Darling Ingredients Inc. — Fiscal 2022 Form 10-K Summary
Reporting period: The provided filing is the annual report for the 52 weeks ended December 31, 2022, filed February 27, 2023. The request metadata references “2021 Q4,” but the filing is not a 2021 quarterly report and does not provide a standalone fourth-quarter 2022 income statement.
Business Context
Darling Ingredients develops and produces sustainable ingredients from animal by-products, used cooking oil, bakery residuals and other bio-nutrients. Its operations span more than 260 locations across five continents and are organized into Feed Ingredients, Food Ingredients and Fuel Ingredients.
Key businesses include rendering, fats and proteins, collagen, natural casings, organic fertilizers, bioenergy and the 50%-owned Diamond Green Diesel joint venture with Valero. During 2022, Darling acquired Valley Proteins, FASA Group and Group Op de Beeck.
Key Financial Metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $6.532 billion | $4.741 billion | +37.8% |
| Operating income | $1.029 billion | $884.5 million | +16.3% |
| Net income attributable to Darling | $737.7 million | $650.9 million | +13.3% |
| Diluted EPS | $4.49 | $3.90 | +15.1% |
| Net cash provided by operating activities | $813.7 million | $704.4 million | +15.5% |
| Adjusted EBITDA | $1.097 billion | $851.4 million | +28.9% |
| Adjusted EBITDA including Darling’s DGD share | $1.541 billion | $1.235 billion | +24.8% |
Margins: Consolidated gross margin declined to 23.4% from 26.2%. Feed Ingredients gross margin decreased to 23.5% from 27.4%, primarily because of lower margins from acquired operations and higher energy costs. Food Ingredients gross margin improved to 24.5% from 23.0%. Fuel Ingredients gross margin, excluding DGD’s equity contribution, declined to 20.0% from 27.0%.
Segment performance: Feed Ingredients revenue increased to $4.539 billion and segment operating income increased 28.3% to $506.3 million. Food Ingredients revenue increased to $1.460 billion and segment operating income increased 31.8% to $176.6 million. Fuel Ingredients revenue increased to $533.6 million and segment operating income increased 2.6% to $435.9 million, supported substantially by DGD.
Diamond Green Diesel: Darling recorded $372.3 million of equity income from DGD, compared with $351.6 million in 2021. DGD’s two facilities had combined renewable diesel capacity of approximately 1.2 billion gallons per year after completion of the Port Arthur plant in November 2022. DGD recorded approximately $761.1 million of blender tax credits in 2022; Darling’s economic share was 50%.
Cash Flow, Capital Allocation and Liquidity
- Cash used in investing activities was $2.417 billion, including $1.772 billion for acquisitions, $391.3 million of capital expenditures and $264.8 million invested in DGD.
- Cash provided by financing activities was $1.679 billion, primarily reflecting debt raised to fund acquisitions.
- Capital expenditures increased 42.8% to $391.3 million. Management expected approximately $565 million of 2023 capital expenditures, including compliance, replacement and expansion projects.
- Unrestricted cash was $127.0 million at December 31, 2022, while revolver availability was $1.313 billion. Working capital was $569.7 million and the working-capital ratio was 1.53 to 1.
- Total debt, including current and long-term debt, was approximately $3.385 billion at carrying value, compared with $1.463 billion at January 1, 2022. The company stated that it was in compliance with its financial covenants.
- Debt maturities include approximately $242.6 million in 2024, $1.527 billion in 2026 and $503.0 million in 2027.
- Darling repurchased approximately $125.5 million of common stock in 2022 and had approximately $374.5 million remaining under its $500 million authorization at year-end. The company has not paid common-stock dividends since 1989 and did not expect to pay dividends in 2023.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by acquisitions, higher finished-product prices and higher volumes, partially offset by unfavorable foreign-currency translation.
- Feed Ingredients raw-material volume increased approximately 27.2%, mainly from Valley Proteins and FASA.
- Interest expense rose to $125.6 million from $62.1 million because of higher debt balances and interest rates.
- Income tax expense decreased to $146.6 million from $164.1 million, and the effective tax rate declined to 16.4% from 20.0%, primarily because of increased biofuel tax incentives.
- Acquisition and integration costs increased to $16.4 million from $1.4 million.
- Goodwill increased to $1.970 billion from $1.219 billion, primarily from acquisitions. The company recorded $29.7 million of restructuring and asset impairment charges, including approximately $18.4 million related to the planned closure of the Peabody, Massachusetts collagen plant, $2.7 million of related goodwill impairment and $8.6 million related to the loss of a Canadian raw-material customer.
- Sales to DGD increased to approximately $1.1 billion from $521.7 million, making DGD the company’s largest finished-product customer and representing approximately 17% of 2022 net sales.
Outlook, Management Commentary and Risks
Management did not provide formal financial guidance, citing unpredictable commodity prices, energy prices, weather, government policies, global demand and other factors. Management stated that operating cash flow, unrestricted cash and available credit were expected to fund working capital, scheduled debt service, taxes and maintenance and compliance capital expenditures for at least the next twelve months.
Management expected to finance the previously announced Gelnex acquisition, estimated at approximately $1.2 billion, and the Miropasz acquisition, estimated at approximately €110 million, with borrowings under the credit agreement. Gelnex was expected to close in the first half of 2023 and Miropasz in the third quarter of 2023, subject to customary approvals.
In January 2023, DGD partners approved a project to enable approximately 50% of Port Arthur’s current capacity to produce sustainable aviation fuel. Completion was expected in 2025 at an estimated total cost of approximately $315 million.
- Commodity-price volatility, raw-material availability, higher natural gas and diesel costs, inflation, interest rates and foreign exchange movements can materially affect margins and liquidity.
- DGD depends on renewable-fuel mandates, low-carbon fuel standards and tax credits. Policy changes, legal challenges or reduced mandates could impair demand and profitability.
- Acquisitions increase leverage and integration risk. Valley Proteins, FASA and Group Op de Beeck represented approximately $2.3 billion of assets and $805.6 million of 2022 net sales that were excluded from management’s internal-control assessment for the acquisition year.
- Customer and supplier concentration is material: the top ten finished-product customers represented approximately 40% of product sales, while the top ten raw-material suppliers represented approximately 26% of raw-material supply.
- The company faces environmental, food-safety, animal-disease, climate, cybersecurity, labor, pension and regulatory risks. Contingency reserves for insurance, environmental, litigation and tax matters totaled approximately $92.1 million at year-end.
- Darling remains involved in Lower Passaic River environmental litigation and related proceedings. The filing states that the ultimate liability cannot be determined, although management does not currently expect a material financial effect.
Important Facts for Investors to Verify
- Confirm the requested period: this source is FY2022, not 2021 Q4.
- Assess whether the substantial increase in debt and planned Gelnex and Miropasz financing is consistent with expected cash generation and covenant headroom.
- Evaluate the sustainability of DGD earnings, including the effect of tax credits, RIN and LCFS values, feedstock costs and the Port Arthur ramp-up.
- Review acquisition integration, provisional purchase accounting, contingent consideration for FASA and the goodwill balance of approximately $2.0 billion.
- Monitor gross-margin normalization in Feed Ingredients following the acquisitions and higher energy costs.
- Review the 2026 debt maturity concentration and exposure to variable interest rates; management estimated that a 1% rate increase would raise annual interest expense by approximately $12.2 million.
- Verify the status and potential exposure of environmental, litigation, pension, guarantee and other off-balance-sheet commitments, including approximately $401.1 million of commodity purchase commitments over the next five years.