Business Context and Reporting Period
Darling Ingredients Inc. is a global producer of sustainable ingredients from animal by-products, recycled oils and other bio-nutrients. It operates through Feed Ingredients, Food Ingredients and Fuel Ingredients, including its 50% investment in Diamond Green Diesel Holdings LLC.
This Form 10-Q covers the 13 weeks ended March 30, 2024, compared with the 13 weeks ended April 1, 2023. The request metadata references 2023 Q1, but the filing is the first quarter of fiscal 2024.
Financial Highlights
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $1.420 billion | $1.791 billion | Down 20.7% |
| Operating income | $137.2 million | $255.8 million | Down 46.4% |
| Net income attributable to Darling | $81.2 million | $185.8 million | Down 56.3% |
| Diluted earnings per share | $0.50 | $1.14 | Down $0.64 |
| Adjusted EBITDA | $165.1 million | $289.1 million | Down 42.9% |
| Operating cash flow | $263.9 million | $188.4 million | Up $75.5 million |
| Gross margin | 21.4% | 23.7% | Down 2.3 percentage points |
Net income included $78.4 million of equity income from Diamond Green Diesel, compared with $94.3 million in the prior-year quarter. Interest expense increased to $62.9 million from $50.3 million, primarily because Gelnex acquisition debt was outstanding for the full quarter, revolver borrowings increased and interest rates were higher.
The effective tax rate was 4.6%, compared with 12.4% in the prior-year period, reflecting lower pretax earnings, the geographic earnings mix and biofuel tax incentives. Adjusted EBITDA including Darling’s share of DGD Joint Venture Adjusted EBITDA was $280.1 million, compared with $418.4 million.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $145.5 million at March 30, 2024; total cash, cash equivalents and restricted cash were $292.6 million.
- Total debt was $4.466 billion, including $4.363 billion of long-term debt net of current maturities. Debt was approximately $4.427 billion at December 30, 2023.
- Revolving credit facility availability was $811.1 million, after $635.0 million of borrowings, ancillary facilities and letters of credit.
- Working capital was $652.0 million, with a current ratio of 1.67 to 1, compared with $857.5 million and 1.86 to 1 at year-end 2023.
- Capital expenditures were $93.8 million in the quarter. Management expects approximately $306 million of additional capital expenditures during the remainder of fiscal 2024, primarily funded through operating cash flow.
- Investing cash outflows were $291.0 million, including $109.9 million for acquisitions, $90.0 million invested in DGD and a $100.0 million loan to DGD that was repaid during the quarter.
- Management stated that operating cash flow, unrestricted cash and revolver availability should be sufficient for the next twelve months, subject to commodity, currency, economic and regulatory risks.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of lower finished-product commodity prices and lower Feed Ingredients volumes. Feed Ingredients sales fell to $889.8 million from $1.237 billion, and operating income fell 63.7% to $44.5 million.
- Feed Ingredients gross margin declined to 20.7% from 23.2%. Average first-quarter prices for meat and bone meal, bleachable fancy tallow, yellow grease and corn were materially lower than in Q1 2023.
- Food Ingredients sales were relatively stable at $391.3 million versus $396.4 million, but operating income fell 39.6% to $32.8 million. The decline reflected lower collagen and fat prices, higher depreciation and amortization, and a $17.9 million after-tax out-of-period inventory adjustment.
- Food Ingredients processed volume increased 13.6%, primarily from the Gelnex acquisition, but gross margin fell to 23.8% from 26.8%.
- Fuel Ingredients operating income fell 20.3% to $87.8 million. Lower diesel fuel, renewable identification number and low-carbon fuel credit values, along with a lower-of-cost-or-market reserve at DGD, more than offset higher volumes.
- Operating cash flow improved because working-capital changes, especially accounts receivable and inventory, more than offset the decline in net income.
- The Company acquired the Miropasz Group in Poland for approximately $114.3 million in cash, plus a $7.6 million acquisition holdback. Purchase accounting remains provisional.
- A $25.2 million pretax gain resulted from a reduction in the fair value of FASA contingent consideration.
- No share repurchases were made during the quarter. Approximately $321.6 million remained under the $500 million repurchase authorization at March 30, 2024.
Outlook, Risks and Unusual Items
The filing does not provide quantitative financial guidance. Management states that commodity prices, agricultural-based input prices, energy costs, raw-material availability, foreign exchange rates and government renewable-fuel policies are too volatile to support operating or financial estimates.
- DGD’s two renewable diesel facilities have combined capacity of approximately 1.2 billion gallons annually. A project to convert approximately 50% of DGD’s Port Arthur capacity to sustainable aviation fuel is expected to be completed in the fourth quarter of 2024 at an estimated total cost of $315 million. Additional partner funding or borrowing may be required if DGD cash flow is insufficient.
- Blender tax credits are scheduled to remain available through December 31, 2024; the Clean Fuels Production Credit is expected to apply from 2025 through 2027. Changes to these programs could materially affect results.
- Loss reserves for insurance, regulatory, environmental, litigation and tax contingencies totaled approximately $97.1 million. Management believes the reserves are adequate, but final costs could exceed estimates.
- The Company remains involved in litigation and regulatory matters relating to the Lower Passaic River. The ultimate liability cannot be determined, although management does not currently expect a material impact.
- Potentially material risks include high leverage, variable-rate debt, commodity-price declines, reduced raw-material availability, foreign currency movements, geopolitical conflicts, climate and environmental regulation, disease outbreaks, cyber risks and pension or multiemployer-plan obligations.
- The Company had approximately $340.0 million of off-balance-sheet commodity purchase commitments over the next five years, including $188.1 million for natural gas and diesel fuel.
- Management concluded that disclosure controls were effective. Internal-control integration work continues for Gelnex and Miropasz; Miropasz will be excluded from the fiscal 2024 internal-control assessment as permitted by SEC rules.
Investor Verification Checklist
- Verify whether lower commodity prices and Feed Ingredients margins stabilize or continue to pressure earnings.
- Track DGD operating results, renewable-fuel credit values, feedstock costs and progress and funding requirements for the SAF project.
- Assess leverage, floating-rate exposure, debt maturities and continued revolver availability.
- Review the final purchase-accounting adjustments for Miropasz and the effect of Gelnex integration and profitability.
- Confirm the financial effect of the $17.9 million after-tax Gelnex inventory adjustment and whether additional control issues emerge.
- Monitor the expiration and replacement of blender tax credits, implementation of the Clean Fuels Production Credit and related regulatory developments.
- Evaluate environmental, litigation, multiemployer pension and other contingency exposures beyond recorded reserves.