Darling Ingredients Inc. — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended July 3, 2021, compared with June 27, 2020. The request metadata identifies “2020 Q2,” but the filing is the second-quarter 2021 Form 10-Q. The financial statements are unaudited and use a 52/53-week fiscal year.
Business Context
Darling operates globally in Feed Ingredients, Food Ingredients and Fuel Ingredients. It processes animal by-products, used cooking oil, bakery residuals and other bio-nutrients into fats, proteins, collagen, food ingredients, renewable fuels and bioenergy. Fuel Ingredients includes the company’s 50% equity investment in Diamond Green Diesel Holdings LLC, its joint venture with Valero.
Key Financial Metrics
| Metric | Three months ended July 3, 2021 | Three months ended June 27, 2020 | Six months ended July 3, 2021 | Six months ended June 27, 2020 |
|---|---|---|---|---|
| Net sales | $1,198.7 million | $848.7 million | $2,245.4 million | $1,701.5 million |
| Operating income | $268.3 million | $106.3 million | $467.8 million | $229.1 million |
| Net income attributable to Darling | $196.6 million | $65.4 million | $348.3 million | $150.9 million |
| Diluted earnings per share | $1.17 | $0.39 | $2.08 | $0.90 |
| Operating cash flow | Not separately reported | Not separately reported | $297.9 million | $263.6 million |
| Adjusted EBITDA | $221.7 million | $126.1 million | $398.3 million | $235.8 million |
| Adjusted EBITDA including Darling’s DGD share | $353.7 million | $195.2 million | $638.5 million | $408.5 million |
Six-month gross margin increased to 26.5% from 24.8%. Six-month income tax expense was $83.7 million, with an effective tax rate of 19.2%, compared with 20.0% in the prior-year period. Interest expense declined to $31.7 million from $37.0 million.
Segment Performance and Material Changes
- Feed Ingredients: Second-quarter sales increased 53.2% to $771.9 million, and operating income increased 228.3% to $106.7 million. Six-month sales increased 40.1% to $1,423.4 million, while operating income increased 258.7% to $176.5 million. Higher finished-product prices were the primary driver; raw-material volumes increased modestly.
- Food Ingredients: Second-quarter sales increased to $317.0 million and operating income increased 127.6% to $37.1 million. Six-month operating income increased 94.1% to $68.7 million, supported by higher collagen volumes and edible fat prices, partly offset by weaker Brazilian currency and lower Brazilian volumes.
- Fuel Ingredients: Second-quarter operating income increased 92.8% to $141.3 million; six-month operating income increased 44.2% to $257.1 million. Results benefited from higher renewable identification number prices, renewable diesel prices, volumes and blender tax credits at DGD. Standalone segment gross margin declined because of higher European raw-material costs.
- Diamond Green Diesel: Equity income increased to $125.8 million in the second quarter and $228.0 million for six months, compared with $63.5 million and $161.3 million, respectively. DGD recorded $162.9 million of blender tax credits in the first six months, compared with $152.2 million in the prior-year period. No DGD distributions were received during the first six months.
- Commodity prices: Major feed and fat commodity prices were substantially higher than in the prior-year period, including second-quarter increases of 89.0% for bleachable fancy tallow, 110.5% for yellow grease and 40.7% for meat and bone meal.
Cash Flow, Debt and Liquidity
- Cash, cash equivalents and restricted cash totaled $77.9 million at July 3, 2021, compared with $81.7 million at January 2, 2021.
- Cash flow from operations was $297.9 million. Investing cash outflow was $129.9 million, including $126.1 million of capital expenditures. Financing cash outflow was $170.9 million, including $75.7 million of share repurchases and $43.9 million of withholding taxes on stock awards.
- Total debt was $1.435 billion, including $500.0 million of 5.25% senior notes due 2027, €515.0 million of 3.625% senior notes due 2026, $250.0 million of Term Loan B borrowings and $42.0 million drawn on the revolving facility.
- Revolver availability was approximately $902.1 million. Management stated that the company was in compliance with applicable debt covenants.
- Working capital was $330.4 million, with a current ratio of 1.48 to 1. Management believes operating cash flow, cash and revolver availability will be sufficient for the next twelve months.
- The company expects approximately $186 million of additional capital expenditures during the remainder of fiscal 2021, including compliance and expansion projects.
Guidance, Outlook, Risks and Unusual Items
- The company does not provide forward-looking financial or operating estimates because results are highly sensitive to commodity prices, energy costs, weather, agricultural conditions, government programs, currency movements and global demand.
- Management expects DGD’s Norco expansion to be completed and begin startup in the fourth quarter of 2021. The expansion is estimated to cost approximately $1.1 billion and add 400 million gallons of annual renewable diesel capacity.
- DGD also approved a Port Arthur, Texas facility expected to begin operations in the first half of 2023. Estimated project cost is approximately $1.45 billion. The project could require additional borrowing or partner contributions if DGD cash flow is insufficient.
- Darling provided guarantees of up to $50 million for its share of DGD’s IMTT terminaling obligations and approximately $160 million for its share of DGD’s GTL terminaling obligations. No liability was recorded because management considered payment risk remote.
- COVID-19 had not materially affected operations through the reporting date, although the company incurred approximately $1.9 million of COVID-related charges during the first six months of fiscal 2021. Future effects remain uncertain, particularly for supply chains, customers and raw-material availability.
- The company recorded $0.8 million of restructuring and asset impairment charges related to the shutdown of U.S. and Canadian biodiesel processing facilities.
- Contingency reserves for insurance, environmental, litigation and tax matters totaled approximately $69.4 million. The company accepted and paid a $0.6 million EPA settlement relating to the lower Passaic River area, while related third-party claims remain unresolved; management does not currently expect a material effect.
- Multiemployer pension withdrawal liabilities could become material. Accrued withdrawal liabilities were approximately $3.9 million, and an additional $1.3 million liability was recorded during the first six months.
- Major risks include commodity-price volatility, renewable-fuel policy changes, energy costs, foreign-exchange movements, disease outbreaks, environmental and regulatory requirements, leverage, pension obligations, DGD execution and demand for renewable fuels.
Most Important Facts to Verify
- Confirm the reporting-period discrepancy: the filing is for Q2 2021, not Q2 2020.
- Assess how much of the earnings increase reflects potentially volatile commodity prices, DGD tax credits, renewable fuel prices and RIN prices.
- Monitor DGD Norco and Port Arthur construction costs, completion timing, funding requirements and future distributions.
- Reconcile total debt, variable-rate exposure, euro-denominated obligations and the $902.1 million revolver availability against future capital needs.
- Evaluate whether the company’s projected $186 million of remaining 2021 capital expenditures can be funded from operations without increasing leverage.
- Review exposure to Passaic River litigation, environmental matters, multiemployer pension liabilities and DGD guarantees.
- Consider the sustainability of the $200 million share-repurchase authorization while the company is funding major DGD expansions.