Darling Ingredients Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended September 28, 2019, compared with September 29, 2018. Although the request identifies “2018 Q3,” the provided filing is the third-quarter 2019 Form 10-Q, filed November 6, 2019. Darling is a global producer of sustainable feed, food, fuel and bioenergy ingredients operating through Feed Ingredients, Food Ingredients and Fuel Ingredients segments.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Net sales | $842.0 million | $812.6 million | $2,504.5 million | $2,534.6 million |
| Operating income | $59.9 million | $15.6 million | $182.5 million | $181.3 million |
| Net income attributable to Darling | $25.7 million | $(6.0) million | $70.0 million | $60.8 million |
| Diluted earnings per share | $0.15 | $(0.04) | $0.42 | $0.37 |
| Adjusted EBITDA | $108.2 million | $97.0 million | $327.2 million | $322.5 million |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $262.7 million | $199.7 million |
Margins: Consolidated gross margin was 22.5% in Q3 2019 versus 20.3% in Q3 2018, and 22.2% for the first nine months versus 21.9%. Operating margin was approximately 7.1% in Q3 2019 versus 1.9% in Q3 2018, and approximately 7.3% for the nine months versus 7.2%.
- Q3 segment performance: Feed Ingredients operating income was $22.1 million, Food Ingredients was $19.5 million and Fuel Ingredients was $33.3 million, including $32.0 million of equity income from Diamond Green Diesel.
- First nine months: Feed Ingredients operating income declined to $53.1 million from $70.8 million; Food Ingredients increased to $73.6 million from $19.2 million; Fuel Ingredients declined to $101.6 million from $136.3 million.
- Balance sheet: Cash and cash equivalents were $69.1 million at September 28, 2019, versus $107.3 million at December 29, 2018. Total assets were $4.94 billion and total stockholders’ equity was $2.37 billion.
- Debt and liquidity: Debt carrying value was $1.62 billion, including $1.56 billion of long-term debt. Revolving credit availability was $926.9 million. Working capital was $257.8 million, compared with $357.4 million at year-end 2018.
- Capital spending: Capital expenditures were $245.1 million for the first nine months, up from $213.7 million. Management expected approximately $55.0 million of additional capital expenditures during the remainder of fiscal 2019.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 3.6%, while nine-month sales decreased 1.2%, reflecting lower protein, collagen-related and fuel-market pricing, partly offset by higher volumes and acquisitions.
- Q3 profitability improved substantially, driven by stronger Feed and Food Ingredients results and a significant improvement in Diamond Green Diesel results. The prior-year quarter included a Diamond Green Diesel loss.
- First-nine-month net income attributable to Darling increased 15.0%, despite lower segment operating income in Feed and Fuel Ingredients.
- Fuel Ingredients results were negatively affected by the absence of approximately $160.4 million of reinstated 2017 biofuel blender tax credits recorded by Diamond Green Diesel in the first nine months of 2018.
- The company refinanced its $500.0 million 5.375% senior notes due 2022 with $500.0 million of 5.25% senior notes due 2027. It recognized $12.1 million of debt extinguishment costs in the first nine months of 2019.
- Darling adopted the new lease standard effective December 30, 2018, recognizing approximately $135.7 million of operating lease right-of-use assets and $134.4 million of operating lease liabilities at adoption.
- Management began presenting equity income from Diamond Green Diesel within operating income for all periods because the joint venture had become integral to the company’s operations.
- The company repurchased approximately $11.7 million of common stock during the quarter and had approximately $188.3 million remaining under its repurchase authorization at September 28, 2019.
Outlook, Commentary, Risks and Unusual Items
- Management did not provide formal financial or operating forecasts, citing volatility in commodity prices, energy costs, weather, crop conditions, government policies, foreign exchange rates and global demand.
- Management stated that operating cash flow, unrestricted cash and revolver availability should be sufficient for expected working capital, scheduled debt service, taxes and maintenance and compliance capital expenditures over the next twelve months.
- Diamond Green Diesel’s existing capacity was approximately 275 million gallons of renewable diesel annually. A new parallel facility is expected to increase capacity by approximately 400 million gallons, with estimated completion in the fourth quarter of 2021 and estimated project cost of approximately $1.1 billion. The partners may need to provide additional funding if available cash falls below specified levels.
- Diamond Green Diesel distributed $55.4 million to each partner during the first nine months of 2019 and approximately $12.1 million to each partner in October 2019.
- A potential Port Arthur, Texas renewable diesel project is under review. A final investment decision is expected in 2021; the project remains subject to engineering, permits and board approval.
- African Swine Fever reduced slaughter volumes and raw-material availability in China and affected demand for certain porcine plasma products, although the relevant plasma-feed ban had been lifted subject to new guidelines.
- Key exposures include commodity and finished-product prices, raw-material volumes, energy costs, foreign currency, interest rates, renewable-fuel policies, animal disease, regulatory compliance, customer credit and highly leveraged operations.
- Contingency reserves for insurance, environmental, litigation and tax matters totaled approximately $66.8 million. The company continues to face potential liabilities related to the Lower Passaic River environmental matter and litigation involving the Fresno facility relocation.
- Multiemployer pension withdrawal liabilities could be material; accrued scheduled withdrawal liabilities were approximately $6.1 million, but potential liabilities for underfunded plans cannot currently be calculated.
- Goodwill totaled $1.21 billion. Management identified several reporting units with limited excess fair value and stated that declines in product prices, margins or raw-material supply could result in future impairment.
Investor Verification Items
- Verify the period designation: the filing is for Q3 2019, not Q3 2018.
- Assess the sustainability of earnings excluding Diamond Green Diesel equity income, tax effects and other unusual items, including the prior-year biofuel blender tax credits.
- Monitor Diamond Green Diesel expansion costs, funding requirements, distributions and operating performance.
- Reconcile reported debt, variable-rate exposure, covenant compliance and the company’s reliance on subsidiary cash distributions.
- Evaluate whether lower protein, collagen, diesel and renewable identification number prices could pressure margins and goodwill valuations.
- Track African Swine Fever, raw-material volumes, foreign exchange movements and regulatory changes affecting international operations.
- Review capital expenditure needs, remaining share repurchase authorization and the company’s ability to maintain liquidity during adverse commodity cycles.
- Review the potential financial impact of environmental, Fresno facility, insurance and multiemployer pension contingencies, for which final outcomes remain uncertain.