Darling Ingredients Inc. — Form 10-Q Summary
Business context and reporting period
Darling Ingredients is a global producer of sustainable ingredients from animal by-products, used cooking oil and food residuals for feed, food, fuel, bioenergy and other markets. Operations span more than 200 locations across five continents and are reported in Feed Ingredients, Food Ingredients and Fuel Ingredients.
The filing covers the 13 weeks ended April 4, 2015, compared with the 13 weeks ended March 29, 2014. The request metadata identifies “2014 Q1,” but the filing itself is a first-quarter 2015 Form 10-Q. Financial statements are unaudited.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $874.7 million | $946.3 million | Down $71.6 million |
| Operating income/(loss) | $31.8 million | $(0.6) million | Improved $32.4 million |
| Operating margin | 3.6% | Less than 0% | Improved |
| Net income/(loss) attributable to Darling | $0.1 million | $(52.8) million | Improved $52.9 million |
| Diluted EPS | $0.00 | $(0.32) | Improved |
| Adjusted EBITDA | $98.2 million | $65.1 million | Up $33.1 million |
| Pro forma Adjusted EBITDA | $103.5 million | $130.0 million | Down $26.5 million |
| Net cash from operating activities | $59.2 million | $(30.5) million | Improved $89.7 million |
| Capital expenditures | $50.8 million | $51.4 million | Down $0.6 million |
Gross margin was $190.2 million, or 21.7% of sales, versus 18.1% in the prior-year quarter. Excluding the prior-year $44.8 million non-cash VION inventory step-up, Q1 2014 gross margin would have been 22.8%, making the comparable underlying margin lower in Q1 2015.
Segment sales and operating income were $547.5 million and $35.4 million for Feed Ingredients, $270.2 million and $10.8 million for Food Ingredients, and $57.0 million and $2.5 million for Fuel Ingredients, respectively. Fuel Ingredients segment income, including the DGD joint venture, was $0.3 million versus $7.2 million in Q1 2014.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $112.1 million at April 4, 2015, compared with $108.8 million at January 3, 2015.
- Working capital was $568.2 million, with a current ratio of 2.19 to 1.
- Total debt was $2.09 billion, including $299.6 million of Term Loan A, $1.145 billion of Term Loan B, $88.6 million drawn on the revolving facility and $500.0 million of 5.375% senior notes due 2022.
- Revolver availability was $879.4 million after borrowings and $32.0 million of letters of credit.
- Management stated that the company was in compliance with its debt covenants as of April 4, 2015. Effective May 13, 2015, the maximum total leverage covenant was amended to remain at 5.0 to 1.0 for the duration of the loans.
- Total assets were $4.96 billion and total stockholders’ equity was $1.96 billion at quarter-end.
Material changes versus the prior comparable period
- Sales declined 7.6%, primarily because of lower finished-product prices and unfavorable foreign exchange translation; higher raw-material volumes partly offset these effects.
- Raw materials processed increased approximately 12.9% to 2.44 million metric tons.
- Feed Ingredients sales declined $38.6 million. Lower prices for proteins, fats, used cooking oil and bakery products outweighed volume growth.
- Food Ingredients operating income improved from a $12.1 million loss to $10.8 million of income, although the prior-year period included a $31.9 million non-cash inventory step-up.
- Interest expense declined $35.8 million to $23.1 million because the prior-year period included the redemption premium and deferred-loan-cost write-off related to retiring the 8.5% senior notes.
- Foreign currency losses declined to $2.5 million from $13.8 million, while foreign currency translation produced a $98.6 million after-tax loss in other comprehensive income. Accumulated other comprehensive loss increased to $274.9 million.
- Equity in unconsolidated subsidiaries declined to a $1.8 million loss from $5.1 million of income, primarily because of weaker DGD joint venture results amid lower petroleum prices and uncertainty surrounding renewable-fuel requirements.
Outlook, risks, contingencies and unusual items
Management does not provide forward-looking financial or operating estimates because results are sensitive to commodity prices, raw-material volumes, weather, energy costs, foreign exchange and regulatory changes. Management expects to incur $150 million to $200 million of additional capital expenditures during the remainder of fiscal 2015. The Oracle E-Business Suite ERP implementation is expected to be completed in 2016 and is expected to have a total cash-flow impact of $40 million to $42 million; approximately $38.4 million had been spent through April 4, 2015.
Management believes operating cash flow, cash on hand and revolver availability will meet working-capital needs, planned capital expenditures, debt service, taxes and other requirements over the next 12 months. The company remains highly leveraged and relies partly on distributions and intercompany payments from subsidiaries, which may be constrained by law, regulation, foreign-exchange controls or operating performance.
- Commodity exposure includes protein, fat, corn, palm oil, soy meal, natural gas and diesel fuel prices. Q1 2015 benchmark prices for major feed products were generally below Q1 2014 levels.
- Bird flu had not materially affected results as of the filing date, but animal diseases could reduce raw-material availability or product demand.
- The DGD joint venture recorded a Q1 net loss of $4.5 million, compared with $9.3 million of net income in the prior-year quarter. It later received $126.0 million of 2014 blenders credits, repaid approximately $43 million of debt and distributed $25 million to Darling.
- Commodity purchase commitments for the next 12 months totaled $92.4 million, and operating lease obligations were approximately $34.1 million. Letters of credit and foreign bank guarantees totaled $42.1 million.
- Insurance, environmental and litigation reserves were approximately $58.1 million, partially offset by $11.4 million of insurance recovery receivables. The company disclosed environmental and permit litigation, including matters involving the Lower Passaic River and the Fresno facility, but does not currently expect a material impact.
- Potentially material exposure exists from underfunded multiemployer pension plans and withdrawal liabilities, although the company cannot currently quantify possible additional obligations.
Most important facts for investors to verify
- Whether lower commodity prices and the stronger U.S. dollar continue to pressure comparable operating income and pro forma Adjusted EBITDA.
- The company’s leverage trajectory, covenant compliance and ability to generate sufficient cash for scheduled debt amortization and interest.
- Actual performance and cash distributions from the DGD joint venture, including effects of renewable-fuel regulations and petroleum prices.
- Progress, cost and execution risks associated with the ERP implementation and acquisition integration activities.
- Developments in environmental, litigation, pension, regulatory and animal-disease matters, including any changes to reserve requirements.
- Reconciliations for Adjusted EBITDA and adjusted EPS, which are non-GAAP measures and exclude or adjust for significant acquisition-related and other unusual items.