Darling International Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011, consisting of 52 weeks. The provided metadata references 2010 Q4, but the filing is the fiscal 2011 annual report and includes quarterly data for the fourth quarter of 2011.
Business context
Darling provides rendering, used cooking oil collection, grease-trap servicing, and bakery-waste recycling services. It processes animal by-products, used cooking oil, and bakery waste into protein meals, fats, greases, hides, bakery by-products, fertilizers, and related value-added products. Operations are organized into Rendering and Bakery segments and include more than 120 processing and transfer facilities in the United States.
The December 2010 acquisition of Griffin Industries materially expanded the company’s scale. Fiscal 2011 included 52 weeks of Griffin contribution compared with only two weeks in fiscal 2010.
Financial performance and metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net sales | $1,797.2 million | $724.9 million | +$1,072.3 million |
| Operating income | $314.6 million | $82.5 million | +$232.1 million |
| Net income | $169.4 million | $44.2 million | +$125.2 million |
| Diluted EPS | $1.47 | $0.53 | +$0.94 |
| Adjusted EBITDA | $393.5 million | $114.4 million | +$279.1 million |
| Capital expenditures | $60.2 million | $24.7 million | +$35.5 million |
- Margins: Operating margin was approximately 17.5%, net margin approximately 9.4%, and adjusted EBITDA margin approximately 21.9%. The filing does not present a conventional gross margin.
- Segment sales: Rendering generated $1,501.3 million, or 83.5% of sales; Bakery generated $296.0 million, or 16.5%.
- Cash flow: Cash provided by operating activities was $240.9 million, compared with $81.5 million in fiscal 2010. Cash used in investing activities was $83.7 million, including $60.2 million of capital expenditures and $23.3 million invested in the Valero joint venture. Cash used in financing activities was $137.4 million.
- Balance sheet: Cash and cash equivalents were $38.9 million. Working capital was $92.4 million, compared with $30.8 million at the prior year-end; the reported working-capital ratio improved to 1.73 from 1.20.
- Debt: Total debt was approximately $280.0 million, consisting primarily of $250.0 million of 8.5% senior notes due 2018 and a $30.0 million term loan. The company had no revolving borrowings and reported $391.6 million of revolver availability, net of $23.4 million of letters of credit. The remaining $30.0 million term loan was repaid after year-end.
- Equity and goodwill: Stockholders’ equity was $920.4 million and goodwill was $381.4 million. One reporting unit had fair value only approximately 14% above carrying value, creating sensitivity to future impairment.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the full-year contribution from Griffin, which contributed approximately $868.2 million of the year-over-year sales increase, and by higher finished-product commodity prices, which contributed approximately $210.7 million.
- Higher prices for fats, proteins, and bakery products benefited revenue, but formula-based raw-material costs increased by approximately $139.6 million.
- Operating income benefited from Griffin and stronger commodity markets but was partly offset by lower yields, quality downgrades, higher payroll and incentive costs, and higher diesel expense.
- Interest expense increased to $37.2 million from $8.7 million because of acquisition-related debt and a $4.9 million write-off of deferred loan costs.
- Fiscal 2011 had no acquisition costs, compared with $10.8 million in fiscal 2010, while depreciation and amortization increased substantially to $78.9 million from $31.9 million.
- Average commodity prices increased year over year, including BFT up 48.3%, poultry grease up 58.4%, yellow grease up 60.6%, and bakery by-products up 65.0%. Prices declined materially in the fourth quarter from the third quarter.
Guidance, outlook, commentary, and risks
Management characterized fiscal 2011 as a record-setting year but cautioned that the results may not be indicative of future performance. The outlook depends heavily on commodity prices, raw-material availability, biofuel mandates, export markets, and energy costs.
- Commodity and supply risk: Finished products are commodities, and prices can be volatile. Raw-material procurement is described as the most competitive aspect of the business. The ten largest raw-material suppliers represented approximately 25% of supply, while the ten largest finished-product customers represented approximately 28% of product sales.
- Energy exposure: Natural gas and diesel fuel are significant operating costs. Natural gas costs declined in 2011, but higher diesel costs more than offset that benefit.
- Renewable diesel joint venture: The 50/50 Valero joint venture was constructing a facility designed for approximately 9,300 barrels per day of renewable diesel capacity. Darling committed approximately $93.2 million, had invested approximately $21.7 million on its balance sheet at year-end, and was responsible for 50% of qualifying cost overruns. Completion was expected by the end of fiscal 2012 or early fiscal 2013, but timing, technology, cost overruns, profitability, and regulatory support remained uncertain.
- Liquidity commitments: Contractual obligations totaled approximately $601.9 million, including $69.9 million of expected joint-venture capital contributions, $68.5 million of operating leases, $158.7 million of estimated interest, and $22.4 million of purchase commitments.
- Regulatory and food-safety risk: The company is subject to FDA, USDA, EPA, transportation, environmental, and occupational-safety requirements, including BSE and FSMA-related rules. Management did not expect currently known requirements to have a material impact, but acknowledged possible additional costs, recalls, permit issues, and export restrictions.
- Legal and environmental contingencies: Reserves for insurance, environmental, and litigation matters were approximately $38.0 million, offset by $9.6 million of insurance recovery receivables. The Lower Passaic River litigation and related EPA matter remain unresolved, and ultimate liability cannot be determined.
- Pensions: The company had a pension liability of approximately $27.3 million and participated in underfunded multi-employer plans for which withdrawal liabilities could be material. Expected fiscal 2012 pension funding was approximately $2.3 million.
- Dividends: The company had not paid dividends since 1989 and did not expect to pay cash dividends in 2012.
Most important facts to verify
- Whether fiscal 2011 earnings and cash flow remain sustainable after normalizing for Griffin’s first full year and unusually favorable commodity pricing.
- Current prices and spreads for fats, proteins, bakery products, competing commodities, natural gas, and diesel fuel.
- Progress, final cost, operating performance, and remaining funding obligations for the Diamond Green Diesel facility.
- Debt repayment after year-end, revolver availability, covenant compliance, and the maturity and refinancing risk of the 8.5% notes due 2018.
- Raw-material volumes, supplier retention, customer concentration, and the effects of meat-processing consolidation.
- Potential goodwill impairment, particularly for the reporting unit with only a 14% fair-value cushion.
- Exposure from the Lower Passaic River litigation, environmental matters, self-insurance reserves, and underfunded multi-employer pension plans.
- Impact of BSE, FSMA, renewable-fuel policy, export restrictions, and other regulatory changes on product demand and operating costs.