Darling Ingredients Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended July 2, 2022, compared with July 3, 2021. The filing is unaudited and reflects the company’s three segments: Feed Ingredients, Food Ingredients and Fuel Ingredients.
Business context and reporting period
Darling collects and processes animal by-products, used cooking oil, bakery residuals and other bio-nutrients into feed, food, fuel and specialty ingredients. Its Fuel Ingredients segment includes a 50% equity investment in Diamond Green Diesel Holdings LLC, a renewable diesel joint venture with Valero.
The May 2, 2022 acquisition of Valley Proteins added 18 rendering and used-cooking-oil facilities in the United States. Group Op de Beeck, acquired in February 2022, was also included in the 2022 results. The filing metadata references “2021 Q2,” but the actual Form 10-Q period is the quarter ended July 2, 2022.
Financial performance and key metrics
| Metric | Three months ended July 2, 2022 | Three months ended July 3, 2021 | Six months ended July 2, 2022 | Six months ended July 3, 2021 |
|---|---|---|---|---|
| Net sales | $1.650 billion | $1.199 billion | $3.017 billion | $2.245 billion |
| Operating income | $278.6 million | $268.3 million | $511.5 million | $467.8 million |
| Net income attributable to Darling | $202.0 million | $196.6 million | $390.0 million | $348.3 million |
| Diluted EPS | $1.23 | $1.17 | $2.37 | $2.08 |
| Gross margin | 25.4% | 26.7% | 25.3% | 26.5% |
| Adjusted EBITDA, company share | $312.0 million | $221.7 million | $556.1 million | $398.3 million |
| Adjusted EBITDA including Darling’s DGD share | $402.6 million | $353.7 million | $733.2 million | $638.5 million |
Six-month net sales increased approximately 34%, while net income attributable to Darling increased approximately 12%. The six-month effective tax rate declined to 15.7% from 19.2%, primarily due to increased biofuel tax incentives and discrete stock-based compensation tax benefits.
Six-month operating cash flow was $361.0 million, compared with $297.9 million in the prior-year period. Capital expenditures were $151.5 million. Cash used in investing activities was $1.625 billion, including $1.236 billion for acquisitions and $239.8 million contributed to DGD. Financing activities provided $1.358 billion, primarily through new debt borrowings.
Liquidity, debt and capital structure
- Cash and cash equivalents were $146.7 million at July 2, 2022, versus $68.9 million at January 1, 2022.
- Working capital was $542.0 million, with a current ratio of 1.59 to 1.
- Total debt, before unamortized debt costs, was approximately $2.914 billion; carrying value of current and long-term debt was approximately $2.914 billion in aggregate.
- Debt included $750 million of 6% senior notes due 2030, $500 million of 5.25% senior notes due 2027, €515 million of 3.625% senior notes due 2026, $400 million of Term A-1 borrowings, $500 million of Term A-2 borrowings and $200 million of Term Loan B borrowings.
- Revolving credit availability was approximately $1.446 billion, with no revolving borrowings outstanding at July 2, 2022.
- Management stated that the company was in compliance with its debt covenants and believed operating cash flow, cash and available credit would be sufficient for the next 12 months.
Material changes versus the prior comparable period
- Revenue growth: Feed Ingredients sales increased to $2.050 billion for the first six months from $1.423 billion, primarily from higher finished-product prices, increased volumes and the Valley Proteins acquisition.
- Segment performance: Six-month Feed Ingredients operating income increased 63.3% to $288.3 million; Food Ingredients increased 35.7% to $93.2 million; Fuel Ingredients declined 31.7% to $175.5 million.
- Margin pressure: Consolidated six-month gross margin declined to 25.3% from 26.5%. Management cited higher energy prices and lower margins from Valley Proteins. Fuel Ingredients also experienced higher raw-material costs, lower LCFS credit values and lower RIN prices.
- DGD contribution: Equity income from DGD declined to $145.5 million for six months from $228.0 million. Management cited higher raw-material costs and a catalyst turnaround, partly offset by higher fuel prices and blender tax credits.
- Acquisitions and leverage: The Valley Proteins acquisition required approximately $1.177 billion of initial cash consideration and was financed largely with new term debt and revolver borrowings. The company also issued $750 million of 6% senior notes in June 2022.
- Share repurchases: The company repurchased $65.9 million of common stock during the first six months and had approximately $434.1 million remaining under its authorization at July 2, 2022.
- Foreign currency: Foreign currency translation produced a $90.5 million after-tax loss in accumulated other comprehensive income during the first six months, largely reflecting a stronger U.S. dollar.
Guidance, outlook, risks and unusual items
The company does not provide forward-looking financial or operating estimates because results are materially affected by volatile commodity prices, energy costs, raw-material availability, weather, government programs and foreign exchange rates.
- DGD’s Port Arthur expansion was under construction and was expected to begin operations in the fourth quarter of 2022. The total project cost was estimated at approximately $1.45 billion, with DGD cash flow expected to fund most remaining costs, subject to performance and financing conditions.
- The company expected approximately $231 million of additional capital expenditures during the remainder of fiscal 2022, including compliance, expansion and acquired-company spending.
- Subsequent to quarter-end, the company acquired FASA Group in Brazil for approximately $562.6 million, funded with approximately $515 million of revolver borrowings and cash on hand.
- Subsequent to quarter-end, DGD repaid its $50 million shareholder loan, and each joint venture partner received an approximately $90.5 million dividend.
- The quarter included an $8.6 million impairment charge after the loss of a large Canadian raw-material customer and $5.4 million of acquisition and integration costs.
- Contingency reserves for insurance, environmental, litigation and tax matters totaled approximately $107.5 million. The company disclosed environmental and regulatory proceedings, including matters involving the Lower Passaic River and the acquired Valley Proteins business.
- Key risks include commodity and energy-price volatility, reduced rendering volumes, renewable-fuel policy changes, DGD operating or expansion issues, interest-rate and currency exposure, COVID-19 and geopolitical disruption, environmental obligations and the company’s substantial leverage.
Most important facts for investors to verify
- Whether DGD’s Port Arthur expansion reached operation as expected and whether projected production, margins and tax-credit benefits were achieved.
- The final purchase-accounting adjustments and operating performance of Valley Proteins and the subsequent FASA acquisition.
- Post-quarter-end revolver borrowings, total leverage and compliance with debt covenants following the FASA acquisition.
- The sustainability of margins amid higher energy costs, raw-material costs and volatile fats, proteins, renewable diesel, RIN and LCFS prices.
- The extent to which operating cash flow can fund planned capital expenditures, DGD expansion needs, debt service and future acquisitions.
- Potential exposure from environmental proceedings, multiemployer pension plans, self-insurance reserves and other contingencies.
- The effect of foreign exchange movements on reported earnings, accumulated other comprehensive loss and euro-denominated debt.