Darling Ingredients Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 1, 2022, compared with October 2, 2021. Although the request identifies “2021 Q3,” the supplied filing is the third-quarter 2022 Form 10-Q. Results are unaudited and presented in thousands, except per-share data.
Business Context and Reporting Period
Darling operates globally across Feed Ingredients, Food Ingredients and Fuel Ingredients. Its businesses collect and process animal by-products, used cooking oil, bakery residuals and other organic materials into feed, food, collagen, fuel and bioenergy products. Fuel Ingredients includes the company’s 50% equity investment in Diamond Green Diesel Holdings LLC, a joint venture with Valero.
Fiscal 2022 included the acquisitions of Valley Proteins, Group Op de Beeck and the FASA Group. FASA was acquired on August 1, 2022, and Valley Proteins on May 2, 2022. Their results are included from the respective acquisition dates.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $1,747.6 million | $1,185.9 million | $4,764.1 million | $3,431.3 million |
| Operating income | $268.3 million | $205.7 million | $779.8 million | $673.4 million |
| Net income attributable to Darling | $191.1 million | $146.8 million | $581.1 million | $495.2 million |
| Diluted EPS | $1.17 | $0.88 | $3.54 | $2.96 |
| Gross margin | 21.5% | 27.5% | 23.9% | 26.8% |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $638.4 million | $452.0 million |
| Adjusted EBITDA | $274.4 million | $229.5 million | $830.5 million | $627.8 million |
Q3 net sales increased approximately 47.3%, operating income increased 30.4%, net income attributable to Darling increased 30.1%, and diluted EPS increased 33.0%. For the first nine months, net sales increased approximately 38.9%, operating income increased 15.8%, net income attributable to Darling increased 17.4%, and diluted EPS increased 19.6%.
Gross margin declined despite higher sales, primarily because acquired businesses carried lower margins, energy costs increased and the prior-year period benefited from certain alternative fuel mixture credits. Q3 segment gross margins were 20.4% for Feed Ingredients, 26.3% for Food Ingredients and 19.6% for Fuel Ingredients, compared with 28.1%, 22.6% and 38.1%, respectively, in Q3 2021.
Cash Flow, Debt and Liquidity
- Operating cash flow for the first nine months was $638.4 million, up from $452.0 million, driven by higher net income and increased distributions from Diamond Green Diesel.
- Investing cash outflows were $2.223 billion, including $1.760 billion for acquisitions, $257.1 million of capital expenditures and $239.8 million invested in Diamond Green Diesel.
- Financing cash inflows were $1.683 billion, primarily reflecting borrowings used to fund acquisitions.
- Cash, cash equivalents and restricted cash totaled $147.4 million at October 1, 2022, including $126.0 million of unrestricted cash.
- Total debt was approximately $3.285 billion before current maturities and debt issuance costs, compared with $1.487 billion at January 1, 2022. The increase principally reflects acquisition financing and the issuance of $1.0 billion of 6% senior notes due 2030.
- Revolving credit availability was $1.355 billion at October 1, 2022. The company also had full availability of $300.0 million under the delayed-draw A-3 facility and $500.0 million under the delayed-draw A-4 facility.
- Working capital was $534.1 million, with a current ratio of 1.52 to 1. Management stated that operating cash flow, cash and available credit should fund expected needs for the next twelve months.
Material Changes Versus the Prior Comparable Period
- Acquisitions: Valley Proteins and FASA substantially increased Feed Ingredients volumes and revenue. The acquisitions also added goodwill, intangible assets and debt, and generated $13.6 million of acquisition and integration costs during the first nine months.
- Feed Ingredients: Q3 revenue increased to $1.273 billion from $769.6 million, while operating income increased to $117.9 million from $107.4 million. Volume growth and higher finished-product prices were partly offset by lower margins and higher energy costs.
- Food Ingredients: Q3 revenue increased to $347.9 million from $311.9 million and operating income rose to $53.8 million from $31.2 million, supported by higher-margin hydrolyzed collagen sales.
- Fuel Ingredients: Q3 operating income increased to $119.2 million from $83.2 million, but nine-month operating income declined to $294.7 million from $340.3 million. The nine-month decline reflected higher DGD raw-material costs, a catalyst turnaround, lower LCFS credit values and the prior-year alternative fuel mixture credits.
- Diamond Green Diesel: Equity income was $103.4 million in Q3 versus $54.0 million, but $248.9 million for the first nine months versus $282.0 million. The joint venture recorded $544.6 million of blender tax credits in the first nine months versus $224.6 million in the prior year.
- Interest expense: Interest expense increased to $39.8 million in Q3 and $79.4 million for the first nine months, versus $15.4 million and $47.1 million, respectively, due to higher debt and interest rates.
- Foreign currency: Foreign currency translation reduced other comprehensive income by $187.3 million for the first nine months, reflecting the stronger U.S. dollar.
Guidance, Outlook, Risks and Unusual Items
- Management does not provide forward-looking financial or operating estimates because results are highly sensitive to commodity prices, energy costs, weather, raw-material volumes, government policies and foreign exchange.
- Diamond Green Diesel’s Port Arthur expansion was expected to begin operations in November 2022. The project is expected to increase joint-venture renewable diesel capacity to approximately 1.2 billion gallons annually. Additional partner funding or joint-venture borrowing could be required if project cash flow is insufficient.
- The Inflation Reduction Act extended blender tax credits through December 31, 2024 and introduced the Clean Fuels Production Credit for 2025–2027. Management was still assessing the future tax effects.
- On October 18, 2022, the company announced a proposed approximately $1.2 billion cash acquisition of Gelnex, expected to close in the first quarter of 2023, subject to approvals. On November 2, 2022, it announced a proposed approximately €110.0 million acquisition of Miropasz Group, expected to close in the third quarter of 2023.
- FASA contingent consideration had a recorded liability of approximately $161.3 million at October 1, 2022. The acquisition accounting remains provisional and could be adjusted.
- Reserves for insurance, environmental, litigation and tax contingencies totaled approximately $98.9 million. The company also disclosed potential material exposure from underfunded multiemployer pension plans, although it could not estimate the current liability.
- The company paid $0.3 million into escrow under a consent decree concerning the Upper Passaic River and paid a $0.5 million civil penalty related to Valley Proteins’ Maryland facility.
- Key risks include commodity and energy-price volatility, renewable-fuel policy changes, foreign exchange movements, leverage and variable-rate debt, acquisition integration, DGD expansion execution, environmental and regulatory matters, pandemics, geopolitical disruption and climate-related regulation.
- The company repurchased $103.1 million of common stock during the first nine months and had approximately $396.9 million remaining under its $500.0 million authorization.
Investor Verification Checklist
- Verify the filing period: the supplied Form 10-Q is for Q3 2022, not Q3 2021.
- Assess whether acquisition-driven revenue growth translates into sustainable margins, particularly in Feed Ingredients.
- Reconcile reported leverage and debt maturities with the planned Gelnex acquisition and remaining DGD expansion funding needs.
- Monitor Diamond Green Diesel production, credit values, feedstock costs, tax incentives and the Port Arthur startup.
- Evaluate sensitivity to fat, protein, collagen, natural gas, diesel, LCFS/RIN and other commodity prices.
- Review provisional acquisition accounting, including FASA contingent consideration and goodwill.
- Track environmental, litigation, pension and regulatory contingencies, including the Passaic River and multiemployer pension matters.
- Confirm the effect of foreign currency translation and the company’s hedging program on earnings, liquidity and accumulated other comprehensive loss.