Darling Ingredients Inc. — Form 10-Q Summary
Reporting period: The provided filing is for the 13 and 26 weeks ended June 28, 2014, with comparative periods ended June 29, 2013. Although the request metadata states “2013 Q2,” the filing itself clearly identifies the period as second quarter 2014. The financial statements are unaudited.
Business Context
Darling Ingredients develops and produces sustainable ingredients from animal by-products, used cooking oil, bakery residuals and other bio-nutrients for feed, food, fuel, pharmaceutical and industrial markets. Following the VION acquisition, operations span more than 200 locations across five continents and are reported in Feed Ingredients, Food Ingredients and Fuel Ingredients.
Results are not directly comparable with 2013 because the company acquired Rothsay in October 2013 and VION Ingredients on January 7, 2014. VION contributed approximately $1,028.5 million of revenue and a $14.0 million loss during the first six months of 2014.
Key Financial Metrics
| Metric | Three months ended June 28, 2014 | Three months ended June 29, 2013 | Six months ended June 28, 2014 | Six months ended June 29, 2013 |
|---|---|---|---|---|
| Net sales | $1,007.0 million | $423.6 million | $1,938.4 million | $869.0 million |
| Operating income | $75.5 million | $50.8 million | $74.9 million | $109.4 million |
| Net income attributable to Darling | $32.8 million | $26.4 million | $(20.0) million | $58.8 million |
| Diluted EPS | $0.20 | $0.22 | $(0.12) | $0.50 |
| Gross margin percentage | 25.7% | 26.8% | 23.0% | 27.2% |
| Adjusted EBITDA | $143.0 million | $72.9 million | $208.1 million | $153.3 million |
Second-quarter net sales increased 138%, principally from the acquired businesses. Adjusted for the VION inventory step-up and acquisition and integration costs, management reported second-quarter net income of $38.9 million, or $0.24 per diluted share. Six-month reported earnings were affected by substantial acquisition-related and financing items.
Cash Flow, Balance Sheet and Liquidity
- Six-month operating cash flow was $41.0 million, down from $129.2 million in the prior-year period.
- Investing cash use was $2.184 billion, including $2.076 billion for acquisitions and $103.5 million of capital expenditures.
- Financing cash flow was $1.408 billion, primarily reflecting acquisition-related borrowings and the $500 million 5.375% senior notes issuance.
- Cash and cash equivalents declined to $143.8 million from $870.9 million at December 28, 2013.
- Working capital was $590.6 million, with a 2.1-to-1 current ratio, compared with $950.7 million and 6.4-to-1 at year-end 2013.
- Total debt was approximately $2.371 billion, including $500 million of 5.375% senior notes, $1.631 billion of term loans, $200.0 million drawn on the revolving facility and other obligations. Debt, net of current maturities, was $2.303 billion.
- Revolving facility availability was $767.3 million after borrowings and letters of credit. Management stated that the company was in compliance with its financial and other debt covenants at June 28, 2014.
- Management expects $125 million to $150 million of additional capital expenditures during the remainder of fiscal 2014. The ERP implementation is expected to be completed in 2015, with an estimated total cash-flow impact of $38 million to $42 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased by $583.4 million and operating income increased by $24.7 million, largely due to VION and Rothsay.
- Six-month operating income declined by $34.5 million despite substantially higher sales, reflecting the VION inventory step-up, weaker bakery residuals performance, acquisition costs and higher depreciation.
- Interest expense increased to $85.4 million from $11.3 million for the six months, reflecting acquisition debt, financing costs, the $27.3 million redemption premium on the 8.5% notes and a $4.3 million deferred-loan-cost write-off.
- The company recorded a six-month foreign-currency loss of $13.8 million, including approximately $12.6 million from euro forward contracts related to the VION closing.
- The DGD Joint Venture became profitable as operations ramped, contributing $7.1 million of equity income for the six months versus a $3.2 million loss in the prior-year period.
- Food Ingredients generated $624.8 million of six-month revenue but reported a $0.8 million operating loss, including a $35.3 million VION inventory step-up. Excluding that item, management reported $34.5 million of operating income.
Outlook, Commentary and Risks
- The company does not provide forward-looking financial or operational estimates because results are exposed to volatile commodity prices, weather, crop conditions, regulation, global demand and foreign exchange.
- Management expects available operating cash flow, cash and revolving-facility capacity to meet working capital, maintenance and compliance capital expenditures, scheduled debt service, taxes and other needs for the next twelve months.
- Fuel Ingredients results were pressured by lower renewable identification number values and uncertainty regarding 2014 renewable-volume obligations and the U.S. blender’s tax credit.
- Food Ingredients margins were affected by the Russian trade-border closure, increased raw-material supply and weaker European edible-fat pricing.
- On August 3, 2014, a fire temporarily shut down the DGD facility in Norco, Louisiana. Management’s preliminary assessment indicated isolated damage, no injuries and a possible return to operation within approximately 60 days. Insurance coverage and business-interruption claims were under review, and a limited turnaround was planned that could increase winter nameplate capacity by approximately 10%.
- Other material risks include high leverage, variable interest rates, foreign-exchange exposure, commodity and energy-price volatility, integration of VION and Rothsay, ERP implementation, environmental and permitting matters, pension funding and multiemployer-plan withdrawal liabilities.
- Insurance, environmental and litigation reserves were $66.3 million at June 28, 2014, compared with $35.5 million at year-end 2013. Management considers the reserves adequate but notes that final costs could exceed estimates.
Important Facts for Investors to Verify
- Confirm the filing period: the source is a June 28, 2014 Form 10-Q, not a 2013 second-quarter filing.
- Assess the sustainability of reported performance excluding the $49.8 million six-month VION inventory step-up, $20.1 million acquisition and integration costs, financing charges, hedge losses and discrete tax items.
- Evaluate post-acquisition leverage, debt maturities, variable-rate exposure, covenant headroom and the company’s dependence on subsidiary distributions for debt service.
- Monitor DGD facility insurance recovery, repair timing, operational disruption and the effect of the planned turnaround.
- Review whether Food Ingredients can achieve expected margins after inventory accounting effects and amid European edible-fat and gelatin market pressures.
- Reconcile management’s non-GAAP Adjusted EBITDA and Pro forma Adjusted EBITDA measures to GAAP earnings and operating cash flow.
- Verify the effect of commodity prices, renewable-fuel policy, foreign-exchange movements, pension obligations and environmental contingencies on future liquidity.