Darling International Inc. — Fiscal 2010 Form 10-K Summary
Reporting period: Fifty-two weeks ended January 1, 2011, compared primarily with the fifty-two weeks ended January 2, 2010. The request metadata references “Darling Ingredients Inc.” and “2009 Q4,” but the supplied filing is for Darling International Inc. and reports fiscal 2010 annual results.
Business context
Darling collects and recycles animal by-products, used cooking oil and bakery waste into protein meals, tallow, greases, bakery by-products, hides and other industrial and feed ingredients. Following the December 17, 2010 acquisition of Griffin Industries, the Company operated Rendering, Restaurant Services and Bakery segments and had more than 125 processing and transfer facilities. Griffin contributed only two weeks of reported results.
Financial performance and liquidity
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Net sales | $724.9 million | $597.8 million | +$127.1 million, +21.3% |
| Operating income | $82.5 million | $70.9 million | +$11.6 million, +16.3% |
| Operating margin | 11.4% | 11.9% | Down approximately 50 bps |
| Net income | $44.2 million | $41.8 million | +$2.5 million, +5.9% |
| Diluted EPS | $0.53 | $0.51 | +$0.02 |
| Adjusted EBITDA | $114.4 million | $96.2 million | +$18.3 million, +19.0% |
| Net cash from operations | $81.5 million | $79.2 million | +$2.3 million |
| Capital expenditures | $24.7 million | $23.6 million | +$1.1 million |
Revenue growth was driven primarily by higher BFT and yellow grease prices, increased raw-material volumes, the Griffin acquisition and improved restaurant-service activity. BFT and yellow grease prices increased substantially, while MBM and poultry-meal prices declined. Formula-based raw-material pricing offset part of the benefit of higher finished-product prices by increasing raw-material costs.
Net income benefited from improved operating performance but was reduced by $10.8 million of acquisition costs, approximately $3.1 million of Griffin-related financing fees included in interest expense, approximately $0.9 million of deferred loan-cost write-offs and approximately $1.0 million of plant-fire and casualty losses. The effective tax rate was 37.1%, compared with 37.5% in fiscal 2009.
Cash used in investing activities was $783.6 million, principally reflecting $758.2 million of acquisitions, including Griffin. Financing activities provided $653.2 million, primarily from new debt used to fund the Griffin transaction. Cash and cash equivalents declined to $19.2 million from $68.2 million, while working capital declined to $30.8 million from $75.1 million.
At January 1, 2011, total debt was approximately $710.0 million, consisting of $250.0 million of 8.5% senior notes due 2018, $300.0 million of term loans and $160.0 million drawn under a $325.0 million revolving facility. Revolver availability was approximately $141.6 million after letters of credit. Management stated that the Company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Net sales increased 21.3%, with Rendering sales up to $536.9 million, Restaurant Services sales up to $177.8 million and newly reported Bakery sales of $10.2 million.
- Operating income increased, but operating margin compressed because acquisition-related costs, higher payroll and integration expenses, and higher diesel costs partly offset commodity-price and volume benefits.
- Griffin was acquired for approximately $872.0 million, funded primarily with cash, new debt and approximately 10 million shares issued to former Griffin shareholders. Griffin added approximately $27.7 million of reported revenue and $1.9 million of earnings in the two-week post-acquisition period.
- Total assets increased to $1.38 billion from $426.2 million, including substantial increases in property, plant and equipment, intangible assets and goodwill resulting from Griffin.
- Goodwill increased to $376.3 million from $79.1 million. No goodwill impairment was recorded in fiscal 2010 or fiscal 2009; a $15.9 million impairment charge was recorded in fiscal 2008.
- The Company did not pay dividends and stated that it did not expect to pay cash dividends in 2011.
Guidance, outlook, risks and unusual items
Management did not provide formal fiscal 2011 earnings guidance. It stated that fiscal 2010 was an exceptional year but cautioned that the results may not be indicative of future performance. Management expected operating cash flow, unrestricted cash and revolving-credit availability to support working capital, maintenance and compliance capital expenditures, debt service, taxes and continued funding of the renewable-diesel joint venture over the next twelve months.
On January 21, 2011, Darling and Valero formed Diamond Green Diesel Holdings LLC, a 50/50 joint venture to develop a renewable-diesel facility with planned capacity of approximately 9,300 barrels per day. Each sponsor committed approximately $93.2 million toward estimated aggregate project costs of $427.0 million. The project also had a conditional DOE loan guarantee of approximately $241 million. Darling would be required to maintain approximately $27 million in a segregated account, provide completion support and fund 50% of cost overruns, subject to the project agreements.
After year-end, Darling completed a common-stock offering that generated approximately $292.7 million of net proceeds. The proceeds were used to repay the entire $160.0 million revolver balance and $140.0 million of term debt, reducing leverage and increasing debt capacity.
Key risks include commodity-price volatility; availability and concentration of raw-material suppliers; energy costs; customer and counterparty exposure; integration of Griffin; substantial leverage and floating-rate debt; environmental, food-safety and BSE regulation; weather and seasonality; underfunded multi-employer pension plans; litigation and remediation exposure; and the ability to finance, construct and operate the renewable-diesel facility. The Company carried approximately $28.2 million of insurance, environmental and litigation reserves, compared with $15.6 million at the prior year-end. Its ultimate liability in the Lower Passaic River matter could not be determined, although management did not expect a material effect based on information then available.
Most important facts for investors to verify
- Confirm the post-offering debt balance and liquidity after the February 2011 repayment of approximately $300 million.
- Assess whether higher BFT and yellow-grease prices, raw-material volumes and restaurant activity were sustainable rather than cyclical.
- Evaluate Griffin integration progress, realized synergies, acquisition accounting and the effect of the limited two-week contribution in fiscal 2010.
- Review the renewable-diesel joint venture’s final financing, permits, construction cost, completion guarantees, segregated-cash requirements and exposure to cost overruns.
- Monitor goodwill and intangible-asset impairment sensitivity, particularly given approximately $376.3 million of goodwill and $391.0 million of net intangible assets.
- Review debt covenants, floating-rate exposure and refinancing requirements; the filing estimated that a 1% increase in rates would raise fiscal 2011 interest expense by approximately $4.6 million before subsequent debt repayments.
- Follow commodity prices, raw-material supply, diesel and natural-gas costs, export markets, food-safety rules and environmental litigation developments.