Darling Ingredients Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended March 30, 2019, with comparison to the 13 weeks ended March 31, 2018. Although the request metadata identifies “2018 Q1,” the filing is a first-quarter fiscal 2019 report, filed May 8, 2019.
Business context
Darling is a global producer of sustainable natural ingredients derived from animal by-products, used cooking oil, bakery residuals and other bio-nutrients. It operates through Feed Ingredients, Food Ingredients and Fuel Ingredients. The Fuel Ingredients segment includes the company’s 50% investment in Diamond Green Diesel Holdings LLC, a joint venture with Valero.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $835.1 million | $875.4 million | Down 4.6% |
| Operating income | $24.3 million | $31.8 million | Down 23.6% |
| Net income | $19.6 million | $98.1 million | Down 80.0% |
| Net income attributable to Darling | $18.0 million | $97.3 million | Down 81.5% |
| Diluted earnings per share | $0.11 | $0.58 | Down $0.47 |
| Adjusted EBITDA | $103.4 million | $110.4 million | Down 6.3% |
| Net cash from operating activities | $48.6 million | $26.9 million | Up $21.7 million |
| Capital expenditures | $84.3 million | $56.6 million | Up 48.9% |
Consolidated gross margin was approximately 22.6%, compared with 22.5% in the prior-year quarter. The company reported $23.8 million of equity income from unconsolidated subsidiaries, primarily DGD, versus $97.2 million in the prior-year period. Interest expense declined to $19.9 million from $23.1 million.
At March 30, 2019, total assets were $5.0 billion, unrestricted cash was $95.7 million, and total debt was approximately $1.69 billion, including current maturities. Working capital was $325.0 million, with a current ratio of 1.60 to 1. The company had $901.5 million of availability under its revolving credit facility.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower Food Ingredients and Fuel Ingredients sales, partly offset by higher Feed Ingredients sales.
- Feed Ingredients revenue increased 2.1% to $495.8 million, but operating income fell 30.0% to $15.2 million. Higher raw-material prices relative to selling prices and an unfavorable international supply mix compressed margins.
- Food Ingredients revenue declined to $279.2 million from $305.5 million, while operating income doubled to $23.6 million. Improved collagen results and the closure of the Argentina collagen plant supported profitability.
- Fuel Ingredients revenue fell to $60.1 million from $84.1 million. Segment operating income excluding DGD declined 82.6% to $3.0 million.
- The prior-year quarter included approximately $160.4 million of retroactively reinstated 2017 biofuel blender tax credits at DGD. No comparable credits were recorded in Q1 2019, driving most of the decline in equity income and earnings.
- Operating cash flow improved despite lower earnings, while investing cash use increased because of higher capital spending. Cash, cash equivalents and restricted cash declined by $11.5 million during the quarter.
- The company adopted ASC 842 lease accounting on December 30, 2018, recognizing approximately $135.7 million of operating lease right-of-use assets and $134.4 million of additional operating lease liabilities at adoption.
- On April 3, 2019, after quarter-end, Darling issued $500 million of 5.25% senior notes due 2027 and used the proceeds and cash on hand to refinance its 5.375% senior notes due 2022.
Guidance, outlook and management commentary
Management does not provide formal forward-looking financial or operating estimates because results are highly sensitive to commodity prices, energy costs, weather, crop conditions, government policies, global demand, foreign exchange and raw-material volumes.
- The company expects approximately $216.0 million of additional capital expenditures for the remainder of fiscal 2019, including new construction, and intends to fund these expenditures with operating cash flow.
- Management believes operating cash flow, unrestricted cash and revolving-credit availability will be sufficient for the next 12 months to fund working capital, maintenance and compliance capital expenditures, scheduled debt and interest payments, taxes and other planned needs.
- DGD’s approved parallel expansion is expected to increase annual renewable diesel capacity from 275 million gallons to approximately 675 million gallons. Estimated project cost is approximately $1.1 billion, with completion and startup targeted for the fourth quarter of 2021.
- During April 2019, DGD distributed approximately $17.7 million to Darling. Under the new distribution policy, distributions are subject to available cash exceeding specified thresholds while the expansion is being constructed.
Risks, contingencies and unusual items
- The company is highly leveraged and relies partly on dividends, distributions and intercompany payments from subsidiaries to service debt. Foreign-exchange controls, currency devaluations or legal restrictions could limit access to subsidiary cash.
- Commodity-price volatility, lower finished-product prices, higher natural-gas or diesel costs, reduced feedstock availability and adverse agricultural markets could reduce margins and liquidity.
- African Swine Fever reduced pig slaughter volumes and affected demand for porcine plasma in China, although the plasma-use ban was lifted subject to new guidelines.
- Management identified approximately $805.9 million of goodwill in six reporting units whose fair values had less than 30% excess over carrying values; one reporting unit had less than 10% excess. No triggering event requiring impairment was identified at March 30, 2019.
- Environmental, insurance, litigation and tax contingency reserves totaled approximately $66.8 million. The company is involved in proceedings related to the Lower Passaic River and the Fresno facility permit, but management does not currently expect a material impact.
- Potential liabilities associated with underfunded multiemployer pension plans could be material, although the company cannot currently quantify the possible exposure. Accrued withdrawal liabilities from two plans totaled approximately $1.6 million.
- The company had $69.3 million of commodity purchase commitments for the next 12 months, $23.5 million of standby letters of credit and $17.8 million of foreign bank guarantees.
Important facts for investors to verify
- Confirm the effect of the April 2019 refinancing on interest expense, maturity dates, covenants and cash balances in subsequent filings.
- Assess whether DGD’s expansion remains on schedule and within the approximately $1.1 billion cost estimate, including Darling’s potential funding obligations.
- Monitor commodity spreads, feedstock volumes, biofuel policies and the absence or reinstatement of blender tax credits.
- Review debt leverage, covenant compliance and the company’s ability to upstream cash from non-guarantor subsidiaries.
- Track goodwill headroom, African Swine Fever impacts, environmental proceedings and multiemployer pension exposure.
- Reconcile non-GAAP Adjusted EBITDA with GAAP earnings and cash flow; the filing states that Adjusted EBITDA is not a GAAP liquidity measure and excludes DGD’s equity contribution.