DARLING INGREDIENTS INC. quarterly report, Q1 FY2023

Darling Ingredients Inc. Form 10-Q Summary

Reporting period: The filing covers the 13 weeks ended April 1, 2023, compared with the 13 weeks ended April 2, 2022. Although the request identifies “2022 Q1,” the filing is the first quarter of fiscal 2023 and was filed May 9, 2023. Darling operates through Feed Ingredients, Food Ingredients and Fuel Ingredients.

Financial performance and position

Metric	Q1 2023	Q1 2022	Change
Net sales	$1.791 billion	$1.366 billion	+31.1%
Gross margin	$424.2 million; 23.7%	$345.8 million; 25.3%	Margin down 160 basis points
Operating income	$255.8 million	$232.9 million	+9.8%
Net income attributable to Darling	$185.8 million	$188.1 million	-1.2%
Diluted earnings per share	$1.14	$1.14	Flat
Adjusted EBITDA	$289.1 million	$244.1 million	+18.4%
Operating cash flow	$188.4 million	$152.2 million	+$36.2 million

Feed Ingredients sales increased to $1.237 billion from $879.4 million, primarily from the Valley Proteins and FASA acquisitions, higher volumes and higher protein prices. Segment operating income declined slightly to $122.7 million, and gross margin fell to 23.2% from 26.6%.
Food Ingredients sales increased to $396.4 million from $354.8 million. Operating income rose 28.7% to $54.3 million, supported by higher-margin hydrolyzed collagen. Gross margin increased to 26.8% from 23.8%.
Fuel Ingredients operating income increased 24.4% to $110.2 million. The improvement reflected higher DGD blender tax credits and Renewable Identification Number prices, partly offset by higher feedstock costs, lower fuel prices and downtime at DGD’s St. Charles plant.
Equity income from the Diamond Green Diesel joint venture increased to $94.3 million from $71.8 million. DGD recorded approximately $246.0 million of blender tax credits in the quarter, compared with $155.8 million in the prior-year period.
Interest expense increased to $50.3 million from $15.6 million, primarily because of acquisition-related borrowings, additional senior notes and higher revolving-credit borrowings.
The effective tax rate was 12.4%, compared with 12.0%. Management states that the lower rate than the 21% federal statutory rate primarily reflected jurisdictional earnings mix, foreign withholding and state taxes, and biofuel tax incentives.

Liquidity, debt and cash flows

Cash and cash equivalents were $132.6 million at April 1, 2023. Total cash, cash equivalents and restricted cash were $261.8 million.
Working capital was $803.5 million, with a current ratio of 1.73 to 1, compared with $569.7 million and 1.53 to 1 at December 31, 2022.
Total debt was $4.677 billion, including $4.559 billion of long-term debt net of current maturities, compared with total debt of $3.385 billion at year-end 2022. The increase primarily funded the Gelnex acquisition.
Revolving-credit borrowings were $582.0 million, and availability was $866.1 million after borrowings, ancillary facilities and letters of credit.
Cash used in investing activities was $1.257 billion, including $1.079 billion for acquisitions, $111.3 million of capital expenditures and $75.0 million invested in DGD.
Cash provided by financing activities was $1.173 billion, primarily from $807.4 million of long-term debt proceeds and net revolving-facility borrowings.
Management believes operating cash flow, unrestricted cash and available revolver capacity will be sufficient for anticipated needs over the next 12 months.

Material changes and unusual items

On March 31, 2023, Darling acquired Gelnex, a global collagen producer with six processing facilities, for a preliminary purchase price of approximately $1.183 billion, including a $104.1 million acquisition holdback. The transaction was funded primarily with $800 million of new term loans and revolver borrowings. Because it closed on the last business day of the quarter, Gelnex contributed no operating results to Q1 2023.
The preliminary Gelnex purchase accounting included $626.2 million of goodwill and $284.0 million of identifiable intangible assets. These amounts remain subject to measurement-period adjustments.
FASA contributed $93.5 million of sales and $4.5 million of net income in Q1 2023. Valley Proteins contributed $226.4 million of sales and a $0.5 million net loss.
Restructuring and asset impairment charges were $4.5 million, principally employee termination costs associated with closing the Peabody, Massachusetts collagen plant.
Other income included approximately $8.8 million of insurance proceeds related to the prior-year Tacoma plant fire.
Other comprehensive income was $84.0 million, driven primarily by foreign-currency translation and derivative adjustments.
Darling repurchased $43.8 million of common stock during the quarter. Approximately $330.7 million remained under the authorized $500 million repurchase program at April 1, 2023.

Guidance, outlook and risks

The company does not provide formal forward-looking financial or operating estimates because results are highly sensitive to commodity prices, energy costs, weather, raw-material volumes, government policies and foreign-exchange movements.
Management expects approximately $454 million of additional capital expenditures during the remainder of fiscal 2023, including compliance, expansion and acquired-company projects, to be funded through operating cash flow.
Darling expects its previously announced acquisition of Poland’s Miropasz Group for approximately €110 million to close in the third quarter of 2023, subject to customary approvals; management expects to finance it through the credit agreement.
DGD’s Port Arthur sustainable aviation fuel upgrade is expected to be completed in 2025 at an estimated cost of approximately $315 million. Additional partner funding or DGD borrowings may be required if joint-venture cash flow is insufficient.
Key risks include commodity and energy-price volatility, reduced raw-material availability, renewable-fuel policy changes, interest-rate and foreign-exchange exposure, high leverage, acquisition integration, geopolitical and supply-chain disruption, climate and environmental regulation, animal disease outbreaks, pension and multiemployer-plan liabilities, and litigation or environmental contingencies.
Insurance, environmental, litigation and tax reserves totaled approximately $92.1 million, with approximately $36.0 million of related insurance recovery receivables. The company states that existing reserves are reasonable but final costs could exceed estimates.
The company is subject to potential liabilities associated with the Lower Passaic River Superfund matter; management states that the ultimate liability cannot be determined but does not currently expect a material effect.
Unfunded multiemployer pension withdrawal liabilities could be material, although the recorded liability for plans that have provided withdrawal notice was approximately $3.8 million.

Facts investors should verify

Reconcile the increase in debt and interest expense with the expected earnings contribution and integration costs from Gelnex, FASA and Valley Proteins.
Monitor whether Feed Ingredients margins recover from the 23.2% level after acquisition-related and energy-cost pressure.
Verify the final purchase-price allocation for Gelnex, including goodwill, intangible assets, deferred taxes and any post-closing adjustments.
Assess DGD’s exposure to renewable-fuel credits, RIN prices, feedstock costs, plant uptime and the funding requirements for the SAF project.
Evaluate available liquidity after the planned Miropasz acquisition, expected capital expenditures and potential DGD funding obligations.
Review covenant compliance and refinancing or maturity risk, particularly for the $200 million Term Loan B maturing in December 2024 and other debt maturities in 2026 and 2027.
Track commodity prices, foreign-exchange movements, environmental claims, pension obligations and the company’s substantial purchase commitments.