Darling Ingredients Inc. — Form 10-Q Summary
Reporting period: The provided filing is for the quarter and six months ended July 1, 2023, with comparable periods ended July 2, 2022. The request metadata identifies “2022 Q2,” but the filing itself is the 2023 second-quarter report. Results are unaudited and presented under U.S. GAAP.
Business context and reporting period
Darling operates globally across Feed Ingredients, Food Ingredients and Fuel Ingredients. Its businesses process animal by-products, used cooking oil, bakery residuals and other organic materials into fats, proteins, collagen, gelatin, specialty ingredients, renewable fuels and bioenergy. Fuel Ingredients includes the company’s 50% investment in Diamond Green Diesel Holdings LLC, a joint venture with Valero.
The company completed the Gelnex collagen acquisition on March 31, 2023. Operations acquired from Gelnex, FASA and Valley Proteins materially affect period-over-period comparability.
Key financial metrics
| Metric | Three months ended July 1, 2023 | Three months ended July 2, 2022 | Six months ended July 1, 2023 | Six months ended July 2, 2022 |
|---|---|---|---|---|
| Net sales | $1.758 billion | $1.650 billion | $3.549 billion | $3.017 billion |
| Operating income | $356.7 million | $278.6 million | $612.5 million | $511.5 million |
| Net income attributable to Darling | $252.4 million | $202.0 million | $438.2 million | $390.0 million |
| Diluted earnings per share | $1.55 | $1.23 | $2.69 | $2.37 |
| Operating margin | 20.3% | 16.9% | 17.3% | 17.0% |
| Net margin attributable to Darling | 14.4% | 12.2% | 12.4% | 12.9% |
| Adjusted EBITDA | $260.9 million | $312.0 million | $550.0 million | $556.1 million |
Six-month gross margin declined to 23.2% from 25.3%; second-quarter gross margin declined to 22.6% from 25.4%. Interest expense increased to $120.5 million from $39.6 million for the six-month period, primarily because of acquisition-related borrowings and higher interest rates.
Cash flow, debt and liquidity
- Six-month operating cash flow was $405.7 million, up from $361.0 million.
- Capital expenditures were $234.3 million, compared with $151.5 million. Management expects approximately $330 million of additional 2023 capital expenditures.
- Acquisitions used $1.079 billion of cash, principally for Gelnex. Total investing cash outflow was $1.348 billion.
- Cash and cash equivalents were $111.5 million at July 1, 2023, compared with $127.0 million at December 31, 2022. Total cash, cash equivalents and restricted cash were $244.1 million.
- Total debt was $4.547 billion, including $4.459 billion of long-term debt net of current maturities, versus $3.385 billion at year-end 2022.
- Revolving credit facility availability was approximately $956.0 million. Management stated that the company was in compliance with applicable debt covenants.
- Working capital was $862.4 million, with a current ratio of 1.85 to 1, compared with $569.7 million and 1.53 to 1 at December 31, 2022.
Material changes versus the prior comparable period
- Second-quarter sales increased 6.5%, while six-month sales increased 17.7%, largely reflecting acquisitions and higher volumes.
- Six-month operating income increased 19.7%. Fuel Ingredients operating income increased 92.3%, primarily because of higher Diamond Green Diesel production volumes and lower joint-venture feedstock costs.
- Feed Ingredients operating income declined 18.5% for the six months. Lower finished-product prices and higher expenses associated with Valley Proteins and FASA more than offset volume gains.
- Food Ingredients operating income increased 3.2% for the six months. Higher sales of hydrolyzed collagen offset lower Gelnex margins, increased depreciation and amortization, and restructuring costs.
- Diamond Green Diesel equity income increased to $307.3 million from $145.5 million for the six-month period. The joint venture recorded $633.5 million of blender tax credits, compared with $354.2 million in the prior year.
- The company acquired Gelnex for a preliminary purchase price of approximately $1.2 billion. Gelnex contributed $91.2 million of sales and a $19.1 million net loss to the six-month 2023 results.
- An immaterial out-of-period correction reduced FASA contingent consideration and goodwill by approximately $85.1 million. The contingent consideration liability was $87.3 million at July 1, 2023.
- The company repurchased $52.9 million of common stock during the first six months, leaving approximately $321.6 million under the authorization.
Guidance, outlook, commentary and risks
Management does not provide forward-looking financial or operational estimates because results are highly sensitive to commodity prices, energy costs, weather, raw-material volumes, government programs and foreign exchange. Management expects operating cash flow, unrestricted cash and revolving-credit availability to fund working capital, scheduled debt service and planned capital expenditures for the next twelve months, subject to identified risks.
- Commodity prices remain a major earnings driver. In the second quarter, protein prices increased year over year, while tallow, yellow grease, corn, palm oil and soybean meal prices generally declined.
- Renewable-fuel economics depend on the U.S. Renewable Fuel Standard, low-carbon fuel standards, tax credits and other government policies. Blender tax credits were extended through 2024; the Clean Fuels Production Credit is scheduled to apply from 2025 through 2027.
- Diamond Green Diesel is developing a sustainable aviation fuel upgrade expected to be completed in 2025 at an estimated cost of approximately $315 million. Additional partner funding or borrowing may be required if joint-venture cash flow is insufficient.
- The company remains highly leveraged and exposed to floating interest rates, foreign exchange movements, refinancing requirements and restrictions on upstream cash transfers from subsidiaries.
- Other risks include the Russia-Ukraine conflict, inflation, supply-chain disruption, energy-price volatility, climate-related regulation, disease outbreaks, environmental and litigation matters, pension and multiemployer-plan liabilities, and changes in renewable-fuel policy.
- Outstanding commitments include approximately $299.7 million of commodity purchases over the next five years and $53.4 million of letters of credit and bank guarantees.
Important facts for investors to verify
- Confirm that the intended period is second quarter 2023, not second quarter 2022, because the supplied filing covers July 1, 2023.
- Assess the sustainability of earnings from Diamond Green Diesel, including the effect of tax credits, renewable-diesel margins and the sustainable aviation fuel project.
- Reconcile acquisition-related volume growth with lower segment margins and determine the normalized profitability of Gelnex, FASA and Valley Proteins.
- Monitor leverage, variable-rate debt, debt maturities and the remaining revolving-credit capacity.
- Review the provisional Gelnex purchase-price allocation and the valuation of FASA contingent consideration.
- Evaluate exposure to commodity prices, raw-material availability, foreign exchange, environmental claims and potentially material multiemployer pension withdrawal liabilities.
- Confirm the timing and funding of expected 2023 capital expenditures, the Miropasz acquisition and any future DGD funding requirements.