Darling Ingredients Inc. — Form 10-Q Summary
Reporting period: Quarterly period ended September 30, 2023, covering 13 and 39 weeks. The request metadata references “2022 Q3,” but the supplied filing is the third-quarter 2023 Form 10-Q; comparable periods ended October 1, 2022.
Business Context and Reporting Period
Darling operates globally across Feed Ingredients, Food Ingredients and Fuel Ingredients. Its businesses process animal by-products, used cooking oil, bakery residuals and other bio-nutrients into fats, proteins, collagen, specialty ingredients, renewable fuels and bioenergy. Fuel Ingredients includes the company’s 50% investment in Diamond Green Diesel Holdings LLC, a joint venture with Valero.
The statements are unaudited and prepared under U.S. GAAP. The company completed the Gelnex collagen acquisition on March 31, 2023 and continued integrating the FASA and Valley Proteins acquisitions.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Net sales | $1,625.2 million | $1,747.6 million | Down 7.0% |
| Operating income | $178.4 million | $268.3 million | Down 33.5% |
| Net income attributable to Darling | $125.0 million | $191.1 million | Down 34.6% |
| Diluted earnings per share | $0.77 | $1.17 | Down $0.40 |
| Adjusted EBITDA | $247.8 million | $274.4 million | Down 9.7% |
| Gross margin | 23.8% | 21.5% | Up 230 basis points |
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|---|---|---|
| Net sales | $5,174.0 million | $4,764.1 million | Up 8.6% |
| Operating income | $790.9 million | $779.8 million | Up 1.4% |
| Net income attributable to Darling | $563.2 million | $581.1 million | Down 3.1% |
| Diluted earnings per share | $3.47 | $3.54 | Down $0.07 |
| Adjusted EBITDA | $797.8 million | $830.5 million | Down 3.9% |
| Gross margin | 23.4% | 23.9% | Down 50 basis points |
Cash Flow, Debt and Liquidity
- Cash provided by operating activities was $682.3 million for the first nine months, compared with $638.4 million in the prior-year period.
- Capital expenditures were $380.6 million, compared with $257.1 million. Management expects approximately $184 million of additional capital expenditures during the remainder of fiscal 2023.
- Cash used in investing activities was $1.51 billion, including $1.09 billion for acquisitions and $380.6 million of capital expenditures.
- Net cash provided by financing activities was $902.2 million. The company repurchased $52.9 million of common stock during the first nine months.
- Cash, cash equivalents and restricted cash totaled $253.5 million at September 30, 2023, including $119.0 million of unrestricted cash.
- Total debt was $4.41 billion, including $4.34 billion of long-term debt net of current maturities, compared with total debt of $3.38 billion at December 31, 2022. The increase primarily funded acquisitions and related investments.
- Revolving credit facility availability was approximately $1.044 billion. Management stated that the company was in compliance with applicable debt covenants.
- Working capital was $809.3 million, with a current ratio of 1.78 to 1, compared with $569.7 million and 1.53 to 1 at December 31, 2022.
Material Changes Versus the Prior Comparable Period
- Third quarter: Revenue declined primarily because lower fat, used cooking oil and bakery product prices outweighed acquisition-related volume growth. Feed Ingredients sales fell 17.7%, while Food Ingredients sales increased 31.0%, principally from Gelnex.
- Feed Ingredients operating income declined 33.6% to $78.3 million despite gross margin improving to 23.2% from 20.4%. Lower fat prices, lower volumes and higher selling, general and administrative costs pressured results.
- Food Ingredients operating income increased 12.5% to $60.5 million. Higher Gelnex volumes more than offset lower collagen prices and increased costs.
- Fuel Ingredients operating income declined 45.3% to $65.2 million. Results were affected by the planned catalyst turnaround and an unexpected minor-fire shutdown at DGD’s St. Charles plant, lower renewable identification number and LCFS credit values, and unfavorable commodity derivative impacts.
- Interest expense rose $30.5 million in the third quarter and $111.3 million for the nine-month period, reflecting higher debt balances and higher variable interest rates.
- For the first nine months, higher DGD production volumes, including the Port Arthur plant, drove a 36.6% increase in Fuel Ingredients operating income and offset weakness in Feed Ingredients.
- Gelnex contributed $180.0 million of sales and a $18.0 million net loss for the first nine months, including acquisition-related effects and purchase-accounting impacts.
Guidance, Outlook, Risks and Unusual Items
- Management does not provide forward-looking financial or operational estimates because results are highly sensitive to commodity prices, energy costs, weather, raw-material volumes, government policies and global demand.
- Management believes operating cash flow, unrestricted cash and available revolver capacity will be sufficient for the next twelve months, but identifies significant sensitivity to commodity-price declines, energy costs, foreign exchange, inflation, credit-market disruption, conflicts and economic conditions.
- The DGD Port Arthur SAF upgrade is expected to be completed in 2025 at an estimated total cost of approximately $315 million. The project is expected to be funded primarily by DGD cash flow, but additional borrowing or partner contributions may be required.
- The company expects the previously announced Miropasz acquisition in Poland, valued at approximately €110 million subject to adjustments, to close in the first quarter of 2024, pending customary approvals. Management expects to finance it through borrowings.
- The company recorded an immaterial out-of-period correction reducing FASA contingent consideration and goodwill by approximately $85.1 million. The contingent consideration liability was $78.6 million at September 30, 2023 and is remeasured quarterly.
- The company recorded $5.4 million of restructuring charges in the first nine months, mainly related to closing the Peabody, Massachusetts collagen plant and a European processing location.
- Contingency reserves for insurance, environmental, litigation and tax matters totaled approximately $90.0 million. Management believes additional unreserved liabilities are unlikely to materially affect results, but final costs could exceed estimates.
- Potential multiemployer pension withdrawal liabilities could be material, although the company cannot currently estimate the possible liability for underfunded plans. Recorded withdrawal liabilities totaled approximately $6.6 million.
- The company has $325.7 million of commodity purchase commitments over the next five years, plus approximately $56.4 million of letters of credit and bank guarantees.
- Key structural risks include dependence on renewable-fuel policies and tax credits, DGD operating performance, commodity and raw-material volatility, high leverage, variable interest rates, foreign exchange, climate and environmental regulation, disease outbreaks, geopolitical conflict and acquisition integration.
Important Facts for Investors to Verify
- Reconcile the significant increase in debt with acquisition funding, interest-rate exposure and scheduled maturities, particularly the Term Loan B maturity in December 2024 and other facilities maturing in 2026.
- Assess whether DGD’s weaker third-quarter contribution reflects temporary plant disruptions or a sustained decline in renewable-fuel margins, RIN values and LCFS credits.
- Evaluate the earnings quality and cash conversion of DGD: nine-month equity income was $361.7 million, while distributions received were $163.6 million.
- Monitor Feed Ingredients exposure to fat and used cooking oil prices, raw-material volumes and competing agricultural commodities.
- Assess Gelnex integration, profitability and provisional purchase-accounting values, including the $564.5 million of preliminary goodwill and $350.5 million of identifiable intangible assets.
- Verify the funding requirements and potential partner contributions for the DGD SAF project and the planned Miropasz acquisition.
- Review environmental, litigation, multiemployer pension, guarantee and contingent-consideration exposures that may exceed recorded liabilities.
- Confirm that the company’s stated covenant compliance and approximately $1.044 billion of revolver availability remain intact under adverse commodity, currency and interest-rate scenarios.