Darling International Inc. — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended July 2, 2011, compared with July 3, 2010. The supplied metadata references “2010 Q2,” but the filing is for the second quarter of fiscal 2011. The company operated more than 125 U.S. processing and transfer facilities across Rendering and Bakery segments.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $470.6 million | $166.2 million | $910.5 million | $329.0 million |
| Operating income | $92.2 million | $18.9 million | $180.4 million | $38.5 million |
| Net income | $52.2 million | $11.4 million | $98.8 million | $22.8 million |
| Diluted EPS | $0.44 | $0.14 | $0.87 | $0.28 |
| Operating margin | 19.6% | 11.4% | 19.8% | 11.7% |
| Net margin | 11.1% | 6.8% | 10.8% | 6.9% |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $118.5 million | $26.6 million |
Q2 sales increased approximately 183% and six-month sales increased approximately 177%. Operating income increased approximately 388% in the quarter and 369% year to date; net income increased approximately 359% and 332%, respectively. Comparisons were substantially affected by the December 2010 acquisition of Griffin, which contributed 13 weeks in Q2 and 26 weeks year to date.
Segment sales for Q2 were $392.7 million in Rendering and $77.9 million in Bakery. Segment profit was $93.4 million and $18.5 million, respectively, before corporate activities and interest. Six-month segment sales were $764.2 million and $146.3 million, respectively.
Liquidity, debt and cash flow
- Cash and cash equivalents were $12.4 million at July 2, 2011, down from $19.2 million at January 1, 2011.
- Working capital was $60.8 million, with a 1.40-to-1 working-capital ratio, versus $30.8 million and 1.20-to-1 at year-end.
- Operating cash flow was $118.5 million. Investing cash outflows were $38.1 million, including $27.9 million of capital expenditures and $10.7 million invested in the Valero joint venture.
- Financing cash outflows were $87.2 million, including $240.0 million of term-loan repayments and $140.0 million of revolver repayments, partly offset by $293.2 million of common-stock issuance.
- Debt consisted primarily of $250.0 million of 8.5% senior notes due 2018, a $60.0 million term loan and $20.0 million outstanding under the revolving facility. Revolver availability was $371.6 million, after $23.4 million of letters of credit.
- Management stated that the company was in compliance with its debt covenants and expected operating cash flow, cash and revolver availability to cover needs for the next twelve months.
Material changes and unusual items
- The Griffin acquisition, completed December 17, 2010 for approximately $872.2 million, added the Bakery segment and materially expanded Rendering operations.
- Higher finished-product commodity prices significantly supported revenue. Q2 Jacobsen index prices increased year over year by approximately 47% for MBM, 60% for BFT, 70% for poultry grease, 77% for yellow grease and 93% for bakery by-products.
- Higher commodity prices also increased formula-based raw-material costs. Lower production yields, higher payroll and energy costs partially offset the benefit of pricing and volume.
- Interest expense increased to $7.7 million in Q2 and $22.0 million year to date, primarily because of acquisition-related debt. Year-to-date interest expense included a $4.2 million write-off of deferred loan costs.
- The company recorded a $3.5 million reduction in selling, general and administrative expense from revaluing Griffin contingent consideration.
- The company invested in Diamond Green Diesel Holdings LLC, a 50/50 renewable-diesel joint venture with Valero. The planned facility is designed for approximately 9,300 barrels per day. Darling committed approximately $93.2 million, including 50% of specified cost overruns; $10.7 million had been contributed by July 2, 2011.
Outlook, risks and contingencies
Management did not provide formal earnings guidance. It expected elevated maintenance capital expenditures for Griffin facilities and believed liquidity was sufficient for working capital, capital expenditures, debt service, taxes and joint-venture funding over the next twelve months.
- Results depend heavily on volatile commodity prices, raw-material collection volumes, product yields, global demand and competing prices for corn, soybean oil and soybean meal.
- Natural-gas and diesel-fuel costs remain material operating risks; the company uses limited derivatives and alternative fuels to manage exposure.
- Key regulatory and market risks include renewable-fuel policy changes, export restrictions, BSE requirements, food-safety rules, product recalls, animal disease outbreaks and foreign trade barriers.
- The Valero joint venture creates a remaining funding commitment of approximately $82.5 million based on the stated $93.2 million commitment less $10.7 million contributed, plus potential exposure to 50% of construction cost overruns.
- Other disclosed commitments included $23.9 million of commodity purchases and approximately $14.1 million of operating lease obligations over the next twelve months.
- Insurance, environmental and litigation reserves were approximately $30.0 million at July 2, 2011. The Lower Passaic River litigation and related EPA matter remained unresolved, and ultimate liability could not be determined.
- The company had approximately $1.1 million accrued for one multi-employer pension plan withdrawal liability and warned that additional liabilities from underfunded plans could be material.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting, while Griffin integration controls remained under evaluation.
Investor verification items
- Verify the extent to which revenue and earnings growth is attributable to Griffin acquisition accounting versus organic volume, pricing and margin improvement.
- Monitor Rendering and Bakery commodity prices, formula-based raw-material costs, yields and energy costs.
- Reconcile debt repayment, revolver availability, covenant compliance and cash balances against future capital and joint-venture funding needs.
- Assess construction progress, total cost, cost overruns and operating viability of the Diamond Green Diesel facility.
- Review exposure to the Lower Passaic River matter, environmental claims, self-insurance reserves and multi-employer pension liabilities.
- Evaluate the sustainability of margins if commodity prices decline, raw-material volumes weaken or export and renewable-fuel policies change.