Business Context and Reporting Period
Darling Ingredients Inc. (NYSE: DAR) is a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients. The company operates in three segments: Feed Ingredients, Food Ingredients, and Fuel Ingredients. This summary covers the unaudited quarterly period ended September 28, 2024 (Q3 2024) and the nine months ended September 28, 2024, compared to the same periods in 2023.
Key Financial Metrics
| Metric (in millions) | Q3 2024 | Q3 2023 | 9M 2024 | 9M 2023 |
|---|---|---|---|---|
| Total Net Sales | $1,421.9 | $1,625.2 | $4,297.5 | $5,174.0 |
| Net Income (Attributable to Darling) | $16.9 | $125.0 | $177.0 | $563.2 |
| Diluted EPS | $0.11 | $0.77 | $1.10 | $3.47 |
| Operating Income | $60.1 | $178.4 | $345.8 | $790.9 |
| Adjusted EBITDA (Non-GAAP) | $197.6 | $247.8 | $559.6 | $797.8 |
| Combined Adjusted EBITDA (Non-GAAP) | $236.7 | $334.3 | $790.4 | $1,261.0 |
| Operating Cash Flow (9M) | $684.9 (2024) vs $682.3 (2023) | |||
| Total Debt (Carrying Value) | $4,246.2 (Sep 28, 2024) | |||
| Cash & Equivalents | $114.8 (Sep 28, 2024) | |||
| Revolving Credit Availability | $1,008.3 (Sep 28, 2024) |
Material Changes vs. Prior Period
- Revenue Decline: Total net sales decreased 12.5% in Q3 2024 and 17.0% in the first nine months of 2024 compared to the prior year. This was driven primarily by lower finished product commodity prices (fats, proteins, collagen) and, in the Feed segment, lower sales volumes for used cooking oil and bakery residuals.
- Profitability Compression: Net income attributable to Darling dropped 86.5% in Q3 and 68.6% in the nine-month period. Operating income fell 66.3% in Q3 and 56.3% year-to-date.
- Segment Performance:
- Feed Ingredients: Operating income decreased 61.0% in Q3 due to lower finished product prices and a $16.2 million loss from the increase in the FASA contingent consideration liability.
- Food Ingredients: Operating income decreased 49.9% in Q3, primarily due to decreasing collagen prices.
- Fuel Ingredients: Operating income decreased 79.0% in Q3. The decline was driven by lower Renewable Identification Number (RIN) values, lower Low Carbon Fuel Standard (LCFS) credit values, lower diesel prices, and a lower-of-cost-or-market reserve recorded by the Diamond Green Diesel (DGD) Joint Venture.
- Equity Income: Equity in net income from the DGD Joint Venture decreased significantly from $54.4 million in Q3 2023 to $2.4 million in Q3 2024, reflecting the challenging biofuel market environment.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: The company does not provide forward-looking financial or operational estimates due to the volatility of agricultural-based commodities, energy prices, and government policies.
- Unusual Items:
- Out-of-Period Adjustment: In Q1 2024, the company recorded a $17.9 million (net of tax) adjustment to earnings due to an inventory overstatement at the Gelnex subsidiary.
- Contingent Consideration: A $16.2 million charge in Q3 2024 related to the FASA acquisition contingent consideration liability significantly impacted Feed segment results. Conversely, the nine-month period included a $42.2 million gain from the reduction of this liability.
- Risks and Contingencies:
- Regulatory Policy: The company's Fuel segment is heavily dependent on U.S. government tax credits (blenders tax credit, SAF credits, and the Clean Fuels Production Credit). Changes to these policies could materially impact results.
- Environmental Litigation: The company is a potentially responsible party (PRP) in the Lower Passaic River Superfund Site cleanup. While the company asserts it is not responsible for the liabilities, the ultimate cost cannot be determined.
- Geopolitical: Conflicts in Ukraine and the Middle East continue to create volatility in energy and commodity prices.
- Capital Allocation: The company has a $500 million share repurchase program, with approximately $500 million remaining as of September 28, 2024. Capital expenditures for the remainder of 2024 are expected to be approximately $140 million.
Investor Verification Checklist
- DGD Joint Venture Performance: Verify the sustainability of the DGD Joint Venture's earnings given the sharp decline in RIN and LCFS credit values and the impact of the lower-of-cost-or-market reserve.
- Commodity Price Exposure: Assess the correlation between the company's gross margins and the Jacobsen Index (fats/proteins) and Reuters (palm oil/soy meal) prices, noting the significant price declines in Q3 2024.
- Debt Service Capacity: Review the company's ability to service its ~$4.25 billion debt load given the compression in operating cash flow and the reliance on variable interest rates (SOFR/EURIBOR).
- Regulatory Dependency: Evaluate the risk associated with the expiration of the blenders tax credit on December 31, 2024, and the transition to the Clean Fuels Production Credit (CFPC) in 2025.
- Acquisition Integration: Monitor the integration and performance of the Gelnex (Food Ingredients) and Miropasz (Feed Ingredients) acquisitions, particularly regarding the out-of-period inventory adjustment at Gelnex.