facilities and higher borrowings under the revolving credit facility as compared to the same period in fiscal 2021.
Foreign Currency Loss.
Foreign currency losses were $5.5 million for the six months ended July 2, 2022 as compared to foreign currency losses of $1.1 million for the six months ended July 3, 2021. The increase in currency losses is due primarily to increased losses on derivatives offset by the revaluation of non-functional currency assets and liabilities as compared to the same period in fiscal 2021.
Other Expense, net.
Other expense was $1.0 million in the six months ended July 2, 2022, compared to other expense of $2.4 million for the six months ended July 3, 2021. The decrease in other expense was primarily due to a decrease in the non-service component of pension expense and an increase in interest income as compared to the same period in fiscal 2021.
Equity in Net Income in Investment of Other Unconsolidated Subsidiaries.
The change in this line item is not significant and primarily represents the Company's pro rata share of the net income from foreign unconsolidated subsidiaries.
Income Taxes.
The Company recorded income tax expense of $73.4 million for the six months ended July 2, 2022, compared to $83.7 million recorded in the six months ended July 3, 2021, a decrease of $10.3 million, which is primarily due to an increase in the amount of biofuel tax incentives and discrete tax benefits from stock-based compensation recognized during the six months ended July 2, 2022. The effective tax rate for the six months ended July 2, 2022 and July 3, 2021 is 15.7% and 19.2%, respectively. The effective tax rate for the six months ended July 2, 2022 differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, and discrete items, including excess tax benefits from stock-based compensation. The effective tax rate for the first six months of fiscal 2021 differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, certain taxable income inclusion items in the U.S. based on foreign earnings, and discrete items, including excess tax benefits from stock-based compensation and favorable settlements with tax authorities. The Company's effective tax rate excluding biofuel tax incentives and discrete items is 26.2% for the six months ended July 2, 2022, compared to 27.2% for the six months ended July 3, 2021.
Non-U.S. GAAP Measures
For a discussion of the reasons the Company's management believes the following Non-GAAP financial measures provide useful information to investors and the purposes for which the Company's management uses such measures, see “Results of Operations - Three Months Ended July 2, 2022 Compared to the Three Months Ended July 3, 2021 - Non-U.S. GAAP Measures.”
Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA and (Non-GAAP) Pro Forma Adjusted EBITDA
First Six Months of Fiscal 2022 As Compared to First Six Months of Fiscal 2021
44
| Six Months Ended | ||||||||
| (dollars in thousands) |
July 2,
2022 |
July 3,
2021 |
||||||
| Net income attributable to Darling | $ | 390,049 | $ | 348,348 | ||||
| Depreciation and amortization | 172,359 | 157,756 | ||||||
| Interest expense | 39,611 | 31,696 | ||||||
| Income tax expense | 73,416 | 83,687 | ||||||
| Restructuring and asset impairment charges | 8,557 | 778 | ||||||
| Acquisition and integration costs | 9,131 | — | ||||||
| Foreign currency loss | 5,512 | 1,094 | ||||||
| Other expense, net | 1,044 | 2,357 | ||||||
| Equity in net income of Diamond Green Diesel | (145,484) | (228,013) | ||||||
| Equity in net income of other unconsolidated subsidiaries | (3,632) | (2,552) | ||||||
| Net income attributable to non-controlling interests | 5,511 | 3,139 | ||||||
| Darling's Adjusted EBITDA | $ | 556,074 | $ | 398,290 | ||||
| Foreign currency exchange impact (1) | 23,155 | — | ||||||
| Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) | $ | 579,229 | $ | 398,290 | ||||
| DGD Joint Venture Adjusted EBITDA (Darling's Share) | $ | 177,171 | $ | 240,201 | ||||
| Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA | $ | 733,245 | $ | 638,491 | ||||
(1) The average rates assumption used in this calculation was the actual fiscal average rate for the six months ended July 2, 2022 of €1.00:$1.09 and C$1.00:$0.79 as compared to the average rate for the six months ended July 3, 2021 of €1.00:$1.20 and C$1.00:$0.80, respectively.
FINANCING, LIQUIDITY AND CAPITAL RESOURCES
Credit Facilities
Indebtedness
Certain Debt Outstanding at July 2, 2022.
On July 2, 2022, debt outstanding under the Company's Amended Credit Agreement, the Company's 6% Notes, the Company's 5.25% Notes and the Company's 3.625% Notes consists of the following (in thousands):
45
| Senior Notes: | |||||
| 6 % Notes due 2030 | $ | 750,000 | |||
| Less unamortized deferred loan costs | (9,397) | ||||
| Carrying value of 6% Notes due 2030 | $ | 740,603 | |||
| 5.25 % Notes due 2027 | $ | 500,000 | |||
| Less unamortized deferred loan costs | (4,548) | ||||
| Carrying value of 5.25% Notes due 2027 | $ | 495,452 | |||
| 3.625 % Notes due 2026 - Denominated in euros | $ | 537,506 | |||
| Less unamortized deferred loan costs | (4,142) | ||||
| Carrying value of 3.625% Notes due 2026 | $ | 533,364 | |||
| Amended Credit Agreement: | |||||
| Term A-1 facility | $ | 400,000 | |||
| Less unamortized deferred loan costs | (809) | ||||
| Carrying value of Term A-1 facility | $ | 399,191 | |||
| Term A-2 facility | $ | 500,000 | |||
| Less unamortized deferred loan costs | (1,167) | ||||
| Carrying value of Term A-2 facility | $ | 498,833 | |||
| Term Loan B | $ | 200,000 | |||
| Less unamortized deferred loan costs | (1,618) | ||||
| Carrying value of Term Loan B | $ | 198,382 | |||
| Revolving Credit Facility: | |||||
| Maximum availability | $ | 1,500,000 | |||
| Ancillary Facilities | 50,134 | ||||
| Borrowings outstanding | — | ||||
| Letters of credit issued | 3,858 | ||||
| Availability | $ | 1,446,008 | |||
|
Other Debt
|
$ | 48,004 | |||
During the first six months of fiscal 2022, the U.S. dollar strengthened as compared to the euro at January 1, 2022. Using the euro based debt outstanding at July 2, 2022 and comparing the closing balance sheet rate at July 2, 2022 to the balance sheet rate at January 1, 2022, the U.S. dollar debt balances of euro based debt decreased by approximately $45.5 million at July 2, 2022. The closing balance sheet rate assumption used in this calculation was the actual fiscal closing balance sheet rate at July 2, 2022 of €1.00:$1.0437 as compared to the closing balance sheet rate at January 1, 2022 of €1.00:$1.13200.
Senior Secured Credit Facilities
. On January 6, 2014, Darling, Darling International Canada Inc. (“Darling Canada”) and Darling International NL Holdings B.V. (“Darling NL”) entered into a Second Amended and Restated Credit Agreement (as subsequently amended, the “Amended Credit Agreement”), restating its then existing Amended and Restated Credit Agreement dated September 27, 2013, with the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents from time to time party thereto. Effective March 2, 2022, the Company, and certain of its subsidiaries entered into an amendment (the "Eighth Amendment") with its lenders to the Amended Credit Agreement. Among other things, the Eighth Amendment (a) added a new delayed draw incremental term facility (the “term A-2 facility”) and new incremental term loans pursuant thereto, in an aggregate principal amount of up to $500.0 million, which is available to the Company for general corporate purposes, including acquisitions and capital expenditures, and will mature on December 9, 2026 and (b) updated and modified certain other terms and provisions of the Amended Credit Agreement to reflect the addition of the term A-2 facility to the Amended Credit Agreement. The Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of $2.925 billion comprised of (i) the Company's $525.0 million term loan B facility, (ii) the Company's $400.0 million delayed draw term A-1 loan, (iii) the Company's $500.0 million delayed draw term A-2 loan and (iv) the Company's $1.5 billion five-year revolving loan facility (up to $150.0 million of which will be available for a letter of credit subfacility and $50.0 million of which will be available for a swingline sub-facility) (collectively, the “Senior Secured Credit Facilities”). The Amended Credit Agreement also permits Darling and the other borrowers thereunder to incur ancillary facilities provided by any revolving lender party to the Senior Secured Credit Facilities (with certain restrictions). Up to $1.46 billion of the revolving loan facility is available to be borrowed by Darling, Darling Canada, Darling NL, Darling Ingredients International Holding B.V. (“Darling BV”), Darling GmbH, and Darling Belgium in U.S. dollars, Canadian dollars, euros,
46
Sterling and other currencies to be agreed and available to each applicable lender. The remaining $40.0 million must be borrowed in U.S. dollars only by Darling. The revolving loan facility will mature on December 9, 2026. The revolving credit facility will be used for working capital needs, general corporate purposes and other purposes not prohibited by the Amended Credit Agreement.
•
As of July 2, 2022, the Company had availability of $1,446.0 million under the revolving credit facility, taking into account that the Company had no outstanding borrowings, $50.1 million in ancillary facilities and letters of credit issued of $3.9 million.
•
As of July 2, 2022, the Company has borrowed all $400.0 million under the terms of the term A-1 facility and has made no repayments. Amounts borrowed under the term A-1 facility that are repaid by the Company cannot be reborrowed. The term A-1 facility borrowings are repayable in quarterly installments of 0.25% of the aggregate principle amount of the relevant term A-1 facility on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter following the second anniversary of December 9, 2021 and continuing until the last day of such quarterly period ending immediately prior to the term A-1 facility maturity date of December 9, 2026 and one final installment in the amount of the term A-1 facility then outstanding, due and payable on December 9, 2026.
•
As of July 2, 2022, the Company has borrowed all $500.0 million under the terms of the term A-2 facility and has made no repayments. Amounts borrowed under the term A-2 facility that are repaid by the Company cannot be reborrowed. The term A-2 facility borrowings are repayable in quarterly installments of 0.625% of the aggregate principle amount of the relevant term A-2 facility on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter following the borrowings or September 30, 2022 and continuing until the last day of such quarterly period ending March 31, 2025, and quarterly installments of 1.25% of the aggregate principle amount of the relevant term A-2 facility due and payable on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter ending June 30, 2025 and continuing until the last day of such quarterly period ending immediately prior to the term A-2 facility maturity date of December 9, 2026 and one final installment in the amount of the term A-2 facility then outstanding, due and payable on December 9, 2026.
•
As of July 2, 2022, the Company has borrowed all $525.0 million under the terms of the term loan B facility and repaid $325.0 million, which when repaid, cannot be reborrowed. As a result of early payments made by the Company under the term loan B facility only one final installment of the relevant term loan B facility then outstanding is due on December 18, 2024. The term loan B facility will mature on December 18, 2024.
•
The interest rate applicable to any borrowings under the revolving loan facility will equal the adjusted term secured overnight financing rate (SOFR) for U.S. dollar borrowings or the adjusted euro interbank rate (EURIBOR) for euro borrowings or the adjusted daily simple Sterling overnight index average (SONIA) for British pound borrowings or CDOR for Canadian dollar borrowings plus 1.25% per annum or base rate or the adjusted term SOFR for U.S. dollar borrowings or Canadian prime rate for Canadian dollar borrowings or the adjusted daily simple European short term rate (ESTR) for euro borrowings or the adjusted daily SONIA rate for British pound borrowings plus 0.25% per annum subject to certain step-ups or step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowing under the delayed draw term A-1 facility will equal the adjusted term SOFR plus a minimum of 1.50% per annum subject to certain step-ups based on the Company's total leverage ratio. The interest rate applicable to any borrowing under the delayed draw term A-2 facility will equal the adjusted term SOFR plus 1.25% per annum subject to certain step-ups and step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal the base rate plus 1.00% or LIBOR plus 2.00%.
6% Senior Notes due 2030.
On June 9, 2022, Darling issued and sold $750.0 million aggregate principal amount of 6% Senior Notes due 2030 (the “6% Notes”). The 6% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of June 9, 2022 (the “6% Indenture”), among Darling, the subsidiary guarantors party thereto from time to time, and Truist Bank, as trustee. The 6% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than foreign subsidiaries) that are borrowers under or that guarantee the Senior Secured Credit Facilities.
5.25 % Senior Notes due 2027.
On April 3, 2019, Darling issued and sold $500.0 million aggregate principal amount of 5.25% Senior Notes due 2027 (the “5.25% Notes”). The 5.25% Notes, which were offered in a private offering,
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were issued pursuant to a Senior Notes Indenture, dated as of April 3, 2019 (the “5.25% Indenture”), among Darling, the subsidiary guarantors party thereto from time to time, and Regions Bank, as trustee. The 5.25% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than foreign subsidiaries) that are borrowers under or that guarantee the Senior Secured Credit Facilities.
3.625% Senior Notes due 2026.
On May 2, 2018, Darling Global Finance B.V. issued and sold €515.0 million aggregate principal amount of 3.625% Senior Notes due 2026 (the “3.625% Notes”). The 3.625% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of May 2, 2018 (the “3.625% Indenture”), among Darling Global Finance B.V., Darling, the subsidiary guarantors party thereto from time to time, Citibank, N.A., London Branch, as trustee and principal paying agent, and Citigroup Global Markets Deutschland AG, as principal registrar. The 3.625% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than any foreign subsidiary or any receivable entity) that guarantee the Senior Secured Credit Facilities.
Other debt consists of European overdraft ancillary facilities and finance lease obligations, note arrangements in Brazil, China and European notes that are not part of the Company's Amended Credit Agreement, 6% Notes, 5.25% Notes or 3.625% Notes.
The classification of long-term debt in the Company’s July 2, 2022 consolidated balance sheet is based on the contractual repayment terms of the 6% Notes, the 5.25% Notes, the 3.625% Notes and debt issued under the Amended Credit Agreement.
On August 1, 2022, the Company paid approximately R$2.9 billion Brazilian Real in cash (approximately $562.6 million USD at the exchange rate in effect on the closing date) for all the shares of the FASA Group, the largest independent rendering company in Brazil, subject to post closing adjustments and a contingent payment based on future earnings growth. The Company financed this transaction by borrowing approximately $515.0 million of revolver borrowings under the Company's Amended Credit Agreement with the remainder coming from cash on hand.
As a result of the Company's borrowings under its Amended Credit Agreement, the 6% Indenture, the 5.25% Indenture and the 3.625% Indenture, the Company is highly leveraged. Investors should note that, in order to make scheduled payments on the indebtedness outstanding under the Amended Credit Agreement, the 6% Notes, the 5.25% Notes and the 3.625% Notes, and otherwise, the Company will rely in part on a combination of dividends, distributions and intercompany loan repayments from the Company's direct and indirect U.S. and foreign subsidiaries. The Company is prohibited under the Amended Credit Agreement, the 6% Indenture, the 5.25% Indenture and the 3.625% Indenture from entering (or allowing such subsidiaries to enter) into contractual limitations on the Company's subsidiaries’ ability to declare dividends or make other payments or distributions to the Company. The Company has also attempted to structure the Company's consolidated indebtedness in such a way as to maximize the Company's ability to move cash from the Company's subsidiaries to Darling or another subsidiary that will have fewer limitations on the ability to make upstream payments, whether to Darling or directly to the Company's lenders as a Guarantor. Nevertheless, applicable laws under which the Company's direct and indirect subsidiaries are formed may provide limitations on such dividends, distributions and other payments. In addition, regulatory authorities in various countries where the Company operates or where the Company imports or exports products may from time to time impose import/export limitations, foreign exchange controls or currency devaluations that may limit the Company's access to profits from the Company's subsidiaries or otherwise negatively impact the Company's financial condition and therefore reduce the Company's ability to make required payments under the Amended Credit Agreement, the 6% Notes, the 5.25% Notes and the 3.625% Notes, or otherwise. In addition, fluctuations in foreign exchange values may have a negative impact on the Company's ability to repay indebtedness denominated in U.S. or Canadian dollars or euros. See
“Risk Factors - Our business may be adversely impacted by fluctuations in exchange rates, which could affect our ability to comply with our financial covenants”
and
“- Our ability to repay our indebtedness depends in part on the performance of our subsidiaries, including our non-guarantor subsidiaries, and their ability to make payments”
in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022 as filed with the SEC on March 1, 2022.
As of July 2, 2022, the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 6% Indenture, the 5.25% Indenture and the 3.625% Indenture.
Working Capital and Capital Expenditures
On July 2, 2022, the Company had working capital of $542.0 million and its working capital ratio was 1.59 to 1 compared to working capital of $336.3 million and a working capital ratio of 1.45 to 1 on January 1, 2022. As of July 2,
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2022, the Company had unrestricted cash of $146.7 million and funds available under the revolving credit facility of $1,446.0 million, compared to unrestricted cash of $68.9 million and funds available under the revolving credit facility of $1,285.9 million at January 1, 2022. The Company diversifies its cash investments by limiting the amounts deposited with any one financial institution.
Net cash provided by operating activities was $361.0 million for the first six months ended July 2, 2022, as compared to net cash provided by operating activities of $297.9 million for the first six months ended July 3, 2021, an increase of $63.1 million due primarily to an increase in net income and the effect from equity in net income of the DGD Joint Venture. Additionally, changes in operating assets and liabilities impacted cash provided by operating activities, which includes an approximately $12.1 million decrease in cash provided by accounts receivable, an approximately $55.2 million decrease in cash provided by inventory and prepaid expense, an approximately $69.6 million increase in cash provided by accounts payable and accrued expenses, an approximately $37.9 million decrease in income taxes refundable/payable and an approximately $32.8 million decrease in cash provided by other primarily from an increase in hedging activities. Cash used in investing activities was $1,624.8 million for the first six months ended July 2, 2022, compared to $129.9 million for the first six months ended July 3, 2021, an increase in cash used in investing activities of $1,494.9 million, primarily due to acquisitions and capital contributions to the DGD Joint Venture. Net cash provided in financing activities was $1,357.6 million for the first six months ended July 2, 2022, compared to net cash used in financing activities of $170.9 million for the first six months ended July 3, 2021, an increase in net cash provided in financing activities of $1,528.5 million, primarily due to an increase in debt borrowings in the first six months ended July 2, 2022 compared to the first six months ended July 3, 2021.
Capital expenditures of $151.5 million were made during the first six months of fiscal 2022, compared to $126.1 million in the first six months of fiscal 2021. The Company expects to incur additional capital expenditures of approximately $231 million for the remainder of fiscal 2022 including compliance and expansion projects and spending related to acquired companies. The Company intends to finance these costs using cash flows from operations. Capital expenditures related to compliance with environmental regulations were $16.9 million and $13.9 million during the first six months ended July 2, 2022 and July 3, 2021, respectively.
Accrued Insurance and Pension Plan Obligations
Based upon the annual actuarial estimate, current accruals and claims paid during the first six months of fiscal 2022, the Company has accrued approximately $18.8 million it expects will become due during the next twelve months in order to meet obligations related to the Company’s self insurance reserves and accrued insurance obligations, which are included in current accrued expenses at July 2, 2022. The self insurance reserve is composed of estimated liability for claims arising for workers’ compensation, auto liability and general liability claims. The self insurance reserve liability is determined annually, based upon a third party actuarial estimate. The actuarial estimate may vary from year to year due to changes in cost of health care, the pending number of claims or other factors beyond the control of management of the Company.
Based upon current actuarial estimates, the Company expects to contribute approximately $0.3 million to its domestic pension plans in order to meet minimum pension funding requirements during the next twelve months. In addition, the Company expects to make payments of approximately $3.4 million under its foreign pension plans in the next twelve months. The minimum pension funding requirements are determined annually, based upon a third party actuarial estimate. The actuarial estimate may vary from year to year due to fluctuations in return on investments or other factors beyond the control of management of the Company or the administrator of the Company’s pension funds. No assurance can be given that the minimum pension funding requirements will not increase in the future. The Company has made tax deductible discretionary and required contributions to its domestic pension plans for the first six months ended July 2, 2022 of approximately $0.1 million. Additionally, the Company has made required and tax deductible discretionary contributions to its foreign pension plans for the first six months ended July 2, 2022 of approximately $1.4 million.
The U.S. Pension Protection Act of 2006 (“PPA”) went into effect in January 2008. The stated goal of the PPA is to improve the funding of U.S. pension plans. U.S. plans in an under-funded status are required to increase employer contributions to improve the funding level within PPA timelines. Volatility in the world equity and other financial markets, including that associated with the current COVID-19 outbreak and the Russia-Ukraine war, could have a material negative impact on U.S. pension plan assets and the status of required funding under the PPA. The Company participates in various U.S. multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants. The Company's contributions to each individual U.S. multiemployer plan represent less than 5% of the total contributions to each plan.
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Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities for two of the U.S. plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone under PPA guidelines. With respect to the other U.S. multiemployer pension plans in which the Company participates and which are not individually significant, five plans have certified as critical or red zone and one has certified as endangered or yellow zone as defined by the PPA. The Company currently has withdrawal liabilities recorded on three U.S. multiemployer plans in which it participated. As of July 2, 2022, the Company has an aggregate accrued liability of approximately $3.9 million representing the present value of scheduled withdrawal liability payments on the multiemployer plans that have given notice of withdrawal. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require
additional funding under the PPA, the amounts could be material.
DGD Joint Venture
In January 2011, Darling, through a wholly-owned subsidiary, entered into a limited liability company agreement (as subsequently amended, the “DGD LLC Agreement”) with Valero to form the DGD Joint Venture. The DGD Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant located adjacent to Valero's refinery in Norco, Louisiana (the “DGD Norco Facility”). The DGD Norco Facility reached mechanical completion and began the production of renewable diesel and certain other co-products in late June 2013. In October 2021, the DGD Joint Venture completed an expansion of the DGD Norco Facility that increased its renewable diesel production capability to up to 750 million gallons per year of renewable diesel, as well as separating renewable naphtha (approximately 30 million gallons) and other light end renewable hydrocarbons for sale into low carbon fuel markets. The expansion of the DGD Norco Facility was completed and became operational in October 2021, at a total cost, including naphtha production and improved logistics capability, of approximately $1.1 billion, which was substantially funded by DGD Joint Venture cash flow. Additionally, in January 2021, we and our DGD Joint Venture partner approved the construction of a new facility to be located next to Valero’s Port Arthur Refinery in Port Arthur, Texas, capable of producing 470 million gallons per year of renewable diesel and 20 million gallons per year of renewable naphtha and having similar logistics flexibilities as those of the DGD Norco Facility. Construction is underway, and the new plant is anticipated to commence operations in the fourth quarter of 2022, with the total cost of the expansion project estimated to be approximately $1.45 billion. Once operational, the new plant is expected to increase the DGD Joint Venture’s total renewable diesel production capacity to approximately 1.2 billion gallons per year. Based on forecasted margins as of the date of this report, the remaining capital expenditures at the Port Arthur expansion project are expected to be primarily funded by DGD Joint Venture cash flow; however, if the DGD Joint Venture cash flow is not sufficient to fund the remaining project costs, the DGD Joint Venture may need to borrow funds or the joint venture partners may be required to contribute additional funds to complete the project.
On May 1, 2019, Darling, through its wholly owned subsidiary Darling Green Energy LLC, (“Darling Green”), and Diamond Alternative Energy, LLC, a wholly owned subsidiary of Valero (“Diamond Alternative” and together with Darling Green, the “DGD Lenders”) entered into a revolving loan agreement (the “DGD Loan Agreement”) with the DGD Joint Venture. The DGD Lenders have committed to make loans available to the DGD Joint Venture in the total amount of $50.0 million with each lender committed to $25.0 million of the total commitment. Any borrowings by the DGD Joint Venture under the DGD Loan Agreement are at the applicable annum rate equal to the sum of (a) the LIBO Rate (meaning Reuters BBA Libor Rates Page 3750) on such day plus (b) 2.50%. The DGD Loan Agreement matures on April 29, 2023, unless extended by agreement of the parties. During the fourth quarter of fiscal 2021, the DGD Joint Venture borrowed all $50.0 million available under the DGD Loan Agreement, including the Company's full $25.0 million commitment and paid interest to the Company for the six months ended July 2, 2022 of approximately $0.4 million. As of July 2, 2022, $25.0 million was owed to Darling Green under the DGD Loan Agreement. Subsequent to July 2, 2022, the DGD Joint Venture repaid all $50.0 million outstanding under the DGD Loan Agreement including the Company's full $25.0 million commitment together with interest.
On March 30, 2021, the DGD Joint Venture entered into a $400.0 million senior, unsecured revolving credit facility, with CoBank ACB acting as lead arranger and the administrative agent for the lending group, which is comprised of Farm Credit System institutions. The revolving credit facility matures March 30, 2024 and is non-recourse to the joint venture partners. As of July 2, 2022, the DGD Joint Venture has borrowings outstanding of $100.0 million under this unsecured revolving credit facility.
Based on the sponsor support agreements executed in connection with the initial construction of the DGD Norco Facility, the Company contributed a total of approximately $111.7 million for initial completion of the DGD Norco Facility including the Company's portion of cost overruns and working capital funding. In fiscal year 2021, each joint partner contributed a total of approximately $189.0 million and in the six months ended July 2, 2022, each joint venture partner
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made additional capital contributions of approximately $239.75 million to the DGD Joint Venture. As of July 2, 2022, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $1,702.2 million included on the consolidated balance sheet. On August 5, 2022, each joint venture partner received a dividend distribution of approximately $90.5 million from the DGD Joint Venture.
The Company’s original investment in DGD has expanded since 2011 to the point that it is now integral to how Darling operates its business. Darling traditionally collected and converted used cooking oil and animal fats into feed ingredients which were sold on a caloric value to feed animals as well as for industrial technical uses. Over the past decade, the world’s increasing focus on climate change and greenhouse gas has provided a new finished market for the Company’s finished fats ingredients. With Darling’s significant fats ownership, this has and continues to transform how Darling operates. In 2021, a large portion of Darling’s total U.S. finished fats products were sold to the DGD Norco Facility as feedstock for renewable diesel. In 2021, DGD was Darling’s largest finished product customer in terms of net sales, with Darling recording sales of approximately $521.7 million to DGD or 11% of total net sales.
From a procurement, production and distribution standpoint, DGD has become integral to Darling’s base business. DGD is integrated to the Company’s operations via the combined vertical operating structure from collecting raw fats, to processing collected fats at Darling facilities nationwide to transporting the refined fats to the DGD Norco Facility as feedstock. The Darling supply chain has become more efficient and sustainable with transparency for verification to obtain full value to low carbon intensity markets. The development of the low carbon markets in North America and Europe has influenced how Darling operates its core business and has also been a driver for the recent DGD expansions, which are making DGD much more relevant to Darling’s earnings. Since 2011 when construction began on DGD, Darling has invested substantially to increase its U.S. railcar fleet to efficiently manage nationwide transportation of Darling fats to DGD. Additionally, Darling acquired an Iowa location on the Mississippi River that further enhances the ability of the Company's Midwest network of facilities to collect and deliver feedstocks to DGD via water, rail or truck from a centralized location. Darling has also stepped up collection efforts by providing indoor used cooking oil collection units in exchange for extended collection contracts at eating establishments and has moved to more of a centralized digital marketing effort with restaurant chains and franchise groups and invested in internet search engine key words to improve visibility with restaurants. The Company also includes DGD in marketing efforts to emphasize environmental sustainability that restaurants participate in when their used cooking oil is collected by Darling. From a production standpoint, Darling now isolates used cooking oil from other fats to preserve identification to qualify for a higher carbon intensity value. As a result, the Company includes its equity in net income of the DGD Joint Venture as operating income.
Financial Impact of Significant Debt Outstanding
The Company has a substantial amount of indebtedness, which could make it more difficult for the Company to satisfy its obligations to its financial lenders and its contractual and commercial commitments, limit the Company's ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements on commercially reasonable terms or at all, require the Company to use a substantial portion of its cash flows from operations to pay principal and interest on its indebtedness instead of other purposes, thereby reducing the amount of the Company's cash flows from operations available for working capital, capital expenditures, acquisitions and other general corporate purposes, increase the Company's vulnerability to adverse economic, industry and business conditions, expose the Company to the risk of increased interest rates as certain of the Company's borrowings are at variable rates of interest, limit the Company's flexibility in planning for, or reacting to, changes in the Company's business and the industry in which the Company operates, place the Company at a competitive disadvantage compared to other, less leveraged competitors, and/or increase the Company's cost of borrowing.
Cash Flows and Liquidity Risks
Management believes that the Company’s cash flows from operating activities, unrestricted cash and funds available under the Amended Credit Agreement, will be sufficient to meet the Company’s working capital needs and maintenance and compliance-related capital expenditures, scheduled debt and interest payments, income tax obligations, and other contemplated needs through the next twelve months. Numerous factors could have adverse consequences to the Company that cannot be estimated at this time, such as negative impacts from the current COVID-19 outbreak and the Russia-Ukraine war and those other factors discussed below under the heading “Forward Looking Statements”. These factors, coupled with volatile prices for natural gas and diesel fuel, currency exchange fluctuations, general performance of the U.S. and global economies, disturbances in world financial, credit, commodities and stock markets, and any decline in consumer confidence, including the inability of consumers and companies to obtain credit due to lack of liquidity in the financial markets, among others, could negatively impact the Company’s results of operations in fiscal year 2022 and thereafter. The Company reviews the appropriate use of unrestricted cash periodically. As of the date of this report, no
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decision has been made as to non-ordinary course material cash usages at this time; however, potential usages could include: opportunistic capital expenditures and/or acquisitions and joint ventures; investments relating to the Company’s renewable energy strategy, including, without limitation, potential required funding obligations with respect to the DGD Joint Venture expansion project or potential investments in additional renewable diesel and/or biofuel projects; investments in response to governmental regulations relating to climate change, human and animal food safety or other regulations; unexpected funding required by the legislation, regulation or mass termination of multiemployer plans; and paying dividends or repurchasing stock, subject to limitations under the Amended Credit Agreement, the 6% Notes, the 5.25% Notes and the 3.625% Notes, as well as suitable cash conservation to withstand adverse commodity cycles. The Company's Board of Directors has approved a share repurchase program of up to an aggregate of $500.0 million of the Company's Common Stock depending on market conditions. The repurchases may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. The program runs through August 13, 2024, unless further extended or shortened by the Board of Directors. During the first six months of fiscal 2022, the Company has repurchased approximately $65.9 million of its common stock in the open market. As of July 2, 2022, the Company had approximately $434.1 million remaining in its share repurchase program. Subsequent to July 2, 2022, the Company repurchased approximately $29.3 million, including commissions of its common stock in the open market.
Each of the factors described above has the potential to adversely impact the Company's liquidity in a variety of ways, including through reduced raw materials availability, reduced finished product prices, reduced sales, potential inventory buildup, increased bad debt reserves, potential impairment charges and/or higher operating costs.
Sales prices for the principal products that the Company sells are typically influenced by sales prices for agricultural-based alternative ingredients, the prices of which are based on established commodity markets and are subject to volatile changes. Any decline in these prices has the potential to adversely impact the Company's liquidity. Any of a decline in raw material availability, a decline in agricultural-based alternative ingredients prices, increases in energy prices or the impact of U.S. and foreign regulation (including, without limitation, China), changes in foreign exchange rates, imposition of currency controls and currency devaluations has the potential to adversely impact the Company's liquidity. A decline in commodities prices, a rise in energy prices, a slowdown in the U.S. or international economy or other factors could cause the Company to fail to meet management's expectations or could cause liquidity concerns.
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Based upon the underlying purchase agreements, the Company has commitments to purchase $322.0 million of commodity products consisting of approximately $118.2 million of finished products, approximately $185.0 million of natural gas and diesel fuel and approximately $18.8 million of other commitments during the next five years, which are not included in liabilities on the Company’s balance sheet at July 2, 2022. The Company intends to take physical delivery of the commodities under the forward purchase agreements and accordingly, these contracts are not subject to the requirements of derivative accounting because they qualify as normal purchases. The commitments will be recorded on the balance sheet of the Company when delivery of these commodities or products occurs and ownership passes to the Company during the remainder of fiscal 2022 and through fiscal 2026, in accordance with accounting principles generally accepted in the United States.
The following table summarizes the Company’s other commercial commitments, including both on- and off-balance sheet arrangements that are part of the Company's Amended Credit Agreement and other foreign and domestic bank guarantees that are not a part of the Company's Amended Credit Agreement at July 2, 2022 (in thousands):
| Other commercial commitments: | |||||
| Standby letters of credit | $ | 3,858 | |||
| Standby letters of credit (ancillary facility) | 27,400 | ||||
| Foreign and domestic bank guarantees | 22,004 | ||||
| Total other commercial commitments: | $ | 53,262 | |||
CRITICAL ACCOUNTING POLICIES
The Company follows certain significant accounting policies when preparing its consolidated financial statements. A complete summary of these policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022, filed with the SEC on March 1, 2022.
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Business Combinations
The Company accounts for its business combinations using the acquisition method of accounting when the activities acquired have been determined to be a business. The consideration transferred in a business combination is measured at fair value, which is determined as the sum of the acquisition-date fair values of the assets transferred, liabilities incurred by the Company and any equity interests issued by the Company. The consideration transferred is allocated to the tangible and intangible assets acquired and liabilities assumed at their estimated fair value on the acquisition date. The excess of fair value is recorded as goodwill. The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of acquisition. Acquisition costs are expensed as incurred.
Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates. Depending on the acquisition size, the Company determines the fair values using the assistance of a valuation expert who assists the Company primarily using the cost, market and income approaches and using estimates of future revenue and cash flows, discount rates and the selection of comparable companies. The Company's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of the acquisition, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statement of operations.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 22, “New Accounting Pronouncements,” to the consolidated financial statements for a description of new accounting pronouncements.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking” statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements. Statements that are not statements of historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “planned,” “contemplate,” “potential,” “possible,” “proposed,” “intend,” “believe,” “anticipate,” “expect,” “may,” “will,” “would,” “should,” “could,” and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this report are forward looking statements, including, without limitation, the statements under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding industry prospects, the Company’s financial position and the Company's use of cash. Forward-looking statements are based on the Company's current expectations and assumptions regarding its business, the economy and other future conditions. The Company cautions readers that any such forward-looking statements it makes are not guarantees of future performance and that actual results may differ materially from anticipated results or expectations expressed in its forward-looking statements as a result of a variety of factors, including many that are beyond the Company's control.
In addition to those factors discussed elsewhere in this report and in the Company's other public filings with the SEC, important factors that could cause actual results to differ materially from the Company’s expectations include: existing and unknown future limitations on the ability of the Company's direct and indirect subsidiaries to make their cash flow available to the Company for payments on the Company's indebtedness or other purposes; global demands for bio-fuels and grain and oilseed commodities, which have exhibited volatility, and can impact the cost of feed for cattle, hogs and poultry, thus affecting available rendering feedstock and selling prices for the Company’s products; reductions in raw material volumes available to the Company due to weak margins in the meat production industry as a result of higher feed costs, reduced consumer demand or other factors, reduced volume from food service establishments, or otherwise; reduced demand for animal feed; reduced finished product prices, including a decline in fat and used cooking oil finished product prices; changes to worldwide government policies relating to renewable fuels and greenhouse gas (“GHG”) emissions that adversely affect programs like the U.S. government's renewable fuel standard, low carbon fuel standards (“LCFS”) and tax credits for biofuels both in the United States and abroad; possible product recall resulting from developments relating to the discovery of unauthorized adulterations to food or food additives; the occurrence of 2009 H1N1 flu (initially known as “Swine Flu”), highly pathogenic strains of avian influenza (collectively known as “Bird Flu”), severe acute respiratory syndrome (“SARS”), bovine spongiform encephalopathy (or “BSE”), porcine epidemic diarrhea (“PED”) or other diseases associated with animal origin in the United States or elsewhere, such as the outbreak of ASF in China and elsewhere; the occurrence of pandemics, epidemics or disease outbreaks, such as the current COVID-19
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outbreak; unanticipated costs and/or reductions in raw material volumes related to the Company’s compliance with the existing or unforeseen new U.S. or foreign (including, without limitation, China) regulations (including new or modified animal feed, Bird Flu, SARS, PED, BSE or ASF or similar or unanticipated regulations) affecting the industries in which the Company operates or its value added products; risks associated with the DGD Joint Venture, including possible unanticipated operating disruptions and issues relating to the ongoing expansion project; risks and uncertainties relating to international sales and operations, including imposition of tariffs, quotas, trade barriers and other trade protections imposed by foreign countries; difficulties or a significant disruption in the Company's information systems or failure to implement new systems and software successfully; risks relating to possible third party claims of intellectual property infringement; increased contributions to the Company’s pension and benefit plans, including multiemployer and employer-sponsored defined benefit pension plans as required by legislation, regulation or other applicable U.S. or foreign law or resulting from a U.S. mass withdrawal event; bad debt write-offs; loss of or failure to obtain necessary permits and registrations; continued or escalated conflict in the Middle East, North Korea, Ukraine or elsewhere, including the Russia-Ukraine war; uncertainty regarding the exit of the U.K. from the European Union; and/or unfavorable export or import markets. These factors, coupled with volatile prices for natural gas and diesel fuel, climate conditions, currency exchange fluctuations, general performance of the U.S. and global economies, disturbances in world financial, credit, commodities and stock markets, and any decline in consumer confidence and discretionary spending, including the inability of consumers and companies to obtain credit due to lack of liquidity in the financial markets, among others, could cause actual results to vary materially from the forward-looking statements included in this report or negatively impact the Company's results of operations. Among other things, future profitability may be affected by the Company’s ability to grow its business, which faces competition from companies that may have substantially greater resources than the Company. The Company's announced share repurchase program may be suspended or discontinued at any time and purchases of shares under the program are subject to market conditions and other factors, which are likely to change from time to time. For more detailed discussion of these factors see the Risk Factors discussion in Item 1A of Part I of the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2022. The Company cautions readers that all forward-looking statements speak only as of the date made, and the Company undertakes no obligation to update any forward-looking statements, whether as a result of changes in circumstances, new events or otherwise.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risks affecting the Company include exposures to changes in prices of the finished products the Company sells, interest rates on debt, availability of raw material supplies and the price of natural gas and diesel fuel used in the Company's plants. Raw materials available to the Company are impacted by seasonal factors, including holidays, when raw material volume declines; warm weather, which can adversely affect the quality of raw material processed and finished products produced; and cold weather, which can impact the collection of raw material. Predominantly all of the Company’s finished products are commodities that are generally sold at prices prevailing at the time of sale. Additionally, with the acquisition of foreign entities we are exposed to foreign currency exchange risks, imposition of currency controls and the possibility of currency devaluation.
The Company makes limited use of derivative instruments to manage cash flow risks related to natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Soybean meal forwards and options are entered into with the intent of managing the impact of changing prices for poultry meal sales. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of BBP by reducing the impact of changing prices. Foreign currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. The interest rate swaps and the natural gas swaps are subject to the requirements of FASB authoritative guidance. Some of the Company's natural gas and diesel fuel instruments are not subject to the requirements of FASB authoritative guidance because some of the natural gas and diesel fuel instruments qualify as normal purchases as defined in FASB authoritative guidance therefore not subject to fair value derivative accounting. At July 2, 2022, the Company had corn option contracts, soybean meal forward contracts and foreign exchange forward and option contracts outstanding that qualified and were designated for hedge accounting as well as corn forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.
In fiscal 2021, the Company entered into corn option contracts on the Chicago Board of Trade that are designated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the fourth quarter of fiscal 2022. As of July 2, 2022 and January 1, 2022 the aggregate fair value of these corn option contracts was approximately $2.4 million and $2.8 million, respectively. These amounts are included in
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accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss. The Company may enter into corn option contracts in the future from time to time.
In fiscal 2021 and fiscal 2022, the Company entered into foreign exchange forward and option contracts that are considered cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2023. As of July 2, 2022 and January 1, 2022, the aggregate fair value of these foreign exchange contracts was approximately $10.5 million and $0.6 million, respectively. As of July 2, 2022, approximately $10.9 million is included in other current assets, approximately $3.1 million is included in noncurrent assets, approximately $1.9 million is included in accrued expenses and approximately $1.6 million is in noncurrent liabilities, with an offset recorded in accumulated other comprehensive loss. As of January 1, 2022, approximately $2.8 million is included in other current assets and approximately $2.2 million is included in accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
In fiscal 2021 and fiscal 2022, the Company entered into soybean meal forward contracts to hedge a portion of its forecasted poultry meal sales into the fourth quarter of fiscal 2022. As of July 2, 2022 and January 1, 2022, the aggregate fair value of the soybean meal contracts was $0.1 million and $0.1 million, respectively. The amounts are included in other current assets and accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
As of July 2, 2022, the Company had the following outstanding forward and option contract amounts that were entered into to hedge foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency (in thousands):
| Functional Currency | Contract Currency | Range of | U.S. | ||||||||||||||||||||
| Type | Amount | Type | Amount | Hedge rates | Equivalent | ||||||||||||||||||
| Brazilian real | 2,599 | Euro | 468 | 5.55 | $ | 490 | |||||||||||||||||
| Brazilian real | 3,121,236 | U.S. dollar | 746,850 | 3.35-6.63 | 746,850 | ||||||||||||||||||
| Euro | 38,298 | U.S. dollar | 41,403 | 1.06 - 1.17 | 41,403 | ||||||||||||||||||
| Euro | 26,873 | Polish zloty | 126,000 | 4.61 - 4.73 | 28,047 | ||||||||||||||||||
| Euro | 5,363 | Japanese yen | 750,820 | 129.66 - 143.73 | 5,598 | ||||||||||||||||||
| Euro | 15,349 | Chinese renminbi | 109,671 | 7.07 - 7.69 | 16,019 | ||||||||||||||||||
| Euro | 15,059 | Australian dollar | 22,350 | 1.48 - 1.52 | 15,717 | ||||||||||||||||||
| Euro | 3,274 | British pound | 2,826 | 0.86 | 3,417 | ||||||||||||||||||
| Euro | 37 | Canadian dollar | 50 | 1.37 | 38 | ||||||||||||||||||
| Euro | 500,000 | Brazilian real | 2,500,000 | 5.00 | 521,850 | ||||||||||||||||||
| Polish zloty | 2,495 | U.S. dollar | 559 | 4.46 | 559 | ||||||||||||||||||
| Polish zloty | 40,387 | Euro | 8,544 | 4.70 - 4.73 | 8,935 | ||||||||||||||||||
| British pound | 263 | Euro | 305 | 0.86 | 316 | ||||||||||||||||||
| Japanese yen | 216,550 | U.S. dollar | 1,665 | 114.67 - 134.79 | 1,665 | ||||||||||||||||||
| U.S. dollar | 482 | Japanese yen | 65,000 | 134.88 | 482 | ||||||||||||||||||
| U.S. dollar | 252,729 | Euro | 240,000 | 1.05 | 252,729 | ||||||||||||||||||
| Australian dollar | 1,495 | Euro | 986 | 1.50 - 1.59 | 1,014 | ||||||||||||||||||
| Australian dollar | 190 | U.S. dollar | 132 | 0.69 | 132 | ||||||||||||||||||
| $ | 1,645,261 | ||||||||||||||||||||||
The above foreign currency contracts that are not designated as hedges had an aggregate fair value of approximately $0.3 million and are included in other current assets and accrued expenses at July 2, 2022.
Additionally, the Company had corn forward contracts that are marked to market because they did not qualify for hedge accounting at July 2, 2022. These contracts have an aggregate fair value of approximately $1.9 million and are included in other current assets and accrued expenses at July 2, 2022.
As of July 2, 2022, the Company had forward purchase agreements in place for purchases of approximately $185.0 million of natural gas and diesel fuel and approximately $18.8 million of other commitments during the next five
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years. As of July 2, 2022, the Company had forward purchase agreements in place for purchases of approximately $118.2 million of finished product during the next five years.
Foreign Exchange
The Company has significant international operations and is subject to certain opportunities and risks, including currency fluctuations. As a result, the Company is affected by changes in foreign currency exchange rates, particularly with respect to the euro, Brazilian real, Canadian dollar, Australian dollar, Chinese renminbi, British pound, Polish zloty, and Japanese yen.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
As required by Rule 13a-15(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), the Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Based on management’s evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
. As required by Exchange Act Rule 13a-15(d), the Company’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any change occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no change in the Company’s internal control over financial reporting during the last fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting.
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DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 2, 2022
PART II: Other Information
Item 1. LEGAL PROCEEDINGS
The information required by this Item 1 is contained within Note 17 (Contingencies) on pages 24 through 25 of this Form 10-Q and is incorporated herein by reference.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties that are not currently known or that are currently deemed to be immaterial may also materially and adversely affect our business operations and financial condition or the market price of our common stock.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 9, 2021, the Company’s Board of Directors approved the extension for an additional two years ending August 13, 2024 of its previously announced share repurchase program and refreshed and increased the amount of the program up to an aggregate of $500.0 million of the Company's common stock depending on market conditions. During the first six months of fiscal 2022, the Company repurchased approximately $65.9 million, including commissions, worth of its common stock in the open market. As of July 2, 2022, the Company had approximately $434.1 million remaining under the share repurchase program initially approved in August 2017 and subsequently extended to August 13, 2024.
The following table is a summary of equity securities purchased by the Company during the second quarter of fiscal 2022.
| ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||||||||||||
| Period |
Total Number of Shares Purchased
(1)
|
Average Price Paid per Share
(2)
|
Total Number of Shares Purchased as part of Publicly Announced Plans or Programs
(4)
|
Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plan or Programs at End of Period. | ||||||||||||||||||||||
| April 2022: | ||||||||||||||||||||||||||
| April 3, 2022 through April 30, 2022 | 5,392 | 79.57 | — | $ | 482,816,622 | |||||||||||||||||||||
| May 2022: | ||||||||||||||||||||||||||
| May 1, 2022 through May 28, 2022 | 32,277 | 77.87 | — | 482,816,622 | ||||||||||||||||||||||
| June 2022: | ||||||||||||||||||||||||||
| May 29, 2022 through July 2, 2022 | 728,569 | 79.08 | 700,174 | 434,132,893 | ||||||||||||||||||||||
| Total | 766,238 | (3) | 78.72 | 700,174 | $ | 434,132,893 | ||||||||||||||||||||
(1) All shares purchased during the second quarter were acquired by the Company pursuant to the announced share repurchase program (other than shares withheld for taxes on restricted stock, restricted stock units, performance units and exercised options and the strike price on exercised options).
(2) The average price paid per share is calculated on a trade date basis and excludes commissions.
(3) Includes 66,064 shares withheld for the exercise of options and taxes on restricted stock, restricted stock units, performance units and options. The 700,174 shares were repurchased at an average of $69.53 per share.
(4) Represents purchases made during the quarter under the authorization from the Company's Board of Directors, as announced, to repurchase up to an aggregate of $500.0 million of the Company's common stock over the period ending August 13, 2024, unless extended or shortened by the Board of Directors.
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Item 6. EXHIBITS
The following exhibits are filed herewith:
| 4.1 | ||||||||||||||
| 31.1 | ||||||||||||||
| 31.2 | ||||||||||||||
| 32 | ||||||||||||||
| 101 | Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of July 2, 2022 and January 1, 2022; (ii) Consolidated Statements of Operations for the three and six months ended July 2, 2022 and July 3, 2021; (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended July 2, 2022 and July 3, 2021; (iv) Consolidated Statements of Stockholders' Equity for the six months ended July 2, 2022 and July 3, 2021; (v) Consolidated Statements of Cash Flows for the six months ended July 2, 2022 and July 3, 2021; (vi) Notes to the Consolidated Financial Statements. | |||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DARLING INGREDIENTS INC. | |||||||||||
| Date: | August 9, 2022 | By: | /s/ Brad Phillips | ||||||||
| Brad Phillips | |||||||||||
| Chief Financial Officer | |||||||||||
|
(Principal Financial Officer and Duly Authorized Officer)
|
|||||||||||
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TABLE OF CONTENTS
Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RisksprintItem 4. Controls and ProceduresprintPart Ii: Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint