Darling Ingredients Inc. — Form 10-Q Summary
Reporting period: Three months ended April 2, 2022, compared with the 13 weeks ended April 3, 2021. The requested metadata identifies “2021 Q1,” but the filing is for the first quarter of fiscal 2022.
Business context
Darling is a global producer of sustainable ingredients from animal by-products, recycled oils and other bio-nutrients. Its three operating segments are Feed Ingredients, Food Ingredients and Fuel Ingredients, including the 50% Diamond Green Diesel joint venture with Valero.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1.366 billion | $1.047 billion | +30.5% |
| Operating income | $232.9 million | $199.5 million | +16.7% |
| Net income attributable to Darling | $188.1 million | $151.8 million | +23.9% |
| Diluted earnings per share | $1.14 | $0.90 | +$0.24 |
| Net cash from operating activities | $152.2 million | $138.8 million | +$13.4 million |
| Adjusted EBITDA | $244.1 million | $176.6 million | +38.3% |
| Darling plus DGD share of Adjusted EBITDA | $330.7 million | $284.8 million | +16.1% |
Consolidated gross margin was 25.3%, compared with 26.2% in the prior-year quarter. The effective tax rate declined to 12.0% from 15.8%, primarily due to biofuel tax incentives and discrete stock-compensation tax benefits. Excluding biofuel incentives and discrete items, the effective tax rate was 25.7% versus 26.5%.
- Feed Ingredients: Sales of $879.4 million and operating income of $123.7 million, up 35.0% and 77.2%, respectively. Higher fat prices and raw-material volumes drove results, partly offset by higher energy costs. Gross margin declined to 26.6% from 27.1%.
- Food Ingredients: Sales of $354.8 million and operating income of $42.2 million, up 19.0% and 34.0%. Higher collagen prices and volumes more than offset increased energy costs. Gross margin declined slightly to 23.8% from 24.0%.
- Fuel Ingredients: Sales of $132.1 million and operating income of $88.6 million, down 23.5% in operating income. DGD results were pressured by higher raw-material costs, a catalyst turnaround and lower LCFS credit values, despite higher blender tax credits and fuel and RIN prices.
At April 2, 2022, cash and cash equivalents were $99.5 million, working capital was $445.6 million and the working-capital ratio was 1.55. Total debt was approximately $1.713 billion, including $396.0 million drawn on the revolver, $200.0 million of Term Loan B, $500.0 million of 2027 senior notes, $569.0 million of euro-denominated 2026 notes and $59.5 million of other debt. Revolver availability was $1.050 billion; delayed-draw Term A-1 and A-2 facilities had $400 million and $500 million of availability, respectively.
Material changes versus the prior comparable period
- Net sales increased $319.6 million, reflecting higher finished-product prices, increased volumes and acquisitions, partially offset by foreign-currency translation.
- Adjusted EBITDA increased $67.5 million, although DGD’s share of Adjusted EBITDA declined to $86.6 million from $108.2 million.
- Investing cash outflows increased to $294.5 million from $64.3 million, primarily due to a $164.8 million DGD capital contribution, $59.0 million of acquisition spending and higher capital expenditures.
- Financing cash flow shifted to a $180.9 million inflow from an $81.0 million outflow, principally due to increased revolver borrowings.
- The company acquired Group Op de Beeck in Belgium for approximately $71.3 million in cash consideration, subject to preliminary purchase-accounting adjustments.
- The company repurchased $17.2 million of common stock during the quarter, with approximately $482.8 million remaining under the repurchase authorization.
- Acquisition and integration costs were $3.8 million in Q1 2022, while the prior-year period included $0.8 million of restructuring and impairment charges related to biodiesel facility closures.
Guidance, outlook, risks and unusual items
Management does not provide forward-looking financial or operating estimates because results are highly sensitive to commodity prices, energy costs, weather, raw-material availability, government programs and global demand. Management expects approximately $268 million of additional capital expenditures during the remainder of fiscal 2022 and intends to fund them primarily with operating cash flow.
- DGD’s Port Arthur expansion is expected to begin operations in the fourth quarter of 2022. Once operational, DGD’s total renewable diesel capacity is expected to reach approximately 1.2 billion gallons annually.
- On May 2, 2022, after quarter-end, Darling acquired Valley Proteins for approximately $1.2 billion in cash, funded with $400 million of Term A-1 borrowings, $500 million of Term A-2 borrowings and additional revolver debt.
- On May 5, 2022, Darling announced an agreement to acquire FASA Group in Brazil for approximately R$2.8 billion, or about $560 million at the signing-date exchange rate, subject to regulatory approval, closing conditions and potential contingent consideration.
- Management stated that cash flow from operations, cash and available credit should meet anticipated needs for the next 12 months, but warned that post-quarter-end acquisitions substantially increase leverage and financing requirements.
- Key risks include commodity and energy-price volatility, lower LCFS or other renewable-fuel credits, COVID-19 effects, the Russia-Ukraine war, supply-chain disruption, foreign-exchange movements, climate-related regulation, disease outbreaks, regulatory compliance and DGD operating or expansion issues.
- Contingency reserves for insurance, environmental, litigation and tax matters were approximately $80.5 million. Multiemployer pension withdrawal liabilities could be material, although the recorded liability was approximately $3.8 million.
- Darling remains involved in litigation and potential contribution claims related to the Lower Passaic River Superfund site; the ultimate liability cannot be determined, but management does not currently expect a material financial impact.
Investor verification checklist
- Verify the incremental debt, leverage and covenant position following the May 2 Valley Proteins acquisition.
- Assess financing sources and regulatory status for the proposed FASA acquisition.
- Monitor DGD’s Port Arthur construction schedule, remaining funding needs, operating performance and exposure to LCFS, RIN and blender-credit changes.
- Reconcile the decline in Fuel Ingredients profitability with commodity prices, catalyst-turnaround effects and credit values.
- Evaluate whether higher energy costs continue to compress Feed and Food Ingredients margins.
- Review commodity, foreign-exchange and derivative exposures, including approximately $126.2 million of forward natural-gas and diesel purchases and $252.6 million of total commodity commitments over the next five years.