Darling Ingredients Inc. — Form 10-Q Summary
Business context and reporting period
Darling Ingredients is a global producer of sustainable feed, food, fuel and bioenergy ingredients from animal by-products, recycled oils, food residuals and other bio-nutrients. The company operates through Feed Ingredients, Food Ingredients and Fuel Ingredients segments, including its 50% investment in Diamond Green Diesel Holdings LLC, a renewable diesel joint venture with Valero.
This filing covers the 13 and 26 weeks ended June 27, 2020, compared with June 29, 2019. The request metadata identifies “2019 Q2,” but the filing itself is a second-quarter fiscal 2020 Form 10-Q.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $848.7 million | $827.3 million | $1.702 billion | $1.662 billion |
| Operating income | $106.3 million | $74.1 million | $229.1 million | $122.7 million |
| Net income attributable to Darling | $65.4 million | $26.3 million | $150.9 million | $44.3 million |
| Diluted EPS | $0.39 | $0.16 | $0.90 | $0.26 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $263.6 million | $154.3 million |
- Total gross margin was 25.5% in Q2 2020 versus 22.1% in Q2 2019; the six-month margin was 24.8% versus 22.1%.
- Approximate operating margin was 12.5% in Q2 2020 and 13.5% for the first six months. Approximate net margin attributable to Darling was 7.7% and 8.9%, respectively.
- Adjusted EBITDA was $126.1 million in Q2 2020 versus $115.5 million; six-month Adjusted EBITDA was $235.8 million versus $219.0 million. Including Darling’s share of DGD Adjusted EBITDA, the figures were $195.2 million and $159.4 million for the quarter, and $408.5 million and $292.7 million for the six months.
- Cash, cash equivalents and restricted cash totaled $76.3 million at June 27, 2020, including $76.2 million of unrestricted cash. Working capital was $324.8 million, with a 1.54-to-1 current ratio.
- Total debt carrying value was $1.596 billion, including $1.553 billion of long-term debt and $42.8 million of current maturities. Revolver availability was $939.7 million after borrowings, ancillary facilities and letters of credit.
- Capital expenditures were $123.2 million in the first six months, down from $167.9 million in the prior-year period.
Material changes versus the prior comparable period
- Q2 sales increased 2.6%, while six-month sales increased 2.4%. Operating income increased 43.5% for the quarter and 86.7% for the six months.
- Feed Ingredients operating income increased to $32.5 million from $15.8 million in Q2, supported by higher protein and fat prices and higher U.S. raw material volumes. Six-month operating income rose to $49.2 million from $31.0 million.
- Food Ingredients operating income declined to $16.3 million from $30.5 million in Q2 and to $35.4 million from $54.1 million for the six months, reflecting lower collagen volumes, COVID-19-related demand disruption and the absence of a prior-year asset-sale gain.
- Fuel Ingredients operating income increased to $73.3 million from $41.1 million in Q2 and to $178.3 million from $68.3 million for the six months. The primary driver was DGD’s recognition of approximately $72.2 million of Q2 and $152.2 million of six-month blender tax credits, compared with none in the 2019 comparable periods.
- DGD contributed equity income of $63.5 million in Q2 and $161.3 million for the six months, versus $38.1 million and $62.4 million, respectively. DGD paid Darling $125.0 million in April 2020 and approximately $80.2 million in July 2020.
- Interest expense declined to $17.9 million in Q2 and $37.0 million for the six months, primarily because Term Loan A was repaid in 2019 and borrowing rates were lower.
- Financing activities used $128.0 million in the first six months, including $55.0 million of share repurchases, compared with $10.9 million used in the prior-year period.
Guidance, outlook, risks and unusual items
- Management does not provide forward-looking financial or operating estimates because results are highly sensitive to commodity prices, weather, agricultural conditions, government programs, global demand and raw material availability.
- COVID-19 had not materially affected operations through the filing date, and all facilities remained operational. However, temporary slaughterhouse closures, slower restaurant reopenings and lower specialty collagen and gelatin demand affected the second quarter. Management cautioned that future supply-chain or customer disruptions could materially affect results.
- The company temporarily reduced non-essential capital expenditures because of COVID-19 uncertainty. It had previously expected approximately $306 million of fiscal 2020 capital expenditures, but the filing does not provide a revised full-year estimate.
- DGD’s new parallel renewable diesel facility is expected to increase annual capacity by approximately 400 million gallons, to approximately 675 million gallons, at an estimated project cost of $1.1 billion, with startup targeted for the fourth quarter of 2021. The project may require additional partner contributions or loans if available cash falls below specified levels.
- The company expects operating cash flow, unrestricted cash and revolver availability to meet working capital, maintenance and compliance capital expenditures, scheduled debt service and other needs for the next twelve months.
- Key risks include commodity-price volatility, reduced raw material supply, energy costs, foreign exchange, renewable-fuel policy and tax-credit changes, COVID-19, African Swine Fever, DGD expansion execution, leverage, pension funding and potential impairment of goodwill.
- Goodwill totaled $1.217 billion. Four reporting units had fair value less than 30% above carrying value, including Canada Feed at less than 10% excess fair value; management identified approximately $496.8 million of goodwill in these four units but recorded no impairment.
- Insurance, environmental, litigation and tax contingency reserves totaled approximately $67.5 million. The company accepted a $0.6 million EPA settlement offer related to the lower Passaic River, subject to administrative approval. Potential liability associated with the broader matter remains indeterminate.
- The company had approximately $103.9 million of off-balance-sheet commodity purchase commitments over the next two years and $38.3 million of letters of credit and bank guarantees.
Most important facts for investors to verify
- Whether DGD’s blender tax credits and renewable diesel economics remain sustainable after the unusually large 2020 contribution to earnings.
- Progress, cost discipline, funding requirements and commissioning timing for DGD’s approximately $1.1 billion expansion.
- COVID-19 effects on slaughterhouse, restaurant and logistics volumes, as well as collagen and gelatin demand.
- Exposure to declining fats, proteins, used cooking oil and other commodity prices and to foreign currency movements.
- Goodwill headroom in the four relatively close reporting units, particularly Canada Feed.
- Compliance with leverage and interest-coverage covenants and the company’s ability to access subsidiary cash for debt service.
- Potential liabilities from multiemployer pension plans, environmental proceedings, guarantees and other contingencies.
- The distinction between GAAP results and non-GAAP Adjusted EBITDA, including the fact that DGD’s share of Adjusted EBITDA is presented separately.