Darling International Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 2, 2010, compared with October 3, 2009. Although the request metadata states “2009 Q3,” the filing is the third-quarter 2010 Form 10-Q, filed November 10, 2010. Darling operates in Rendering and Restaurant Services, collecting and processing animal by-products and used cooking oil and providing grease-trap services.
Financial Performance and Position
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $168.7 million | $159.9 million | $497.7 million | $448.2 million |
| Operating income | $19.3 million | $25.4 million | $57.8 million | $54.4 million |
| Operating margin | 11.5% | 15.9% | 11.6% | 12.1% |
| Net income | $11.4 million | $16.1 million | $34.2 million | $32.6 million |
| Diluted EPS | $0.14 | $0.19 | $0.41 | $0.40 |
| Net margin | 6.7% | 10.1% | 6.9% | 7.3% |
- Cash flow: Nine-month operating cash flow was $48.1 million, versus $49.6 million in the prior-year period. Investing cash use increased to $35.3 million, including $15.9 million of capital expenditures and $18.2 million of acquisitions. Financing cash use was $4.0 million, primarily debt repayment.
- Liquidity: Cash and cash equivalents were $77.1 million at October 2, 2010, compared with $68.2 million at January 2, 2010. Working capital was $91.4 million, with a 2.23:1 working-capital ratio.
- Debt: Term-loan debt was $28.8 million, and there were no revolver borrowings. Revolver availability was $108.9 million after $16.1 million of letters of credit. Approximately $5.0 million of debt was classified as current, and the term loan includes a $22.5 million balloon payment due April 7, 2012.
- Balance sheet: Total assets were $461.3 million and stockholders’ equity was $322.0 million. Inventories increased to $26.6 million from $19.1 million at January 2, 2010.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales increased 5.5%, but operating income declined 23.9% and net income declined 29.2%. Nine-month sales increased 11.0%, operating income increased 6.2%, and net income increased 5.1%.
- Rendering sales increased $4.8 million in Q3 and $28.7 million for the first nine months. Restaurant Services sales increased $4.0 million in Q3 and $20.8 million for the first nine months.
- Higher BFT and yellow-grease prices and increased raw-material volumes supported revenue. These benefits were offset by lower MBM prices, quality downgrades associated with extreme summer temperatures, higher formula-based raw-material costs, acquisition-related operating costs, and higher natural-gas and diesel costs.
- Q3 cost of sales and operating expenses rose 10.9% to $125.7 million, outpacing sales growth. Depreciation and amortization increased 26.7% to $7.6 million, primarily because of acquisitions and capital additions.
- Restaurant Services segment profit increased to $7.8 million from $6.3 million in Q3 and to $22.5 million from $11.2 million for the first nine months. Rendering segment profit declined to $20.9 million from $29.1 million in Q3 and to $64.2 million from $71.5 million for the first nine months.
- The company acquired rendering assets from Nebraska By-Products for approximately $15.3 million on May 28, 2010. It also continued integrating the 2009 Sanimax and Boca acquisitions.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Griffin acquisition: On November 8, 2010, Darling agreed to acquire Griffin Industries for an aggregate purchase price of $840.0 million, consisting of $740.0 million in cash and $100.0 million in Darling common stock, subject to adjustments. Closing was expected in mid-December 2010, subject to regulatory and other conditions. Darling could owe a $35.0 million termination fee in specified circumstances and an additional $15.0 million if closing occurs after December 31, 2010 under certain conditions.
- The company was negotiating replacement financing expected to include a revolving facility, term loan B, and senior unsecured notes to fund the Griffin transaction. Management believed available cash, operating cash flow, existing revolver capacity, and anticipated new financing would cover expected needs for the next twelve months, but this depended on successful financing and transaction closing.
- A fire at a blending plant after quarter-end caused estimated losses of approximately $0.9 million before insurance recoveries.
- Commodity prices, raw-material availability, product quality, energy costs, foreign trade conditions, renewable-fuel policies, and food-safety regulations materially affect results. Management specifically cited volatility in MBM, BFT, and yellow-grease prices and the risk of higher natural-gas and diesel costs.
- Environmental, permitting, insurance, litigation, and regulatory reserves totaled approximately $15.8 million at October 2, 2010. The company was involved in the Lower Passaic River litigation and related EPA proceedings; ultimate liability could not be determined.
- Multi-employer pension withdrawal liabilities included approximately $1.2 million for one plan and $1.1 million for another. Management stated that additional liabilities from underfunded plans could be material.
- Off-balance-sheet commitments included approximately $8.2 million of commodity purchases and $10.9 million of operating lease obligations due during the next twelve months.
- The company was pursuing a renewable-diesel joint venture with Valero. It expected to spend up to approximately $1.2 million during the remainder of 2010, but project completion and financing were not assured.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether the Griffin acquisition closed on the expected timetable, the final purchase price and financing structure, and the resulting leverage and covenant position.
- Whether commodity prices, raw-material volumes, product quality, and energy costs support or pressure margins after the Q3 deterioration.
- The timing and amount of the term-loan balloon payment and the company’s refinancing or repayment plan.
- Potential exposure from the Lower Passaic River matter, environmental claims, multi-employer pension plans, and self-insurance reserves.
- Insurance recoveries and final financial impact from the post-quarter-end plant fire.
- Changes in renewable-fuel incentives, RFS2 implementation, export markets, and Enhanced BSE and other food-safety requirements.