Darling Ingredients Inc. Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2017, compared with October 1, 2016. The request metadata identifies “2016 Q3,” but the filing is the 2017 third-quarter Form 10-Q, filed November 7, 2017. Results are unaudited and presented under U.S. GAAP.
Business context
Darling operates globally across Feed Ingredients, Food Ingredients and Fuel Ingredients. It converts animal by-products, used cooking oil, bakery residuals and other bio-nutrients into food, feed, fuel, pharmaceutical, fertilizer and industrial ingredients. Fuel Ingredients includes the company’s 50% investment in Diamond Green Diesel Holdings LLC with Valero.
Key financial metrics
| Metric | Three months ended September 30, 2017 | Three months ended October 1, 2016 | Nine months ended September 30, 2017 | Nine months ended October 1, 2016 |
|---|---|---|---|---|
| Net sales | $937.7 million | $853.9 million | $2.714 billion | $2.511 billion |
| Operating income | $33.3 million | $35.5 million | $101.8 million | $116.7 million |
| Net income attributable to Darling | $7.8 million | $28.7 million | $22.7 million | $61.8 million |
| Diluted EPS | $0.05 | $0.17 | $0.14 | $0.37 |
| Net cash from operating activities | Not separately provided | Not separately provided | $268.8 million | $280.6 million |
| Adjusted EBITDA | $110.5 million | $106.2 million | $323.1 million | $329.1 million |
- Third-quarter operating margin was approximately 3.6%, compared with 4.2% in the prior-year quarter. Nine-month operating margin was approximately 3.8%, compared with 4.6%.
- Third-quarter net margin attributable to Darling was approximately 0.8%, compared with 3.4%. Nine-month net margin was approximately 0.8%, compared with 2.5%.
- Cash and cash equivalents were $110.1 million at September 30, 2017, compared with $114.6 million at December 31, 2016. Working capital was $416.0 million, with a current ratio of 1.76 to 1.
- Total debt was approximately $1.752 billion before unamortized debt costs, including $500.0 million of 5.375% senior notes, $608.3 million of euro-denominated 4.75% senior notes, and term loans. Long-term debt, net of current maturities and debt costs, was $1.734 billion.
- The company had $976.0 million of available revolving-credit capacity, net of letters of credit, and reported compliance with its debt covenants.
- Capital expenditures were $196.4 million during the first nine months, compared with $168.2 million in the prior-year period. Management expected approximately $43.0 million of additional capital expenditures during the remainder of fiscal 2017.
Material changes versus the prior comparable period
- Revenue increased 9.8% in the quarter and 8.1% year to date, supported by higher sales volumes, commodity prices, foreign exchange translation and growth in Feed and Food Ingredients.
- Operating income declined 6.2% in the quarter and 12.8% year to date. The nine-month comparison also reflects $0.4 million of acquisition and integration costs in 2016 that did not recur in 2017.
- Feed Ingredients quarterly sales increased 8.3% to $575.5 million, while operating income declined 4.8% to $33.6 million. Higher volumes and fat prices were offset by higher payroll-related costs and depreciation from new facilities.
- Food Ingredients quarterly operating income increased 89.9% to $15.0 million, reflecting improved gelatin, edible-fat and casing performance. For the nine-month period, however, operating income declined 19.0% to $40.1 million, primarily because of South American gelatin inefficiencies and macroeconomic pressure.
- Fuel Ingredients was the largest negative change. Including the DGD joint venture, quarterly segment income fell to $7.3 million from $24.1 million, and nine-month segment income fell to $21.6 million from $56.0 million. The principal factor was the expiration of North American biofuel blenders tax credits after December 31, 2016.
- DGD equity income declined to $7.7 million in the quarter and $16.7 million year to date, from $18.1 million and $37.6 million, respectively. DGD was expanding annual renewable diesel capacity from 160 million to 275 million gallons, with completion targeted for the second quarter of 2018.
- Interest expense decreased to $22.5 million in the quarter and $66.7 million year to date, primarily due to lower debt balances. Income tax expense increased to $6.3 million in the quarter and $15.9 million year to date, largely due to the expiration of biofuel tax incentives.
- Other comprehensive income included foreign-currency translation gains of $46.2 million in the quarter and $111.0 million year to date, increasing accumulated other comprehensive loss attributable to Darling from $340.0 million at year-end 2016 to $224.1 million.
Liquidity, outlook and management commentary
- Management stated that operating cash flow, unrestricted cash and available revolver capacity should be sufficient for working capital, maintenance and compliance capital expenditures, scheduled debt service, taxes and other expected needs over the next twelve months.
- Management does not provide forward-looking financial or operating estimates because results are highly sensitive to commodity prices, energy costs, weather, crop conditions, regulatory programs, raw-material volumes, currency movements and global demand.
- The company’s share-repurchase authorization was extended through August 2019. Approximately $10.9 million had been repurchased since inception, with $100.0 million remaining under the authorization.
- Key exposures include agricultural commodity prices, feedstock availability, natural gas and diesel costs, interest rates, foreign exchange, biofuel policies and tax credits, animal diseases, environmental and operating regulations, and DGD expansion execution.
- The company had $89.8 million of commodity purchase commitments and $41.1 million of operating lease obligations expected during the next twelve months. Standby letters of credit and foreign bank guarantees totaled $36.2 million.
- Contingency reserves for insurance, environmental, litigation and tax matters were approximately $54.9 million. Potential liabilities related to the Lower Passaic River Superfund site and the Fresno facility permit litigation could not be determined, although management did not expect either matter to have a material effect based on available information.
- Two multiemployer pension plans could involve material withdrawal liabilities if triggered. The company had accrued approximately $1.8 million for scheduled withdrawal payments but could not estimate potential liabilities for other underfunded plans.
Important facts for investors to verify
- Confirm that the requested period is 2017 Q3 rather than 2016 Q3.
- Assess whether the loss of biofuel blenders tax credits and related DGD earnings reduction is permanent, partially offsettable or subject to future policy changes.
- Review debt maturities, variable-rate exposure, foreign-currency debt and covenant calculations, particularly the Term Loan B maturity in January 2021 and other facilities maturing in 2021.
- Evaluate whether the DGD expansion remains on schedule and within the estimated $190 million project cost, including planned 2018 downtime.
- Monitor Feed and Food Ingredients margins, commodity-price volatility, raw-material volumes and the identified goodwill sensitivity, including approximately $770.3 million of goodwill in reporting units with relatively limited valuation headroom.
- Review environmental, permit, litigation, pension, insurance and regulatory contingencies for changes after September 30, 2017.
- Reconcile reported Adjusted EBITDA to GAAP earnings and note that DGD joint-venture Adjusted EBITDA is excluded from the company’s Adjusted EBITDA measure.