Darling International Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 28, 2013, consisting of 52 weeks. The provided metadata references “2012 Q4,” but the filing is the fiscal 2013 annual report and includes quarterly data for the fourth quarter of fiscal 2013.
Business context
Darling collects and processes animal by-products, used cooking oil, bakery residuals and food-processing residuals into proteins, fats, hides, bakery feed products, biodiesel and other specialty ingredients. Fiscal 2013 operations were reported in two segments: Rendering and Bakery. The Company completed the Rothsay acquisition in Canada on October 28, 2013, contributing nine weeks of results, and acquired VION Ingredients on January 7, 2014, after the fiscal year-end.
Following the VION acquisition, the Company became a global ingredients platform with more than 200 locations, approximately 10,000 employees and three planned operating segments: Feed Ingredients, Food Ingredients and Fuel Ingredients.
Financial performance and key metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Net sales | $1,723.6 million | $1,701.4 million | +1.3% |
| Operating income | $169.6 million | $231.7 million | -26.8% |
| Net income | $109.0 million | $130.8 million | -16.7% |
| Diluted EPS | $0.91 | $1.11 | -18.0% |
| Adjusted EBITDA | $268.4 million | $317.1 million | -15.4% |
| Net cash from operations | $210.7 million | $249.5 million | -15.5% |
| Capital expenditures | $118.3 million | $115.4 million | +2.5% |
Net sales increased primarily from the Rothsay acquisition, higher raw-material volumes, increased other Rendering sales and product purchases for resale. These benefits were partly offset by lower commodity prices and lower production yields. Rendering revenue increased to $1,457.6 million from $1,406.1 million, while Bakery revenue declined to $265.9 million from $295.4 million.
Operating margin declined to approximately 9.8% from approximately 13.6%. Net margin declined to approximately 6.3% from approximately 7.7%. The filing does not present a consolidated gross margin.
Interest expense increased to $38.1 million from $24.1 million, including approximately $13.0 million of commitment fees on an unused bridge facility. The effective tax rate declined to 33.4% from 36.8%, partly reflecting biofuel tax incentives. A $27.5 million unrealized foreign-currency hedge gain benefited fiscal 2013 earnings.
Liquidity, cash flow and debt
- Cash and cash equivalents were $870.9 million at December 28, 2013, compared with $103.2 million at the prior year-end.
- Working capital was $950.7 million, compared with $158.6 million, and the working-capital ratio increased to 6.38 from 2.20.
- Availability under the revolving credit facility was $680.7 million at December 28, 2013.
- Total balance-sheet liabilities were $1,223.2 million, including current and long-term debt of approximately $886.8 million.
- Cash used in investing activities was $895.4 million, primarily due to $734.1 million spent on acquisitions and $118.3 million of capital expenditures.
- Cash provided by financing activities was $1,457.4 million, primarily from debt borrowings and $840.6 million of proceeds from the December 2013 common-stock offering.
- At February 7, 2014, following the VION acquisition financing, total debt excluding trade debt was approximately $2.4 billion. The amended credit facilities totaled $2.65 billion, including a $1.3 billion Term Loan B, and the Company had $500 million of 5.375% senior notes due 2022.
Material changes versus the prior comparable period
- Revenue grew modestly, but profitability and operating cash flow declined materially.
- Commodity prices weakened for pet-food poultry meal, tallow, poultry grease, yellow grease and corn. Fourth-quarter declines were particularly sharp.
- Higher poultry volumes partly offset lower beef volumes; the mix shift reduced yields.
- Energy costs, primarily natural gas and diesel, increased.
- SG&A increased 12.6% to $170.8 million, reflecting acquisition-related costs, payroll and benefits, and ERP implementation expenses.
- Depreciation and amortization increased 15.7% to $98.8 million because of capital investment and acquisitions.
- Goodwill increased to $701.6 million from $381.4 million, largely from the Rothsay and Terra transactions. No goodwill impairment was recorded, although one reporting unit had only approximately 24% fair-value headroom over carrying value.
- The Company began commercial production at the 50/50 Diamond Green Diesel joint venture with Valero. The facility has stated capacity of approximately 9,300 barrels per day and generated $7.7 million of equity income for Darling in fiscal 2013, compared with a $2.7 million loss in fiscal 2012.
Outlook, commentary, risks and unusual items
Management stated that fiscal 2013 results should not be viewed as indicative of future performance because the Rothsay and VION acquisitions materially changed the Company’s scale, geographic footprint, product mix, leverage and liquidity requirements. Management expected operating cash flow, acquisition-related cash flows, cash on hand and credit availability to fund working capital, capital expenditures, debt service and other needs for the following twelve months, but identified significant uncertainties.
- Key risks include commodity-price volatility, reduced raw-material availability, competition for used cooking oil, higher natural-gas and diesel costs, customer and supplier concentration, foreign exchange exposure and changing renewable-fuel policies.
- The Company is highly leveraged following the VION acquisition. Variable-rate debt creates interest-rate exposure; management estimated that a 1% increase in rates would increase annual interest expense by approximately $18.7 million based on February 7, 2014 debt.
- Integration of Rothsay, VION and the multi-year Oracle ERP implementation could create operating, reporting and control problems or unanticipated costs.
- Food-safety, BSE, animal-disease, environmental, permitting, product-recall and international regulatory risks could affect volumes, costs, market access and liquidity.
- Loss reserves for insurance, environmental and litigation matters totaled approximately $35.5 million at year-end, with $8.8 million of related insurance recovery receivables.
- The Lower Passaic River matter was settled for $195,000, but potential EPA-related investigation, remediation and natural-resource liabilities could not be determined.
- The Fresno facility permit litigation remained pending; management did not expect a material financial impact, but the ultimate outcome was uncertain.
- The Company had not paid common-stock dividends since 1989 and did not expect to pay dividends in 2014.
Most important facts for investors to verify
- Reconcile fiscal 2013 reported results with pro forma results reflecting Rothsay and VION; reported 2013 results include only nine weeks of Rothsay and no VION operating results.
- Review the post-acquisition debt structure, leverage and covenant calculations under the amended credit agreement and 5.375% senior notes.
- Assess whether commodity prices, raw-material volumes, yields and energy costs support recovery from the fiscal 2013 margin decline.
- Evaluate integration progress, expected synergies and costs for Rothsay, VION and the ERP implementation.
- Review the Diamond Green Diesel joint venture’s sustained production, profitability, debt restrictions and exposure to renewable-fuel mandates.
- Monitor goodwill headroom, acquisition accounting adjustments, foreign-currency exposure and potential impairment risk.
- Review unresolved environmental, permit, product-safety, pension and multiemployer-plan obligations, including liabilities not fully estimable.