Darling Ingredients Inc. Form 10-Q Summary
Business context and reporting period
This filing covers the 13 and 39 weeks ended October 2, 2021, compared with September 26, 2020. The company produces sustainable feed, food, fuel and bioenergy ingredients from animal by-products, recycled oils and other bio-nutrients. Its operating segments are Feed Ingredients, Food Ingredients and Fuel Ingredients. The request identifies “2020 Q3,” but the filing is the third quarter of fiscal 2021.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $1,185.9 million | $850.6 million | $3,431.3 million | $2,552.1 million |
| Operating income | $205.7 million | $127.5 million | $673.4 million | $356.6 million |
| Net income attributable to Darling | $146.8 million | $101.1 million | $495.2 million | $252.1 million |
| Diluted EPS | $0.88 | $0.61 | $2.96 | $1.51 |
| Gross margin | 27.5% | 24.9% | 26.8% | 24.9% |
| Effective tax rate | 22.3% | 4.5% | 20.2% | 14.5% |
| Adjusted EBITDA | $229.5 million | $122.1 million | $627.8 million | $357.9 million |
Net cash provided by operating activities was $452.0 million for the first nine months, compared with $470.4 million in the prior-year period. Capital expenditures were $191.7 million, and net cash used in investing activities was $219.7 million. Net cash used in financing activities was $240.1 million. Cash, cash equivalents and restricted cash ended at $67.4 million, compared with $66.0 million at September 26, 2020.
At October 2, 2021, total debt was $1.381 billion, including $33.0 million drawn on the revolving facility, $200.0 million of term loan B, $500.0 million of 5.25% senior notes due 2027 and €515.0 million of 3.625% senior notes due 2026. Unrestricted cash was $67.2 million and revolving-credit availability was $912.6 million. Working capital was $347.4 million, with a 1.46-to-1 current ratio.
Material changes versus the prior comparable period
- Third-quarter sales increased 39.4%, while nine-month sales increased 34.5%, primarily due to substantially higher finished-product commodity prices and, to a lesser extent, currency effects.
- Third-quarter operating income increased 61.3%; nine-month operating income increased 88.8%. Feed Ingredients was the principal driver, with third-quarter segment operating income rising 480.5% to $107.4 million.
- Feed Ingredients gross margin increased to 28.1% from 25.1% in the third quarter and to 27.7% from 25.4% for the first nine months. Higher prices for fats, proteins, used cooking oil and bakery products more than offset modest volume changes.
- Food Ingredients operating income increased 47.9% in the third quarter and 77.1% year to date, supported by higher collagen and edible-fat prices and lower depreciation, partly offset by weaker Brazilian volumes and currency effects.
- Fuel Ingredients third-quarter operating income declined 19.3% because Hurricane Ida caused downtime at the Diamond Green Diesel joint venture. Nine-month Fuel Ingredients operating income nevertheless increased 20.9%, aided by higher renewable identification number and renewable diesel prices.
- Interest expense declined to $15.4 million in the quarter and $47.1 million year to date, reflecting lower deferred-loan-cost amortization and term-loan paydowns.
- Income tax expense increased materially, partly because the prior-year period benefited from discrete tax items. The 2021 nine-month effective tax rate was 20.2%, versus 14.5% in 2020.
- The company repurchased $97.9 million of common stock during the first nine months and had approximately $102.1 million remaining under its $200 million authorization at October 2, 2021.
Guidance, outlook, commentary and risks
Management does not provide forward-looking financial or operating estimates because results are highly sensitive to commodity prices, weather, raw-material volumes, energy costs, government policies and currency movements. Management stated that operating cash flow, cash on hand and revolver availability should be sufficient for working capital, planned capital expenditures, scheduled debt service, taxes and other needs over the next twelve months.
- Management expected approximately $120 million of additional capital expenditures for the remainder of fiscal 2021, including compliance and expansion projects.
- The Diamond Green Diesel Norco expansion became operational in October 2021, increasing renewable diesel capacity by 400 million gallons annually to approximately 690 million gallons. The project cost was approximately $1.1 billion.
- A Port Arthur, Texas expansion is under construction and is expected to begin operations in the first half of 2023. Estimated project cost is approximately $1.45 billion; insufficient joint-venture cash flow could require additional borrowing or partner contributions.
- Subsequent to quarter-end, each DGD partner contributed approximately $37.75 million, and the joint venture borrowed $50 million under its partner loan agreement, including Darling’s $25 million commitment.
- The company shut down U.S. and Canadian biodiesel processing operations in December 2020 because of unfavorable economics. Fiscal 2021 restructuring and asset-impairment charges were approximately $0.8 million.
- COVID-19 had not materially disrupted operations, but the company incurred approximately $2.4 million of related charges during the first nine months. Future effects could include supply-chain disruption, lower raw-material availability and weaker demand.
- Key risks include volatile commodity and energy prices, changes in renewable-fuel mandates and tax credits, DGD operating or construction issues, foreign-exchange movements, disease outbreaks, regulatory and environmental requirements, leverage, pension obligations and availability of subsidiary cash.
- Contingency reserves for insurance, environmental, litigation and tax matters were approximately $70.8 million. The company also disclosed potential material withdrawal liabilities under certain underfunded multiemployer pension plans, although the current accrued liability was approximately $3.9 million.
- The company accepted a $0.6 million EPA settlement related to the lower Passaic River area. It stated that ultimate liability for related claims cannot be determined, but management currently does not expect the matter to materially affect financial position, results or cash flows.
Facts investors should verify
- Confirm that the intended comparison is fiscal 2021 third quarter, not fiscal 2020, because the filing period ended October 2, 2021.
- Assess the sustainability of earnings gains driven by unusually higher commodity prices, especially fats, proteins, used cooking oil and related substitutes.
- Monitor DGD Norco expansion performance, Port Arthur construction costs, funding requirements and exposure to renewable-fuel credits and mandates.
- Review leverage, variable-rate debt, the December 2024 term-loan maturity and the company’s reliance on subsidiary distributions for debt service.
- Evaluate working-capital absorption, including higher receivables and inventories, and the effect of receivables factoring on reported operating cash flow.
- Track commodity, currency, energy, COVID-19, environmental, Passaic River and multiemployer pension exposures, including whether disclosed reserves remain adequate.