Darling Ingredients Inc. — Form 10-K Summary
Reporting period: Fiscal year ended January 2, 2021, comprising 53 weeks. The source filing is a fiscal 2020 Form 10-K, not a 2019 fourth-quarter filing. Fiscal 2019 ended December 28, 2019 and comprised 52 weeks.
Business Context
Darling is a global producer of sustainable ingredients derived primarily from animal by-products, used cooking oil, bakery residuals and other bio-nutrients. Its products serve feed, pet food, food, pharmaceutical, industrial, fertilizer, bioenergy and renewable-fuel markets. Operations span more than 200 locations across five continents and are reported through Feed Ingredients, Food Ingredients and Fuel Ingredients.
- Feed Ingredients: Fats, proteins, used cooking oil, bakery residuals, blood products, hides, fertilizers and related services.
- Food Ingredients: Collagen, natural casings, edible fats, bone products, heparin and meat by-products.
- Fuel Ingredients: The Diamond Green Diesel joint venture, European bioenergy operations and related renewable-fuel activities.
Financial Performance
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $3.572 billion | $3.364 billion | +6.2% |
| Operating income | $430.9 million | $475.8 million | -9.4% |
| Net income attributable to Darling | $296.8 million | $312.6 million | -5.1% |
| Diluted EPS | $1.78 | $1.86 | -4.3% |
| Adjusted EBITDA | $504.2 million | $436.9 million | +15.4% |
| Net cash provided by operating activities | $624.7 million | $362.6 million | +$262.1 million |
| Capital expenditures | $280.1 million | $359.5 million | -22.1% |
Consolidated gross margin was $883.1 million, or 24.7% of sales, compared with $774.8 million, or 23.0%, in fiscal 2019. Income tax expense was $53.3 million, with an effective tax rate of 15.1%, compared with 15.6% in fiscal 2019. Management attributes the adjusted EBITDA improvement primarily to higher protein and fat prices and increased Feed Ingredients volumes.
Segment Results
| Segment | 2020 Sales | 2019 Sales | 2020 Operating Income | 2019 Operating Income |
|---|---|---|---|---|
| Feed Ingredients | $2.072 billion | $1.971 billion | $96.6 million | $54.7 million |
| Food Ingredients | $1.186 billion | $1.119 billion | $83.4 million | $90.6 million |
| Fuel Ingredients | $314.1 million | $274.3 million | $317.3 million | $398.8 million |
- Feed Ingredients raw material volume increased 2.4% to approximately 8.95 million metric tons. Gross margin increased to 25.5% from 22.9%, and operating income rose 76.6%.
- Food Ingredients raw material volume increased approximately 0.4%. Gross margin declined modestly to 22.4% from 22.7%; operating income decreased 7.9%, reflecting a prior-year asset-sale gain, a weak Brazilian real and COVID-19-related European volume weakness.
- Fuel Ingredients operating income declined 20.4%, primarily because fiscal 2019 included reinstated 2018 and 2019 blenders tax credits, while fiscal 2020 included $38.2 million of restructuring and impairment charges related to biodiesel facility closures.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $81.6 million at January 2, 2021, compared with $72.9 million at December 28, 2019.
- Working capital was $311.7 million, with a current ratio of 1.46, versus $228.9 million and 1.33, respectively, at the prior year-end.
- Revolving-credit availability was approximately $893.9 million after borrowings, ancillary facilities and letters of credit.
- Total debt carrying value was approximately $1.508 billion, consisting principally of $500.0 million of 5.25% notes due 2027, €515.0 million of 3.625% notes due 2026, $300.0 million of Term Loan B borrowings and $55.0 million of revolver borrowings.
- Management stated that the Company was in compliance with its debt covenants and expected operating cash flow, cash on hand and available revolver capacity to fund working capital, scheduled debt service and planned capital expenditures for the next twelve months.
- Fiscal 2021 capital expenditures were expected to be approximately $312 million, including approximately $230 million of maintenance and compliance spending and $82 million primarily for expansion projects.
Material Changes and Unusual Items
- Fiscal 2020 included an additional week, which increased net sales by approximately $73 million and operating income by approximately $8 million.
- The Company recorded approximately $38.2 million of restructuring and asset impairment charges after deciding to shut down U.S. and Canadian biodiesel processing facilities because of unfavorable industry economics. This included approximately $31.6 million of goodwill impairment and $6.2 million of long-lived asset impairment.
- COVID-19 did not materially disrupt operations through the filing date; all facilities remained operational. The Company recorded approximately $7.5 million of COVID-19-related charges and experienced temporary second-quarter disruptions in specialty collagen and gelatin supply and sales.
- The Company repurchased approximately $55.0 million of common stock, or 2.19 million shares, during fiscal 2020. Approximately $200 million remained under the repurchase authorization at year-end.
- DGD contributed $315.1 million of equity income, compared with $364.5 million in fiscal 2019. DGD distributed approximately $205.2 million to Darling during fiscal 2020.
- DGD’s Norco expansion was expected to begin operations in the fourth quarter of 2021 at an estimated total cost of approximately $1.1 billion. In January 2021, the partners also approved a Port Arthur, Texas facility expected to begin operations in the second half of 2023, with an estimated cost of approximately $1.45 billion.
Outlook, Risks and Contingencies
Management did not provide formal operating forecasts because results are highly sensitive to commodity prices, energy costs, weather, raw-material volumes, government programs and global demand. Management expected renewable-fuel regulations and mandates to continue supporting DGD demand, but noted that lower fuel demand, adverse policy changes or weaker project economics could affect results.
- Key exposures include volatility in protein, fat, oil, grain and energy prices; competition for animal by-products and used cooking oil; supplier and customer concentration; weather and climate-related disruptions; foreign currency movements; and international regulatory and trade risks.
- DGD depends materially on U.S. renewable-fuel programs, including RFS2, low-carbon fuel standards and biofuel tax credits. DGD recorded approximately $287.9 million of blenders tax credits in fiscal 2020, of which Darling’s share was 50%.
- Goodwill was approximately $1.260 billion. The filing identifies commodity prices, gross margins and raw-material volumes as important impairment assumptions.
- Loss reserves for insurance, environmental, litigation and tax contingencies totaled approximately $66.2 million at year-end, partly offset by $27.0 million of insurance recovery receivables.
- The Company accepted a $0.6 million EPA cash-out settlement offer concerning the Lower Passaic River matter, subject to administrative approval. Potential ultimate liability, if any, remains uncertain, although management believes the matter is unlikely to be material.
- Underfunded multiemployer pension plans could require additional contributions or withdrawal liabilities that management cannot currently quantify and that could be material.
- The Company provides no cash dividend and has not paid common-stock dividends since 1989; it did not expect to pay dividends in 2021.
Most Important Facts for Investors to Verify
- Confirm that the intended comparison is fiscal 2020 versus fiscal 2019, rather than a 2019 Q4 filing.
- Assess the sustainability of earnings excluding substantial DGD blenders tax credits, including the timing and amount of future credits.
- Monitor execution, funding requirements and returns for the Norco and Port Arthur DGD projects.
- Evaluate commodity-price, raw-material-supply and energy-cost sensitivity, particularly for Feed Ingredients and DGD.
- Review the $38.2 million biodiesel shutdown charges and whether additional closure, remediation or restructuring costs arise.
- Reconcile operating cash flow with DGD distributions, working-capital changes and capital expenditures.
- Review debt maturities, variable-rate exposure, covenant headroom and the Company’s reliance on cash upstreamed from subsidiaries.
- Track goodwill impairment sensitivity, pension underfunding and the unresolved Lower Passaic River environmental matter.
- Verify the effect of the additional fiscal week when comparing fiscal 2020 growth and margins with fiscal 2019.