Darling Ingredients Inc. — Form 10-Q Summary
Reporting period: 13 weeks ended April 3, 2021, compared with 13 weeks ended March 28, 2020. Although the request identifies “2020 Q1,” the filing is for fiscal first quarter 2021. The financial statements are unaudited and prepared under U.S. GAAP.
Business Context
Darling develops sustainable ingredients from animal by-products, used cooking oil, food residuals and other bio-nutrients. It operates through Feed Ingredients, Food Ingredients and Fuel Ingredients. Fuel Ingredients includes the company’s 50% investment in Diamond Green Diesel Holdings LLC, a renewable diesel joint venture with Valero.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,046.7 million | $852.8 million | +22.8% |
| Operating income | $199.5 million | $122.8 million | +62.5% |
| Net income | $153.4 million | $86.1 million | +78.2% |
| Net income attributable to Darling | $151.8 million | $85.5 million | +77.5% |
| Diluted earnings per share | $0.90 | $0.51 | +$0.39 |
| Net cash from operating activities | $138.8 million | $34.5 million | +$104.3 million |
| Capital expenditures | $60.8 million | $61.6 million | -$0.8 million |
| Adjusted EBITDA | $176.6 million | $109.7 million | +61.0% |
| Darling plus DGD share of Adjusted EBITDA | $284.8 million | $213.3 million | +33.5% |
Consolidated gross margin was approximately 26.2%, compared with 24.1% in the prior-year quarter. The effective tax rate was 15.8%, compared with 17.5%; excluding discrete items, the rates were 20.0% and 18.8%, respectively.
Segment Performance
| Segment | Q1 2021 Sales | Q1 2021 Operating Income | Prior-Year Operating Income |
|---|---|---|---|
| Feed Ingredients | $651.4 million | $69.8 million | $16.7 million |
| Food Ingredients | $298.1 million | $31.5 million | $19.1 million |
| Fuel Ingredients | $97.2 million | $115.8 million | $105.0 million |
Feed Ingredients benefited primarily from substantially higher commodity prices, while processed volume declined approximately 0.5%. Food Ingredients benefited from higher collagen volumes and edible fat prices, partly offset by COVID-19-related weakness in South America. Fuel Ingredients benefited from higher European volumes and prices, increased renewable identification number prices and higher diesel prices.
Financial Condition, Debt and Liquidity
- Cash and cash equivalents were $71.2 million at April 3, 2021, compared with $81.6 million at January 2, 2021.
- Working capital was $303.1 million, with a 1.48-to-1 current ratio, compared with $311.7 million and 1.46-to-1 at year-end.
- Total debt was approximately $1.44 billion before current maturities and deferred loan costs; carrying value of long-term debt was $1.42 billion.
- Debt included $500 million of 5.25% senior notes due 2027, euro-denominated 3.625% senior notes due 2026, a $250 million Term Loan B balance and $69 million drawn on the revolving facility.
- Revolving credit availability was approximately $879.9 million after borrowings, ancillary facilities and letters of credit. Management stated that the company was in compliance with applicable financial and other debt covenants.
- The company expects approximately $250 million of additional capital expenditures during the remainder of fiscal 2021, including compliance and expansion projects, primarily financed through operating cash flow.
Material Changes Versus Prior Comparable Period
- Revenue increased 22.8%, driven mainly by higher finished-product prices and favorable currency effects, with relatively stable overall processed volumes.
- Feed Ingredients operating income increased 318.0%, reflecting higher prices for fats, proteins and other products.
- Diamond Green Diesel equity income increased to $102.2 million from $97.8 million. DGD recorded approximately $79.0 million of blender tax credits in the quarter.
- Interest expense declined to $16.4 million from $19.1 million, primarily due to lower Term Loan B balances and lower borrowing rates.
- Operating cash flow increased substantially to $138.8 million, while financing activities used $81.0 million, primarily because of debt repayments and withholding-tax payments on stock awards.
- The company incurred $0.8 million of restructuring and asset impairment charges related to the shutdown of U.S. and Canadian biodiesel processing operations initiated in December 2020.
- The company repurchased no common stock during the quarter; approximately $200 million remained available under the repurchase authorization.
Outlook, Risks and Unusual Items
Management did not provide formal financial or operating guidance, stating that commodity prices, weather, energy costs, agricultural conditions, government policies, global demand and other factors make forward estimates unreliable. Management expects operating cash flow, cash on hand and revolver availability to satisfy working capital, capital expenditures, scheduled debt service, taxes and other needs for at least the next twelve months.
- COVID-19 had not materially disrupted operations through the quarter, and facilities remained operational, but management identified potential future supply-chain, customer-demand and raw-material risks.
- The DGD Norco expansion, estimated at approximately $1.1 billion, was expected to start up in the fourth quarter of 2021. A Port Arthur expansion, estimated at approximately $1.45 billion, was expected to begin operations in the second half of 2023. Additional partner funding or borrowing may be required if DGD cash flow is insufficient.
- Darling provided guarantees of up to $50 million for its share of certain DGD terminaling obligations and up to approximately $160 million for its share of new Port Arthur terminaling obligations. No liability was recorded because management considered payment remote.
- Key risks include volatile commodity and energy prices, renewable-fuel policy and tax-credit changes, foreign-exchange movements, raw-material availability, COVID-19 and other diseases, regulatory and environmental liabilities, pension funding requirements, high leverage and dependence on cash distributions from subsidiaries.
- Contingency reserves for insurance, environmental, litigation and tax matters totaled approximately $67.8 million, with $27.0 million of insurance recovery receivables. The company settled its lower Passaic River EPA matter for $0.6 million; related litigation and potential liabilities remain subject to uncertainty.
- Accrued liabilities for certain multiemployer pension-plan withdrawal obligations were approximately $4.0 million. Management stated that potential liabilities for underfunded plans that could terminate or require additional funding could be material.
Investor Verification Checklist
- Verify the sustainability of earnings gains attributable to commodity prices, especially Feed Ingredients margins.
- Monitor DGD expansion costs, startup timing, renewable-fuel credits, RIN prices and the possibility of required partner funding.
- Assess leverage, Term Loan B maturity in December 2024, variable-rate exposure and reliance on subsidiary cash transfers.
- Track approximately $250 million of planned remaining 2021 capital expenditures and related operating cash-flow coverage.
- Review environmental, litigation, multiemployer pension and guarantee exposures, including the Passaic River matter and DGD terminaling guarantees.
- Evaluate sensitivity to COVID-19 developments, raw-material supply, foreign exchange, energy prices and renewable-fuel regulations.