Darling International Inc. — Form 10-Q Summary
Reporting period: The filing is for the 13 and 39 weeks ended September 28, 2013, compared with September 29, 2012. Although the request metadata identifies “2012 Q3,” the source filing is a third-quarter 2013 Form 10-Q, filed November 7, 2013.
Business Context
Darling operates more than 120 U.S. processing and transfer facilities and recycles animal by-products, used cooking oil and bakery residuals into fats, proteins, hides, bakery by-products and related products. Its two reportable segments are Rendering and Bakery. Results are highly sensitive to commodity prices, raw-material volumes, product yields, energy costs, export demand and regulatory developments.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $425.8 million | $452.7 million | $1,294.8 million | $1,276.5 million |
| Operating income | $41.7 million | $65.8 million | $151.0 million | $182.3 million |
| Net income | $27.7 million | $37.2 million | $86.5 million | $102.0 million |
| Diluted EPS | $0.23 | $0.31 | $0.73 | $0.86 |
| Operating margin | 9.8% | 14.5% | 11.7% | 14.3% |
| Net margin | 6.5% | 8.2% | 6.7% | 8.0% |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $168.7 million | $196.6 million |
- Q3 Rendering sales were $362.1 million, down from $368.2 million; Bakery sales were $63.7 million, down from $84.6 million.
- Q3 segment profit was $65.1 million for Rendering and $9.9 million for Bakery, compared with $70.6 million and $18.6 million, respectively, in the prior-year quarter.
- At September 28, 2013, cash and cash equivalents were $8.0 million, down from $103.2 million at December 29, 2012.
- Working capital was $76.1 million, with a 1.51-to-1 current ratio, versus $158.6 million and 2.20-to-1 at year-end 2012.
- Long-term debt was $250.1 million, principally the 8.5% Senior Notes due 2018. No borrowings were outstanding under the revolving or delayed-draw facilities, and revolver availability was $967.3 million after letters of credit.
- Total assets increased to $1.714 billion from $1.552 billion, primarily reflecting acquisitions, increased property and equipment, goodwill and the investment in Diamond Green Diesel.
Material Changes Versus Prior Comparable Period
- Q3 sales decreased 6.0%, while nine-month sales increased 1.4%.
- Q3 operating income declined $24.1 million, or approximately 36.7%; nine-month operating income declined $31.2 million, or approximately 17.1%.
- Q3 net income declined 25.6%; nine-month net income declined 15.2%.
- Lower prices for poultry meal, bleachable fancy tallow, poultry grease, yellow grease and corn reduced revenue. Q3 average corn prices were down 25.6%, while poultry grease prices were down 11.5%.
- Lower commodity prices reduced raw-material costs under formula-based purchasing arrangements, partially offsetting the revenue decline. Higher energy, payroll, repairs and maintenance costs pressured margins.
- Bakery performance weakened substantially because of lower corn-linked finished-product prices and lower yields. Rendering results were supported by higher MBM prices, collection and processing fees, hide sales and Terra-related activity.
- Acquisition costs were $8.3 million in Q3 and $9.2 million for nine months, including Terra transaction costs and costs related to the Rothsay acquisition and proposed VION transaction.
- Equity income from the Diamond Green Diesel joint venture increased to $12.0 million in Q3 from a $0.8 million loss, as the facility began production in June 2013.
- Cash flow from operations fell $27.9 million year over year, while investing cash use rose to $250.8 million from $116.7 million, reflecting $121.4 million of acquisitions and $45.0 million invested in the joint venture.
Guidance, Outlook, Risks and Unusual Items
- Management stated that operating performance remained broadly consistent with the second quarter when adjusted for acquisition expenses and a non-operating settlement, but warned that third-quarter results may not indicate future performance.
- Diamond Green Diesel operated at reduced rates after excessive wear was identified in a heat exchanger. Management expected production to return to or exceed its 9,300-barrel-per-day nameplate capacity by mid-November 2013; a shutdown began November 7, 2013 for heat-exchanger replacement. The reduced run rate negatively affected Q3 EPS by approximately $0.03.
- On October 28, 2013, the company acquired Rothsay for approximately CAD $645 million, funded through borrowings under the Senior Secured Facilities.
- On October 5, 2013, Darling agreed to acquire VION Ingredients for approximately EUR 1.6 billion, subject to regulatory, works council, debt-settlement and other closing conditions. Financing commitments included a $1.2 billion term loan B and a $1.3 billion senior unsecured bridge facility.
- Management believed operating cash flow, available revolver capacity and financing commitments would be sufficient for the next twelve months, but identified significant liquidity sensitivity to acquisition and integration costs, commodity prices, raw-material availability, energy prices and regulatory changes.
- The company had approximately $35.7 million of insurance, environmental and litigation reserves, offset by approximately $9.3 million of insurance recovery receivables.
- Potentially material risks include commodity-price volatility, reduced slaughter and raw-material volumes, energy-cost increases, export restrictions, animal disease, food-safety rules, renewable-fuel policy changes, pension and multiemployer withdrawal liabilities, acquisition integration, ERP implementation and environmental or permit litigation.
- Off-balance-sheet commitments included approximately $23.9 million of commodity purchases and $20.0 million of operating lease payments due during the next twelve months.
- Management reported compliance with the Credit Agreement and Notes covenants, and concluded that disclosure controls were effective with no material change in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether the Rothsay acquisition and proposed VION acquisition closed as planned and the resulting debt, leverage, goodwill and integration costs.
- Post-quarter borrowing levels, interest rates, covenant headroom and liquidity after financing the Rothsay and VION transactions.
- Diamond Green Diesel’s actual production rates, repair costs, profitability and any intellectual-property exposure.
- Trends in MBM, poultry meal, fats, yellow grease and corn prices, as well as raw-material volumes and production yields.
- Whether lower cash balances and higher acquisition spending materially change liquidity risk despite substantial revolver availability.
- The outcome and potential cost of environmental, permit, litigation and multiemployer pension matters.
- Progress, cost and operational risk associated with the Oracle E-Business Suite ERP implementation, expected to be completed in 2015.