Business Context and Reporting Period
Darling Ingredients Inc. filed this Form 10-K for the 52 weeks ended December 30, 2023, compared with the 52 weeks ended December 31, 2022. The request metadata references “2022 Q4,” but the supplied filing is the fiscal 2023 annual report and does not provide a standalone fourth-quarter 2022 comparison.
Darling converts animal by-products, used cooking oil, bakery residuals and other bio-nutrients into feed, food, fuel, bioenergy and fertilizer ingredients. It operates through Feed Ingredients, Food Ingredients and Fuel Ingredients across more than 260 locations on five continents. Major recent acquisitions include Valley Proteins, FASA and Gelnex.
Financial Performance and Key Metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Net sales | $6.788 billion | $6.532 billion | +3.9% |
| Gross margin | $1.645 billion; 24.2% | $1.530 billion; 23.4% | Margin +80 bps |
| Operating income | $949.7 million | $1.029 billion | -7.7% |
| Net income attributable to Darling | $647.7 million | $737.7 million | -12.2% |
| Diluted EPS | $3.99 | $4.49 | -11.1% |
| Adjusted EBITDA | $1.110 billion | $1.097 billion | +1.1% |
| Cash flow from operations | $899.3 million | $813.7 million | +$85.6 million |
| Capital expenditures | $555.5 million | $391.3 million | +$164.2 million |
- Segment sales: Feed Ingredients $4.473 billion, down 1.5%; Food Ingredients $1.752 billion, up 20.0%; Fuel Ingredients $563.4 million, up 5.6%.
- Segment operating income: Feed Ingredients $419.2 million, down 17.2%; Food Ingredients $211.6 million, up 19.9%; Fuel Ingredients $425.3 million, down 2.4%.
- Segment gross margins: Feed 24.3%, Food 25.2% and Fuel 20.7%, compared with 23.5%, 24.5% and 20.0%, respectively, in fiscal 2022.
- Tax: Income tax expense was $59.6 million, with an effective tax rate of 8.3%, primarily reflecting biofuel tax incentives and the geographic mix of earnings. The rate excluding federal and state biofuel tax effects was 28.4%.
- Liquidity: Year-end unrestricted cash was $126.5 million, working capital was $857.5 million and revolver availability was $832.5 million. The working-capital ratio was 1.86 to 1.
- Debt: Total debt, including trade debt, was approximately $4.4 billion. Consolidated debt reported on the balance sheet was $4.427 billion, including $610.9 million of revolver borrowings. Management stated that all debt covenants were satisfied.
- Balance sheet: Total assets were $11.061 billion and total stockholders’ equity was $4.694 billion. Goodwill was $2.485 billion and the investment in Diamond Green Diesel was approximately $2.2 billion.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because of the Gelnex, FASA and Valley acquisitions and higher Food Ingredients volumes, partially offset by lower Feed Ingredients commodity prices.
- Feed Ingredients sales declined $66.4 million. Higher protein volumes and acquisition contributions were more than offset by lower fats, used cooking oil and bakery prices.
- Food Ingredients sales and operating income increased substantially due to Gelnex, higher hydrolyzed collagen sales and improved product mix.
- Fuel Ingredients operating income declined despite higher DGD production and increased blender tax credits. Lower diesel and RIN prices, lower LCFS credit values and a lower-of-cost-or-market inventory reserve offset those benefits.
- Interest expense more than doubled to $259.2 million from $125.6 million because of acquisition-related borrowings, higher revolver usage and higher interest rates.
- Operating cash flow improved, while investing cash use declined to $1.675 billion from $2.417 billion because of lower acquisition spending and lower DGD capital contributions. Financing activities provided $876.3 million.
- Goodwill increased from $1.970 billion to $2.485 billion, primarily from acquisitions and foreign-currency translation. Three of six reporting units had fair values less than 30% above carrying value, creating impairment sensitivity.
- The company repurchased 926,167 shares for approximately $52.9 million in fiscal 2023. Approximately $321.6 million remained under the program at year-end. Darling has not paid a common-stock dividend since 1989 and did not expect to pay one in 2024.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide forward-looking financial or operating estimates, citing commodity prices, energy costs, weather, government policies, global demand and other factors outside its control.
- Management expects approximately $500 million of fiscal 2024 capital expenditures, including compliance, replacement and expansion projects, funded primarily from operating cash flow.
- The DGD joint venture operates renewable-diesel facilities with approximately 1.2 billion gallons of annual capacity. Its Port Arthur sustainable aviation fuel project is expected to be completed in 2025 at an estimated DGD cost of approximately $315 million. Additional funding could be required if DGD cash flow is insufficient.
- DGD recorded approximately $1.236 billion of blender tax credits in fiscal 2023, with Darling’s 50% share affecting earnings. The blender credit is scheduled through 2024, followed by the Clean Fuels Production Credit for 2025–2027. Changes to renewable-fuel mandates, RINs, LCFS credits or tax incentives could materially affect results.
- Gelnex contributed $267.1 million of sales but a $26.2 million net loss in fiscal 2023. Its acquisition-date purchase price was approximately $1.2 billion, and internal-control reporting for Gelnex was excluded from management’s fiscal 2023 assessment.
- Fiscal 2023 included restructuring and asset impairment charges of $18.6 million, including closure or transfer costs for U.S. Feed locations and the Peabody, Massachusetts collagen plant.
- The company recorded an immaterial $85.1 million out-of-period correction reducing FASA contingent consideration and goodwill. Management concluded it did not affect previously issued financial statements.
- Key risks include volatile commodity and energy prices, raw-material procurement and supplier concentration, dependence on DGD and renewable-fuel policy, high leverage and variable interest rates, acquisitions and integration, weather and climate change, animal disease, environmental compliance, litigation, labor and pension obligations, foreign exchange and cybersecurity.
- Contingency reserves for insurance, regulatory, governmental, environmental, litigation and tax matters were approximately $95.1 million at year-end. The company considers additional liability from disclosed claims unlikely to be material, but the ultimate Lower Passaic River liability cannot be determined.
Most Important Facts for Investors to Verify
- Reconcile fiscal-year results with any desired fourth-quarter figures; the supplied filing is not a quarterly filing.
- Assess debt maturities, particularly approximately $2.785 billion of contractual debt payments scheduled for 2026, alongside revolver availability and interest-rate exposure.
- Evaluate the sustainability of earnings after separating operating performance from DGD tax credits, commodity prices, acquisition effects and other unusual items.
- Monitor DGD production, margins, feedstock availability, RIN and LCFS prices, tax-credit policy and funding requirements for the SAF project.
- Review Gelnex integration, profitability, valuation assumptions and the excluded internal controls covering approximately $1.4 billion of assets.
- Stress-test goodwill and other asset values against lower commodity prices, weaker volumes and margin compression.
- Review supplier and customer concentration, including DGD’s approximately 20% share of fiscal 2023 sales and 22% of year-end accounts receivable.
- Examine environmental, litigation, pension, contingent consideration and off-balance-sheet commitments, including approximately $326.1 million of commodity and other purchase commitments over the stated periods.