Darling International Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2012, consisting of 52 weeks. The provided filing is a fiscal 2012 annual report, not a 2011 fourth-quarter filing; quarterly data for the fourth quarter of fiscal 2012 is included below.
Business Context
Darling provides rendering, used cooking oil, bakery residual recycling and grease-trap services. It operates more than 120 U.S. processing and transfer facilities and sells protein meals, fats, greases, hides, bakery by-products and value-added products to feed, pet food, fertilizer, biofuel and industrial customers. Its principal operating segments are Rendering and Bakery.
| Segment | Fiscal 2012 Sales | Share of Sales | Segment Profit |
|---|---|---|---|
| Rendering | $1.406 billion | 82.6% | $267.5 million |
| Bakery | $295.4 million | 17.4% | $57.1 million |
| Total | $1.701 billion | 100.0% | Not applicable |
Financial Performance and Liquidity
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Net sales | $1,701.4 million | $1,797.2 million | Down 5.3% |
| Operating income | $231.7 million | $314.0 million | Down 26.2% |
| Operating margin | 13.6% | 17.5% | Down 3.9 percentage points |
| Net income | $130.8 million | $169.4 million | Down 22.8% |
| Net margin | 7.7% | 9.4% | Down 1.7 percentage points |
| Diluted EPS | $1.11 | $1.47 | Down 24.5% |
| Adjusted EBITDA | $317.1 million | $392.9 million | Down 19.3% |
| Cash flow from operations | $249.5 million | $240.9 million | Up $8.6 million |
| Capital expenditures | $115.4 million | $60.2 million | Up 91.7% |
Fourth-quarter fiscal 2012 sales were $424.9 million, operating income was $49.5 million and net income was $28.8 million, compared with fourth-quarter 2011 sales of $430.9 million, operating income of $59.0 million and net income of $29.5 million.
At year-end, working capital was $158.6 million, with a 2.20-to-1 current ratio. Unrestricted cash was $103.2 million, compared with $38.9 million at the prior year-end. The company had $384.9 million available under its revolving credit facility, after $30.1 million of letters of credit, and no revolving borrowings.
Total debt was approximately $250.2 million, consisting primarily of $250.0 million of 8.5% Senior Notes due 2018. The original $300.0 million term loan had been fully repaid. Management stated that the company was in compliance with its debt covenants and expected available liquidity and operating cash flow to fund anticipated needs for the next twelve months.
Material Changes Versus Fiscal 2011
- Sales declined $95.8 million, primarily from lower Rendering commodity prices and lower raw-material volumes. Rendering sales declined $95.2 million; Bakery sales declined $0.6 million.
- Lower prices for California meat-and-bone meal, bleachable fancy tallow, poultry grease and yellow grease reduced revenue, partly offset by higher Illinois meat-and-bone meal, poultry meal and corn prices.
- Raw-material volumes from rendering suppliers and restaurants declined, while bakery volumes were weak in the first half of the year before recovering toward historical levels.
- Cost of sales declined $35.6 million, helped by lower natural gas and diesel costs and formula-based reductions in raw-material costs, but these savings did not offset lower sales and higher payroll and benefit costs.
- Operating income decreased $82.3 million. Selling, general and administrative expense increased 11.5% to $151.7 million, and depreciation and amortization increased 8.2% to $85.4 million.
- Interest expense declined $13.1 million because of lower debt balances and lower debt-cost write-offs.
- Cash generation remained strong, but investing cash use increased to $153.8 million because of higher capital expenditures and $43.4 million invested in the Valero renewable diesel joint venture.
Outlook, Commentary, Risks and Unusual Items
Management described fiscal 2012 as the company’s second-best year in its history despite weaker earnings. The outlook remained sensitive to volatile commodity prices, raw-material availability, slaughter rates, export demand and energy costs. The 2012 Midwest drought raised grain prices and could pressure future meat and poultry production and therefore raw-material supply.
The 50/50 Diamond Green Diesel joint venture with Valero was substantially complete, with phased commissioning expected in the second quarter of 2013. The facility is designed for approximately 9,300 barrels per day of renewable diesel. Darling had invested approximately $62.5 million at year-end, had contributed approximately $66.7 million toward its estimated $93.2 million commitment and expected approximately $35.1 million of additional joint-venture capital contributions in fiscal 2013. Darling is also responsible for 50% of specified cost overruns; anticipated additional scope-change costs were $17.3 million in total.
The company began implementing a company-wide Oracle enterprise resource planning system. Approximately $13.8 million had been spent through year-end, with total expected cash impact of $32 million to $36 million over the implementation period.
Key risks include commodity-price volatility, competition for animal by-products and used cooking oil, dependence on major suppliers and customers, energy-price fluctuations, export restrictions related to BSE and other animal diseases, food-safety and environmental regulation, joint-venture construction and startup risk, underfunded multiemployer pension plans, litigation and environmental contingencies, and potential goodwill impairment. Goodwill totaled approximately $381.4 million; one reporting unit had fair value only 11% above carrying value and included approximately $159.6 million of goodwill.
Insurance, environmental and litigation reserves totaled approximately $37.0 million at year-end, supported by $9.3 million of insurance recovery receivables. The company was involved in the Lower Passaic River environmental litigation and a Fresno facility permitting lawsuit; management did not expect either matter to have a material effect, although ultimate outcomes remain uncertain.
The company has not paid common-stock dividends since 1989 and did not expect to pay cash dividends in 2013. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm that the relevant period is fiscal 2012 rather than “2011 Q4,” and distinguish the reported fourth-quarter results from full-year results.
- Assess sensitivity of earnings and cash flow to fat, protein, bakery-feed and competing commodity prices, including the sharp fourth-quarter declines in several Rendering commodities.
- Monitor raw-material collection volumes, slaughter rates, restaurant used-cooking-oil competition and supplier concentration.
- Review the Diamond Green Diesel facility’s commissioning, final costs, operating performance, financing and Darling’s remaining contribution and overrun exposure.
- Evaluate liquidity after capital expenditures, ERP spending, joint-venture contributions, debt service and potential pension or contingency payments.
- Review debt covenants, the 8.5% Senior Notes maturity and the company’s ability to refinance or repay the 2018 notes.
- Assess goodwill impairment risk, particularly for the reporting unit with approximately $159.6 million of goodwill and limited valuation headroom.
- Track regulatory, environmental, food-safety, export and litigation developments, including the Lower Passaic River and Fresno matters.