Darling International Inc. — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended June 30, 2012, compared with July 2, 2011. The request metadata identifies “2011 Q2,” but the filing is for fiscal 2012 second quarter. The financial statements are unaudited. Darling operates rendering and bakery businesses serving animal feed, pet food, fertilizer, biofuels, and industrial markets.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $436.7 million | $470.6 million | $823.8 million | $910.5 million |
| Operating income | $64.0 million | $92.3 million | $116.5 million | $180.4 million |
| Operating margin | 14.6% | 19.6% | 14.1% | 19.8% |
| Net income | $36.2 million | $52.2 million | $64.8 million | $98.8 million |
| Net margin | 8.3% | 11.1% | 7.9% | 10.9% |
| Diluted EPS | $0.31 | $0.44 | $0.55 | $0.87 |
| Cash flow from operations | Not separately provided | Not separately provided | $142.9 million | $118.5 million |
| Capital expenditures | Not separately provided | Not separately provided | $53.5 million | $27.9 million |
- Second-quarter revenue declined 7.2%, operating income declined 30.6%, and net income declined 30.6% year over year.
- Six-month revenue declined 9.5%, operating income declined 35.4%, and net income declined 34.4%.
- Operating cash flow increased $24.4 million despite lower earnings, primarily because of favorable changes in taxes, inventories, payables, and receivables.
- At June 30, 2012, cash and cash equivalents were $72.3 million, compared with $38.9 million at December 31, 2011. Working capital was $113.4 million, with a 1.84-to-1 current ratio.
- Long-term debt was $250.0 million, consisting principally of 8.5% senior notes due 2018. The term loan was fully repaid, and the revolving facility had no borrowings, $25.3 million of letters of credit, and $389.7 million of availability.
Material Changes Versus Prior Comparable Period
- Rendering sales declined to $371.5 million from $392.7 million in the second quarter and to $693.8 million from $764.2 million for the first six months.
- Bakery sales declined to $65.2 million from $77.9 million in the second quarter and to $130.0 million from $146.3 million for the first six months.
- Lower finished-product prices and lower raw-material volumes were the principal revenue pressures. Management attributed lower volumes to weaker slaughter, processor rates, and commercial bakery production.
- Commodity prices were weaker for several fats, greases, MBM, and bakery by-products. Feed-grade and pet-food poultry meal prices partly offset the declines.
- Lower natural gas and diesel costs reduced operating costs, but these benefits were insufficient to offset lower revenue and increased selling, general and administrative expenses.
- Second-quarter SG&A increased 8.2% to $36.9 million; six-month SG&A increased 14.7% to $74.3 million, primarily due to payroll and incentive-related costs and the absence of a prior-year purchase accounting contingency gain.
- Interest expense declined to $5.8 million from $7.7 million in the quarter and to $12.7 million from $22.0 million for the first six months, reflecting debt repayments and lower deferred loan-cost write-offs.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that cash from operations, cash on hand, and revolving-credit availability should fund working capital, maintenance and compliance capital expenditures, debt service, taxes, and continued Joint Venture funding for the next twelve months. No formal earnings guidance was provided.
- The Diamond Green Diesel joint venture with Valero is constructing a renewable diesel facility expected to produce approximately 9,300 barrels per day. Darling’s total planned contribution is approximately $93.2 million; $48.8 million had been contributed by June 30, 2012. The company expects to fund its share of an anticipated $8.1 million scope-change cost, or approximately $4.1 million.
- The company acquired substantially all assets of RVO BioPur, LLC on June 8, 2012. Management considered the acquisition immaterial to reported revenue and net income.
- Key operating risks include commodity-price volatility, lower raw-material availability, energy-price increases, weak domestic or international demand, export restrictions, BSE and other food-safety issues, renewable-fuel policy changes, and potential regulatory costs.
- The continuing Midwest drought could raise grain prices and reduce meat and poultry production, potentially constraining raw-material supplies. Indonesia’s closure to U.S. beef-derived MBM remained in effect as of the filing date.
- Contingency reserves for insurance, environmental, and litigation matters were approximately $39.9 million at June 30, 2012, supported by $9.6 million of insurance recovery receivables. Significant matters include the Lower Passaic River litigation and a Fresno facility permitting lawsuit.
- The company had approximately $19.8 million of commodity purchase commitments and expected $15.9 million of operating lease payments during the next twelve months, excluding the separate Joint Venture funding commitment.
- Potential multi-employer pension withdrawal liabilities could be material, although the company cannot currently quantify its full exposure.
Investor Verification Checklist
- Verify the sustainability of earnings amid lower commodity prices and reduced raw-material volumes.
- Review current status, construction costs, funding requirements, and start-up prospects for the Diamond Green Diesel facility.
- Assess available liquidity after Joint Venture contributions, capital expenditures, commodity commitments, leases, pension funding, and contingencies.
- Confirm compliance with the credit agreement and senior-notes covenants and monitor the maturity and refinancing profile of the $250.0 million senior notes.
- Evaluate exposure to BSE-related export restrictions, renewable-fuel mandates, food-safety regulation, and foreign trade barriers.
- Track litigation, environmental reserves, multi-employer pension exposure, and any additional cost overruns associated with the Joint Venture.
- Reconcile the filing’s reported fiscal 2012 period with the request metadata, which refers to 2011 Q2.