UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
FORM 10-Q
| | | | | | | | |
|
(Mark One) |
/X/ ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended September 30, 2017 | July 1, 2023 |
| OR |
| | |
/ / ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE |
| SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from _______ to _______ |
Commission File Number 001-13323
DARLING INGREDIENTS INC.
(Exact name of registrant as specified in its charter)
|
| | | | | | | | | | |
Delaware | | | 36-2495346 |
(State or other jurisdiction | | | (I.R.S. Employer |
of incorporation or organization) | | Identification Number) |
| | |
251 O'Connor Ridge Blvd., Suite 300
| | |
Irving, Texas
| | 75038 |
(Address of principal executive offices) | | (Zip Code) |
5601 N MacArthur Blvd., Irving, Texas 75038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 717-0300
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock $0.01 par value per share | DAR | New York Stock Exchange | (“NYSE”) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X ☒ No ____☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes X ☒ No ___☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | | | | | | | Accelerated filer | ☐ |
| | | | | | | | | | |
Large accelerated filer | X | | | | | | | | Accelerated filer | |
| | | | | | | | | | |
Non-accelerated filer | ☐ | | (Do not check if a smaller reporting company) | | Smaller reporting company | ☐ |
| | | | | | | | | | |
| | | | | | | | | Emerging growth company | ☐ |
| | | | | | | | | | |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period |
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act. | ☐ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X ☒
There were 164,681,819159,491,100 shares of common stock, $0.01 par value, outstanding at November 2, 2017.
August 3, 2023.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017JULY 1, 2023
TABLE OF CONTENTS
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2017July 1, 2023 and December 31, 20162022
(in thousands, except share data)
| | | September 30, 2017 | | December 31, 2016 | | July 1, 2023 | | December 31, 2022 |
ASSETS | (unaudited) | | | ASSETS | (unaudited) | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 110,146 |
| | $ | 114,564 |
| Cash and cash equivalents | $ | 111,541 | | | $ | 127,016 | |
Restricted cash | 282 |
| | 293 |
| Restricted cash | 299 | | | 315 | |
Accounts receivable, net | 414,947 |
| | 388,397 |
| |
Accounts receivable, less allowance for bad debts of $12,912 at July 1, 2023 and $11,889 at December 31, 2022 | | Accounts receivable, less allowance for bad debts of $12,912 at July 1, 2023 and $11,889 at December 31, 2022 | 746,638 | | | 676,573 | |
Inventories | 375,098 |
| | 330,815 |
| Inventories | 825,130 | | | 673,621 | |
Prepaid expenses | 39,272 |
| | 29,984 |
| Prepaid expenses | 116,540 | | | 85,665 | |
Income taxes refundable | 5,370 |
| | 7,479 |
| Income taxes refundable | 22,621 | | | 18,583 | |
Other current assets | 17,101 |
| | 21,770 |
| Other current assets | 53,188 | | | 56,324 | |
Total current assets | 962,216 |
| | 893,302 |
| Total current assets | 1,875,957 | | | 1,638,097 | |
Property, plant and equipment, less accumulated depreciation of $1,019,845 at September 30, 2017 and $842,186 at December 31, 2016 | 1,621,867 |
| | 1,515,575 |
| |
Intangible assets, less accumulated amortization of $364,842 at September 30, 2017 and $301,187 at December 31, 2016 | 697,908 |
| | 711,927 |
| |
Property, plant and equipment, less accumulated depreciation of $2,219,926 at July 1, 2023 and $2,054,928 at December 31, 2022 | | Property, plant and equipment, less accumulated depreciation of $2,219,926 at July 1, 2023 and $2,054,928 at December 31, 2022 | 2,774,526 | | | 2,462,082 | |
Intangible assets, less accumulated amortization of $685,911 at July 1, 2023 and $623,101 at December 31, 2022 | | Intangible assets, less accumulated amortization of $685,911 at July 1, 2023 and $623,101 at December 31, 2022 | 1,074,604 | | | 865,122 | |
Goodwill | 1,298,266 |
| | 1,225,893 |
| Goodwill | 2,566,169 | | | 1,970,377 | |
Investment in unconsolidated subsidiaries | 290,028 |
| | 292,717 |
| Investment in unconsolidated subsidiaries | 2,214,312 | | | 1,926,395 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 196,554 | | | 186,141 | |
Other assets | 47,018 |
| | 43,613 |
| Other assets | 246,032 | | | 136,268 | |
Deferred income taxes | 17,219 |
| | 14,990 |
| Deferred income taxes | 25,085 | | | 17,888 | |
| $ | 4,934,522 |
| | $ | 4,698,017 |
| | $ | 10,973,239 | | | $ | 9,202,370 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | |
| | |
| Current liabilities: | | | |
Current portion of long-term debt | $ | 18,215 |
| | $ | 23,247 |
| Current portion of long-term debt | $ | 88,085 | | | $ | 69,846 | |
Accounts payable, principally trade | 213,592 |
| | 180,895 |
| Accounts payable, principally trade | 427,066 | | | 472,491 | |
Income taxes payable | 21,974 |
| | 4,913 |
| Income taxes payable | 29,821 | | | 44,851 | |
Current operating lease liabilities | | Current operating lease liabilities | 48,381 | | | 49,232 | |
Accrued expenses | 292,483 |
| | 242,796 |
| Accrued expenses | 420,196 | | | 432,023 | |
Total current liabilities | 546,264 |
| | 451,851 |
| Total current liabilities | 1,013,549 | | | 1,068,443 | |
Long-term debt, net of current portion | 1,734,176 |
| | 1,727,696 |
| Long-term debt, net of current portion | 4,458,797 | | | 3,314,969 | |
Long-term operating lease liabilities | | Long-term operating lease liabilities | 149,165 | | | 141,703 | |
Other non-current liabilities | 96,354 |
| | 96,114 |
| Other non-current liabilities | 339,270 | | | 298,933 | |
Deferred income taxes | 353,041 |
| | 346,134 |
| Deferred income taxes | 561,895 | | | 481,832 | |
Total liabilities | 2,729,835 |
| | 2,621,795 |
| Total liabilities | 6,522,676 | | | 5,305,880 | |
Commitments and contingencies |
|
| |
|
| Commitments and contingencies | | | |
Stockholders’ equity: | |
| | |
| Stockholders’ equity: | | | |
Common stock, $0.01 par value; 250,000,000 shares authorized; 167,843,895 and 167,641,415 shares issued at September 30, 2017 and at December 31, 2016, respectively | 1,678 |
| | 1,676 |
| |
Common stock, $0.01 par value; 250,000,000 shares authorized; 174,317,233 and 173,593,099 shares issued at July 1, 2023 and December 31, 2022, respectively | | Common stock, $0.01 par value; 250,000,000 shares authorized; 174,317,233 and 173,593,099 shares issued at July 1, 2023 and December 31, 2022, respectively | 1,743 | | | 1,736 | |
Additional paid-in capital | 1,512,726 |
| | 1,499,431 |
| Additional paid-in capital | 1,680,188 | | | 1,660,084 | |
Treasury stock, at cost; 3,185,406 and 3,028,857 shares at September 30, 2017 and at December 31, 2016, respectively | (43,155 | ) | | (40,909 | ) | |
Treasury stock, at cost; 14,827,327 and 13,623,503 shares at July 1, 2023 and December 31, 2022, respectively | | Treasury stock, at cost; 14,827,327 and 13,623,503 shares at July 1, 2023 and December 31, 2022, respectively | (624,852) | | | (554,451) | |
Accumulated other comprehensive loss | (224,092 | ) | | (340,006 | ) | Accumulated other comprehensive loss | (212,561) | | | (383,874) | |
Retained earnings | 875,498 |
| | 852,802 |
| Retained earnings | 3,523,712 | | | 3,085,528 | |
Total Darling's stockholders’ equity | 2,122,655 |
| | 1,972,994 |
| Total Darling's stockholders’ equity | 4,368,230 | | | 3,809,023 | |
Noncontrolling interests | 82,032 |
| | 103,228 |
| Noncontrolling interests | 82,333 | | | 87,467 | |
Total stockholders' equity | $ | 2,204,687 |
| | $ | 2,076,222 |
| Total stockholders' equity | 4,450,563 | | | 3,896,490 | |
| $ | 4,934,522 |
| | $ | 4,698,017 |
| | $ | 10,973,239 | | | $ | 9,202,370 | |
The accompanying notes are an integral part of these consolidated financial statements.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and ninesix months ended September 30, 2017July 1, 2023 and October 1, 2016July 2, 2022
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Net sales | $ | 1,757,621 | | | $ | 1,650,188 | | | $ | 3,548,793 | | | $ | 3,016,522 | |
Costs and expenses: | | | | | | | |
Cost of sales and operating expenses | 1,359,702 | | | 1,231,507 | | | 2,726,675 | | | 2,252,084 | |
Loss/(gain) on sale of assets | 259 | | | (1,055) | | | (68) | | | (1,444) | |
Selling, general and administrative expenses | 136,751 | | | 107,776 | | | 272,217 | | | 209,808 | |
Restructuring and asset impairment charges | 896 | | | 8,557 | | | 5,420 | | | 8,557 | |
Acquisition and integration costs | 1,706 | | | 5,358 | | | 8,728 | | | 9,131 | |
Change in fair value of contingent consideration | (7,499) | | | — | | | (7,499) | | | — | |
Depreciation and amortization | 122,086 | | | 93,113 | | | 238,092 | | | 172,359 | |
Total costs and expenses | 1,613,901 | | | 1,445,256 | | | 3,243,565 | | | 2,650,495 | |
Equity in net income of Diamond Green Diesel | 212,964 | | | 73,680 | | | 307,301 | | | 145,484 | |
Operating income | 356,684 | | | 278,612 | | | 612,529 | | | 511,511 | |
| | | | | | | |
Other expense: | | | | | | | |
Interest expense | (70,193) | | | (24,008) | | | (120,492) | | | (39,611) | |
| | | | | | | |
Foreign currency gain/(loss) | 2,490 | | | (4,412) | | | 7,494 | | | (5,512) | |
| | | | | | | |
Other income/(expense), net | 5,079 | | | (302) | | | 11,238 | | | (1,044) | |
Total other expense | (62,624) | | | (28,722) | | | (101,760) | | | (46,167) | |
| | | | | | | |
Equity in net income of other unconsolidated subsidiaries | 1,849 | | | 2,272 | | | 1,969 | | | 3,632 | |
Income before income taxes | 295,909 | | | 252,162 | | | 512,738 | | | 468,976 | |
| | | | | | | |
Income tax expense | 40,712 | | | 47,333 | | | 67,686 | | | 73,416 | |
| | | | | | | |
Net income | 255,197 | | | 204,829 | | | 445,052 | | | 395,560 | |
| | | | | | | |
Net income attributable to noncontrolling interests | (2,814) | | | (2,833) | | | (6,868) | | | (5,511) | |
| | | | | | | |
Net income attributable to Darling | $ | 252,383 | | | $ | 201,996 | | | $ | 438,184 | | | $ | 390,049 | |
| | | | | | | |
Basic income per share | $ | 1.58 | | | $ | 1.25 | | | $ | 2.74 | | | $ | 2.41 | |
Diluted income per share | $ | 1.55 | | | $ | 1.23 | | | $ | 2.69 | | | $ | 2.37 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net sales | $ | 937,681 |
| | $ | 853,856 |
| | $ | 2,714,101 |
| | $ | 2,510,838 |
|
Costs and expenses: | |
| | |
| | | | |
Cost of sales and operating expenses | 744,028 |
| | 671,167 |
| | 2,134,419 |
| | 1,947,175 |
|
Selling, general and administrative expenses | 83,141 |
| | 76,508 |
| | 256,589 |
| | 234,135 |
|
Acquisition and integration costs | — |
| | — |
| | — |
| | 401 |
|
Depreciation and amortization | 77,202 |
| | 70,653 |
| | 221,306 |
| | 212,440 |
|
Total costs and expenses | 904,371 |
| | 818,328 |
| | 2,612,314 |
| | 2,394,151 |
|
Operating income | 33,310 |
| | 35,528 |
| | 101,787 |
| | 116,687 |
|
| | | | | | | |
Other expense: | |
| | |
| | | | |
Interest expense | (22,531 | ) | | (23,867 | ) | | (66,657 | ) | | (71,748 | ) |
Foreign currency gain/(loss) | (2,055 | ) | | 354 |
| | (4,430 | ) | | (2,241 | ) |
Other expense, net | (1,447 | ) | | (2,007 | ) | | (5,103 | ) | | (5,685 | ) |
Total other expense | (26,033 | ) | | (25,520 | ) | | (76,190 | ) | | (79,674 | ) |
| | | | | | | |
Equity in net income of unconsolidated subsidiaries | 7,703 |
| | 18,138 |
| | 16,669 |
| | 37,633 |
|
Income before income taxes | 14,980 |
| | 28,146 |
| | 42,266 |
| | 74,646 |
|
| | | | | | | |
Income tax expense/(benefit) | 6,296 |
| | (744 | ) | | 15,856 |
| | 9,102 |
|
| | | | | | | |
Net income | 8,684 |
| | 28,890 |
| | 26,410 |
| | 65,544 |
|
| | | | | | | |
Net income attributable to noncontrolling interests | (923 | ) | | (196 | ) | | (3,671 | ) | | (3,772 | ) |
| | | | | | | |
Net income attributable to Darling | $ | 7,761 |
| | $ | 28,694 |
| | $ | 22,739 |
| | $ | 61,772 |
|
| | | | | | | |
Basic income per share | $ | 0.05 |
| | $ | 0.17 |
| | $ | 0.14 |
| | $ | 0.38 |
|
Diluted income per share | $ | 0.05 |
| | $ | 0.17 |
| | $ | 0.14 |
| | $ | 0.37 |
|
The accompanying notes are an integral part of these consolidated financial statements.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and nine months ended September 30, 2017 and October 1, 2016
(in thousands)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net income | $ | 8,684 |
| | $ | 28,890 |
| | $ | 26,410 |
| | $ | 65,544 |
|
Other comprehensive income/(loss), net of tax: | | | | | | | |
Foreign currency translation | 46,211 |
| | (5,839 | ) | | 111,002 |
| | 43,684 |
|
Pension adjustments | 759 |
| | 727 |
| | 2,278 |
| | 2,104 |
|
Natural gas swap derivative adjustments | 22 |
| | — |
| | 22 |
| | — |
|
Corn option derivative adjustments | 850 |
| | 734 |
| | (1,121 | ) | | 1,255 |
|
Total other comprehensive income/(loss), net of tax | 47,842 |
| | (4,378 | ) | | 112,181 |
| | 47,043 |
|
Total comprehensive income | $ | 56,526 |
| | $ | 24,512 |
| | $ | 138,591 |
| | $ | 112,587 |
|
Comprehensive income/(loss) attributable to noncontrolling interests | 109 |
| | (94 | ) | | (62 | ) | | 1,211 |
|
Comprehensive income attributable to Darling | $ | 56,417 |
| | $ | 24,606 |
| | $ | 138,653 |
| | $ | 111,376 |
|
The accompanying notes are an integral part of these consolidated financial statements.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME/(LOSS)
NineThree and six months ended September 30, 2017July 1, 2023 and October 1, 2016July 2, 2022
(in thousands)
(unaudited)
|
| | | | | | | |
| September 30, 2017 | | October 1, 2016 |
Cash flows from operating activities: | | | |
Net Income | $ | 26,410 |
| | $ | 65,544 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 221,306 |
| | 212,440 |
|
Loss/(gain) on disposal of property, plant, equipment and other assets | (537 | ) | | 873 |
|
Gain on insurance proceeds from insurance settlements | — |
| | (356 | ) |
Deferred taxes | (14,242 | ) | | (5,223 | ) |
Increase/(decrease) in long-term pension liability | 1,574 |
| | (1,105 | ) |
Stock-based compensation expense | 14,710 |
| | 7,953 |
|
Write-off deferred loan costs | 443 |
| | 292 |
|
Deferred loan cost amortization | 6,581 |
| | 8,393 |
|
Equity in net income of unconsolidated subsidiaries | (16,669 | ) | | (37,633 | ) |
Distributions of earnings from unconsolidated subsidiaries | 26,600 |
| | 26,317 |
|
Changes in operating assets and liabilities, net of effects from acquisitions: | | | |
Accounts receivable | (5,311 | ) | | (3,058 | ) |
Income taxes refundable/payable | 18,332 |
| | 1,432 |
|
Inventories and prepaid expenses | (31,058 | ) | | (11,368 | ) |
Accounts payable and accrued expenses | 39,937 |
| | 27,438 |
|
Other | (19,294 | ) | | (11,377 | ) |
Net cash provided by operating activities | 268,782 |
| | 280,562 |
|
Cash flows from investing activities: | | | |
Capital expenditures | (196,446 | ) | | (168,224 | ) |
Acquisitions, net of cash acquired | (12,144 | ) | | (8,511 | ) |
Investment in unconsolidated subsidiary | (4,750 | ) | | — |
|
Gross proceeds from disposal of property, plant and equipment and other assets | 4,953 |
| | 4,492 |
|
Proceeds from insurance settlement | 3,301 |
| | 1,537 |
|
Payments related to routes and other intangibles | (5,635 | ) | | — |
|
Net cash used by investing activities | (210,721 | ) | | (170,706 | ) |
Cash flows from financing activities: | | | |
Proceeds from long-term debt | 24,069 |
| | 28,765 |
|
Payments on long-term debt | (94,250 | ) | | (128,364 | ) |
Borrowings from revolving credit facility | 142,000 |
| | 83,000 |
|
Payments on revolving credit facility | (147,327 | ) | | (93,028 | ) |
Net cash overdraft financing | 2,590 |
| | — |
|
Deferred loan costs | (1,177 | ) | | — |
|
Issuance of common stock | 22 |
| | 143 |
|
Repurchase of common stock | — |
| | (5,000 | ) |
Minimum withholding taxes paid on stock awards | (2,140 | ) | | (1,843 | ) |
Acquisition of noncontrolling interest | (429 | ) | | — |
|
Distributions to noncontrolling interests | (2,513 | ) | | (885 | ) |
Net cash used by financing activities | (79,155 | ) | | (117,212 | ) |
Effect of exchange rate changes on cash | 16,676 |
| | (943 | ) |
Net decrease in cash and cash equivalents | (4,418 | ) | | (8,299 | ) |
Cash and cash equivalents at beginning of period | 114,564 |
| | 156,884 |
|
Cash and cash equivalents at end of period | $ | 110,146 |
| | $ | 148,585 |
|
Supplemental disclosure of cash flow information: | | | |
Accrued capital expenditures | $ | (3,532 | ) | | $ | (3,302 | ) |
Cash paid during the period for: | | | |
Interest, net of capitalized interest | $ | 58,219 |
| | $ | 62,395 |
|
Income taxes, net of refunds | $ | 13,719 |
| | $ | 14,018 |
|
Non-cash financing activities | | | |
Debt issued for assets | $ | 3 |
| | $ | 10 |
|
Contribution of assets to unconsolidated subsidiary | $ | — |
| | $ | 2,674 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Net income | $ | 255,197 | | | $ | 204,829 | | | $ | 445,052 | | | $ | 395,560 | |
Other comprehensive income/(loss), net of tax: | | | | | | | |
Foreign currency translation adjustments | 82,592 | | | (93,855) | | | 138,809 | | | (90,473) | |
Pension adjustments | 327 | | | 428 | | | 654 | | | 857 | |
Commodities derivative adjustments | (17,662) | | | 24,462 | | | 3,462 | | | 2,404 | |
Interest rate swap adjustments | 9,606 | | | — | | | 10,326 | | | — | |
Foreign exchange derivative adjustments | 9,271 | | | (20,719) | | | 14,891 | | | 8,716 | |
Total other comprehensive income/(loss), net of tax | 84,134 | | | (89,684) | | | 168,142 | | | (78,496) | |
Total comprehensive income | $ | 339,331 | | | $ | 115,145 | | | $ | 613,194 | | | $ | 317,064 | |
Comprehensive income attributable to noncontrolling interests | 301 | | | 2,687 | | | 3,697 | | | 6,232 | |
Comprehensive income attributable to Darling | $ | 339,030 | | | $ | 112,458 | | | $ | 609,497 | | | $ | 310,832 | |
The accompanying notes are an integral part of these consolidated financial statements.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Six months ended July 1, 2023 and July 2, 2022
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | |
| Number of Outstanding Shares | $0.01 par Value | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Stockholders' equity attributable to Darling | Non-controlling Interests | Total Stockholders' Equity |
Balances at December 31, 2022 | 159,969,596 | | $ | 1,736 | | $ | 1,660,084 | | $ | (554,451) | | $ | (383,874) | | $ | 3,085,528 | | $ | 3,809,023 | | $ | 87,467 | | $ | 3,896,490 | |
Net income | — | | — | | — | | — | | — | | 185,801 | | 185,801 | | 4,054 | | 189,855 | |
| | | | | | | | | |
Deductions to noncontrolling interests | — | | — | | — | | — | | — | | — | | — | | (3,441) | | (3,441) | |
Addition to noncontrolling interests | — | | — | | — | | — | | — | | — | | — | | 1,643 | | 1,643 | |
Pension adjustments, net of tax | — | | — | | — | | — | | 327 | | — | | 327 | | — | | 327 | |
Commodities derivative adjustments, net of tax | — | | — | | — | | — | | 21,124 | | — | | 21,124 | | — | | 21,124 | |
Interest rate swap adjustments, net of tax | — | | — | | — | | — | | 720 | | — | | 720 | | — | | 720 | |
Foreign exchange derivative adjustments, net of tax | — | | — | | — | | — | | 5,620 | | — | | 5,620 | | — | | 5,620 | |
Foreign currency translation adjustments | — | | — | | — | | — | | 56,875 | | — | | 56,875 | | (658) | | 56,217 | |
Issuance of non-vested stock | — | | — | | 47 | | — | | — | | — | | 47 | | — | | 47 | |
Stock-based compensation | — | | — | | 11,806 | | — | | — | | — | | 11,806 | | — | | 11,806 | |
Treasury stock | (1,039,462) | | — | | — | | (60,510) | | — | | — | | (60,510) | | — | | (60,510) | |
Issuance of common stock | 633,972 | | 6 | | 1,695 | | — | | — | | — | | 1,701 | | — | | 1,701 | |
Balances at April 1, 2023 | 159,564,106 | | $ | 1,742 | | $ | 1,673,632 | | $ | (614,961) | | $ | (299,208) | | $ | 3,271,329 | | $ | 4,032,534 | | $ | 89,065 | | $ | 4,121,599 | |
Net income | — | | — | | — | | — | | — | | 252,383 | | 252,383 | | 2,814 | | 255,197 | |
Distribution of noncontrolling interest earnings | — | | — | | — | | — | | — | | — | | — | | (9,036) | | (9,036) | |
| | | | | | | | | |
Addition to noncontrolling interests | — | | — | | — | | — | | — | | — | | — | | 2,003 | | 2,003 | |
Pension adjustments, net of tax | — | | — | | — | | — | | 327 | | — | | 327 | | — | | 327 | |
Commodities derivative adjustments, net of tax | — | | — | | — | | — | | (17,662) | | — | | (17,662) | | — | | (17,662) | |
Interest rate swap adjustments, net of tax | — | | — | | — | | — | | 9,606 | | — | | 9,606 | | — | | 9,606 | |
Foreign exchange derivative adjustments, net of tax | — | | — | | — | | — | | 9,271 | | — | | 9,271 | | — | | 9,271 | |
Foreign currency translation adjustments | — | | — | | — | | — | | 85,105 | | — | | 85,105 | | (2,513) | | 82,592 | |
Issuance of non-vested stock | — | | — | | 46 | | — | | — | | — | | 46 | | — | | 46 | |
Stock-based compensation | — | | — | | 6,186 | | — | | — | | — | | 6,186 | | — | | 6,186 | |
Treasury stock | (164,362) | | — | | — | | (9,891) | | — | | — | | (9,891) | | — | | (9,891) | |
Issuance of common stock | 90,162 | | 1 | | 324 | | — | | — | | — | | 325 | | — | | 325 | |
Balances at July 1, 2023 | 159,489,906 | | $ | 1,743 | | $ | 1,680,188 | | $ | (624,852) | | $ | (212,561) | | $ | 3,523,712 | | $ | 4,368,230 | | $ | 82,333 | | $ | 4,450,563 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Six months ended July 1, 2023 and July 2, 2022
(in thousands, except share data)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | |
| Number of Outstanding Shares | $0.01 par Value | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Stockholders' equity attributable to Darling | Non-controlling Interests | Total Stockholders' Equity |
Balances at January 1, 2022 | 160,792,004 | | $ | 1,717 | | $ | 1,627,816 | | $ | (374,721) | | $ | (321,690) | | $ | 2,347,838 | | $ | 3,280,960 | | $ | 66,825 | | $ | 3,347,785 | |
| | | | | | | | | |
Net income | — | | — | | — | | — | | — | | 188,053 | | 188,053 | | 2,678 | | 190,731 | |
| | | | | | | | | |
| | | | | | | | | |
Pension adjustments, net of tax | — | | — | | — | | — | | 429 | | — | | 429 | | — | | 429 | |
Commodities derivative adjustments, net of tax | — | | — | | — | | — | | (22,058) | | — | | (22,058) | | — | | (22,058) | |
Foreign exchange derivative adjustments, net of tax | — | | — | | — | | — | | 29,435 | | — | | 29,435 | | — | | 29,435 | |
Foreign currency translation adjustments | — | | — | | — | | — | | 2,515 | | — | | 2,515 | | 867 | | 3,382 | |
Issuance of non-vested stock | 5,000 | | — | | 18 | | — | | — | | — | | 18 | | — | | 18 | |
Stock-based compensation | — | | — | | 6,305 | | — | | — | | — | | 6,305 | | — | | 6,305 | |
Treasury stock | (938,113) | | — | | — | | (64,185) | | — | | — | | (64,185) | | — | | (64,185) | |
Issuance of common stock | 1,644,866 | | 17 | | 3,791 | | — | | — | | — | | 3,808 | | — | | 3,808 | |
Balances at April 2, 2022 | 161,503,757 | | $ | 1,734 | | $ | 1,637,930 | | $ | (438,906) | | $ | (311,369) | | $ | 2,535,891 | | $ | 3,425,280 | | $ | 70,370 | | $ | 3,495,650 | |
Net income | — | | — | | — | | — | | — | | 201,996 | | 201,996 | | 2,833 | | 204,829 | |
| | | | | | | | | |
Pension adjustments, net of tax | — | | — | | — | | — | | 428 | | — | | 428 | | — | | 428 | |
Commodities derivative adjustments, net of tax | — | | — | | — | | — | | 24,462 | | — | | 24,462 | | — | | 24,462 | |
Foreign exchange derivative adjustments, net of tax | — | | — | | — | | — | | (20,719) | | — | | (20,719) | | — | | (20,719) | |
Foreign currency translation adjustments | — | | — | | — | | — | | (93,709) | | — | | (93,709) | | (146) | | (93,855) | |
Issuance of non-vested stock | — | | — | | 30 | | — | | — | | — | | 30 | | — | | 30 | |
Stock-based compensation | — | | — | | 7,016 | | — | | — | | — | | 7,016 | | — | | 7,016 | |
Treasury stock | (751,432) | | — | | — | | (52,811) | | — | | — | | (52,811) | | — | | (52,811) | |
Issuance of common stock | 108,586 | | 1 | | 1,492 | | — | | — | | — | | 1,493 | | — | | 1,493 | |
Balances at July 2, 2022 | 160,860,911 | | $ | 1,735 | | $ | 1,646,468 | | $ | (491,717) | | $ | (400,907) | | $ | 2,737,887 | | $ | 3,493,466 | | $ | 73,057 | | $ | 3,566,523 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended July 1, 2023 and July 2, 2022
(in thousands)
(unaudited)
| | | | | | | | | | | |
| July 1, 2023 | | July 2, 2022 |
Cash flows from operating activities: | | | |
Net Income | $ | 445,052 | | | $ | 395,560 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 238,092 | | | 172,359 | |
Gain on sale of assets | (68) | | | (1,444) | |
| | | |
Asset impairment | — | | | 8,557 | |
Change in fair value of contingent consideration | (7,499) | | | — | |
Gain on insurance proceeds from insurance settlements | (13,836) | | | — | |
Deferred taxes | 34,202 | | | 35,674 | |
Increase/(decrease) in long-term pension liability | 480 | | | (547) | |
Stock-based compensation expense | 18,085 | | | 13,369 | |
| | | |
| | | |
Deferred loan cost amortization | 3,138 | | | 2,207 | |
Equity in net income of Diamond Green Diesel and other unconsolidated subsidiaries | (309,270) | | | (149,116) | |
Distributions of earnings from Diamond Green Diesel and other unconsolidated subsidiaries | 103,794 | | | 1,631 | |
Changes in operating assets and liabilities, net of effects from acquisitions: | | | |
Accounts receivable | 24,397 | | | (47,046) | |
Income taxes refundable/payable | (24,551) | | | (28,834) | |
Inventories and prepaid expenses | (22,301) | | | (95,199) | |
Accounts payable and accrued expenses | (94,080) | | | 72,351 | |
Other | 10,065 | | | (18,487) | |
Net cash provided by operating activities | 405,700 | | | 361,035 | |
Cash flows from investing activities: | | | |
Capital expenditures | (234,307) | | | (151,478) | |
Acquisitions, net of cash acquired | (1,079,083) | | | (1,235,537) | |
Investment in Diamond Green Diesel | (75,000) | | | (239,750) | |
Investment in other unconsolidated subsidiaries | (27) | | | — | |
| | | |
Loan repayment from Diamond Green Diesel | 25,000 | | | — | |
| | | |
Gross proceeds from disposal of property, plant and equipment and other assets | 2,733 | | | 2,161 | |
Proceeds from insurance settlement | 13,836 | | | — | |
Payments related to routes and other intangibles | (1,517) | | | (179) | |
Net cash used in investing activities | (1,348,365) | | | (1,624,783) | |
Cash flows from financing activities: | | | |
Proceeds from long-term debt | 807,956 | | | 1,663,612 | |
Payments on long-term debt | (83,616) | | | (23,600) | |
Borrowings from revolving credit facility | 1,415,916 | | | 777,902 | |
Payments on revolving credit facility | (1,063,516) | | | (937,921) | |
Net cash overdraft financing | 16,673 | | | 12 | |
Deferred loan costs | (9) | | | (10,707) | |
| | | |
Repurchase of common stock | (52,941) | | | (65,887) | |
Minimum withholding taxes paid on stock awards | (15,558) | | | (45,836) | |
| | | |
Distributions to noncontrolling interests | (4,824) | | | — | |
Net cash provided by financing activities | 1,020,081 | | | 1,357,575 | |
Effect of exchange rate changes on cash | 16,535 | | | (16,059) | |
Net increase in cash, cash equivalents and restricted cash | 93,951 | | | 77,768 | |
Cash, cash equivalents and restricted cash at beginning of period | 150,168 | | | 69,072 | |
Cash, cash equivalents and restricted cash at end of period | $ | 244,119 | | | $ | 146,840 | |
| | | |
The accompanying notes are an integral part of these consolidated financial statements.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2017July 1, 2023
(unaudited)
(1)General
The accompanying consolidated financial statements for the three and ninesix month periods ended September 30, 2017July 1, 2023 and October 1, 2016,July 2, 2022, have been prepared by Darling Ingredients Inc., a Delaware corporation (“Darling”, and together with its subsidiaries, the “Company” or “we”, “us” or “our”) in accordance with generally accepted accounting principles in the United States (“GAAP”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended December 31, 2016. 2022.
| |
(2) | Summary of Significant Accounting Policies |
(2)Summary of Significant Accounting Policies
(a)Basis of Presentation
The consolidated financial statements include the accounts of Darling and its consolidated subsidiaries. Noncontrolling interests represent the outstanding ownership interest in the Company's consolidated subsidiaries that are not owned by the Company. In the accompanying Consolidated Statements of Operations, the noncontrolling interest in net income of the consolidated subsidiaries is shown as an allocation of the Company's net income and is presented separately as “Net income attributable to noncontrolling interests”.interests.” In the Company's Consolidated Balance Sheets, noncontrolling interests represent the ownership interests in the CompanyCompany's consolidated subsidiaries' net assets held by parties other than the Company. These ownership interests are presented separately as “Noncontrolling interests” within “Stockholders' Equity.” All significant intercompany balances and transactions have been eliminated in consolidation.
(b)Fiscal Periods
The Company has a 52/52/53 week fiscal year ending on the Saturday nearest December 31.31. Fiscal periods for the consolidated financial statements included herein are as of September 30, 2017,July 1, 2023, and include the 13 and 3926 weeks ended September 30, 2017,July 1, 2023, and the 13 and 3926 weeks ended OctoberJuly 2, 2022.
(c) Cash and Cash Equivalents
The Company considers all short-term highly liquid instruments, with an original maturity of three months or less, to be cash equivalents. Cash balances are recorded net of book overdrafts when a bank right-of-offset exists. All other book overdrafts are recorded in accounts payable and the change in the related balance is reflected in operating activities on the Consolidated Statement of Cash Flows. In addition, the Company has bank overdrafts, which are considered a form of short-term financing with changes in the related balance reflected in financing activities in the Consolidated Statement of Cash Flows. Restricted cash shown on the Consolidated Balance Sheet as of July 1, 2016.2023 and December 31, 2022, primarily represented amounts set aside as collateral for foreign construction projects and U.S. environmental claims and were insignificant to the Company. Restricted cash included in other long term assets on the Consolidated Balance Sheet as of July 1, 2023 and December 31, 2022, primarily represents acquisition consideration hold-back amounts that are part of the purchase price set aside in escrow in the Company's name for possible indemnification claims by the Company, which amounts will be paid to the sellers in the future if no claims arise. A reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of same such amounts shown in the Consolidated Statement of Cash flows is as follows (in thousands):
| | | | | | | | | | | |
| | July 1, 2023 | December 31, 2022 |
Cash and cash equivalents | | $ | 111,541 | | $ | 127,016 | |
Restricted cash | | 299 | | 315 | |
Restricted cash included in other long-term assets | | 132,279 | | 22,837 | |
Total cash, cash equivalents and restricted cash shown in the statement of cash flows | | $ | 244,119 | | $ | 150,168 | |
(d) Accounts Receivable Factoring
The Company has entered into agreements with third party banks to factor certain of the Company's trade receivables in order to enhance working capital by turning trade receivables into cash faster. Under these agreements, the Company sells certain selected customers’ trade receivables to third party banks without recourse for cash less a nominal fee. For the three months ended July 1, 2023 and July 2, 2022, the Company sold approximately $130.6 million and $145.0 million of its trade receivables and incurred approximately $1.7 million and $0.7 million in fees, respectively, which are recorded as interest expense. For the six months ended July 1, 2023 and July 2, 2022, the Company sold approximately $292.0 million and $271.3 million of its trade receivables and incurred approximately $3.7 million and $1.1 million in fees, which are recorded as interest expense.
(e) Revenue Recognition
The Company recognizes revenue on sales when productscontrol of the promised finished product is transferred to the Company's customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for the finished product. Service revenues are shipped andrecognized when the customer takes ownership and assumes risk of loss.service occurs. Certain customers may be required to prepay prior to shipment in order to maintain payment protection related to certain foreign and domestic sales. These amounts are recorded as unearned revenue in accrued expenses and recognized when control of the products have shippedpromised finished product is transferred to the Company's customer. See Note 20 (Revenue) to the Company's Consolidated Financial Statements included herein.
(f) Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the customer takes ownershipreported amounts of revenues and assumes riskexpenses during the reporting period. Actual results could differ from those estimates.
If it is at least reasonably possible that the estimate of loss. The Company recognizes service revenue in the fiscal montheffect on the service occurs.
| |
(d) | Foreign Currency Translation and Remeasurement |
Foreign currency translation is included as a component of accumulated other comprehensive loss and reflects the adjustments resulting from translating the foreign currency denominated financial statements of foreign subsidiaries into U.S. dollars. The functional currencya condition, situation, or set of circumstances that exist at the date of the financial statements will change in the near term due to one or more future confirming events, and the effect of the change would be material to the financial statements, the Company will disclose the nature of the uncertainty and include an indication that it is at least reasonably possible that a change in the estimate will occur in the near term. If the estimate involves certain loss contingencies, the disclosure will also include an estimate of the probable loss or range of loss or state that an estimate cannot be made.
As a result of the Russia-Ukraine war and the current inflationary environment, we have evaluated the potential impact to the Company's operations and for any indicators of potential triggering events that could indicate certain of the Company's foreign subsidiaries isassets may be impaired. Through the currencysix months ended July 1, 2023, the Company has not observed any impairments of the primary economic environmentCompany's assets or a significant change in whichtheir fair value due to the entity operates,Russia-Ukraine war or inflation.
(g) Out-of-Period Correction
During the quarter ended July 1, 2023, the Company determined the fair value of the contingent consideration liability recorded related to the FASA Group of approximately R$867.5 million (approximately $168.1 million USD at the exchange rate in effect on the closing date of the acquisition) was overstated in the initial
purchase price allocation.The error was the result of the use of an incorrect fair value model under the income approach to determine fair value of the contingent consideration liability upon acquisition.Utilizing assistance from external valuation experts and the use of a monte-carlo simulation, the Company determined during the quarter ended July 1, 2023 the acquisition date fair value of the contingent payment was R$428.2 million (approximately $83.0 million USD at the exchange rate in effect on the closing date of the acquisition) representing the probability weighted present value of the expected payment to be made under the agreement using the income approach.This resulted in an overstatement of the fair value of the contingent consideration liability of approximately $85.1 million on the acquisition date.
The Company assessed the impact of this error and concluded that it was not material to the financial statements previously issued for any interim or annual period and the correction of the error during the quarter ended July 1, 2023 is not material to the second quarter 2023 financial statements and is not expected to be material to the annual financial statements for fiscal 2023.The correction of the fair value of the contingent consideration liability at the acquisition date was recorded as an immaterial out-of-period correction during the quarter ended July 1, 2023 with the offset to the balance sheet recorded as a reduction to goodwill of approximately $85.1 million, which is generallyincluded in the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at fiscal period end exchange rates, including intercompany foreign currency transactions that are of long-term investment nature. Income and expense items are translated at average exchange rates occurring during the period. ChangesFeed Ingredients segment.
(h) Reclassifications
in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses in determining net income. The Company incurred net foreign currency translation gains of approximately $114.7 million and approximately $46.2 million for the nine months ended September 30, 2017 and October 1, 2016, respectively.
Certain immaterial prior year amounts have been reclassified to conform to current year presentation.
(i) Earnings Per Share
Basic income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares including non-vested and restricted shares outstanding during the period. Diluted income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares outstanding during the period increased by dilutive common equivalent shares determined using the treasury stock method.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income per Common Share (in thousands, except per share data) |
| Three Months Ended |
| | | July 1, 2023 | | | | | | July 2, 2022 | | |
| Income | | Shares | | Per Share | | Income | | Shares | | Per Share |
Basic: | | | | | | | | | | | |
Net Income attributable to Darling | $ | 252,383 | | | 159,810 | | | $ | 1.58 | | | $ | 201,996 | | | 161,632 | | | $ | 1.25 | |
Diluted: | | | | | | | | | | | |
Effect of dilutive securities: | | | | | | | | | | | |
Add: Option shares in the money and dilutive effect of non-vested stock awards | | | 3,308 | | | | | | | 3,781 | | | |
Less: Pro forma treasury shares | | | (748) | | | | | | | (668) | | | |
Diluted: | | | | | | | | | | | |
Net income attributable to Darling | $ | 252,383 | | | 162,370 | | | $ | 1.55 | | | $ | 201,996 | | | 164,745 | | | $ | 1.23 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Income per Common Share (in thousands, except per share data) |
| Six Months Ended |
| | | July 1, 2023 | | | | | | July 2, 2022 | | |
| Income | | Shares | | Per Share | | Income | | Shares | | Per Share |
Basic: | | | | | | | | | | | |
Net Income attributable to Darling | $ | 438,184 | | | 159,978 | | | $ | 2.74 | | | $ | 390,049 | | | 161,514 | | | $ | 2.41 | |
Diluted: | | | | | | | | | | | |
Effect of dilutive securities: | | | | | | | | | | | |
Add: Option shares in the money and dilutive effect of non-vested stock awards | | | 3,363 | | | | | | | 3,879 | | | |
Less: Pro forma treasury shares | | | (748) | | | | | | | (720) | | | |
Diluted: | | | | | | | | | | | |
Net income attributable to Darling | $ | 438,184 | | | 162,593 | | | $ | 2.69 | | | $ | 390,049 | | | 164,673 | | | $ | 2.37 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Net Income per Common Share (in thousands, except per share data) |
| Three Months Ended |
| | | September 30, 2017 | | | | | | October 1, 2016 | | |
| Income | | Shares | | Per Share | | Income | | Shares | | Per Share |
Basic: | | | | | | | | | | | |
Net Income attributable to Darling | $ | 7,761 |
| | 164,735 |
| | $ | 0.05 |
| | $ | 28,694 |
| | 164,653 |
| | $ | 0.17 |
|
Diluted: | |
| | |
| | |
| | |
| | |
| | |
|
Effect of dilutive securities: | |
| | |
| | |
| | |
| | |
| | |
|
Add: Option shares in the money and dilutive effect of non-vested stock awards | |
| | 4,759 |
| | |
| | |
| | 1,717 |
| | |
|
Less: Pro forma treasury shares | |
| | (2,313 | ) | | |
| | |
| | (934 | ) | | |
|
Diluted: | |
| | |
| | |
| | |
| | |
| | |
|
Net income attributable to Darling | $ | 7,761 |
| | 167,181 |
| | $ | 0.05 |
| | $ | 28,694 |
| | 165,436 |
| | $ | 0.17 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| Net Income per Common Share (in thousands, except per share data) |
| Nine Months Ended |
| | | September 30, 2017 | | | | | | October 1, 2016 | | |
| Income | | Shares | | Per Share | | Loss | | Shares | | Per Share |
Basic: | | | | | | | | | | | |
Net Income attributable to Darling | $ | 22,739 |
| | 164,734 |
| | $ | 0.14 |
| | $ | 61,772 |
| | 164,574 |
| | $ | 0.38 |
|
Diluted: | |
| | |
| | |
| | |
| | |
| | |
|
Effect of dilutive securities: | |
| | |
| | |
| | |
| | |
| | |
|
Add: Option shares in the money and dilutive effect of non-vested stock awards | |
| | 3,645 |
| | |
| | |
| | 1,222 |
| | |
|
Less: Pro forma treasury shares | |
| | (1,751 | ) | | |
| | |
| | (642 | ) | | |
|
Diluted: | |
| | |
| | |
| | |
| | |
| | |
|
Net income attributable to Darling | $ | 22,739 |
| | 166,628 |
| | $ | 0.14 |
| | $ | 61,772 |
| | 165,154 |
| | $ | 0.37 |
|
For the three months endedSeptember 30, 2017 July 1, 2023 and October 1, 2016,July 2, 2022, respectively, 212,525 and 1,228,334no outstanding stock options were excluded from diluted income per common share as the effect waswould be antidilutive. For the three months endedSeptember 30, 2017 July 1, 2023 and October 1, 2016,July 2, 2022, respectively, 437,897478,289 and 887,413 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.
For the nine months ended September 30, 2017 and October 1, 2016, respectively, 723,052 and 1,122,165 outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the nine months ended September 30, 2017 and October 1, 2016, respectively, 650,758 and 812,780249,564 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.
| |
(3) | Acquisition of Noncontrolling Interest |
DuringFor the third quarter of fiscal 2017, the Company, through a wholly-owned international subsidiary, acquired the minority interest in one of its international subsidiaries for approximately $19.1 million, including transaction costs. Except for an insignificant amount, the actual funding was accrued and will occur per the terms of the share purchase agreement underlying the transaction.
A summary of inventories follows (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Finished product | $ | 184,778 |
| | $ | 156,542 |
|
Work in process | 100,147 |
| | 87,284 |
|
Raw material | 37,609 |
| | 39,859 |
|
Supplies and other | 52,564 |
| | 47,130 |
|
| $ | 375,098 |
| | $ | 330,815 |
|
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2015-11, Simplifying the Measurement of Inventory. This ASU amends Topic 330, Inventory. The ASU simplifies the measurement of inventory by requiring certain inventory to be measured at the lower of cost and net realizable value. The adoption of this standard on January 1, 2017 did not have a material impact on the Company's consolidated financial statements.
The gross carrying amount of intangible assets not subject to amortization and intangible assets subject to amortization is as follows (in thousands):
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Indefinite Lived Intangible Assets | | | |
Trade names | $ | 54,629 |
| | $ | 51,687 |
|
| 54,629 |
| | 51,687 |
|
Finite Lived Intangible Assets: | |
| | |
|
Routes | 401,919 |
| | 374,989 |
|
Permits | 511,210 |
| | 493,311 |
|
Non-compete agreements | 3,985 |
| | 3,638 |
|
Trade names | 76,618 |
| | 76,033 |
|
Royalty, consulting, land use rights and leasehold | 14,389 |
| | 13,456 |
|
| 1,008,121 |
| | 961,427 |
|
Accumulated Amortization: | | | |
Routes | (129,504 | ) | | (105,934 | ) |
Permits | (201,656 | ) | | (170,165 | ) |
Non-compete agreements | (2,244 | ) | | (1,788 | ) |
Trade names | (28,343 | ) | | (21,042 | ) |
Royalty, consulting, land use rights and leasehold | (3,095 | ) | | (2,258 | ) |
| (364,842 | ) | | (301,187 | ) |
Total Intangible assets, less accumulated amortization | $ | 697,908 |
| | $ | 711,927 |
|
Gross intangible routes, permits, trade names, non-compete agreements and other intangibles partially decreased in fiscal 2017 as a result of approximately $6.7 million of asset retirements and also increased due to acquired intangibles of approximately $9.0 million and the remaining increase is due to foreign currency translation. Amortization expense for the three and nine monthssix months ended September 30, 2017July 1, 2023 and OctoberJuly 2, 2022, respectively, no outstanding stock options were excluded from diluted income per common share as the effect would be antidilutive. For the six months ended July 1, 2016,2023 and July 2, 2022, respectively, 450,248 and 248,051 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was approximately $20.0 million, $19.6 million and $58.4 million and $58.4 million, respectively.antidilutive.
Changes(3) Investment in the carrying amount of goodwill (in thousands):Unconsolidated Subsidiaries
|
| | | | | | | | | | | | |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total |
Balance at December 31, 2016 | | | | |
Goodwill | $ | 813,621 |
| $ | 317,008 |
| $ | 111,178 |
| $ | 1,241,807 |
|
Accumulated impairment losses | (15,914 | ) | — |
| — |
| (15,914 | ) |
| 797,707 |
| 317,008 |
| 111,178 |
| 1,225,893 |
|
Goodwill acquired during year | 1,880 |
| — |
| — |
| 1,880 |
|
Foreign currency translation | 34,308 |
| 24,086 |
| 12,099 |
| 70,493 |
|
Balance at September 30, 2017 | |
| |
| | |
|
Goodwill | 849,809 |
| 341,094 |
| 123,277 |
| 1,314,180 |
|
Accumulated impairment losses | (15,914 | ) | — |
| — |
| (15,914 | ) |
| $ | 833,895 |
| $ | 341,094 |
| $ | 123,277 |
| $ | 1,298,266 |
|
| |
(7) | Investment in Unconsolidated Subsidiaries |
On January 21, 2011,, a wholly-owned subsidiary of Darling entered into a limited liability company agreement with a wholly-owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (the(“DGD” or the “DGD Joint Venture”). The DGD Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant (the “DGD Facility”), which is capable of processing approximately 12,000 barrels per day of input feedstock to produce renewable diesel fuel and certain other co-products, and is located adjacent to Valero's refinery in Norco, Louisiana. TheValero.
Selected financial information for the Company's DGD Joint Venture reached mechanical completion and beganis as follows:
| | | | | | | | | | | |
(in thousands) | | June 30, 2023 | December 31, 2022 |
Assets: | | | |
Total current assets | | $ | 1,623,715 | | $ | 1,304,805 | |
Property, plant and equipment, net | | 3,828,093 | | 3,866,854 | |
Other assets | | 88,305 | | 61,665 | |
Total assets | | $ | 5,540,113 | | $ | 5,233,324 | |
Liabilities and members' equity: | | | |
Total current portion of long term debt | | $ | 102,935 | | $ | 217,066 | |
Total other current liabilities | | 378,589 | | 515,023 | |
Total long term debt | | 760,700 | | 774,783 | |
Total other long term liabilities | | 16,568 | | 17,249 | |
Total members' equity | | 4,281,321 | | 3,709,203 | |
Total liabilities and members' equity | | $ | 5,540,113 | | $ | 5,233,324 | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
(in thousands) | | June 30, 2023 | June 30, 2022 | | June 30, 2023 | June 30, 2022 |
Revenues: | | | | | | |
Operating revenues | | $ | 2,246,111 | | $ | 1,455,886 | | | $ | 3,926,161 | | $ | 2,436,578 | |
Expenses: | | | | | | |
Total costs and expenses less depreciation, amortization and accretion expense | | 1,751,315 | | 1,274,665 | | | 3,172,719 | | 2,082,237 | |
Depreciation, amortization and accretion expense | | 58,315 | | 31,317 | | | 116,922 | | 57,809 | |
Total costs and expenses | | 1,809,630 | | 1,305,982 | | | 3,289,641 | | 2,140,046 | |
Operating income | | 436,481 | | 149,904 | | | 636,520 | | 296,532 | |
Other income | | 2,121 | | 722 | | | 4,162 | | 711 | |
Interest and debt expense, net | | (12,674) | | (3,266) | | | (26,080) | | (6,275) | |
Net income | | $ | 425,928 | | $ | 147,360 | | | $ | 614,602 | | $ | 290,968 | |
As of July 1, 2023, under the productionequity method of renewable dieselaccounting, the Company has an investment in late June 2013.
On May 31, 2011, the DGD Joint Venture and Diamond Green Diesel LLC, a wholly-owned subsidiary of approximately $2,144.0 million on the consolidated balance sheet. The Company has recorded equity in net income from the DGD Joint Venture (“Opco”), entered into (i) a facility agreement (the “Facility Agreement”) with Diamond Alternative Energy, LLC, a wholly-owned subsidiary of Valero (the “Lender”),approximately $213.0 million and (ii) a loan agreement (the “Loan Agreement”) with$73.7 million for the Lender, which providedthree months ended July 1, 2023 and July 2, 2022, respectively. The Company has recorded equity in net income from the DGD Joint Venture with a 14 year multiple advance term loan facility of approximately $221.3$307.3 million (the “JV Loan”) to support and $145.5 million for the design, engineeringsix months ended July 1, 2023 and constructionJuly 2, 2022, respectively. In December 2019, the blender tax credits were extended for calendar years 2020, 2021 and 2022. On August 16, 2022, the U.S. government enacted the Inflation Reduction Act ( the “IR Act”). As part of the DGD Facility, whichIR Act, the blender tax credits were extended as is now in production. The Facility Agreementuntil December 31, 2024. After 2024, the Clean Fuels Production Credit (the “CFPC”) becomes effective from 2025 through 2027. Under the CFPC, on-road transportation fuel receives a base credit of up to $1.00 per gallon of renewable diesel multiplied by the fuel's emission reduction percentage as long as it is produced
at a qualifying facility and the Loan Agreement prohibit the Lender from assigning all or any portion of the Facility Agreement or the Loan Agreement to unaffiliated third parties. Opco has also pledged substantially all of its assetsit meets prevailing wage requirements and apprenticeship requirements. In contrast to the Lender,blenders tax credits, the CFPC requires that production must take place in the United States. For the three months ended June 30, 2023 and June 30, 2022, the DGD Joint Venture recorded approximately $387.5 million and $198.4 million of blenders tax credits, respectively. For the six months ended June 30, 2023 and June 30, 2022, the DGD Joint Venture recorded approximately $633.5 million and $354.2 million of blenders tax credits, respectively. The blenders tax credits are recorded as a reduction of cost of sales by the DGD Joint Venture. In the six months ended July 1, 2023 and July 2, 2022, respectively, the Company made $75.0 million and $239.75 million capital contributions to the DGD Joint Venture. In the six months ended July 1, 2023 and July 2, 2022, the Company received $101.4 million and zero dividend distributions from the DGD Joint Venture, respectively. As of July 1, 2023, the DGD Joint Venture has pledged allborrowings outstanding of Opco's equity interests to$50.0 million under their unsecured revolving credit facility. On July 18, 2023, the Lender, untilCompany received approximately $62.2 million as a dividend distribution from the JV Loan has been paid in full and the JV Loan has terminated in accordance with its terms.DGD Joint Venture.
In addition to the DGD Joint Venture, the Company has investments in other unconsolidated subsidiaries that are insignificant to the Company. Selected
(4) Acquisitions
Gelnex
On March 31, 2023, the Company acquired all of the shares of Gelnex, a leading global producer of collagen products (the “Gelnex Acquisition”). The Gelnex Acquisition includes a network of five processing facilities in South America and one in the United States. The initial purchase price of approximately $1.2 billion was comprised of an initial cash payment of approximately $1.1 billion, which consisted of a payment of approximately R$4.3 billion Brazilian real (approximately $855.1 million USD at the exchange rate of R$5.0812:USD$1.00 on the closing date) and a payment of approximately $243.5 million in USD, and is subject to various post-closing adjustments in accordance with the stock purchase agreement. In addition, the Company incurred a liability of approximately $104.1 million for acquisition consideration hold-back amounts that are part of the purchase price set aside in escrow in the Company's name for possible indemnification claims by the Company, which amounts will be paid to the sellers in the future if no claims arise. The hold-back amount represents a noncash investing activity during the period of acquisition. The Gelnex Acquisition gives us immediate capacity to serve the growing needs of our collagen customers and the growing gelatin market. The initial purchase price was financed by borrowing all of the Company's term A-3 facility of $300.0 million and term A-4 facility of $500.0 million, with the remainder coming through revolver borrowings under the Company's Amended Credit Agreement.
The following table summarizes the preliminary estimated fair value of the assets acquired and the liabilities assumed in the Gelnex Acquisition as of March 31, 2023 (in thousands) inclusive of all measurement period adjustments recorded:
| | | | | |
Accounts receivable | $ | 81,000 | |
Inventories | 141,066 | |
Other current assets | 3,502 | |
Property, plant and equipment | 127,769 | |
Identifiable intangible assets | 283,951 | |
Goodwill | 630,669 | |
Operating lease right-of-use assets | 134 | |
Other assets | 2,703 | |
Deferred tax asset | 857 | |
Accounts payable | (15,059) | |
Current operating lease liabilities | (26) | |
Current portion of long-term debt | (44,692) | |
Accrued expenses | (18,888) | |
Long-term debt, net of current portion | (1,407) | |
Long-term operating lease liabilities | (123) | |
Deferred tax liability | (8,310) | |
Other noncurrent liabilities | (19) | |
Purchase price, net of cash acquired | $ | 1,183,127 | |
Less hold-back | 104,145 | |
Cash paid for acquisition, net of cash acquired | $ | 1,078,982 | |
As the Gelnex Acquisition occurred on the last business day of the first quarter, and the Company preliminarily allocated the purchase price of the acquisition to the assets acquired and liabilities assumed based on their estimated fair values on a provisional basis using methods based on historical experience, with the excess of the purchase price over the aggregate provisional fair values recorded as goodwill.
The above amounts are provisional in nature and are subject to change during the measurement period if additional information about the facts and circumstances that existed at the acquisition date becomes available. The Company is in the ongoing process of conducting a valuation of all the assets acquired and liabilities assumed related to the acquisition including identifiable intangible assets, personal and real property, deferred taxes and others, including possible future purchase price adjustments related to working capital and taxes. The Company has engaged third party valuation experts to assist in the determination of the fair value of assets acquired and liabilities assumed using the income, market or cost approaches (or a combination thereof).
The $630.7 million of goodwill from the Gelnex Acquisition, which is expected to strengthen the Company's gelatin business and expand its ability to service increased demand of its collagen customer base, is assigned to the Food Ingredients segment. Of the preliminary goodwill booked in the Gelnex Acquisition approximately $506.4 million is expected to be deductible for tax purposes. The identifiable intangibles of $284.0 million have preliminarily been recorded as other intangible assets. Due to the fact that the Company is in the process of conducting a valuation of all the assets acquired, certain other disclosures regarding the type and weighted average life of intangibles is not known at this time and will be updated when the information becomes available.
The final fair value of the net assets acquired may result in adjustments to these assets and liabilities, including goodwill, which may be significant. If new information is obtained about facts and circumstances that existed at the acquisition date, the Company will adjust its measurement of provisional amounts recorded, thus the final determination of the values presented in the above table of assets acquired and liabilities assumed may result in retrospective adjustments to the values presented with a corresponding adjustment to goodwill. During the second quarter ended July 1, 2023 immaterial amounts have been adjusted to goodwill.
The amount of net sales and net income (loss) from the Gelnex Acquisition included in the Company's consolidated statement of operations for both the three and six months ended July 1, 2023 were $91.2 million and $(19.1) million, respectively. The Company incurred acquisition costs related to the Gelnex Acquisition for the three and six months ended July 1, 2023 of approximately $0.1 million and $5.9 million, respectively.
FASA Group
On August 1, 2022, the Company acquired all of the shares of the FASA Group, the largest independent rendering company in Brazil, pursuant to a stock purchase agreement dated May 5, 2022 (the “FASA Acquisition”). The FASA Group, with its 14 rendering plants and an additional two plants under construction at the time of acquisition, will supplement the Company's global supply of waste fats, making it a leader in the supply of low-carbon waste fats and oils.
The Company initially paid approximately R$2.9 billion Brazilian real in cash (approximately $562.6 million USD at the exchange rate in effect on the closing date of the acquisition) for all the shares of the FASA Group, subject to certain post closing adjustments and a contingent payment based on future earnings growth in accordance with the terms set forth in the stock purchase agreement. Under the stock purchase agreement, such contingent payment could range from R$0 to a maximum of R$1.0 billion if future earnings growth reaches certain levels over a three-year period. The Company completed an initial analysis as of the acquisition date for this contingency and recorded a liability of approximately R$867.5 million (approximately $168.1 million USD at the exchange rate in effect on the closing date of the acquisition) representing the present value of the maximum contingency under the income approach.
As disclosed in Note 2(g), as a result of the immaterial out-of-period correction identified during the quarter ended July 1, 2023, utilizing assistance from external valuation experts and the use of a Monte Carlo model, the Company determined the acquisition date fair value of the contingent consideration was R$428.2 million (approximately $83.0 million USD at the exchange rate in effect on the closing date of the acquisition) representing the probability weighted present value of the expected payment to be made under the agreement using the income approach, resulting in an overstatement of the fair value of the contingent consideration liability of approximately $85.1 million. The immaterial out-of-period correction reduced the acquisition date fair value of contingent consideration liability and goodwill
associated with the FASA Acquisition by approximately $85.1 million during the quarter ended July 1, 2023.The Company will analyze the contingent consideration liability using a Monte Carlo model each quarter and any change in fair value will be recorded through operating income as changes in fair value of contingent consideration including the accretion of the change in the long-term liability.
The hold-back and contingent consideration amounts represent a noncash investing activity during the period of acquisition. The Company initially financed the FASA Acquisition by borrowing approximately $515.0 million of revolver borrowings under the Company's Amended Credit Agreement, with the remainder coming from cash on hand. During the fourth quarter of fiscal 2022, the Company made immaterial working capital adjustments and made a cash payment for working capital purchase price adjustment per the stock purchase agreement of approximately $7.1 million with an offset to goodwill. The Company obtained new information about facts and circumstances that existed at the acquisition date during the first and second quarter of 2023 that resulted in measurement period adjustments to increase property, plant and equipment by approximately $81.5 million, decrease intangible assets by approximately $41.7 million, decrease goodwill by approximately $21.5 million, increase deferred tax liabilities by approximately $16.0 million and increase other assets and liabilities by approximately $2.3 million, with the net impact of the adjustments to the consolidated statement of operations being immaterial.
The following table summarizes the final fair value of the assets acquired and the liabilities assumed in the FASA Acquisition as of August 1, 2022 at the exchange rate of R$5.16:USD$1.00 (in thousands), as adjusted for the immaterial out of period correction disclosed in Note 2(g) and inclusive of all measurement adjustments recorded:
| | | | | |
Accounts receivable | $ | 76,640 | |
Inventories | 43,058 | |
Other current assets | 33,327 | |
Property, plant and equipment | 224,384 | |
Identifiable intangible assets | 119,477 | |
Goodwill (1) | 301,937 | |
Operating lease right-of-use assets | 583 | |
Other assets | 62,388 | |
Deferred tax asset | 2,315 | |
Accounts payable | (15,920) | |
Current portion of long-term debt | (18,680) | |
Accrued expenses | (38,708) | |
Long-term debt, net of current portion | (41,926) | |
Long-term operating lease liabilities | (583) | |
Deferred tax liability | (95,653) | |
Other noncurrent liabilities | (503) | |
Non-controlling interests | (21,704) | |
Purchase price, net of cash acquired | $ | 630,432 | |
Less hold-back | 21,705 | |
Less contingent consideration (1) | 82,984 | |
Cash paid for acquisition, net of cash acquired | $ | 525,743 | |
(1) As disclosed in Note 2(g), the immaterial out-of-period correction made during the quarter ended July 1, 2023 resulted in a reduction of goodwill and contingent consideration liability recorded associated with the FASA Acquisition of approximately $85.1 million.
The $301.9 million of goodwill from the FASA Acquisition, which is expected to strengthen the Company's base business and expand its ability to provide additional low carbon intensity feedstocks to fuel the growing demand for renewable diesel, was assigned to the Feed Ingredients segment and is nondeductible for tax purposes. The identifiable intangible assets include $108.5 million in routes with a life of 12 years and $10.9 million in trade name with a life of 5 years for a total weighted average life of approximately 11.4 years.
The amount of net sales and net income (loss) from the FASA Acquisition included in the Company's consolidated statement of operations for the three and six months ended July 1, 2023 were $90.3 million and $183.8 million and $(2.7) million and $1.8 million, respectively.
Valley Proteins
On May 2, 2022, the Company acquired all of the shares of Valley Proteins, pursuant to a stock purchase agreement dated December 28, 2021 (the “Valley Acquisition”). The Valley Acquisition includes a network of 18 major rendering plants and used cooking oil facilities throughout the southern, southeast and mid-Atlantic regions of the U.S. The Company initially paid approximately $1.177 billion in cash for the Valley Acquisition, subject to various post-closing adjustments in accordance with the stock purchase agreement. During the third quarter of fiscal 2022, the Company made immaterial working capital adjustments and made a cash payment for a working capital purchase price adjustment per the stock purchase agreement of approximately $6.0 million with an offset to goodwill. The initial purchase price was financed by borrowing all of the Company's term A-1 facility of $400.0 million and term A-2 facility of $500.0 million, with the remainder coming through revolver borrowings under the Company's Amended Credit Agreement.
The following table summarizes the final fair value of the assets acquired and the liabilities assumed in the Valley Acquisition as of May 2, 2022 (in thousands) inclusive of all measurement period adjustments recorded:
| | | | | |
Accounts receivable | $ | 68,558 | |
Inventories | 58,246 | |
Other current assets | 13,825 | |
Property, plant and equipment | 409,405 | |
Identifiable intangible assets | 389,200 | |
Goodwill | 358,298 | |
Operating lease right-of-use assets | 16,380 | |
Other assets | 14,164 | |
Deferred tax asset | 1,075 | |
Accounts payable | (47,615) | |
Current portion of long-term debt | (2,043) | |
Current operating lease liabilities | (4,779) | |
Accrued expenses | (66,034) | |
Long-term debt, net of current portion | (5,995) | |
Long-term operating lease liabilities | (11,601) | |
Other noncurrent liabilities | (19,436) | |
Purchase price, net of cash acquired | $ | 1,171,648 | |
The $358.3 million of goodwill from the Valley Acquisition, which is expected to strengthen the Company's base business and expand its ability to provide additional low carbon intensity feedstocks to fuel the growing demand for renewable diesel, was assigned to the Feed Ingredients segment. For U.S. income tax purposes, the Valley Acquisition is treated as a purchase of substantially all the assets of Valley Proteins; therefore, almost all of the goodwill is expected to be deductible for tax purposes. The identifiable intangible assets include $292.1 million in collection routes with a life of 15 years and $97.1 million in permits with a life of 15 years for a total weighted average life of approximately 15 years.
The amount of net sales and net income from the Valley Acquisition included in the Company's consolidated statement of operations for the three and six months ended July 1, 2023 were $199.9 million and $426.3 million and $4.1 million and $3.6 million, respectively.
As a result of the Gelnex Acquisition, the FASA Acquisition and the Valley Acquisition, effective March 31, 2023, August 1, 2022 and May 2, 2022, respectively, the Company began including the operations of these acquisitions in the Company's consolidated financial statements. The following table presents selected pro forma information, for comparative purposes, assuming the Company's DGD Joint Venture Gelnex Acquisition, the FASA Acquisition and the Valley Acquisition had occurred on January 2, 2022 for the periods presented (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2023 | | July 2, 2022 | | July 1, 2023 | | July 2, 2022 |
Net sales | $ | 1,757,621 | | | $ | 1,927,083 | | | $ | 3,647,060 | | | $ | 3,705,923 | |
Net income | 255,197 | | | 200,668 | | | 448,019 | | | 371,706 | |
The Company notes that pro forma results of operations for the additional acquisitions discussed below have not been presented because the effect of each acquisition individually or in the aggregate is not deemed material to net sales, total assets and net income of the Company for any period presented.
On February 25, 2022, a wholly-owned international subsidiary of the Company acquired all of the shares of Group Op de Beeck, a Belgium digester, organic and industrial waste processing company, that is now included in our Fuel Ingredients segment, for an initially estimated purchase price of approximately $91.7 million, plus or minus various closing adjustments in accordance with the stock purchase agreement. Initially, the Company paid approximately $71.3 million in cash consideration. In the second quarter of fiscal 2022, the Company paid an additional $4.2 million for purchase price adjustments related to working capital and estimated future construction costs for a total purchase price of approximately $75.5 million. The Company recorded assets and liabilities consisting of property, plant and equipment of approximately $28.1 million, intangible assets of approximately $27.2 million, goodwill of approximately $29.6 million and other net liabilities of approximately $9.4 million including working capital and net debt.
Additionally, the Company completed other immaterial acquisitions in the first six months of fiscal 2023 and 2022.
On November 2, 2022, the Company announced that we entered into a definitive agreement to purchase Polish rendering company, Miropasz Group for approximately €110.0 million, subject to post-closing adjustments. The transaction is subject to customary approvals, including the receipt of regulatory approval and is anticipated to close in the third quarter of 2023.
The Company incurred acquisition costs and integration costs of approximately $1.7 million and $5.4 million for the three months ended July 1, 2023 and July 2, 2022, respectively. The Company incurred acquisition and integration costs of approximately $8.7 million and $9.1 million for the six months ended July 1, 2023 and July 2, 2022, respectively.
(5) Inventories
A summary of inventories follows (in thousands):
| | | | | | | | | | | |
| July 1, 2023 | | December 31, 2022 |
Finished product | $ | 480,025 | | | $ | 384,289 | |
Work in process | 138,034 | | | 100,790 | |
Raw material | 68,387 | | | 69,164 | |
Supplies and other | 138,684 | | | 119,378 | |
| $ | 825,130 | | | $ | 673,621 | |
(6) Intangible Assets
The gross carrying amount of intangible assets not subject to amortization and intangible assets subject to amortization
is as follows (in thousands):
|
| | | | | | | |
(in thousands) | | September 30, 2017 | December 31, 2016 |
Assets: | | | |
Total current assets | | $ | 218,357 |
| $ | 268,734 |
|
Property, plant and equipment, net | | 390,723 |
| 354,871 |
|
Other assets | | 5,482 |
| 12,164 |
|
Total assets | | $ | 614,562 |
| $ | 635,769 |
|
Liabilities and members' equity: | | | |
Total current portion of long term debt | | $ | 17,023 |
| $ | 17,023 |
|
Total other current liabilities | | 32,924 |
| 23,200 |
|
Total long term debt | | 40,986 |
| 53,753 |
|
Total other long term liabilities | | 443 |
| 418 |
|
Total members' equity | | 523,186 |
| 541,375 |
|
Total liabilities and member's equity | | $ | 614,562 |
| $ | 635,769 |
|
| | | | | | | | | | | |
| July 1, 2023 | | December 31, 2022 |
Indefinite Lived Intangible Assets: | | | |
Trade names | $ | 52,203 | | | $ | 51,639 | |
| 52,203 | | | 51,639 | |
Finite Lived Intangible Assets: | | | |
Routes | 753,442 | | | 781,286 | |
Permits | 560,416 | | | 557,083 | |
Non-compete agreements | 695 | | | 695 | |
Trade names | 77,400 | | | 76,549 | |
Royalty, consulting, land use rights and leasehold | 20,382 | | | 20,971 | |
Other intangible assets | 295,977 | | | — | |
| 1,708,312 | | | 1,436,584 | |
Accumulated Amortization: | | | |
Routes | (221,628) | | | (196,108) | |
Permits | (389,854) | | | (368,005) | |
Non-compete agreements | (617) | | | (563) | |
Trade names | (57,999) | | | (53,486) | |
Royalty, consulting, land use rights and leasehold | (5,242) | | | (4,939) | |
Other intangible assets | (10,571) | | | — | |
| (685,911) | | | (623,101) | |
Total Intangible assets, less accumulated amortization | $ | 1,074,604 | | | $ | 865,122 | |
|
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(in thousands) | | September 30, 2017 | September 30, 2016 | | September 30, 2017 | September 30, 2016 |
Revenues: | | | | | | |
Operating revenues | | $ | 175,585 |
| $ | 141,656 |
| | $ | 451,768 |
| $ | 345,650 |
|
Expenses: | | | | | | |
Total costs and expenses less depreciation, amortization and accretion expense | | 154,446 |
| 96,569 |
| | 395,743 |
| 244,643 |
|
Depreciation, amortization and accretion expense | | 6,733 |
| 7,445 |
| | 22,867 |
| 20,370 |
|
Total costs and expenses | | 161,179 |
| 104,014 |
| | 418,610 |
| 265,013 |
|
Operating income | | 14,406 |
| 37,642 |
| | 33,158 |
| 80,637 |
|
Other income | | 408 |
| 114 |
| | 959 |
| 199 |
|
Interest and debt expense, net | | (455 | ) | (1,406 | ) | | (2,306 | ) | (6,148 | ) |
Net income | | $ | 14,359 |
| $ | 36,350 |
| | $ | 31,811 |
| $ | 74,688 |
|
As of September 30, 2017 under the equity method of accounting, the Company has an investmentGross intangible assets changed due to net acquisition activity in the DGD Joint Venturefirst six months of fiscal 2023 by approximately $245.0 million and the remaining change is due to foreign currency translation and retirements. Other intangibles represent the preliminary amounts recorded in the Gelnex Acquisition. Amortization expense for the three months ended July 1, 2023 and July 2, 2022, was approximately $33.3 million and $21.0 million, respectively, and for the six months ended July 1, 2023 and July 2, 2022 was approximately $59.5 million and $37.5 million, respectively.
(7) Goodwill
Changes in the carrying amount of goodwill (in thousands):
| | | | | | | | | | | | | | |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total |
Balance at December 31, 2022 | | | | |
Goodwill | $ | 1,556,855 | | $ | 320,807 | | $ | 143,379 | | $ | 2,021,041 | |
Accumulated impairment losses | (15,914) | | (3,170) | | (31,580) | | (50,664) | |
| 1,540,941 | | 317,637 | | 111,799 | | 1,970,377 | |
Goodwill acquired during year | 3,247 | | 626,202 | | — | | 629,449 | |
| | | | |
| | | | |
Measurement period adjustments | (21,271) | | 4,467 | | (66) | | (16,870) | |
Out-of-period correction (1) | (85,144) | | — | | — | | (85,144) | |
Foreign currency translation | 34,190 | | 31,628 | | 2,539 | | 68,357 | |
Balance at July 1, 2023 | | | | |
Goodwill | 1,487,877 | | 983,104 | | 145,852 | | 2,616,833 | |
Accumulated impairment losses | (15,914) | | (3,170) | | (31,580) | | (50,664) | |
| $ | 1,471,963 | | $ | 979,934 | | $ | 114,272 | | $ | 2,566,169 | |
(1) As disclosed in Note 2(g), the immaterial out-of-period correction made during the quarter ended July 1, 2023 resulted in a reduction of goodwill recorded associated with the FASA Acquisition of approximately $261.6$85.1 million, onwhich is included in the consolidated balance sheet and has recorded an equity net gainFeed Ingredients segment.
(8) Accrued Expenses
Accrued expenses consist of approximately $15.9 million and $37.3 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. In the first quarter of fiscal 2017, the Company received a dividend distribution of $25.0 million from the DGD Joint Venture. Additionally, the biodiesel blenders tax credit expired on December 31, 2016, as a result the DGD Joint Venture fiscal 2017 results do not include any blenders tax credits, while fiscal 2016 included blenders tax credits.following (in thousands):
| | | | | | | | | | | |
| July 1, 2023 | | December 31, 2022 |
Compensation and benefits | $ | 134,677 | | | $ | 145,048 | |
| | | |
Accrued operating expenses | 101,476 | | | 97,128 | |
| | | |
Other accrued expense | 184,043 | | | 189,847 | |
| $ | 420,196 | | | $ | 432,023 | |
(9) Debt
Debt consists of the following (in thousands):
| | | | | | | | | | | |
| July 1, 2023 | | December 31, 2022 |
Amended Credit Agreement: | | | |
Revolving Credit Facility ($212.9 million and $32.0 million denominated in € at July 1, 2023 and December 31, 2022, respectively) | $ | 491,921 | | | $ | 135,028 | |
| | | |
Term A-1 facility | 400,000 | | | 400,000 | |
Less unamortized deferred loan costs | (635) | | | (722) | |
Carrying value Term A-1 facility | 399,365 | | | 399,278 | |
| | | |
Term A-2 facility | 487,500 | | | 493,750 | |
Less unamortized deferred loan costs | (902) | | | (1,034) | |
Carrying value Term A-2 facility | 486,598 | | | 492,716 | |
| | | |
Term A-3 facility | 300,000 | | | — | |
Less unamortized deferred loan costs | (964) | | | — | |
Carrying value Term A-3 facility | 299,036 | | | — | |
| | | |
Term A-4 facility | 496,875 | | | — | |
Less unamortized deferred loan costs | (1,168) | | | — | |
Carrying value Term A-4 facility | 495,707 | | | — | |
| | | |
Term Loan B | 200,000 | | | 200,000 | |
Less unamortized deferred loan costs | (981) | | | (1,302) | |
Carrying value Term Loan B | 199,019 | | | 198,698 | |
| | | |
6% Senior Notes due 2030 with effective interest of 6.12% | 1,000,000 | | | 1,000,000 | |
Less unamortized deferred loan costs net of bond premium | (6,841) | | | (7,228) | |
Carrying value 6% Senior Notes due 2030 | 993,159 | | | 992,772 | |
| | | |
5.25% Senior Notes due 2027 with effective interest of 5.47% | 500,000 | | | 500,000 | |
Less unamortized deferred loan costs | (3,694) | | | (4,127) | |
Carrying value 5.25% Senior Notes due 2027 | 496,306 | | | 495,873 | |
| | | |
3.625% Senior Notes due 2026 - Denominated in euro with effective interest of 3.83% | 562,329 | | | 549,814 | |
Less unamortized deferred loan costs - Denominated in euro | (3,274) | | | (3,728) | |
Carrying value 3.625% Senior Notes due 2026 | 559,055 | | | 546,086 | |
| | | |
Other Notes and Obligations | 126,716 | | | 124,364 | |
| 4,546,882 | | | 3,384,815 | |
Less Current Maturities | 88,085 | | | 69,846 | |
| $ | 4,458,797 | | | $ | 3,314,969 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Amended Credit Agreement: | | | |
Revolving Credit Facility ($5.3 million denominated in euro at December 31, 2016) | $ | — |
| | $ | 5,280 |
|
Term Loan A ($64.8 million and $76.9 million denominated in CAD at September 30, 2017 and December 31, 2016, respectively) | 108,053 |
| | 120,103 |
|
Less unamortized deferred loan costs | (814 | ) | | (1,083 | ) |
Carrying value Term Loan A | 107,239 |
| | 119,020 |
|
| | | |
Term Loan B | 537,500 |
| | 583,500 |
|
Less unamortized deferred loan costs | (4,874 | ) | | (6,298 | ) |
Carrying value Term Loan B | 532,626 |
| | 577,202 |
|
| | | |
5.375% Senior Notes due 2022 with effective interest of 5.72% | 500,000 |
| | 500,000 |
|
Less unamortized deferred loan costs | (6,655 | ) | | (7,667 | ) |
Carrying value 5.375% Senior Notes due 2022 | 493,345 |
| | 492,333 |
|
| | | |
4.75% Senior Notes due 2022 - Denominated in euro with effective interest of 5.10% | 608,318 |
| | 543,840 |
|
Less unamortized deferred loan costs - Denominated in euro | (8,769 | ) | | (8,956 | ) |
Carrying value 4.75% Senior Notes due 2022 | 599,549 |
| | 534,884 |
|
| | | |
Other Notes and Obligations | 19,632 |
| | 22,224 |
|
| 1,752,391 |
| | 1,750,943 |
|
Less Current Maturities | 18,215 |
| | 23,247 |
|
| $ | 1,734,176 |
| | $ | 1,727,696 |
|
As of September 30, 2017, the Company had outstanding debt under a term loan facility denominated in Canadian dollars of CAD$80.6 million. See below for discussion relating to the Company's debt agreements. In addition, as of
September 30, 2017, the Company had capital lease obligations denominated in Canadian dollars included in debt. The current and long-term capital lease obligation was approximately CAD$0.9 million and CAD$0.5 million, respectively.
As of September 30, 2017,July 1, 2023, the Company had outstanding debt under the Company's 4.75% Senior Notes due 2022revolving credit facility denominated in euros of €515.0 million. See below for discussion relating to€195.0 million and outstanding debt under the Company's debt agreements.3.625% Senior Notes due 2026 denominated in euros of
€515.0 million. In addition, at September 30, 2017,July 1, 2023, the Company had capitalfinance lease obligations denominated in euros included in debt. The currentof approximately €7.8 million.
As of July 1, 2023, the Company had other notes and long-termobligations of $126.7 million that consist of various overdraft facilities of approximately $41.3 million, Brazilian notes of approximately $48.5 million, a China working capital lease obligation wasline of credit of approximately €0.3$5.1 million and €0.1other debt of approximately $31.8 million, respectively.including U.S. finance lease obligations of approximately $4.2 million.
Senior Secured Credit Facilities. On January 6, 2014, Darling, Darling International Canada Inc. (“Darling Canada”) and Darling International NL Holdings B.V. (“Darling NL”) entered into a Second Amended and Restated Credit Agreement (as subsequently amended, the “Amended Credit Agreement”), restating its then existing Amended and Restated Credit Agreement dated September 27, 2013, (the Former Credit Agreement), with the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents from time to time party thereto.
Effective December 16, 2016, the Company, and certain of its subsidiaries entered into an amendment (the “Fourth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Fourth Amendment extended the maturity date of the term A loans and revolving credit facility loans under the Amended Credit Agreement from September 27, 2018 to December 16, 2021, subject to a 91-day “springing” adjustment if the term B loans are outstanding 91 days prior to the maturity date (January 6, 2021) of the term B loans.
The Company's Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of $2.65 billion comprised of (i) the Company's $350.0 million term loan A facility, (ii) the Company's $1.3 billion term loan B facility and (iii) the Company's $1.0 billion five-year revolving loan facility (approximately $150.0 million of which is available for a letter of credit sub-facility and $50.0 million of which is available for a swingline sub-facility) (collectively, the “Senior Secured Credit Facilities”). The Amended Credit Agreement also permits Darling and the other borrowers thereunder to incur ancillary facilities provided by any revolving lender party to the Senior Secured Credit Facilities (with certain restrictions). Up to $500.0 million of the revolving loan facility is available to be borrowed by (x) Darling in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender, (y) Darling Canada in Canadian dollars and (z) Darling NL, Darling Ingredients International Holding B.V. (“Darling BV”) and CTH Germany GmbH (“CTH”) in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender. The revolving loan facility and term loan A facility will mature on December 16, 2021, subject to a 91-day “Springing” adjustment if the term B loans are outstanding 91 days prior to the maturity date (January 6, 2021) of the term B loans. The revolving loan facility will be used for working capital needs, general corporate purposes and other purposes not prohibited by the Amended Credit Agreement.
The interest rate applicable to any borrowings under the revolving credit facility equals the adjusted term loan A facility andsecured overnight financing rate (SOFR) for U.S. dollar borrowings or the revolving loan facility will equal either LIBOR/adjusted euro interbank offered rate/rate (EURIBOR) for euro borrowings or the adjusted daily simple Sterling overnight index average (SONIA) for British pound borrowings or CDOR for Canadian dollar borrowings plus 2.00%1.375% per annum or base rate/rate or the adjusted term SOFR for U.S. dollar borrowings or Canadian prime rate for Canadian dollar borrowings or the adjusted daily simple European short term rate (ESTR) for euro borrowings or the adjusted daily SONIA rate for British pound borrowings plus 1.00%0.375% per annum subject to certain step-ups or step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowing under the term A-1 facility and term A-3 facility equals the adjusted term SOFR plus a minimum of 1.50% per annum subject to certain step-ups based on the Company's total leverage ratio. The interest rate applicable to any borrowing under the term A-2 facility and term A-4 facility equals the adjusted term SOFR plus 1.375% per annum subject to certain step-ups or step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal (a) for U.S. dollar term loans, eitherequals the base rate plus 1.50%1.00% or LIBOR plus 2.50%, and (b) for euro term loans, the euro interbank offered rate plus 2.75%, in each case subject to a step-down based on Darling’s total leverage ratio. For term loan B loans, the LIBOR rate shall not be less than 0.75%2.00%.
As of September 30, 2017,July 1, 2023, the Company had $43.3(i) $44.0 million outstanding under the revolving credit facility at base rate plus a margin of 0.375% per annum for a total of 8.625% per annum, (ii) $235.0 million outstanding under the revolver at SOFR plus a margin of 1.375% per annum for a total of 6.5775% per annum, (iii) $400.0 million outstanding under the term loan AA-1 facility at SOFR plus a margin of 1.50% per annum for a total of 6.7025% per annum, (iv) $487.5 million outstanding under the term A-2 facility at SOFR plus a margin of 1.375% per annum for a total of 6.5775% per annum, (v) $300.0 million outstanding under the term A-3 facility at SOFR plus a margin 1.50% per annum for a total of 6.7025% per annum, (vi) $496.9 million outstanding under the term A-4 facility at SOFR plus a margin 1.375% per annum for a total of 6.5775% per annum, (vii) $200.0 million outstanding under the term B facility at LIBOR plus a margin of 2.00% per annum for a total of 3.24%7.15% per annum. The Company had $525.5annum and (viii) €195.0 million outstanding under the term loan Brevolving credit facility at LIBOREURIBOR plus a margin of 2.50%1.375% per annum for a total of 3.74% per annum and $12.0 million outstanding under the term loan B facility at base rate plus a margin of 1.50% per annum for a total of 5.75% per annum. The Company had CAD$80.6 million outstanding under the term loan A facility at CDOR plus a margin of 2.00% per annum for a total of 3.3947%4.7630% per annum. As of September 30, 2017,July 1, 2023, the Company had unused capacityrevolving credit facility availability of $976.0$956.0 million, under the Amended Credit Agreement taking into account amounts borrowed, ancillary facilities of $48.3 million and letters of credit issued of $24.0$3.9 million. The Company also hashad foreign bank guarantees of approximately $13.0 million and U.S. bank guarantees of approximately $10.9 million that are not part of the Company's Amended Credit Agreement in the amount of approximately $12.2 million at September 30, 2017.July 1, 2023.
5.375 % Senior Notes due 2022. On January 2, 2014, Darling Escrow Corporation, a wholly-owned subsidiary of Darling, issued and sold $500.0 million aggregate principal amount of its 5.375% Notes due 2022 (the “5.375% Notes”). The 5.375% Notes, which were offered in a private offering in connection with the Company's acquisition in January 2014 of its Darling Ingredients International business from VION Holding, N.V. (the “VION Acquisition”), were issued pursuant to a 5.375% Notes Indenture, dated as of January 2, 2014 (the “Original 5.375% Indenture”) (as supplemented, the “5.375% Indenture”), among Darling Escrow Corporation, the subsidiary guarantors party thereto from time to time, and U.S. Bank National Association, as trustee (the “5.375% Trustee”).
4.75 % Senior Notes due 2022. On June 3, 2015, Darling Global Finance B.V. (the “4.75% Issuer”), a wholly-owned subsidiary of Darling, issued and sold €515.0 million aggregate principal amount of the 4.75% Senior Notes due 2022 (the “4.75% Notes”). The 4.75% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of June 3, 2015 (the “4.75% Indenture”), among the 4.75% Issuer, Darling, the subsidiary guarantors party thereto from time to time, Citibank, N.A., London Branch, as trustee (the “4.75% Trustee”) and principal paying agent, and Citigroup Global Markets Deutschland AG, as principal registrar.
As of September 30, 2017,July 1, 2023, the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 5.375% Indenture6% Senior Notes due 2030, the 5.25% Senior Notes due 2027 and the 4.75% Indenture. 3.625% Senior Notes due 2026.
(10) Other Noncurrent Liabilities
Other noncurrent liabilities consist of the following (in thousands):
| | | | | | | | | | | |
| July 1, 2023 | | December 31, 2022 |
Accrued pension liability | $ | 22,656 | | | $ | 22,538 | |
Reserve for self-insurance, litigation, environmental and tax matters | 87,915 | | | 76,685 | |
Long-term acquisition hold-backs | 134,969 | | | 26,113 | |
Long-term contingent consideration (1) | 87,329 | | | 169,903 | |
Other | 6,401 | | | 3,694 | |
| $ | 339,270 | | | $ | 298,933 | |
(1) As disclosed in Note 2(g), the immaterial out-of-period correction made during the quarter ended July 1, 2023 resulted in a reduction of goodwill recorded associated with the FASA Acquisition of approximately $85.1 million.
(11) Income Taxes
The Company has provided income taxes for the three and ninesix month periods ended September 30, 2017July 1, 2023 and October 1, 2016,July 2, 2022, based on its estimate of the effective tax rate for the entire 20172023 and 20162022 fiscal years. The Company’s estimated annual effective tax rate is based on forecasts of income by jurisdiction, permanent differences between book and tax income, including Subpart F income, the relative proportion of income and losses by jurisdiction, and statutory income tax rates. Discrete events such as the assessment of the ultimate outcome of tax audits, audit settlements, recognizing previously unrecognized tax benefits due to the lapsing of statutes of limitation, recognizing or derecognizing deferred tax assets due to projections of income or loss and changes in tax laws are recognized in the period in which they occur.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company expects to indefinitely reinvest the earnings of its foreign subsidiaries outside of the United States and has generally not provided deferred income taxes on the accumulated earnings of its foreign subsidiaries except for the accumulated earnings of certain joint venture companies.
The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets. In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions. The Company considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends and its outlook for future years.
Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. As of September 30, 2017,July 1, 2023 and July 2, 2022, the Company had $2.9$19.1 million and $12.1 million, respectively of gross unrecognized tax benefits and $1.6$1.3 million and $1.2 million, respectively of related accrued interest and penalties. An indemnity receivable of $3.3 million has been recorded for the uncertainThe Company's gross unrecognized tax positions relatedbenefits are not expected to the VION Acquisition. It is reasonably possibledecrease significantly within the next twelve monthsmonths.
On August 16, 2022, the U.S. government enacted the IR Act that includes tax incentives for energy and climate initiatives, among other provisions. The blender tax credits, which are refundable excise tax credits, have been extended two years through December 31, 2024. After 2024, the Company’s gross unrecognizedCFPC, a transferable income tax benefits may decrease by upcredit, becomes effective from 2025 through 2027. We are assessing these tax incentives, which could materially change our pre-tax or after-tax amounts and impact our tax rate in future years. We will continue to $1.9 million, excluding interestevaluate the applicability and penalties, primarily due to potential settlements and expirationeffect of certain statutes of limitations.the IR Act as more guidance is issued.
The Company’s major taxing jurisdictions include the United States (federal and state), Canada, the Netherlands, Belgium, Brazil, Germany, France and China. The Company is subject to regular examination by various tax authorities and although the final outcome of these examinations is not yet determinable, the Company does not anticipate that any of the examinations will have a significant impact on the Company's results of operations or financial position.The statute of limitations for the Company’s major tax jurisdictions is open for varying periods, but is generally closed through the 20102013 tax year.
| |
(10) | Other Comprehensive Income |
The Company follows FASB authoritative guidance for reporting and presentation of comprehensive income and its components. (12) Other comprehensive income (loss) is derived from adjustments that reflect pension adjustments, corn option adjustments and foreign currency translation adjustments. Comprehensive Income/(Loss)
The components of other comprehensive income income/(loss) and the related tax impacts for the three and nine monthssix months ended September 30, 2017July 1, 2023 and October 1, 2016July 2, 2022 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Before-Tax | Tax (Expense) | Net-of-Tax |
| Amount | or Benefit | Amount |
| September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 |
Defined benefit pension plans | | | | | | |
Amortization of prior service cost/(benefit) | $ | 9 |
| $ | 8 |
| $ | (3 | ) | $ | (2 | ) | $ | 6 |
| $ | 6 |
|
Amortization of actuarial loss | 1,204 |
| 1,168 |
| (451 | ) | (447 | ) | 753 |
| 721 |
|
Amortization of settlement | — |
| — |
| — |
| — |
| — |
| — |
|
Total defined benefit pension plans | 1,213 |
| 1,176 |
| (454 | ) | (449 | ) | 759 |
| 727 |
|
Natural gas swap derivatives | | | | | | |
Gain/(loss) activity recognized in other comprehensive income (loss) | 36 |
| — |
| (14 | ) | — |
| 22 |
| — |
|
Total natural gas swap derivatives | 36 |
| — |
| (14 | ) | — |
| 22 |
| — |
|
Corn option derivatives | | | | | | |
Loss/(gain) reclassified to net income | (1,352 | ) | (861 | ) | 525 |
| 334 |
| (827 | ) | (527 | ) |
Gain/(loss) activity recognized in other comprehensive income (loss) | 2,740 |
| 2,060 |
| (1,063 | ) | (799 | ) | 1,677 |
| 1,261 |
|
Total corn option derivatives | 1,388 |
| 1,199 |
| (538 | ) | (465 | ) | 850 |
| 734 |
|
| | | | | | |
Foreign currency translation | 46,211 |
| (5,839 | ) | — |
| — |
| 46,211 |
| (5,839 | ) |
| | | | | | |
Other comprehensive income (loss) | $ | 48,848 |
| $ | (3,464 | ) | $ | (1,006 | ) | $ | (914 | ) | $ | 47,842 |
| $ | (4,378 | ) |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| Before-Tax | Tax (Expense) | Net-of-Tax |
| Amount | or Benefit | Amount |
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 |
Defined benefit pension plans | | | | | | |
| | | | | | |
Amortization of prior service (cost)/benefit | $ | — | | $ | 6 | | $ | — | | $ | (2) | | $ | — | | $ | 4 | |
Amortization of actuarial loss | 434 | | 570 | | (107) | | (146) | | 327 | | 424 | |
| | | | | | |
Total defined benefit pension plans | 434 | | 576 | | (107) | | (148) | | 327 | | 428 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Soybean meal option derivatives | | | | | | |
Reclassified to earnings | (166) | | 124 | | 42 | | (31) | | (124) | | 93 | |
Activity recognized in other comprehensive income/(loss) | (163) | | (144) | | 41 | | 37 | | (122) | | (107) | |
Total soybean meal option derivatives | (329) | | (20) | | 83 | | 6 | | (246) | | (14) | |
Corn option derivatives | | | | | | |
Reclassified to earnings | (653) | | 7,238 | | 165 | | (1,839) | | (488) | | 5,399 | |
Activity recognized in other comprehensive income/(loss) | 597 | | 726 | | (150) | | (184) | | 447 | | 542 | |
Total corn option derivatives | (56) | | 7,964 | | 15 | | (2,023) | | (41) | | 5,941 | |
Heating oil derivatives | | | | | | |
Activity recognized in other comprehensive income/(loss) | (23,292) | | 24,847 | | 5,917 | | (6,312) | | (17,375) | | 18,535 | |
Total heating oil derivatives | (23,292) | | 24,847 | | 5,917 | | (6,312) | | (17,375) | | 18,535 | |
Interest swap derivatives | | | | | | |
Reclassified to earnings | (990) | | — | | 251 | | — | | (739) | | — | |
Activity recognized in other comprehensive income/(loss) | 13,867 | | — | | (3,522) | | — | | 10,345 | | — | |
Total interest swap derivatives | 12,877 | | — | | (3,271) | | — | | 9,606 | | — | |
Foreign exchange derivatives | | | | | | |
Reclassified to earnings | (7,459) | | (6,280) | | 2,539 | | 2,055 | | (4,920) | | (4,225) | |
Activity recognized in other comprehensive income/(loss) | 21,515 | | (25,091) | | (7,324) | | 8,597 | | 14,191 | | (16,494) | |
Total foreign exchange derivatives | 14,056 | | (31,371) | | (4,785) | | 10,652 | | 9,271 | | (20,719) | |
| | | | | | |
Foreign currency translation | 82,696 | | (95,562) | | (104) | | 1,707 | | 82,592 | | (93,855) | |
| | | | | | |
Other comprehensive income/(loss) | $ | 86,386 | | $ | (93,566) | | $ | (2,252) | | $ | 3,882 | | $ | 84,134 | | $ | (89,684) | |
|
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| Before-Tax | Tax (Expense) | Net-of-Tax |
| Amount | or Benefit | Amount |
| September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 |
Defined benefit pension plans | | | | | | |
Amortization of prior service cost/(benefit) | $ | 27 |
| $ | 22 |
| $ | (8 | ) | $ | (7 | ) | $ | 19 |
| $ | 15 |
|
Amortization of actuarial loss | 3,610 |
| 3,502 |
| (1,351 | ) | (1,338 | ) | 2,259 |
| 2,164 |
|
Amortization of settlement | — |
| (123 | ) | — |
| 48 |
| — |
| (75 | ) |
Total defined benefit pension plans | 3,637 |
| 3,401 |
| (1,359 | ) | (1,297 | ) | 2,278 |
| 2,104 |
|
Natural gas swap derivatives | | | | | | |
Gain/(loss) activity recognized in other comprehensive income (loss) | 36 |
| — |
| (14 | ) | — |
| 22 |
| — |
|
Total natural gas swap derivatives | 36 |
| — |
| (14 | ) | — |
| 22 |
| — |
|
Corn option derivatives | | | | | | |
Loss/(gain) reclassified to net income | (3,750 | ) | (3,204 | ) | 1,455 |
| 1,243 |
| (2,295 | ) | (1,961 | ) |
Gain/(loss) activity recognized in other comprehensive income (loss) | 1,918 |
| 5,255 |
| (744 | ) | (2,039 | ) | 1,174 |
| 3,216 |
|
Total corn option derivatives | (1,832 | ) | 2,051 |
| 711 |
| (796 | ) | (1,121 | ) | 1,255 |
|
| | | | | | |
Foreign currency translation | 111,002 |
| 43,684 |
| — |
| — |
| 111,002 |
| 43,684 |
|
| | | | | | |
Other comprehensive income (loss) | $ | 112,843 |
| $ | 49,136 |
| $ | (662 | ) | $ | (2,093 | ) | $ | 112,181 |
| $ | 47,043 |
|
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended |
| Before-Tax | Tax (Expense) | Net-of-Tax |
| Amount | or Benefit | Amount |
| July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 |
Defined benefit pension plans | | | | | | |
Amortization of prior service (cost)/benefit | $ | — | | $ | 11 | | $ | — | | $ | (3) | | $ | — | | $ | 8 | |
Amortization of actuarial loss | 868 | | 1,140 | | (214) | | (291) | | 654 | | 849 | |
| | | | | | |
Total defined benefit pension plans | 868 | | 1,151 | | (214) | | (294) | | 654 | | 857 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Soybean meal option derivatives | | | | | | |
Reclassified to earnings | (504) | | (317) | | 128 | | 81 | | (376) | | (236) | |
Activity recognized in other comprehensive income/(loss) | (87) | | (24) | | 22 | | 6 | | (65) | | (18) | |
Total soybean meal option derivatives | (591) | | (341) | | 150 | | 87 | | (441) | | (254) | |
Corn option derivatives | | | | | | |
Reclassified to earnings | (1,537) | | 11,345 | | 390 | | (2,882) | | (1,147) | | 8,463 | |
Activity recognized in other comprehensive income/(loss) | 1,627 | | (10,159) | | (412) | | 2,581 | | 1,215 | | (7,578) | |
Total corn option derivatives | 90 | | 1,186 | | (22) | | (301) | | 68 | | 885 | |
Heating oil derivatives | | | | | | |
Activity recognized in other comprehensive income/(loss) | 5,140 | | 2,377 | | (1,305) | | (604) | | 3,835 | | 1,773 | |
Total heating oil derivatives | 5,140 | | 2,377 | | (1,305) | | (604) | | 3,835 | | 1,773 | |
Interest swap derivatives | | | | | | |
Reclassified to earnings | 866 | | — | | (220) | | — | | 646 | | — | |
Activity recognized in other comprehensive income/(loss) | 12,976 | | — | | (3,296) | | — | | 9,680 | | — | |
Total interest swap derivatives | 13,842 | | — | | (3,516) | | — | | 10,326 | | — | |
Foreign exchange derivatives | | | | | | |
Reclassified to earnings | (12,273) | | (7,351) | | 4,176 | | 2,415 | | (8,097) | | (4,936) | |
Activity recognized in other comprehensive income/(loss) | 34,844 | | 20,331 | | (11,856) | | (6,679) | | 22,988 | | 13,652 | |
Total foreign exchange derivatives | 22,571 | | 12,980 | | (7,680) | | (4,264) | | 14,891 | | 8,716 | |
| | | | | | |
Foreign currency translation | 139,555 | | (92,901) | | (746) | | 2,428 | | 138,809 | | (90,473) | |
| | | | | | |
Other comprehensive income/(loss) | $ | 181,475 | | $ | (75,548) | | $ | (13,333) | | $ | (2,948) | | $ | 168,142 | | $ | (78,496) | |
The following table presents the amounts reclassified out of each component of other comprehensive income income/(loss), net of tax for the three and nine monthssix months ended September 30, 2017July 1, 2023 and October 1, 2016July 2, 2022 as follows (in thousands):
| | | Three Months Ended | Nine Months Ended | | | Three Months Ended | Six Months Ended | |
| September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | Statement of Operations Classification | | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 | Statement of Operations Classification |
Derivative instruments | | | Derivative instruments | |
Soybean meal option derivatives | | Soybean meal option derivatives | $ | 166 | | $ | (124) | | $ | 504 | | $ | 317 | | Net sales |
Foreign exchange contracts | | Foreign exchange contracts | 7,459 | | 6,280 | | 12,273 | | 7,351 | | Net sales |
| Corn option derivatives | $ | 1,352 |
| $ | 861 |
| $ | 3,750 |
| $ | 3,204 |
| Cost of sales and operating expenses | Corn option derivatives | 653 | | (7,238) | | 1,537 | | (11,345) | | Cost of sales and operating expenses |
Interest swaps | | Interest swaps | 990 | | — | | (866) | | — | | Foreign currency Gain/(loss) and interest expense |
| 1,352 |
| 861 |
| 3,750 |
| 3,204 |
| Total before tax | | 9,268 | | (1,082) | | 13,448 | | (3,677) | | Total before tax |
| (525 | ) | (334 | ) | (1,455 | ) | (1,243 | ) | Income taxes | | (2,997) | | (185) | | (4,474) | | 386 | | Income taxes |
| 827 |
| 527 |
| 2,295 |
| 1,961 |
| Net of tax | | 6,271 | | (1,267) | | 8,974 | | (3,291) | | Net of tax |
Defined benefit pension plans | | | Defined benefit pension plans | | |
Amortization of prior service cost | $ | (9 | ) | $ | (8 | ) | $ | (27 | ) | $ | (22 | ) | (a) | Amortization of prior service cost | $ | — | | $ | (6) | | $ | — | | $ | (11) | | (a) |
Amortization of actuarial loss | (1,204 | ) | (1,168 | ) | (3,610 | ) | (3,502 | ) | (a) | Amortization of actuarial loss | (434) | | (570) | | (868) | | (1,140) | | (a) |
Amortization of settlement | — |
| — |
| — |
| 123 |
| (a) | |
| | (1,213 | ) | (1,176 | ) | (3,637 | ) | (3,401 | ) | Total before tax | | (434) | | (576) | | (868) | | (1,151) | | Total before tax |
| 454 |
| 449 |
| 1,359 |
| 1,297 |
| Income taxes | | 107 | | 148 | | 214 | | 294 | | Income taxes |
| (759 | ) | (727 | ) | (2,278 | ) | (2,104 | ) | Net of tax | | (327) | | (428) | | (654) | | (857) | | Net of tax |
Total reclassifications | $ | 68 |
| $ | (200 | ) | $ | 17 |
| $ | (143 | ) | Net of tax | Total reclassifications | $ | 5,944 | | $ | (1,695) | | $ | 8,320 | | $ | (4,148) | | Net of tax |
| |
(a) | These items are included in the computation of net periodic pension cost. See Note 12 Employee Benefit Plans for additional information. |
(a)These items are included in the computation of net periodic pension cost. See Note 14 (Employee Benefit Plans) to the Company's Consolidated Financial Statement included herein for additional information.
The following table presents changes in each component of accumulated other comprehensive income income/(loss) as of September 30, 2017July 1, 2023 as follows (in thousands):
| | | | | | | | | | | | | | | | | | |
| | Six Months Ended July 1, 2023 |
| | Foreign | | | Defined | |
| | Currency | Derivative | | Benefit | |
| | Translation | Instruments | | Pension Plans | Total |
Accumulated Other Comprehensive loss December 31, 2022, attributable to Darling, net of tax | | $ | (374,368) | | $ | 7,176 | | | $ | (16,682) | | $ | (383,874) | |
Other comprehensive loss before reclassifications | | 138,809 | | 37,653 | | | — | | 176,462 | |
Amounts reclassified from accumulated other comprehensive loss | | — | | (8,974) | | | 654 | | (8,320) | |
| | | | | | |
Net current-period other comprehensive income | | 138,809 | | 28,679 | | | 654 | | 168,142 | |
Noncontrolling interest | | (3,171) | | — | | | — | | (3,171) | |
Accumulated Other Comprehensive loss July 1, 2023, attributable to Darling, net of tax | | $ | (232,388) | | $ | 35,855 | | | $ | (16,028) | | $ | (212,561) | |
|
| | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
| | Foreign Currency | Derivative | Defined Benefit | |
| | Translation | Instruments | Pension Plans | Total |
Accumulated Other Comprehensive Income (loss) December 31, 2016, attributable to Darling, net of tax | | $ | (308,910 | ) | $ | 2,468 |
| $ | (33,564 | ) | $ | (340,006 | ) |
Other comprehensive gain before reclassifications | | 111,002 |
| (2,295 | ) | — |
| 108,707 |
|
Amounts reclassified from accumulated other comprehensive income/(loss) | | — |
| 1,196 |
| 2,278 |
| 3,474 |
|
Net current-period other comprehensive income | | 111,002 |
| (1,099 | ) | 2,278 |
| 112,181 |
|
Noncontrolling interest | | (3,733 | ) | — |
| — |
| (3,733 | ) |
Accumulated Other Comprehensive Income (loss) September 30, 2017, attributable to Darling, net of tax | | (194,175 | ) | $ | 1,369 |
| $ | (31,286 | ) | $ | (224,092 | ) |
(11) (13) Stockholders' Equity
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU amends Topic 718, Compensation - Stock Compensation, which simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. The Company adopted this standard in the quarter ended April 1, 2017 and prior periods were not recasted. The impact of the adoption resulted in the following:
The Company recorded a tax expense of less than $0.1 million within income tax expense for the nine months ended September 30, 2017 related to the excess tax expense on stock options, nonvested stock, director restricted stock units and performance units. Prior to the adoption this amount would have been recorded as reduction of additional paid-in capital.
The Company has made a policy election to account for forfeitures in the period they occur, rather than estimating a forfeiture rate. Applying this guidance on a modified retrospective basis resulted in an insignificant adjustment to opening retained earnings.
The Company no longer reclassifies the excess tax benefit from operating activities to financing activities in the statement of cash flows. The Company elected to apply this change in presentation prospectively and thus prior periods have not been adjusted.
The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares of common stock in the computation of the Company's diluted earnings per share for the nine months ended September 30, 2017. This increased the Company's diluted weighted average common shares outstanding by approximately 155,000 shares in the nine months ended September 30, 2017.
Fiscal 20172023 Long-Term Incentive Opportunity Awards (2017(2023 LTIP). On February 6, 2017,January 3, 2023, the Compensation Committee (the “Committee”) of the Company's Board of Directors adopted the 20172023 LTIP pursuant to which they awarded certain of the Company's key employees, 956,809118,208 restricted stock optionsunits and 559,388177,299 performance share units (the “PSUs”) under the Company's 2017 Omnibus Incentive Plan. The restricted stock optionsunits vest 33.33% on the first, second and third anniversaries of the grant date. The PSUs are tied to a three-year forward-looking performance period and will be earned based on the Company's average return on capital employed (ROCE)gross investment (“ROGI”), as calculated in accordance with the terms of the award agreement, relative to the average ROCEROGI of the Company's performance peer group companies, with the earned award to be determined in the first quarter of fiscal 2020,2026, after the final results for the relevant performance period are determined. The PSUs were granted at a target of 100%, but each PSU will reduce or increase (up to 225%) depending on the Company's ROCEROGI relative to that of the performance peer group companies and is also subject to the application of a total shareholder return (TSR)(“TSR”) cap/collar modifier depending on the Company's TSR during the performance period relative to that of the performance peer group companies. On May 11, 2023, the Committee awarded 4,432 restricted stock units and 6,648 PSUs to a newly hired executive officer, which
will have the same performance period and terms as those issued to the other participants on January 3, 2023. In addition, certainon May 11, 2023, the Committee granted the newly hired executive officer a one-time grant of 44,304 restricted stock units that will vest in three equal installments on the first, second and third anniversaries of the PSUs have a two-year holding requirement after vesting beforegrant.
As previously announced, the PSUs are settled in shares of the Company's Common Stock.
On August 7, 2017, the Company'sCompany’s Board of Directors approved the extension for an additional two years of its previously announceda share repurchase program ofin August 2017, then refreshed and increased the program on December 9, 2021 up to an aggregate of $100.0$500.0 million of the Company's common stockCommon Stock depending on market conditions.conditions, and extended the program to August 13, 2024. During the first six months of fiscal 2023, $52.9 million of Common Stock was repurchased under the share repurchase program. As of July 1, 2023, the Company had approximately $321.6 million remaining under the share repurchase program.
(12) (14) Employee Benefit Plans
The Company has retirement and pension plans covering a substantial number of its domestic and foreign employees. Most retirement benefits are provided by the Company under separate final-pay noncontributory and contributory defined benefit and defined contribution plans for all salaried and hourly employees (excluding those covered by union-sponsored plans) who meet service and age requirements. Although various defined benefit formulas exist for employees, generally these are based on length of service and earnings patterns during employment. Effective January 1, 2012, the Company's Board of Directors authorized the Company to proceed with the restructuring of its domestic retirement benefit program to include the closing of Darling's salaried and hourly defined benefit plans to new participants as well as the freezing of service and wage accruals thereunder effective December 31, 2011 (a curtailment of these plans for financial reporting purposes) and the enhancing of benefits under the Company's domestic defined contribution plans. The Company-sponsored domestic hourly union plan has not been curtailed; however, several locations of the Company-sponsored domestic hourly union plan have been curtailed as a result of collective bargaining renewals for those sites.
Net pension cost for the three and nine monthssix months ended September 30, 2017July 1, 2023 and October 1, 2016July 2, 2022 includes the following components (in thousands):
| | | | | | | | | | | | | | | | | |
| Pension Benefits | | Pension Benefits |
| Three Months Ended | | Six Months Ended |
| July 1, 2023 | July 2, 2022 | | July 1, 2023 | July 2, 2022 |
Service cost | $ | 683 | | $ | 798 | | | $ | 1,358 | | $ | 1,626 | |
Interest cost | 1,961 | | 1,312 | | | 3,917 | | 2,632 | |
Expected return on plan assets | (1,805) | | (2,156) | | | (3,608) | | (4,321) | |
Amortization of prior service cost | — | | 6 | | | — | | 11 | |
Amortization of actuarial loss | 434 | | 570 | | | 868 | | 1,140 | |
| | | | | |
| | | | | |
Net pension cost | $ | 1,273 | | $ | 530 | | | $ | 2,535 | | $ | 1,088 | |
|
| | | | | | | | | | | | | |
| Pension Benefits | | Pension Benefits |
| Three Months Ended |
| Nine Months Ended |
| September 30, 2017 | October 1, 2016 |
| September 30, 2017 | October 1, 2016 |
Service cost | $ | 759 |
| $ | 599 |
| | $ | 2,244 |
| $ | 1,921 |
|
Interest cost | 1,672 |
| 1,702 |
| | 5,020 |
| 5,217 |
|
Expected return on plan assets | (1,799 | ) | (1,886 | ) | | (5,377 | ) | (5,661 | ) |
Amortization of prior service cost | 9 |
| 8 |
| | 27 |
| 22 |
|
Amortization of net loss | 1,204 |
| 1,168 |
| | 3,610 |
| 3,502 |
|
Curtailment gain | — |
| (62 | ) | | — |
| (1,285 | ) |
Settlement gain | — |
| — |
| | — |
| (123 | ) |
Net pension cost | $ | 1,845 |
| $ | 1,529 |
| | $ | 5,524 |
| $ | 3,593 |
|
The Company's funding policy for employee benefit pension plans is to contribute annually not less than the minimum amount required nor more than the maximum amount that can be deducted for federal and foreign income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Based on actuarial estimates at September 30, 2017,July 1, 2023, the Company expects to contribute approximately $4.6$3.7 million to its pension plans to meet funding requirements during the next twelve months. Additionally, the Company has made tax deductible discretionary and required contributions to its pension plans for the ninesix months ended September 30, 2017July 1, 2023 and October 1, 2016July 2, 2022 of approximately $2.6$1.6 million and $2.9$1.5 million, respectively.
The Company participates in various multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants. The Company's contributions to each multiemployer plan represent less than 5% of the total contributions to each such plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities on two of the plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone. With respect to the other multiemployer pension plans in which the Company participates and which are not individually significant, sixfive plans have certified as critical or red zone and one plan has certified as endangered or yellow zone as defined by the Pension Protection Act of 2006.
The Company currently has received notices of withdrawal liability from twoliabilities recorded on four U.S. multiemployer plans in which it participated. During the second quarter of fiscal 2023, the Company was notified by one of their multiemployer plans that an additional partial withdrawal liability was incurred and the Company also received a notification that another one of its multiemployer plans liabilities was being reduced. As a result of these events, the Company recorded an additional liability of approximately $2.8 million. As of September 30, 2017,July 1, 2023, the Company has an aggregate accrued liability of approximately $1.8$6.6 million representing the present value of scheduled withdrawal liability payments under theseon the multiemployer plans.plans that have given notice of withdrawal. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could requireadditional funding under the Pension Protection Act of 2006, the amounts could be material.
(15) Derivatives
The Company’s operations are exposed to market risks relating to commodity prices that affect the Company’s cost of raw materials, finished product prices, and energy costs and the risk of changes in interest rates and foreign currency exchange rates.
The Company makes limited use of derivative instruments to manage cash flow risks related to interest rates, natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Interest rate swaps are entered into with the intent of managing overall borrowing costs by reducing the potential impact of increases in interest rates on floating-rate long-term debt. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Soybean meal forwards and options are entered into with the intent of managing the impact of changing prices for poultry meal sales. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of bakery by-products (“BBP”) by reducing the impact of changing prices. Foreign currency forward and option contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency.
At September 30, 2017,July 1, 2023, the Company had natural gas swapsoybean meal forward and option contracts, foreign exchange forward and option contracts and corn option contractsinterest rate swaps outstanding that qualified and were designated for hedge accounting as well as corn option and forward contracts, soybean meal forward and option contracts and foreign currency forward contracts and soybean meal option contracts that did not qualify and were not designated for hedge accounting.
EntitiesIn the first six months of fiscal 2023 and 2022, the Company's DGD Joint Venture entered into heating oil derivatives that were deemed to be cash flow hedges. As a result, the Company has accrued the other comprehensive income/(loss) portion belonging to Darling with an offset to the investment in DGD as required by FASB ASC Topic 323.
Cash Flow Hedges
In the first quarter and second quarter of fiscal 2023, the Company entered into interest rate swaps that are requireddesignated as cash flow hedges. The notional amount of these swaps totaled $900.0 million. Under the contracts, the Company is obligated to report all derivative instrumentspay a weighted average rate of 4.007% while receiving the 1-month SOFR rate. Under the terms of the interest rate swaps, the Company hedged a portion of its variable rate debt into the first quarter of 2026. At July 1, 2023, the aggregate fair value of these interest rate swaps was approximately $13.3 million. These amounts are included in other current assets and other assets on the statementbalance sheet, with an offset recorded in accumulated other comprehensive loss.
In the first quarter of financial position at fair value.fiscal 2023, the Company also entered into cross currency swaps that are designated as cash flow hedges. The accounting fornotional amount of these swaps was €519.2 million. Under the contracts, the Company is obligated to pay a 4.6% euro denominated fixed rate while receiving a weighted average U.S. dollar fixed rate of 5.799%. Under the terms of the cross currency swaps, the Company hedged its intercompany notes receivable into the first quarter of 2025. Accordingly, changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a cash flow exposure, the effective portion of the gain hedge are initially recorded as gains and/or loss on the derivative instrument is reported initiallylosses as a component of accumulated other comprehensive income (outside of earnings) and is subsequently reclassified intoloss. We immediately reclassify from accumulated other comprehensive loss to earnings whenan amount to offset the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness, as well as the ineffective portion of the gain or loss, are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss isremeasurement recognized in earnings associated with the respective intercompany loan. Additionally, we reclassify amounts from accumulated other comprehensive income/(loss) associated with the interest rate differential between the U.S. dollar and a Euro to interest expense. At July 1, 2023, the aggregate fair value of these cross currency swaps was approximately $4.1 million. These amounts are included in other current assets and other non-current liabilities on the period of change.balance sheet, with an offset recorded in accumulated other comprehensive loss.
Cash Flow Hedges
In the first nine months of fiscal 2017, the Company entered into natural gas swap contracts that are considered cash flow hedges. Under the terms of the natural gas swap contracts, the Company fixed the expected purchase cost of a portion
of its U.S. plants' forecasted natural gas usage into the first quarter of fiscal 2018. As of September 30, 2017, some of the contracts have expired and settled according to the contracts while the remaining contract positions and activity are disclosed below.
In fiscal 2016 and the first nine months of fiscal 2017,2022, the Company entered into corn option contracts on the Chicago Board of Trade that are designated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the second quarter of fiscal 2023. There are not any open designated corn option contracts at July 1, 2023. At July 1, 2023 and December 31, 2022, the aggregate fair value of these corn option contracts was approximately zero and $0.9 million, respectively. The amounts outstanding as of December 31, 2022 are included in other current assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
In fiscal 2022 and fiscal 2023, the Company entered into foreign exchange forward and option contracts that are designated as cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2018. As2024. At July 1, 2023 and December 31, 2022, the aggregate fair value of September 30, 2017, somethese foreign exchange contracts was approximately $33.6 million and $13.8 million, respectively. These amounts are included in other current assets,
accrued expenses, other assets and other non-current liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
In fiscal 2022 and fiscal 2023, the Company entered into soybean meal option contracts to hedge a portion of its forecasted poultry meal sales into the fourth quarter of fiscal 2023. At July 1, 2023 and December 31, 2022, the aggregate fair value of the soybean meal contracts have been settled whilewas approximately $0.1 million and $0.6 million, respectively. These amounts are included in other current assets and accrued expenses on the remaining contract positions and activity are disclosed below. From time to time, the Company may enter into corn option contractsbalance sheet, with an offset recorded in the future.accumulated other comprehensive loss.
As of September 30, 2017,July 1, 2023, the Company had the following designated and non-designated outstanding forward and option contract amounts that were entered into to hedge the future payments of intercompany note transactions, foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency. All of these transactions are currently not designated for hedge accountingcurrency (in thousands):
| | | | | | | | | | | | | | |
Functional Currency | | Contract Currency |
Type | Amount | | Type | Amount |
Brazilian real | 36,462 | | | Euro | 6,778 | |
Brazilian real | 3,073,819 | | | U.S. dollar | 742,803 | |
| | | | |
Euro | 26,862 | | | U.S. dollar | 29,329 | |
Euro | 33,017 | | | Polish zloty | 147,500 | |
Euro | 10,790 | | | Japanese yen | 1,661,510 | |
Euro | 20,614 | | | Chinese renminbi | 158,683 | |
Euro | 18,250 | | | Australian dollar | 29,691 | |
Euro | 4,842 | | | British pound | 4,162 | |
Euro | 35 | | | Canadian dollar | 50 | |
| | | | |
Polish zloty | 1,380 | | | U.S. dollar | 339 | |
Polish zloty | 31,858 | | | Euro | 7,170 | |
British pound | 69 | | | Euro | 81 | |
| | | | |
Japanese yen | 371,817 | | | U.S. dollar | 2,716 | |
U.S. dollar | 1,094 | | | Japanese yen | 156,000 | |
U.S. dollar | 562,340 | | | Euro | 519,182 | |
| | | | |
| | | | |
| | | | |
| | | | |
|
| | | | | | |
Functional Currency | | Contract Currency |
Type | Amount | | Type | Amount |
Brazilian real | 33,790 |
| | Euro | 9,030 |
|
Brazilian real | 80,286 |
| | U.S. dollar | 24,430 |
|
Brazilian real | 953 |
| | Mexican peso | 5,472 |
|
Euro | 82,573 |
| | U.S. dollar | 97,985 |
|
Euro | 7,463 |
| | Polish zloty | 32,000 |
|
Euro | 4,040 |
| | Japanese yen | 526,400 |
|
Euro | 60,758 |
| | Chinese renminbi | 474,901 |
|
Euro | 11,455 |
| | Australian dollar | 17,200 |
|
Euro | 2,281 |
| | British pound | 2,000 |
|
Polish zloty | 35,960 |
| | Euro | 8,383 |
|
Japanese yen | 40,395 |
| | U.S. dollar | 362 |
|
The Company estimates the amount that will be reclassified from accumulated other comprehensive gainloss at September 30, 2017July 1, 2023 into earnings over the next 12 months for all cash flow hedges will be approximately $2.2$49.7 million. As of September 30, 2017,July 1, 2023, no amounts have been reclassified into earnings as a result of the discontinuance of cash flow hedges.
The following table presents the fair value of the Company’s derivative instruments under FASB authoritative guidance as of September 30, 2017 and December 31, 2016 (in thousands):
|
| | | | | | | |
Derivatives Designated | Balance Sheet | Asset Derivatives Fair Value |
as Hedges | Location | September 30, 2017 | December 31, 2016 |
Corn options | Other current assets | $ | 2,876 |
| $ | 4,235 |
|
Corn options | Other assets | 106 |
| — |
|
Natural gas swaps | Other current assets | 82 |
| — |
|
| | | |
Total asset derivatives designated as hedges | $ | 3,064 |
| $ | 4,235 |
|
| | | |
Derivatives Not Designated as Hedges | | |
| |
|
Foreign currency contracts | Other current assets | $ | 1,153 |
| $ | 8,939 |
|
Corn options and futures | Other current assets | 1,167 |
| 151 |
|
Soybean meal options | Other current assets | 64 |
| — |
|
| | | |
Total asset derivatives not designated as hedges | $ | 2,384 |
| $ | 9,090 |
|
| | | |
Total asset derivatives | | $ | 5,448 |
| $ | 13,325 |
|
|
| | | | | | | |
Derivatives Designated | Balance Sheet | Liability Derivatives Fair Value |
as Hedges | Location | September 30, 2017 | December 31, 2016 |
Natural gas swaps | Accrued expenses | $ | 4 |
| $ | — |
|
| | | |
Total liability derivatives designated as hedges | $ | 4 |
| $ | — |
|
| | | |
Derivatives Not Designated as Hedges | | |
| |
|
Foreign currency contracts | Accrued expenses | $ | 1,063 |
| $ | 608 |
|
Corn options and futures | Accrued expenses | 21 |
| 122 |
|
| | | |
Total liability derivatives not designated as hedges | $ | 1,084 |
| $ | 730 |
|
| | | |
Total liability derivatives | $ | 1,088 |
| $ | 730 |
|
The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the three months ended September 30, 2017 and October 1, 2016 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | |
Derivatives Designated as Cash Flow Hedges | Gain or (Loss) Recognized in Other Comprehensive Income (“OCI”) on Derivatives (Effective Portion) (a) | Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (b) | Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (c) |
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 |
Corn options | $ | 2,740 |
| $ | 2,060 |
| $ | 1,352 |
| $ | 861 |
| $ | 1,655 |
| $ | 323 |
|
Natural gas swaps | 36 |
| — |
| — |
| — |
| 34 |
| — |
|
| | | | | | |
Total | $ | 2,776 |
| $ | 2,060 |
| $ | 1,352 |
| $ | 861 |
| $ | 1,689 |
| $ | 323 |
|
| |
(a) | Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $2.8 million and $2.1 million recorded net of taxes of approximately $(1.1) million and $(0.8) million as of September 30, 2017 and October 1, 2016, respectively. |
| |
(b) | Gains and (losses) reclassified from accumulated OCI into income (effective portion) for corn options are included in cost of sales, respectively, in the Company’s consolidated statements of operations. |
| |
(c) | Gains and (losses) recognized in income on derivatives (ineffective portion) for corn options are included in other income/ (expense), net in the Company’s consolidated statements of operations. |
The effect of the Company’s derivative instruments on the consolidated financial statements as of and for the nine months ended September 30, 2017 and October 1, 2016 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | |
Derivatives Designated as Cash Flow Hedges | Gain or (Loss) Recognized in Other Comprehensive Income (“OCI”) on Derivatives (Effective Portion) (a) | Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (b) | Gain or (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) (c) |
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 |
Corn options | $ | 1,918 |
| $ | 5,255 |
| $ | 3,750 |
| $ | 3,204 |
| $ | 350 |
| $ | 537 |
|
Natural gas swaps | 36 |
| — |
| — |
| — |
| 34 |
| — |
|
| | | | | | |
Total | $ | 1,954 |
| $ | 5,255 |
| $ | 3,750 |
| $ | 3,204 |
| $ | 384 |
| $ | 537 |
|
| |
(a) | Amount recognized in accumulated OCI (effective portion) is reported as accumulated other comprehensive income/(loss) of approximately $2.0 million and $5.3 million recorded net of taxes of approximately $(0.8) million and $(2.0) million as of September 30, 2017 and October 1, 2016, respectively. |
| |
(b) | Gains and (losses) reclassified from accumulated OCI into income (effective portion) for corn options are included in cost of sales, respectively, in the Company’s consolidated statements of operations. |
| |
(c) | Gains and (losses) recognized in income on derivatives (ineffective portion) for corn options are included in other income/ (expense), net in the Company’s consolidated statements of operations. |
The table below summarizes the effect of derivatives not designated as hedges on the Company's consolidated statements of operations for the three and nine monthssix months ended September 30, 2017July 1, 2023 and October 1, 2016July 2, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges |
| | | | Three Months Ended | Six Months Ended |
Derivatives not designated as hedging instruments | | Location | | July 1, 2023 | July 2, 2022 | July 1, 2023 | July 2, 2022 |
| | | | | | | |
Foreign exchange | | Foreign currency loss/(gain) | | $ | (2,036) | | $ | 35,025 | | $ | (1,236) | | $ | 42,492 | |
Foreign exchange | | Net sales | | (306) | | 732 | | (977) | | 890 | |
Foreign exchange | | Cost of sales and operating expenses | | (103) | | (503) | | (120) | | (758) | |
Foreign exchange | | Selling, general and administrative expenses | | (2,673) | | 3,937 | | (4,058) | | (2,587) | |
Corn options and futures | | Net sales | | 1,111 | | 850 | | 1,382 | | (1,286) | |
Corn options and futures | | Cost of sales and operating expenses | | (2,191) | | (2,384) | | (2,608) | | 3,169 | |
| | | | | | | |
| | | | | | | |
Heating Oil swaps and options | | Selling, general and administrative expenses | | — | | — | | 49 | | — | |
Soybean meal | | Net sales | | 525 | | — | | 308 | | — | |
| | | | | | | |
Total | | | | $ | (5,673) | | $ | 37,657 | | $ | (7,260) | | $ | 41,920 | |
|
| | | | | | | | | | | | | | | |
| | | | Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges |
| | | | Three Months Ended | Nine Months Ended |
Derivatives not designated as hedging instruments | | Location | | September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 |
| | | | | | | |
Foreign Exchange | | Foreign currency loss/(gain) | | $ | 3,142 |
| $ | 1,871 |
| $ | 12,418 |
| $ | 5,954 |
|
Foreign Exchange | | Selling, general and administrative expense | | (2,118 | ) | (786 | ) | (3,107 | ) | (7,565 | ) |
Corn options and futures | | Net sales | | 165 |
| 267 |
| 125 |
| 612 |
|
Corn options and futures | | Cost of sales and operating expenses | | (1,566 | ) | (997 | ) | (1,250 | ) | (1,610 | ) |
Heating Oil swaps and options | | Net sales | | 492 |
| 323 |
| 492 |
| 476 |
|
Soybean Meal | | Net sales | | (131 | ) | — |
| (412 | ) | 7 |
|
Soybean Oil | | Net sales | | — |
| — |
| 45 |
| — |
|
Total | | | | $ | (16 | ) | $ | 678 |
| $ | 8,311 |
| $ | (2,126 | ) |
At September 30, 2017,July 1, 2023, the Company had forward purchase agreements in place for purchases of approximately $58.6$186.4 million of natural gas and diesel fuel. These forward purchase agreements have no net settlement provisions and theThe Company intends to take physical delivery of the underlying product. Accordingly,commodities under the forward purchase agreements and accordingly, these contracts are not subject to the requirements of fair value accounting because they qualify and the Company has elected to account for these as normal purchases as defined in the FASB authoritative guidance.purchases.
(14) (16) Fair Value Measurements
FASB authoritative guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The following table presents the Company’s financial instruments that are measured at fair value on a recurring and nonrecurring basis as of September 30, 2017July 1, 2023 and are categorized using the fair value hierarchy under FASB authoritative guidance. The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value.
| | | | | | | | | | | | | | |
| | Fair Value Measurements at July 1, 2023 Using |
| | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs |
(In thousands of dollars) | Total | (Level 1) | (Level 2) | (Level 3) |
Assets | | | | |
Derivative instruments | $ | 56,124 | | $ | — | | $ | 56,124 | | $ | — | |
Total Assets | $ | 56,124 | | $ | — | | $ | 56,124 | | $ | — | |
| | | | |
Liabilities | | | | |
Derivative instruments | $ | 14,155 | | $ | — | | $ | 14,155 | | $ | — | |
Contingent consideration | 87,329 | | — | | — | | 87,329 | |
6% Senior notes | 974,300 | | — | | 974,300 | | — | |
5.25% Senior notes | 482,500 | | — | | 482,500 | | — | |
3.625% Senior notes | 548,045 | | — | | 548,045 | | — | |
Term loan A-1 | 399,000 | | — | | 399,000 | | — | |
Term loan A-2 | 485,063 | | — | | 485,063 | | — | |
Term loan A-3 | 298,500 | | — | | 298,500 | | — | |
Term loan A-4 | 494,391 | | — | | 494,391 | | — | |
Term loan B | 200,000 | | — | | 200,000 | | — | |
Revolver debt | 484,542 | | — | | 484,542 | | — | |
Total Liabilities | $ | 4,467,825 | | $ | — | | $ | 4,380,496 | | $ | 87,329 | |
| | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2022 Using |
| | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs |
(In thousands of dollars) | Total | (Level 1) | (Level 2) | (Level 3) |
Assets | | | | |
Derivative instruments | $ | 20,324 | | $ | — | | $ | 20,324 | | $ | — | |
Total Assets | $ | 20,324 | | $ | — | | $ | 20,324 | | $ | — | |
| | | | |
Liabilities | | | | |
Derivative instruments | $ | 5,406 | | $ | — | | $ | 5,406 | | $ | — | |
Contingent consideration | 169,903 | | — | | — | | 169,903 | |
6% Senior notes | 977,200 | | — | | 977,200 | | — | |
5.25% Senior notes | 485,700 | | — | | 485,700 | | — | |
3.625% Senior notes | 533,155 | | — | | 533,155 | | — | |
Term loan A-1 | 398,000 | | — | | 398,000 | | — | |
Term loan A-2 | 488,813 | | — | | 488,813 | | — | |
Term loan B | 199,000 | | — | | 199,000 | | — | |
Revolver debt | 133,003 | | — | | 133,003 | | — | |
Total Liabilities | $ | 3,390,180 | | $ | — | | $ | 3,220,277 | | $ | 169,903 | |
|
| | | | | | | | | | | | |
| | Fair Value Measurements at September 30, 2017 Using |
| | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs |
(In thousands of dollars) | Total | (Level 1) | (Level 2) | (Level 3) |
Assets: | | | | |
Derivative instruments | $ | 5,448 |
| $ | — |
| $ | 5,448 |
| $ | — |
|
Total Assets | $ | 5,448 |
| $ | — |
| $ | 5,448 |
| $ | — |
|
| | | | |
Liabilities: | | | | |
Derivative instruments | $ | 1,088 |
| $ | — |
| $ | 1,088 |
| $ | — |
|
5.375% Senior notes | 517,500 |
| — |
| 517,500 |
| — |
|
4.75% Senior notes | 637,213 |
| — |
| 637,213 |
| — |
|
Term loan A | 108,323 |
| — |
| 108,323 |
| — |
|
Term loan B | 544,541 |
| — |
| 544,541 |
| — |
|
Total Liabilities | $ | 1,808,665 |
| $ | — |
| $ | 1,808,665 |
| $ | — |
|
|
| | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2016 Using |
| | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs |
(In thousands of dollars) | Total | (Level 1) | (Level 2) | (Level 3) |
Assets: | | | | |
Derivative instruments | $ | 13,325 |
| $ | — |
| $ | 13,325 |
| $ | — |
|
Total Assets | $ | 13,325 |
| $ | — |
| $ | 13,325 |
| $ | — |
|
| | | | |
Liabilities: | | | | |
Derivative instruments | $ | 730 |
| $ | — |
| $ | 730 |
| $ | — |
|
5.375% Senior notes | 520,300 |
| — |
| 520,300 |
| — |
|
4.75% Senior notes | 575,111 |
| — |
| 575,111 |
| — |
|
Term loan A | 120,403 |
| — |
| 120,403 |
| — |
|
Term loan B | 593,347 |
| — |
| 593,347 |
| — |
|
Revolver debt | 5,201 |
| — |
| 5,201 |
| — |
|
Total Liabilities | $ | 1,815,092 |
| $ | — |
| $ | 1,815,092 |
| $ | — |
|
Derivative assets and liabilities consist of the Company’s soybean meal contracts, natural gas contracts, corn option and future contracts, and foreign currency forward and option contracts, soybean meal forward contracts and interest rate swap contracts which representsrepresent the difference
between observable market rates of commonly quoted intervals for similar assets and liabilities in active markets and the fixed swap rate considering the instruments term, notional amount and credit risk. See Note 1315 (Derivatives) to the Company's Consolidated Financial Statements included herein for breakdown by instrument type.discussion on the Company's derivatives.
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments and as such have been excluded from the table above. The carrying amount for the Company's other debt is not deemed to be significantly different than the fair value and all other instruments have been recorded at fair value.
The fair value of the senior notes, term loan A,A-1, term loan A-2, term loan A-3, term loan A-4, term loan B and revolver debt is based on market quotation from third-party banks. The carrying amount of the Company's other debt is not deemed to be significantly different from the fair value and all other instruments have been recorded at fair value.
The fair value measurement of the contingent consideration liability uses significant unobservable inputs (level 3). The changes in contingent consideration are due to the following:
| | | | | |
(15)(in thousands of dollars) | Contingencies Contingent Consideration |
Balance as of December 31, 2022 | $ | 169,903 | |
Out-of-period correction (1) | (85,144) | |
Total included in earnings during period | (5,443) | |
Exchange rate changes | 8,013 | |
Balance as of July 1, 2023 | $ | 87,329 | |
(1) As disclosed in Note 2(g), the immaterial out-of-period correction made during the quarter ended July 1, 2023 resulted in a reduction of goodwill recorded associated with the FASA Acquisition of approximately $85.1 million.
(17) Restructuring and Asset Impairment Charges
In December 2022, the Company's management reviewed our global network of collagen plants for optimization opportunities and decided to close our Peabody, Massachusetts plant in 2023. In addition to charges incurred in fiscal 2022, the Company incurred additional restructuring charges in the first six months of fiscal 2023 in the Food Segment for employee termination and retention costs of approximately $5.3 million. In addition, the Company incurred approximately $0.1 million of employee termination costs in the Feed Segment related to closing down of a processing location in Europe and transferring the material to another processing location in Europe.
(18) Contingencies
The Company is a party to various lawsuits, claims and loss contingencies arising in the ordinary course of its business, including insured worker's compensation, auto, and general liability claims, assertions by certain regulatory and governmental agencies related to permitting requirements and/orand environmental matters, including air, wastewater and storm water discharges from the Company’s processing facilities, litigation involving tort, contract, statutory, labor, employment, and other claims, and tax matters.
The Company’s workers compensation, auto and general liability policies contain significant deductibles or self-insured retentions. The Company estimates and accrues its expected ultimate claim costs related to accidents occurring during each fiscal year under these insurance policies and carries this accrual as a reserve until these claims are paid by the Company.
As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental, litigation and tax contingencies. At September 30, 2017July 1, 2023 and December 31, 2016,2022, the reserves for insurance, environmental, litigation and tax contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities werewas approximately $54.9$95.9 million and $51.9$92.1 million, respectively. The Company has insurance recovery receivables reflected on the balance sheet in other current assets and other assets of approximately $15.9$36.0 million as of September 30, 2017July 1, 2023 and December 31, 2016,2022, related to the insurance contingencies. The Company's management believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these contingencies will not
exceed current estimates. The Company believes that the likelihood is remote that any additional liability from the lawsuits and claims that may not be covered by insurance would have a material effect on the Company's financial position, results of operations or cash flows.
Lower Passaic River Area. In December 2009, the Company, along with numerous other entities, received notice from the United States Environmental Protection Agency (“EPA”) that the Company (as alleged successor-in-interest to The Standard Tallow Company)Corporation) is considered a potentially responsible party (a “PRP”) with respect to alleged contamination in the lower 17-mile area of the Passaic River area(the “Lower Passaic River”) which is part of the Diamond Alkali Superfund Site located in Newark, New Jersey. The Company’s designation as a PRP is based upon the operation of a former plant sitesites located in Newark and Kearny, New Jersey by The Standard Tallow Company,Corporation, an entity that the Company acquired in 1996. In the letter, EPA requested that the Company join a group of other parties in funding a remedial investigation and feasibility study at the site. As of the date of this report, the Company has not agreed to participate in the funding group. In March 2016, the Company received another letter from the EPA notifying the Company that it had issued a Record of Decision (the “ROD”) selecting a remedy for the lower 8.3 miles of the lowerLower Passaic River area at an estimated cost of $1.38 billion. The EPA letter makesmade no demand on the Company and layslaid out a framework for remedial design/remedial action implementation inunder which the EPA willwould first seek funding from major PRPs. The letter indicatesindicated that the EPA hashad sent the letter to over 100 parties, which include large chemical and refining companies, manufacturing companies, foundries, plastic companies, pharmaceutical companies and food and consumer product companies. The Company asserts that it is not responsible for any liabilities of its former subsidiary The Standard Tallow Corporation, which was legally dissolved in 2000, and that, in any event, the Standard Tallow Corporation did not discharge any of the eight contaminants of concern identified in the ROD (the “COCs”). Subsequently, the EPA conducted a settlement analysis using a third-party allocator and offered early cash out settlements to those PRPs for whom the third-party allocator determined did not discharge any of the COCs. The Company participated in this allocation process, and in November 2019, received a cash out settlement offer from the EPA in the amount of $0.6 million ($0.3 million for each of the former plant sites in question) for liabilities relating to the lower 8.3 miles of the Lower Passaic River area. The Company accepted this settlement offer, and the settlement became effective on April 16, 2021 following the completion of the EPA's administrative approval process. In September 2021, the EPA released a ROD selecting an interim remedy for the upper nine miles of the Lower Passaic River at an expected additional cost of $441 million. In October 2022, the Company, along with other settling defendants, entered into a Consent Decree with the EPA pursuant to which the Company paid $0.3 million to settle liabilities for both of the former plant sites in question related to the upper nine miles of the Lower Passaic River.The Company paid this amount into escrow, as the settlement is subject to the EPA’s administrative approval process, which includes publication, a public comment period and court approval. On September 30, 2016, Occidental Chemical Corporation (“OCC”) entered into an agreement with the EPA to perform the remedial design for the cleanup plan for the lower 8.3 miles of the Lower Passaic River. On June 30, 2018, OCC filed a complaint in the United States District Court for the District of New Jersey against over 100 companies, including the Company, seeking cost recovery or contribution for costs under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) relating to various investigations and cleanups OCC has conducted or is conducting in connection with the Lower Passaic River. According to the complaint, OCC has incurred or is incurring costs which include the estimated cost to complete the remedial design for the cleanup plan for the lower 8.3 miles of the Lower Passaic River. OCC is also seeking a declaratory judgment to hold the defendants liable for their proper shares of future response costs, including the remedial action for the lower 8.3 miles of the Lower Passaic River. The Company, along with 40 of the other defendants, had previously received a release from OCC of its CERCLA contribution claim of $165 million associated with the costs to design the remedy for the lower 8.3 miles of the Lower Passaic River. Furthermore, the Company's settlements with the EPA described above could preclude certain of the claims alleged by OCC against the Company. The Company's ultimate liability, if any, for investigatory costs, remedial costs and/or natural resource damages in connection with the lowerLower Passaic River area cannot be determined at this time; however, as of the date of this report, the Company has found no definitive evidence that the former Standard Tallow CompanyCorporation plant sitesites contributed any of the primary contaminants of concernCOCs to the Passaic River and, therefore, there is nothing that leads the Company to believe that this matter will have a material effect on the Company's financial position, results of operations or cash flows.
Fresno Facility Permit Issue. The Company has been named as a defendant and a real party in interest in a lawsuit filed on April 9, 2012 in the Superior Court of the State of California, Fresno County, styled Concerned Citizens of West Fresno vs. Darling International Inc. The complaint, as subsequently amended, alleges that the Company's Fresno facility is operating without a proper use permit and seeks, among other things, injunctive relief. The complaint had at one time also alleged that the Company's Fresno facility constitutes a continuing private and public nuisance, but the plaintiff has since amended the complaint to drop these allegations. The City of Fresno was also named as a defendant in the original complaint but has since had a judgment entered in its favor and is no longer a defendant in the lawsuit; however, in December 2013 the City of Fresno filed a motion to intervene as a plaintiff in this matter. The Superior Court heard the motion on February 4, 2014, and entered an order on February 18, 2014 denying the motion. Rendering operations have been conducted on the site since 1955, and the Company believes that it possesses all of the required federal, state and local permits to continue to operate the facility in the manner currently conducted and that its operations do not constitute a private or public nuisance. Accordingly, the Company intends to defend itself vigorously in this matter. Discovery has begun and this matter was scheduled for trial in July 2014; however, the parties have agreed to stay the litigation while they participate in a mediation process, which remains ongoing. In January 2017, the Company entered into a non-binding letter of intent with the City of Fresno pursuant to which the City and the Company will work toward the execution of a definitive agreement to relocate the facility to a different location in Fresno. Whether an agreement to relocate the facility ultimately gets executed is subject to the Company’s receipt of certain incentives and an agreement by the Concerned Citizens of West Fresno to settle and dismiss the aforementioned litigation. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company's financial condition, results of operations or cash flows.
(19) Business Segments
The Company sells its products domestically and internationally, and operatesoperating within three industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients. The measure of segment profit income/(loss) includes all revenues, operating expenses (excluding certain amortization of intangibles), and selling, general and administrative expenses incurred at all operating locations and excludes general corporate expenses.activities.
Included in corporate activities are general corporate expenses and the amortization of certain intangibles. Assets of corporate activities include cash, unallocated prepaid expenses, deferred tax assets, prepaid pension, and miscellaneous other assets.
Feed Ingredients
Feed Ingredients consists principally of (i) the Company's U.S. ingredients business, including the Company's fats and proteins, used cooking oil, trap grease, and food residuals collection businesses, the Rothsay ingredients business,Darling Canada, and the ingredients and specialty products businesses conducted by Darling Ingredients International under the Sonac nameand FASA names (proteins, fats, and plasmablood products) and (ii) the Company's bakery residuals business. Feed Ingredients operations process animal by-products and used cooking oil into fats, proteinproteins and hides.
Food Ingredients
Food Ingredients consists principally of (i) the gelatin and collagen hydrolysates business conducted by Darling Ingredients International under the Rousselot name,and Gelnex names, (ii) the natural casings and meat-by-products business conducted by Darling Ingredients International under the CTH name and (iii) certain specialty products businesses conducted by Darling Ingredients International under the Sonac name.
Fuel Ingredients
The Company's Fuel Ingredients segment consists of (i) the Company's biofuel business conducted underinvestment in the Dar Pro®DGD Joint Venture and Rothsay names (ii) the bioenergy business conducted by Darling Ingredients International under the Ecoson and Rendac names and (iii) the Company's investment in the DGD Joint Venture.names.
Business Segments (in thousands):
| | | | | | | | | | | | | | | | | |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
Three Months Ended July 1, 2023 | | | | | |
Net Sales | $ | 1,141,661 | | $ | 476,093 | | $ | 139,867 | | $ | — | | $ | 1,757,621 | |
Cost of sales and operating expenses | 876,413 | | 371,095 | | 112,194 | | — | | 1,359,702 | |
Gross Margin | 265,248 | | 104,998 | | 27,673 | | — | | 397,919 | |
| | | | | |
Loss/(gain) on sale of assets | 322 | | 2 | | (65) | | — | | 259 | |
Selling, general and administrative expenses | 77,406 | | 33,684 | | 4,971 | | 20,690 | | 136,751 | |
Restructuring and asset impairment charges | — | | 896 | | — | | — | | 896 | |
Acquisition and integration costs | — | | — | | — | | 1,706 | | 1,706 | |
Change in fair value of contingent consideration | (7,499) | | — | | — | | — | | (7,499) | |
Depreciation and amortization | 82,575 | | 28,445 | | 8,567 | | 2,499 | | 122,086 | |
Equity in net income of Diamond Green Diesel | — | | — | | 212,964 | | — | | 212,964 | |
Segment operating income/(loss) | 112,444 | | 41,971 | | 227,164 | | (24,895) | | 356,684 | |
| | | | | |
Equity in net income of other unconsolidated subsidiaries | 1,849 | | — | | — | | — | | 1,849 | |
Segment income/(loss) | 114,293 | | 41,971 | | 227,164 | | (24,895) | | 358,533 | |
| | | | | |
Total other expense | | | | | (62,624) | |
Income before income taxes | | | | | $ | 295,909 | |
| | | | | | | | | | | | | | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |
Three Months Ended September 30, 2017 | | |
Three Months Ended July 2, 2022 | | Three Months Ended July 2, 2022 | |
Net Sales | $ | 575,543 |
| $ | 300,282 |
| $ | 61,856 |
| $ | — |
| $ | 937,681 |
| Net Sales | $ | 1,170,347 | | $ | 369,181 | | $ | 110,660 | | $ | — | | $ | 1,650,188 | |
Cost of sales and operating expenses | 449,608 |
| 240,160 |
| 54,260 |
| — |
| 744,028 |
| Cost of sales and operating expenses | 864,306 | | 280,964 | | 86,237 | | — | | 1,231,507 | |
Gross Margin | 125,935 |
| 60,122 |
| 7,596 |
| — |
| 193,653 |
| Gross Margin | 306,041 | | 88,217 | | 24,423 | | — | | 418,681 | |
| | | |
Selling, general and administrative expense | 45,471 |
| 25,633 |
| (461 | ) | 12,498 |
| 83,141 |
| |
Gain on sale of assets | | Gain on sale of assets | (964) | | (73) | | (18) | | — | | (1,055) | |
Selling, general and administrative expenses | | Selling, general and administrative expenses | 64,863 | | 22,855 | | 4,277 | | 15,781 | | 107,776 | |
Restructuring and impairment charges | | Restructuring and impairment charges | 8,557 | | — | | — | | — | | 8,557 | |
Acquisition and integration costs | | Acquisition and integration costs | — | | — | | — | | 5,358 | | 5,358 | |
Depreciation and amortization | 46,860 |
| 19,506 |
| 7,912 |
| 2,924 |
| 77,202 |
| Depreciation and amortization | 68,938 | | 14,449 | | 6,936 | | 2,790 | | 93,113 | |
Equity in net income of Diamond Green Diesel | | Equity in net income of Diamond Green Diesel | — | | — | | 73,680 | | — | | 73,680 | |
Segment operating income/(loss) | 33,604 |
| 14,983 |
| 145 |
| (15,422 | ) | 33,310 |
| Segment operating income/(loss) | 164,647 | | 50,986 | | 86,908 | | (23,929) | | 278,612 | |
| | | |
Equity in net income of unconsolidated subsidiaries | 523 |
| — |
| 7,180 |
| — |
| 7,703 |
| |
Equity in net income of other unconsolidated subsidiaries | | Equity in net income of other unconsolidated subsidiaries | 2,272 | | — | | — | | — | | 2,272 | |
Segment income/(loss) | 34,127 |
| 14,983 |
| 7,325 |
| (15,422 | ) | 41,013 |
| Segment income/(loss) | 166,919 | | 50,986 | | 86,908 | | (23,929) | | 280,884 | |
| | | |
Total other expense | | (26,033 | ) | Total other expense | | (28,722) | |
Income before income taxes | | $ | 14,980 |
| Income before income taxes | | $ | 252,162 | |
| | | | | | | | | | | | | | | | | |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
Six Months Ended July 1, 2023 | | | | | |
Net Sales | $ | 2,379,155 | | $ | 872,485 | | $ | 297,153 | | $ | — | | $ | 3,548,793 | |
Cost of sales and operating expenses | 1,826,485 | | 661,210 | | 238,980 | | — | | 2,726,675 | |
Gross Margin | 552,670 | | 211,275 | | 58,173 | | — | | 822,118 | |
| | | | | |
Gain on sale of assets | (20) | | (19) | | (29) | | — | | (68) | |
Selling, general and administrative expenses | 152,097 | | 66,806 | | 11,163 | | 42,151 | | 272,217 | |
Restructuring and asset impairment charges | 92 | | 5,328 | | — | | — | | 5,420 | |
Acquisition and integration costs | — | | — | | — | | 8,728 | | 8,728 | |
Change in fair value of contingent consideration | (7,499) | | — | | — | | — | | (7,499) | |
Depreciation and amortization | 172,895 | | 42,918 | | 16,960 | | 5,319 | | 238,092 | |
Equity in net income of Diamond Green Diesel | — | | — | | 307,301 | | — | | 307,301 | |
Segment operating income/(loss) | 235,105 | | 96,242 | | 337,380 | | (56,198) | | 612,529 | |
| | | | | |
Equity in net income of other unconsolidated subsidiaries | 1,969 | | — | | — | | — | | 1,969 | |
Segment income/(loss) | 237,074 | | 96,242 | | 337,380 | | (56,198) | | 614,498 | |
| | | | | |
Total other expense | | | | | (101,760) | |
Income before income taxes | | | | | $ | 512,738 | |
| | | | | |
Segment assets at July 1, 2023 | $ | 4,738,648 | | $ | 2,613,854 | | $ | 2,573,246 | | $ | 1,047,491 | | $ | 10,973,239 | |
| | | | | | | | | | | | | | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |
Three Months Ended October 1, 2016 | | |
Six Months Ended July 2, 2022 | | Six Months Ended July 2, 2022 | |
Net Sales | $ | 531,413 |
| $ | 261,997 |
| $ | 60,446 |
| $ | — |
| $ | 853,856 |
| Net Sales | $ | 2,049,785 | | $ | 723,995 | | $ | 242,742 | | $ | — | | $ | 3,016,522 | |
Cost of sales and operating expenses | 413,602 |
| 211,318 |
| 46,247 |
| — |
| 671,167 |
| Cost of sales and operating expenses | 1,509,829 | | 551,276 | | 190,979 | | — | | 2,252,084 | |
Gross Margin | 117,811 |
| 50,679 |
| 14,199 |
| — |
| 182,689 |
| Gross Margin | 539,956 | | 172,719 | | 51,763 | | — | | 764,438 | |
| | | |
Selling, general and administrative expense | 38,943 |
| 25,352 |
| 1,332 |
| 10,881 |
| 76,508 |
| |
Gain on sale of assets | | Gain on sale of assets | (1,305) | | (82) | | (57) | | — | | (1,444) | |
Selling, general and administrative expenses | | Selling, general and administrative expenses | 121,072 | | 49,699 | | 8,197 | | 30,840 | | 209,808 | |
Restructuring and asset impairment charges | | Restructuring and asset impairment charges | 8,557 | | — | | — | | — | | 8,557 | |
Acquisition and integration costs | | Acquisition and integration costs | — | | — | | — | | 9,131 | | 9,131 | |
Depreciation and amortization | 43,614 |
| 17,383 |
| 6,896 |
| 2,760 |
| 70,653 |
| Depreciation and amortization | 123,288 | | 29,899 | | 13,610 | | 5,562 | | 172,359 | |
Equity in net income of Diamond Green Diesel | | Equity in net income of Diamond Green Diesel | — | | — | | 145,484 | | — | | 145,484 | |
Segment operating income/(loss) | 35,254 |
| 7,944 |
| 5,971 |
| (13,641 | ) | 35,528 |
| Segment operating income/(loss) | 288,344 | | 93,203 | | 175,497 | | (45,533) | | 511,511 | |
| | | |
Equity in net income of unconsolidated subsidiaries | (36 | ) | — |
| 18,174 |
| — |
| 18,138 |
| |
Equity in net income of other unconsolidated subsidiaries | | Equity in net income of other unconsolidated subsidiaries | 3,632 | | — | | — | | — | | 3,632 | |
Segment income/(loss) | 35,218 |
| 7,944 |
| 24,145 |
| (13,641 | ) | 53,666 |
| Segment income/(loss) | 291,976 | | 93,203 | | 175,497 | | (45,533) | | 515,143 | |
| | | |
Total other expense | | (25,520 | ) | Total other expense | | (46,167) | |
Income before income taxes | | $ | 28,146 |
| Income before income taxes | | $ | 468,976 | |
| Segment assets at December 31, 2022 | | Segment assets at December 31, 2022 | $ | 4,866,351 | | $ | 1,251,473 | | $ | 2,307,199 | | $ | 777,347 | | $ | 9,202,370 | |
(20) Revenue
The Company extends payment terms to its customers based on commercially acceptable practices. The term between invoicing and payment due date is not significant. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring finished products or performing services, which is generally based on an executed agreement or purchase order.
Most of the Company's products are shipped based on the customer specifications. Customer returns are infrequent and not material to the Company. Adjustments to net sales for sales deductions are generally recognized in the same period as the sale or when known. Customers in certain industries or countries may be required to prepay prior to shipment in order to maintain payment protection. These represent short-term prepayment from customers and are not material to the Company. The Company elected to treat shipping and handling as fulfillment costs, which will result in billed freight recorded in cost of sales and netted against freight costs. Sales, value-add, and other taxes collected concurrently with revenue-producing activities are excluded from revenue and booked on a net basis.
The following tables present the Company revenues disaggregated by geographic area and major product types by reportable segment for the three and six months ended July 1, 2023 and July 2, 2022 (in thousands):
|
| | | | | | | | | | | | | | | |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
Nine Months Ended September 30, 2017 | | | | | |
Net Sales | $ | 1,677,286 |
| $ | 847,897 |
| $ | 188,918 |
| $ | — |
| $ | 2,714,101 |
|
Cost of sales and operating expenses | 1,304,454 |
| 674,991 |
| 154,974 |
| — |
| 2,134,419 |
|
Gross Margin | 372,832 |
| 172,906 |
| 33,944 |
| — |
| 579,682 |
|
| | | | | |
Selling, general and administrative expense | 134,444 |
| 77,480 |
| 5,732 |
| 38,933 |
| 256,589 |
|
Depreciation and amortization | 134,933 |
| 55,291 |
| 22,472 |
| 8,610 |
| 221,306 |
|
Segment operating income/(loss) | 103,455 |
| 40,135 |
| 5,740 |
| (47,543 | ) | 101,787 |
|
| | | | | |
Equity in net income of unconsolidated subsidiaries | 763 |
| — |
| 15,906 |
| — |
| 16,669 |
|
Segment income/(loss) | 104,218 |
| 40,135 |
| 21,646 |
| (47,543 | ) | 118,456 |
|
| | | | | |
Total other expense | | | | | (76,190 | ) |
Income before income taxes | | | | | $ | 42,266 |
|
| | | | | |
Segment assets at September 30, 2017 | $ | 2,599,196 |
| $ | 1,497,310 |
| $ | 682,868 |
| $ | 155,148 |
| $ | 4,934,522 |
|
| | | | | | | | | | | | | | |
| Three Months Ended July 1, 2023 |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total |
Geographic Area | | | | |
North America | $ | 946,100 | | $ | 101,388 | | $ | — | | $ | 1,047,488 | |
Europe | 96,064 | | 227,193 | | 139,867 | | 463,124 | |
China | 6,160 | | 71,414 | | — | | 77,574 | |
South America | 90,293 | | 54,493 | | — | | 144,786 | |
Other | 3,044 | | 21,605 | | — | | 24,649 | |
Net sales | $ | 1,141,661 | | $ | 476,093 | | $ | 139,867 | | $ | 1,757,621 | |
| | | | |
Major product types | | | | |
Fats | $ | 405,287 | | $ | 38,207 | | $ | — | | $ | 443,494 | |
Used cooking oil | 146,275 | | — | | — | | 146,275 | |
Proteins | 435,956 | | — | | — | | 435,956 | |
Bakery | 67,263 | | — | | — | | 67,263 | |
Other rendering | 70,265 | | — | | — | | 70,265 | |
Food ingredients | — | | 412,307 | | — | | 412,307 | |
Bioenergy | — | | — | | 139,867 | | 139,867 | |
| | | | |
Other | 16,615 | | 25,579 | | — | | 42,194 | |
Net sales | $ | 1,141,661 | | $ | 476,093 | | $ | 139,867 | | $ | 1,757,621 | |
| | | | | | | | | | | | | | |
| Six Months Ended July 1, 2023 |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total |
Geographic Area | | | | |
North America | $ | 1,971,857 | | $ | 200,739 | | $ | — | | $ | 2,172,596 | |
Europe | 206,316 | | 417,466 | | 297,153 | | 920,935 | |
China | 11,503 | | 148,785 | | — | | 160,288 | |
South America | 183,832 | | 65,277 | | — | | 249,109 | |
Other | 5,647 | | 40,218 | | — | | 45,865 | |
Net sales | $ | 2,379,155 | | $ | 872,485 | | $ | 297,153 | | $ | 3,548,793 | |
| | | | |
Major product types | | | | |
Fats | $ | 895,605 | | $ | 83,195 | | $ | — | | $ | 978,800 | |
Used cooking oil | 283,968 | | — | | — | | 283,968 | |
Proteins | 883,103 | | — | | — | | 883,103 | |
Bakery | 142,196 | | — | | — | | 142,196 | |
Other rendering | 140,079 | | — | | — | | 140,079 | |
Food ingredients | — | | 731,448 | | — | | 731,448 | |
Bioenergy | — | | — | | 297,153 | | 297,153 | |
| | | | |
Other | 34,204 | | 57,842 | | — | | 92,046 | |
Net sales | $ | 2,379,155 | | $ | 872,485 | | $ | 297,153 | | $ | 3,548,793 | |
|
| | | | | | | | | | | | | | | |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
Nine Months Ended October 1, 2016 | | | | | |
Net Sales | $ | 1,550,539 |
| $ | 782,014 |
| $ | 178,285 |
| $ | — |
| $ | 2,510,838 |
|
Cost of sales and operating expenses | 1,202,404 |
| 611,151 |
| 133,620 |
| — |
| 1,947,175 |
|
Gross Margin | 348,135 |
| 170,863 |
| 44,665 |
| — |
| 563,663 |
|
| | | | | |
Selling, general and administrative expense | 127,513 |
| 69,566 |
| 4,986 |
| 32,070 |
| 234,135 |
|
Acquisition and integration costs | — |
| — |
| — |
| 401 |
| 401 |
|
Depreciation and amortization | 130,110 |
| 51,823 |
| 20,999 |
| 9,508 |
| 212,440 |
|
Segment operating income/(loss) | 90,512 |
| 49,474 |
| 18,680 |
| (41,979 | ) | 116,687 |
|
| | | | | |
Equity in net income of unconsolidated subsidiaries | 290 |
| — |
| 37,343 |
| — |
| 37,633 |
|
Segment income/(loss) | 90,802 |
| 49,474 |
| 56,023 |
| (41,979 | ) | 154,320 |
|
| | | | | |
Total other expense | | | | | (79,674 | ) |
Income before income taxes | | | | | $ | 74,646 |
|
| | | | | |
Segment assets at December 31, 2016 | $ | 2,464,509 |
| $ | 1,414,409 |
| $ | 657,637 |
| $ | 161,462 |
| $ | 4,698,017 |
|
| | | | | | | | | | | | | | |
| Three Months Ended July 2, 2022 |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total |
Geographic Area | | | | |
North America | $ | 1,028,244 | | $ | 91,381 | | $ | — | | $ | 1,119,625 | |
Europe | 132,247 | | 186,865 | | 110,660 | | 429,772 | |
China | 6,932 | | 64,326 | | — | | 71,258 | |
South America | — | | 12,868 | | — | | 12,868 | |
Other | 2,924 | | 13,741 | | — | | 16,665 | |
Net sales | $ | 1,170,347 | | $ | 369,181 | | $ | 110,660 | | $ | 1,650,188 | |
| | | | |
Major product types | | | | |
Fats | $ | 498,914 | | $ | 53,178 | | $ | — | | $ | 552,092 | |
Used cooking oil | 152,737 | | — | | — | | 152,737 | |
Proteins | 351,125 | | — | | — | | 351,125 | |
Bakery | 89,593 | | — | | — | | 89,593 | |
Other rendering | 64,123 | | — | | — | | 64,123 | |
Food ingredients | — | | 280,435 | | — | | 280,435 | |
Bioenergy | — | | — | | 110,660 | | 110,660 | |
| | | | |
Other | 13,855 | | 35,568 | | — | | 49,423 | |
Net sales | $ | 1,170,347 | | $ | 369,181 | | $ | 110,660 | | $ | 1,650,188 | |
| |
(17) | Related Party Transactions |
| | | | | | | | | | | | | | |
| Six Months Ended July 2, 2022 |
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total |
Geographic Area | | | | |
North America | $ | 1,784,082 | | $ | 175,281 | | $ | — | | $ | 1,959,363 | |
Europe | 246,710 | | 368,875 | | 242,742 | | 858,327 | |
China | 13,568 | | 130,633 | | — | | 144,201 | |
South America | — | | 21,364 | | — | | 21,364 | |
Other | 5,425 | | 27,842 | | — | | 33,267 | |
Net sales | $ | 2,049,785 | | $ | 723,995 | | $ | 242,742 | | $ | 3,016,522 | |
| | | | |
Major product types | | | | |
Fats | $ | 867,308 | | $ | 105,442 | | $ | — | | $ | 972,750 | |
Used cooking oil | 247,633 | | — | | — | | 247,633 | |
Proteins | 621,312 | | — | | — | | 621,312 | |
Bakery | 168,104 | | — | | — | | 168,104 | |
Other rendering | 121,667 | | — | | — | | 121,667 | |
Food ingredients | — | | 550,951 | | — | | 550,951 | |
Bioenergy | — | | — | | 242,742 | | 242,742 | |
| | | | |
Other | 23,761 | | 67,602 | | — | | 91,363 | |
Net sales | $ | 2,049,785 | | $ | 723,995 | | $ | 242,742 | | $ | 3,016,522 | |
Long-Term Performance Obligations. The Company from time to time enters into long-term contracts to supply certain volumes of finished products to certain customers. Revenue recognized to date in 2023 under these long-term supply contracts was approximately $92.3 million, with the remaining performance obligations to be recognized in future periods (generally four years) of approximately $929.1 million.
(21) Related Party Transactions
Raw Material Agreement
The Company entered into a Raw Material Agreement with the DGD Joint Venture in May 2011 pursuant to which the Company will offer to supply certain animal fats and used cooking oil at market prices, up to the DGD Joint Venture's full operational requirement of feedstock, but the DGD Joint Venture is not obligated to purchase the raw material offered by the Company. Additionally, the Company may offer other feedstocks to the DGD Joint Venture, such as inedible corn oil, purchased on a resale basis. For the three months ended September 30, 2017July 1, 2023 and October 1, 2016,July 2, 2022, the Company has recorded sales to the DGD Joint Venture of approximately $44.5 $325.0
million and $42.4$295.7 million, respectively. For the ninesix months ended July 1, 20172023 and July 2, 2016,2022, the Company has recorded sales to the DGD Joint Venture of approximately $122.6$663.6 million and $109.0$510.1 million, respectively. At September 30, 2017July 1, 2023 and December 31, 2016,2022, the Company has $6.9had $33.3 million and $6.3$116.9 million in outstanding receivables due from the DGD Joint Venture, respectively. In addition, the Company has eliminated approximately $6.1$38.4 million and $38.5 million of additional sales for the threesix months ended September 30, 2017July 1, 2023 and July 2, 2022, respectively to defer the Company's portion of profit of approximately $1.1$8.1 million and $10.1 million on those sales relating to inventory assets remaining on the DGD Joint Venture's balance sheet at September 30, 2017.July 1, 2023 and July 2, 2022, respectively.
Revolving Loan Agreement
On February 23, 2015,May 1, 2019, Darling, through its wholly owned subsidiary Darling Green Energy LLC, (“Darling Green”), and a third party Diamond Alternative Energy, LLC, a wholly owned subsidiary of Valero (“Diamond Alternative” and together with Darling Green, the “DGD Lenders”), entered into a revolving loan agreement (the “DGD“2019 DGD Loan Agreement”) with the DGD Joint Venture, Opco. Thepursuant to which the DGD Lenders have committed to making loans available to Opcothe DGD Joint Venture in the total amount of $10.0$50.0 million, with each lender committed to $5.0$25.0 million of the total commitment. Any borrowings by Opcothe DGD Joint Venture under the 2019 DGD Loan Agreement arewere at the applicable annum rate equal to the sum of (a) the LIBO Rate (meaning Reuters BBA Libor Rates Page 3750) on such day plus (b) 2.50%. TheOn June 15, 2023, the DGD Lenders entered into a new revolving loan agreement (the “2023 DGD Loan Agreement”) with the DGD Joint Venture that replaced and superseded in its entirety the 2019 DGD Loan Agreement maturesand pursuant to which the DGD Lenders have committed to making loans available to the DGD Joint Venture in the total amount of $200.0 million with each lender committed to $100.0 million of the total commitment. Any borrowings by the DGD Joint Venture under the 2023 DGD Loan Agreement are at the applicable annum rate equal to the sum of (a) Term SOFR on such day plus (b) 2.50%. The 2023 DGD Loan Agreement expires on June 15, 2026. In September 2022 and again in December 2022, the DGD Joint Venture borrowed all $50.0 million available under the 2019 DGD Loan Agreement, including the Company's full $25.0 million commitment. The Company received interest from the DGD Joint Venture for the three months ended July 1, 2023 and July 2, 2022 of approximately $0.1 million and $0.2 million, respectively and received interest from the DGD Joint Venture for the six months ended July 1, 2023 and July 2, 2022 of approximately $0.6 million and $0.4 million, respectively. As of July 1, 2023 and December 31, 2017, unless extended by agreement of the parties. As of September 30, 2017, no amounts are2022, zero and $25.0 million, respectively, was owed to Darling Green under the 2023 DGD Loan Agreement.Agreement and the 2019 DGD Loan Agreement, as applicable. This note receivable amount is included in other current assets on the balance sheet and is included in investing activities on the cash flow statement.
(18)
In February 2020, in connection with the DGD Joint Venture’s expansion project at its Norco, LA facility, it entered into two agreements (the “IMTT Terminaling Agreements”) with International-Matex Tank Terminals (“IMTT”), pursuant to which the DGD Joint Venture will move raw material and finished product to and from the IMTT terminal facility by pipeline, thereby providing better logistical capabilities. As a condition to entering into the IMTT Terminaling Agreements, IMTT required that the Company and Valero guarantee their proportionate share, up to a maximum of approximately $50 million each, of the DGD Joint Venture’s obligations under the IMTT Terminaling Agreements (the “IMTT Guarantee”), subject to the conditions provided for in the IMTT Terminaling Agreements. The Company has not recorded any liability as a result of the IMTT Guarantee, as the Company believes the likelihood of having to make any payments under the IMTT Guarantee is remote.
In April 2021, in connection with the DGD Joint Venture’s expansion project at its Port Arthur, TX facility, it entered into two agreements (the “GTL Terminaling Agreements”) with GT Logistics, LLC (“GTL”), pursuant to which the DGD Joint Venture will move raw material and finished product to and from the GTL terminal facility by pipeline, thereby providing better logistical capabilities. As a condition to entering into the GTL Terminaling Agreements, GTL required that the Company and Valero guarantee their proportionate share, up to a maximum of approximately $160 million each, of the DGD Joint Venture’s obligations under the GTL Terminaling Agreements (the “GTL Guarantee”), subject to the conditions provided for in the GTL Terminaling Agreements. The maximum amount of the GTL Guarantee is reduced over the 20-year initial term of the GTL Terminaling Agreements as the termination fee under such agreements declines. The Company has not recorded any liability as a result of the GTL Guarantee, as the Company believes the likelihood of having to make any payments under the GTL Guarantee is remote.
(22) Cash Flow Information
The following table sets forth supplemental cash flow information and non-cash transactions (in thousands):
| | | | | | | | | | | |
| Six Months Ended |
| July 1, 2023 | | July 2, 2022 |
Supplemental disclosure of cash flow information: | | | |
Change in accrued capital expenditures | $ | (6,375) | | | $ | (2,947) | |
Cash paid during the period for: | | | |
Interest, net of capitalized interest | $ | 105,420 | | | $ | 33,791 | |
Income taxes, net of refunds | $ | 87,966 | | | $ | 72,377 | |
Non-cash operating activities | | | |
Operating lease right of use asset obtained in exchange for new lease liabilities | $ | 46,549 | | | $ | 41,554 | |
Non-cash financing activities | | | |
Debt issued for assets | $ | (50) | | | $ | 1,005 | |
(23) New Accounting Pronouncements
In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvement to Accounting for Hedging Activities. This ASU amends Topic 815, Derivatives and Hedging, which is intended to more closely align hedge accounting with companies' risk management strategies and simplify the application of hedge accounting. The guidance includes certain targeted improvements to ease the operational burden of applying hedge accounting. The ASU is effective for fiscal years beginning after December 15, 2018 and for interim periods therein with early adoption permitted. The Company will be required to apply the guidance on a cumulative-effect basis with adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company isdoes not believe that any recently issued, but not yet effective, accounting standards if currently evaluating the impact of this standard.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU amends Topic 715, Compensation - Retirement Benefits, which requires that an employer report the service cost component of net benefit costs to be disaggregated from all other components and reported in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost. The ASU is effective for fiscal years beginning after December 15, 2017 and for interim periods therein. The initial adoption of this ASU is not expected toadopted would have a material impacteffect on the Company'saccompanying consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04 Simplifying the Test for Goodwill Impairment. This ASU amends Topic 350, Intangibles-Goodwill and Other, which will simplify the goodwill impairment calculation by eliminating Step 2 from the current goodwill impairment test. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of the assets and liabilities as if that reporting unit had been acquired in a business combination. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. This ASU amends Topic 805, Business Combinations, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. This ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. In order to be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. This ASU is effective for fiscal year beginning after December 15, 2017 and interim periods within those fiscal years. The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash. This ASU amends Topic 230, Statement of Cash Flows, which includes new guidance on the classification and presentation of restricted cash in the statement of cash flows in order to eliminate the discrepancies that currently exist in how companies present these changes. This ASU requires restricted cash to be included with cash and cash equivalents when explaining the changes in cash in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This ASU amends Topic 230, Statement of Cash Flows, which is intended to reduce the existing diversity in practice for classifying various types of cash flows including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interest in securitizations. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new ASU, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance lessor accounting is largely unchanged. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. This ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is assessing the impact of this new standard, specifically on its consolidated balance sheets, and does not expect adoption to significantly change the recognition, measurement or presentation of lease expense within the consolidated statements of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under GAAP. The new ASU introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this ASU requires disclosures sufficient to enable the users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In July 2015, the FASB deferred the elective date of the standard by one year. This ASU allows for either full retrospective or modified retrospective adoption and will become effective for the Company for the fiscal years beginning after December 15, 2017. The Company has completed its assessment of this ASU to identify any potential changes in the amount and timing of revenue recognition for its current contracts and the expected impact on the Company's business processes, systems and controls. Based on this assessment, the Company has elected to adopt this standard on a modified retrospective basis beginning in fiscal 2018. The adoption will not change the timing of revenues as the Company's revenues have been determined to be recognized at a point in time and not over time. The Company has elected not to capitalize contract fulfillment costs as the recovery of such costs are for a period of less than one year's time and are not material to the Company. Additionally, the Company has elected to treat shipping and handling as fulfillment costs and to report sales taxes net, which will result in a reduction of revenue and a reduction of cost of sales for fiscal 2016 of approximately $155.1 million and expects the reduction of revenue and
cost of sales in fiscal 2017 to be similar to fiscal 2016 with no impact on overall earnings. The Company is currently reviewing the expanded incremental disclosures and the disaggregation of revenues disclosures as required under ASU No. 2014-09.
(19) Guarantor Financial Information
The Company's 5.375% Notes and 4.75% Notes (see Note 8) are guaranteed on a senior unsecured basis by the following Notes Guarantors, each of which is a 100% directly or indirectly owned subsidiary of Darling and which constitute all of Darling's existing restricted subsidiaries that are Credit Agreement Guarantors (other than Darling's foreign subsidiaries, Darling Global Finance B.V., which issued the 4.75% Notes and is discussed further below, or any receivables entity): Darling National, Griffin and its subsidiary Craig Protein, Darling AWS LLC, Terra Holding Company, Darling Global Holdings Inc., Darling Northstar LLC, TRS, EV Acquisition, Inc., Rousselot Inc., Rousselot Dubuque Inc., Sonac USA LLC and Rousselot Peabody Inc. In addition, the 4.75% Notes, which were issued by Darling Global Finance B.V., a wholly-owned indirect subsidiary of Darling, are guaranteed on a senior unsecured basis by Darling. The Notes Guarantors, and Darling in the case of the 4.75% Notes, fully and unconditionally guaranteed the 5.375% Notes and 4.75% Notes on a joint and several basis. The following financial statements present condensed consolidated financial data for (i) Darling, (ii) the combined Notes Guarantors, (iii) the combined other subsidiaries of the Company that did not guarantee the 5.375% Notes or the 4.75% Notes (the “Non-guarantors”), and (iv) eliminations necessary to arrive at the Company's consolidated financial statements, which include condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, and the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive income/(loss) and the condensed consolidated statements of cash flows for the three and nine months months ended September 30, 2017 and October 1, 2016. Separate financial information is not presented for Darling Global Finance B.V. since it was formed as a special purpose finance subsidiary for the purpose of issuing the 4.75% Notes and therefore does not have any substantial operations or assets.
Condensed Consolidated Balance Sheet
As of September 30, 2017
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
ASSETS | | | | | |
Cash and cash equivalents | $ | 1,258 |
| $ | 2,694 |
| $ | 106,194 |
| $ | — |
| $ | 110,146 |
|
Restricted cash | 103 |
| — |
| 179 |
| — |
| 282 |
|
Accounts receivable | 35,722 |
| 242,553 |
| 386,776 |
| (250,104 | ) | 414,947 |
|
Inventories | 17,755 |
| 90,993 |
| 266,350 |
| — |
| 375,098 |
|
Income taxes refundable | 1,914 |
| — |
| 3,456 |
| — |
| 5,370 |
|
Prepaid expenses | 14,201 |
| 3,147 |
| 21,924 |
| — |
| 39,272 |
|
Other current assets | 5,564 |
| 1,280 |
| 15,128 |
| (4,871 | ) | 17,101 |
|
Total current assets | 76,517 |
| 340,667 |
| 800,007 |
| (254,975 | ) | 962,216 |
|
Investment in subsidiaries | 4,387,119 |
| 1,152,677 |
| 849,848 |
| (6,389,644 | ) | — |
|
Property, plant and equipment, net | 265,365 |
| 506,393 |
| 850,109 |
| — |
| 1,621,867 |
|
Intangible assets, net | 18,068 |
| 267,541 |
| 412,299 |
| — |
| 697,908 |
|
Goodwill | 21,860 |
| 551,837 |
| 724,569 |
| — |
| 1,298,266 |
|
Investment in unconsolidated subsidiaries | 4,936 |
| — |
| 285,092 |
| — |
| 290,028 |
|
Other assets | 32,574 |
| 329,178 |
| 185,603 |
| (500,337 | ) | 47,018 |
|
Deferred taxes | — |
| — |
| 17,219 |
| — |
| 17,219 |
|
| $ | 4,806,439 |
| $ | 3,148,293 |
| $ | 4,124,746 |
| $ | (7,144,956 | ) | $ | 4,934,522 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| |
| | | |
|
Current portion of long-term debt | $ | 116 |
| $ | — |
| $ | 22,970 |
| $ | (4,871 | ) | $ | 18,215 |
|
Accounts payable | 253,921 |
| 31,824 |
| 163,082 |
| (235,235 | ) | 213,592 |
|
Income taxes payable | 5,853 |
| 373 |
| 15,748 |
| — |
| 21,974 |
|
Accrued expenses | 87,159 |
| 28,478 |
| 191,715 |
| (14,869 | ) | 292,483 |
|
Total current liabilities | 347,049 |
| 60,675 |
| 393,515 |
| (254,975 | ) | 546,264 |
|
Long-term debt, net of current portion | 1,068,926 |
| — |
| 1,165,587 |
| (500,337 | ) | 1,734,176 |
|
Other noncurrent liabilities | 58,400 |
| — |
| 37,954 |
| — |
| 96,354 |
|
Deferred income taxes | 136,430 |
| — |
| 216,611 |
| — |
| 353,041 |
|
Total liabilities | 1,610,805 |
| 60,675 |
| 1,813,667 |
| (755,312 | ) | 2,729,835 |
|
Total stockholders’ equity | 3,195,634 |
| 3,087,618 |
| 2,311,079 |
| (6,389,644 | ) | 2,204,687 |
|
| $ | 4,806,439 |
| $ | 3,148,293 |
| $ | 4,124,746 |
| $ | (7,144,956 | ) | $ | 4,934,522 |
|
Condensed Consolidated Balance Sheet
As of December 31, 2016
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
ASSETS | | | | | |
Cash and cash equivalents | $ | 1,470 |
| $ | 5,754 |
| $ | 107,340 |
| $ | — |
| $ | 114,564 |
|
Restricted cash | 103 |
| — |
| 190 |
| — |
| 293 |
|
Accounts receivable | 39,209 |
| 97,220 |
| 339,251 |
| (87,283 | ) | 388,397 |
|
Inventories | 16,573 |
| 85,890 |
| 228,352 |
| — |
| 330,815 |
|
Income taxes refundable | 3,566 |
| — |
| 3,913 |
| — |
| 7,479 |
|
Prepaid expenses | 11,152 |
| 2,769 |
| 16,063 |
| — |
| 29,984 |
|
Other current assets | 5,859 |
| 3,165 |
| 19,221 |
| (6,475 | ) | 21,770 |
|
Total current assets | 77,932 |
| 194,798 |
| 714,330 |
| (93,758 | ) | 893,302 |
|
Investment in subsidiaries | 4,296,200 |
| 1,154,398 |
| 909,263 |
| (6,359,861 | ) | — |
|
Property, plant and equipment, net | 233,456 |
| 497,312 |
| 784,807 |
| — |
| 1,515,575 |
|
Intangible assets, net | 13,746 |
| 291,724 |
| 406,457 |
| — |
| 711,927 |
|
Goodwill | 21,860 |
| 549,960 |
| 654,073 |
| — |
| 1,225,893 |
|
Investment in unconsolidated subsidiary | 1,438 |
| — |
| 291,279 |
| — |
| 292,717 |
|
Other assets | 36,063 |
| 396,222 |
| 160,505 |
| (549,177 | ) | 43,613 |
|
Deferred income taxes | — |
| — |
| 14,990 |
| — |
| 14,990 |
|
| $ | 4,680,695 |
| $ | 3,084,414 |
| $ | 3,935,704 |
| $ | (7,002,796 | ) | $ | 4,698,017 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
| |
| | | |
|
Current portion of long-term debt | $ | 4,220 |
| $ | — |
| $ | 25,502 |
| $ | (6,475 | ) | $ | 23,247 |
|
Accounts payable | 116,075 |
| 18,142 |
| 130,718 |
| (84,040 | ) | 180,895 |
|
Income taxes payable | (383 | ) | 373 |
| 4,923 |
| — |
| 4,913 |
|
Accrued expenses | 86,581 |
| 33,834 |
| 125,624 |
| (3,243 | ) | 242,796 |
|
Total current liabilities | 206,493 |
| 52,349 |
| 286,767 |
| (93,758 | ) | 451,851 |
|
Long-term debt, net of current portion | 1,109,523 |
| — |
| 1,167,349 |
| (549,176 | ) | 1,727,696 |
|
Other noncurrent liabilities | 63,072 |
| — |
| 33,042 |
| — |
| 96,114 |
|
Deferred income taxes | 140,543 |
| — |
| 205,591 |
| — |
| 346,134 |
|
Total liabilities | 1,519,631 |
| 52,349 |
| 1,692,749 |
| (642,934 | ) | 2,621,795 |
|
Total stockholders’ equity | 3,161,064 |
| 3,032,065 |
| 2,242,955 |
| (6,359,862 | ) | 2,076,222 |
|
| $ | 4,680,695 |
| $ | 3,084,414 |
| $ | 3,935,704 |
| $ | (7,002,796 | ) | $ | 4,698,017 |
|
Condensed Consolidated Statements of Operations
For the three months ended September 30, 2017
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
Net sales | $ | 135,001 |
| $ | 378,088 |
| $ | 489,003 |
| $ | (64,411 | ) | $ | 937,681 |
|
Cost and expenses: | | | | | |
Cost of sales and operating expenses | 103,591 |
| 315,847 |
| 389,001 |
| (64,411 | ) | 744,028 |
|
Selling, general and administrative expenses | 37,154 |
| 14,031 |
| 31,956 |
| — |
| 83,141 |
|
Depreciation and amortization | 10,485 |
| 26,949 |
| 39,768 |
| — |
| 77,202 |
|
Total costs and expenses | 151,230 |
| 356,827 |
| 460,725 |
| (64,411 | ) | 904,371 |
|
Operating income/(loss) | (16,229 | ) | 21,261 |
| 28,278 |
| — |
| 33,310 |
|
| |
| |
| | | |
|
Interest expense | (14,076 | ) | 4,009 |
| (12,464 | ) | — |
| (22,531 | ) |
Foreign currency gains/(losses) | (32 | ) | 320 |
| (2,343 | ) | — |
| (2,055 | ) |
Other income/(expense), net | (4,305 | ) | 1,555 |
| 1,303 |
| — |
| (1,447 | ) |
Equity in net income/(loss) of unconsolidated subsidiaries | (487 | ) | — |
| 8,190 |
| — |
| 7,703 |
|
Earnings in investments in subsidiaries | 27,810 |
| — |
| — |
| (27,810 | ) | — |
|
Income/(loss) before taxes | (7,319 | ) | 27,145 |
| 22,964 |
| (27,810 | ) | 14,980 |
|
Income taxes (benefit) | (15,080 | ) | 11,782 |
| 9,594 |
| — |
| 6,296 |
|
Net income attributable to noncontrolling interests | — |
| — |
| (923 | ) | — |
| (923 | ) |
Net income/(loss) attributable to Darling | $ | 7,761 |
| $ | 15,363 |
| $ | 12,447 |
| $ | (27,810 | ) | $ | 7,761 |
|
Condensed Consolidated Statements of Operations
For the nine months ended September 30, 2017
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
Net sales | $ | 407,054 |
| $ | 1,098,112 |
| $ | 1,389,974 |
| $ | (181,039 | ) | $ | 2,714,101 |
|
Cost and expenses: | | | | | |
Cost of sales and operating expenses | 321,231 |
| 899,129 |
| 1,095,098 |
| (181,039 | ) | 2,134,419 |
|
Selling, general and administrative expenses | 112,921 |
| 41,559 |
| 102,109 |
| — |
| 256,589 |
|
Depreciation and amortization | 30,750 |
| 78,261 |
| 112,295 |
| — |
| 221,306 |
|
Total costs and expenses | 464,902 |
| 1,018,949 |
| 1,309,502 |
| (181,039 | ) | 2,612,314 |
|
Operating income/(loss) | (57,848 | ) | 79,163 |
| 80,472 |
| — |
| 101,787 |
|
| |
| |
| | | |
|
Interest expense | (41,909 | ) | 12,000 |
| (36,748 | ) | — |
| (66,657 | ) |
Foreign currency gains/(losses) | (216 | ) | 500 |
| (4,714 | ) | — |
| (4,430 | ) |
Other income/(expense), net | (10,643 | ) | (3 | ) | 5,543 |
| — |
| (5,103 | ) |
Equity in net income/(loss) of unconsolidated subsidiaries | (1,253 | ) | — |
| 17,922 |
| — |
| 16,669 |
|
Earnings in investments in subsidiaries | 92,641 |
| — |
| — |
| (92,641 | ) | — |
|
Income/(loss) before taxes | (19,228 | ) | 91,660 |
| 62,475 |
| (92,641 | ) | 42,266 |
|
Income taxes (benefit) | (41,967 | ) | 34,386 |
| 23,437 |
| — |
| 15,856 |
|
Net income attributable to noncontrolling interests | — |
| — |
| (3,671 | ) | — |
| (3,671 | ) |
Net income/(loss) attributable to Darling | $ | 22,739 |
| $ | 57,274 |
| $ | 35,367 |
| $ | (92,641 | ) | $ | 22,739 |
|
Condensed Consolidated Statements of Operations
For the three months ended October 1, 2016
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
Net sales | $ | 130,063 |
| $ | 347,384 |
| $ | 433,523 |
| $ | (57,114 | ) | $ | 853,856 |
|
Cost and expenses: | | | | | |
Cost of sales and operating expenses | 99,705 |
| 286,919 |
| 341,657 |
| (57,114 | ) | 671,167 |
|
Selling, general and administrative expenses | 29,987 |
| 13,421 |
| 33,100 |
| — |
| 76,508 |
|
Acquisition and integration costs | — |
| — |
| — |
| — |
| — |
|
Depreciation and amortization | 9,622 |
| 24,813 |
| 36,218 |
| — |
| 70,653 |
|
Total costs and expenses | 139,314 |
| 325,153 |
| 410,975 |
| (57,114 | ) | 818,328 |
|
Operating income/(loss) | (9,251 | ) | 22,231 |
| 22,548 |
| — |
| 35,528 |
|
| |
| |
| | | |
|
Interest expense | (15,382 | ) | 4,437 |
| (12,922 | ) | — |
| (23,867 | ) |
Foreign currency gains/(losses) | (11 | ) | (152 | ) | 517 |
| — |
| 354 |
|
Other income/(expense), net | (3,439 | ) | 258 |
| 1,174 |
| — |
| (2,007 | ) |
Equity in net income/(loss) of unconsolidated subsidiaries | (362 | ) | — |
| 18,500 |
| — |
| 18,138 |
|
Earnings in investments in subsidiaries | 60,952 |
| — |
| — |
| (60,952 | ) | — |
|
Income/(loss) before taxes | 32,507 |
| 26,774 |
| 29,817 |
| (60,952 | ) | 28,146 |
|
Income taxes | 3,813 |
| (3,140 | ) | (1,417 | ) | — |
| (744 | ) |
Net income attributable to noncontrolling interests | — |
| — |
| (196 | ) | — |
| (196 | ) |
Net income/(loss) attributable to Darling | $ | 28,694 |
| $ | 29,914 |
| $ | 31,038 |
| $ | (60,952 | ) | $ | 28,694 |
|
Condensed Consolidated Statements of Operations
For the nine months ended October 1, 2016
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
Net sales | $ | 367,811 |
| $ | 994,028 |
| $ | 1,297,393 |
| $ | (148,394 | ) | $ | 2,510,838 |
|
Cost and expenses: | | | | | |
Cost of sales and operating expenses | 288,976 |
| 796,001 |
| 1,010,592 |
| (148,394 | ) | 1,947,175 |
|
Selling, general and administrative expenses | 100,449 |
| 38,018 |
| 95,668 |
| — |
| 234,135 |
|
Acquisition costs | — |
| — |
| 401 |
| — |
| 401 |
|
Depreciation and amortization | 30,459 |
| 75,723 |
| 106,258 |
| — |
| 212,440 |
|
Total costs and expenses | 419,884 |
| 909,742 |
| 1,212,919 |
| (148,394 | ) | 2,394,151 |
|
Operating income/(loss) | (52,073 | ) | 84,286 |
| 84,474 |
| — |
| 116,687 |
|
| |
| |
| | | |
|
Interest expense | (46,242 | ) | 13,391 |
| (38,897 | ) | — |
| (71,748 | ) |
Foreign currency gains/(losses) | 32 |
| 36 |
| (2,309 | ) | — |
| (2,241 | ) |
Other income/(expense), net | (10,429 | ) | 380 |
| 4,364 |
| — |
| (5,685 | ) |
Equity in net income/(loss) of unconsolidated subsidiaries | (814 | ) | — |
| 38,447 |
| — |
| 37,633 |
|
Earnings in investments in subsidiaries | 157,943 |
| — |
| — |
| (157,943 | ) | — |
|
Income/(loss) before taxes | 48,417 |
| 98,093 |
| 86,079 |
| (157,943 | ) | 74,646 |
|
Income taxes (benefit) | (13,355 | ) | 11,961 |
| 10,496 |
| — |
| 9,102 |
|
Net income attributable to noncontrolling interests | — |
| — |
| (3,772 | ) | — |
| (3,772 | ) |
Net income/(loss) attributable to Darling | $ | 61,772 |
| $ | 86,132 |
| $ | 71,811 |
| $ | (157,943 | ) | $ | 61,772 |
|
Condensed Consolidated Statements of Comprehensive Income/(Loss)
For the three months ended September 30, 2017
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
Net income/(loss) | $ | 8,684 |
| $ | 15,363 |
| $ | 12,447 |
| $ | (27,810 | ) | $ | 8,684 |
|
Other comprehensive income/(loss), net of tax: | | | | | |
Foreign currency translation | — |
| — |
| 46,211 |
| — |
| 46,211 |
|
Pension adjustments | 641 |
| — |
| 118 |
| — |
| 759 |
|
Natural gas swap derivative adjustments | 22 |
| — |
| — |
| — |
| 22 |
|
Corn option derivative adjustments | 850 |
| — |
| — |
| — |
| 850 |
|
Total other comprehensive income/(loss), net of tax | 1,513 |
| — |
| 46,329 |
| — |
| 47,842 |
|
Total comprehensive income/(loss) | 10,197 |
| 15,363 |
| 58,776 |
| (27,810 | ) | 56,526 |
|
Total comprehensive loss attributable to noncontrolling interest | — |
| — |
| 109 |
| — |
| 109 |
|
Total comprehensive income/(loss) attributable to Darling | $ | 10,197 |
| $ | 15,363 |
| $ | 58,667 |
| $ | (27,810 | ) | $ | 56,417 |
|
Condensed Consolidated Statements of Comprehensive Income/(Loss)
For the nine months ended September 30, 2017
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
Net income/(loss) | $ | 26,410 |
| $ | 57,274 |
| $ | 35,367 |
| $ | (92,641 | ) | $ | 26,410 |
|
Other comprehensive income/ (loss), net of tax: | | | | | |
Foreign currency translation | — |
| — |
| 111,002 |
| — |
| 111,002 |
|
Pension adjustments | 1,923 |
| — |
| 355 |
| — |
| 2,278 |
|
Natural gas swap derivative adjustments | 22 |
| — |
| — |
| — |
| 22 |
|
Corn option derivative adjustments | (1,121 | ) | — |
| — |
| — |
| (1,121 | ) |
Total other comprehensive income, net of tax | 824 |
| — |
| 111,357 |
| — |
| 112,181 |
|
Total comprehensive income/(loss) | 27,234 |
| 57,274 |
| 146,724 |
| (92,641 | ) | 138,591 |
|
Total comprehensive loss attributable to noncontrolling interest | — |
| — |
| (62 | ) | — |
| (62 | ) |
Total comprehensive income/(loss) attributable to Darling | $ | 27,234 |
| $ | 57,274 |
| $ | 146,786 |
| $ | (92,641 | ) | $ | 138,653 |
|
Condensed Consolidated Statements of Comprehensive Income/(Loss)
For the three months ended October 1, 2016
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
Net income/(loss) | $ | 28,890 |
| $ | 29,914 |
| $ | 31,038 |
| $ | (60,952 | ) | $ | 28,890 |
|
Other comprehensive income/(loss), net of tax: | | | | | |
Foreign currency translation | — |
| — |
| (5,839 | ) | — |
| (5,839 | ) |
Pension adjustments | 659 |
| — |
| 68 |
| — |
| 727 |
|
Corn option derivative adjustments | 734 |
| — |
| — |
| — |
| 734 |
|
Total other comprehensive income/(loss), net of tax | 1,393 |
| — |
| (5,771 | ) | — |
| (4,378 | ) |
Total comprehensive income/(loss) | 30,283 |
| 29,914 |
| 25,267 |
| (60,952 | ) | 24,512 |
|
Total comprehensive income attributable to noncontrolling interest | — |
| — |
| (94 | ) | — |
| (94 | ) |
Total comprehensive income/(loss) attributable to Darling | $ | 30,283 |
| $ | 29,914 |
| $ | 25,361 |
| $ | (60,952 | ) | $ | 24,606 |
|
Condensed Consolidated Statements of Comprehensive Income/(Loss)
For the nine months ended October 1, 2016
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
Net income/(loss) | $ | 65,544 |
| $ | 86,132 |
| $ | 71,811 |
| $ | (157,943 | ) | $ | 65,544 |
|
Other comprehensive income/(loss), net of tax: | | | | | |
Foreign currency translation | — |
| — |
| 43,684 |
| — |
| 43,684 |
|
Pension adjustments | 1,975 |
| (75 | ) | 204 |
| — |
| 2,104 |
|
Corn option derivative adjustments | 1,255 |
| — |
| — |
| — |
| 1,255 |
|
Total other comprehensive income, net of tax | 3,230 |
| (75 | ) | 43,888 |
| — |
| 47,043 |
|
Total comprehensive income/(loss) | 68,774 |
| 86,057 |
| 115,699 |
| (157,943 | ) | 112,587 |
|
Total comprehensive income attributable to noncontrolling interest | — |
| — |
| 1,211 |
| — |
| 1,211 |
|
Total comprehensive income/(loss) attributable to Darling | $ | 68,774 |
| $ | 86,057 |
| $ | 114,488 |
| $ | (157,943 | ) | $ | 111,376 |
|
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2017
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
Cash flows from operating activities: | | | | | |
| | | | | |
Net income/(loss) | $ | 26,410 |
| $ | 57,274 |
| $ | 35,367 |
| $ | (92,641 | ) | $ | 26,410 |
|
Earnings in investments in subsidiaries | (92,641 | ) | — |
| — |
| 92,641 |
| — |
|
Other operating cash flows | 188,304 |
| (59,113 | ) | 113,181 |
| — |
| 242,372 |
|
Net cash provided by operating activities | 122,073 |
| (1,839 | ) | 148,548 |
| — |
| 268,782 |
|
| | | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | (63,746 | ) | (57,388 | ) | (75,312 | ) | — |
| (196,446 | ) |
Acquisitions | — |
| (12,144 | ) | — |
| — |
| (12,144 | ) |
Investment in subsidiaries and affiliates | (4,750 | ) | — |
| — |
| — |
| (4,750 | ) |
Note receivable from affiliates | — |
| 67,000 |
| (67,000 | ) | — |
| — |
|
Gross proceeds from sale of property, plant and equipment and other assets | 2,309 |
| 1,311 |
| 1,333 |
| — |
| 4,953 |
|
Proceeds from insurance settlements | — |
| — |
| 3,301 |
| — |
| 3,301 |
|
Payments related to routes and other intangibles | (5,635 | ) | — |
| — |
| — |
| (5,635 | ) |
Net cash used in investing activities | (71,822 | ) | (1,221 | ) | (137,678 | ) | — |
| (210,721 | ) |
| | | | | |
Cash flows from financing activities: | | | | | |
Proceeds for long-term debt | — |
| — |
| 24,069 |
| — |
| 24,069 |
|
Payments on long-term debt | (47,182 | ) | — |
| (47,068 | ) | — |
| (94,250 | ) |
Borrowings from revolving facilities | 142,000 |
| — |
| — |
| — |
| 142,000 |
|
Payments on revolving facilities | (142,000 | ) | — |
| (5,327 | ) | — |
| (147,327 | ) |
Net cash overdraft financing | — |
| — |
| 2,590 |
| — |
| 2,590 |
|
Deferred loan costs | (1,177 | ) | — |
| — |
| — |
| (1,177 | ) |
Issuances of common stock | 22 |
| — |
| — |
| — |
| 22 |
|
Minimum withholding taxes paid on stock awards | (2,126 | ) | — |
| (14 | ) | — |
| (2,140 | ) |
Acquisition of noncontrolling interest | — |
| — |
| (429 | ) | — |
| (429 | ) |
Distributions to noncontrolling interests | — |
| — |
| (2,513 | ) | — |
| (2,513 | ) |
Net cash used in financing activities | (50,463 | ) | — |
| (28,692 | ) | — |
| (79,155 | ) |
| | | | | |
Effect of exchange rate changes on cash | — |
| — |
| 16,676 |
| — |
| 16,676 |
|
| | | | | |
Net increase/(decrease) in cash and cash equivalents | (212 | ) | (3,060 | ) | (1,146 | ) | — |
| (4,418 | ) |
Cash and cash equivalents at beginning of year | 1,470 |
| 5,754 |
| 107,340 |
| — |
| 114,564 |
|
Cash and cash equivalents at end of year | $ | 1,258 |
| $ | 2,694 |
| $ | 106,194 |
| $ | — |
| $ | 110,146 |
|
Condensed Consolidated Statements of Cash Flows
For the nine months ended October 1, 2016
(in thousands)
|
| | | | | | | | | | | | | | | |
| Parent | Guarantors | Non-guarantors | Eliminations | Consolidated |
Cash flows from operating activities: | | | | | |
Net income/(loss) | $ | 65,544 |
| $ | 86,132 |
| $ | 71,811 |
| $ | (157,943 | ) | $ | 65,544 |
|
Earnings in investments in subsidiaries | (157,943 | ) | — |
| — |
| 157,943 |
| — |
|
Other operating cash flows | 215,375 |
| (74,110 | ) | 73,753 |
| — |
| 215,018 |
|
Net cash provided by operating activities | 122,976 |
| 12,022 |
| 145,564 |
| — |
| 280,562 |
|
| | | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | (33,431 | ) | (68,145 | ) | (66,648 | ) | — |
| (168,224 | ) |
Acquisitions | — |
| — |
| (8,511 | ) | — |
| (8,511 | ) |
Note receivable from affiliates | — |
| 53,056 |
| (53,056 | ) | — |
| — |
|
Gross proceeds from sale of property, plant and equipment and other assets | 2,375 |
| 816 |
| 1,301 |
| — |
| 4,492 |
|
Proceeds from insurance settlements | — |
| — |
| 1,537 |
| — |
| 1,537 |
|
Net cash used in investing activities | (31,056 | ) | (14,273 | ) | (125,377 | ) | — |
| (170,706 | ) |
| | | | | |
Cash flows from financing activities: | | | | | |
Proceeds for long-term debt | — |
| — |
| 28,765 |
| — |
| 28,765 |
|
Payments on long-term debt | (87,411 | ) | — |
| (40,953 | ) | — |
| (128,364 | ) |
Borrowings from revolving credit facility | 83,000 |
| — |
| — |
| — |
| 83,000 |
|
Payments on revolving credit facility | (83,000 | ) | — |
| (10,028 | ) | — |
| (93,028 | ) |
Issuances of common stock | 143 |
| — |
| — |
| — |
| 143 |
|
Repurchase of treasury stock | (5,000 | ) | — |
| — |
| — |
| (5,000 | ) |
Minimum withholding taxes paid on stock awards | (1,718 | ) | — |
| (125 | ) | — |
| (1,843 | ) |
Distributions to noncontolling interests | — |
| — |
| (885 | ) | — |
| (885 | ) |
Net cash used in financing activities | (93,986 | ) | — |
| (23,226 | ) | — |
| (117,212 | ) |
| | | | | |
Effect of exchange rate changes on cash | — |
| — |
| (943 | ) | — |
| (943 | ) |
| | | | | |
Net increase/(decrease) in cash and cash equivalents | (2,066 | ) | (2,251 | ) | (3,982 | ) | — |
| (8,299 | ) |
Cash and cash equivalents at beginning of year | 3,443 |
| 3,993 |
| 149,448 |
| — |
| 156,884 |
|
Cash and cash equivalents at end of year | $ | 1,377 |
| $ | 1,742 |
| $ | 145,466 |
| $ | — |
| $ | 148,585 |
|
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below under the heading “Forward Looking Statements” and elsewhere in this report, and under the heading “Risk Factors” in Part I, Item 1A in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2022, filed with the SEC on February 28, 201727, 2023 and in the Company's other public filings with the SEC.
The following discussion should be read in conjunction with the unaudited consolidated financial statements and related notes thereto contained in this report.
Overview
The CompanyDarling Ingredients Inc. (“Darling”, and together with its subsidiaries, the “Company” or “we,” “us” or “our”) is a global developer and producer of sustainable natural ingredients from edible and inedible bio-nutrients, creating a wide range of ingredients and customized specialty solutions for customers in the pharmaceutical, food, pet food, feed, industrial, fuel, bioenergy and fertilizer industries. With operations on five continents, the Company collects and transforms all aspects of animal by-product streams into useable and specialty ingredients, such as gelatin,collagen, edible fats, feed-grade fats, animal proteins and meals, plasma, pet food ingredients, organic fertilizers, yellow grease, fuel feedstocks, green energy, natural casings and hides. The Company also recovers and converts usedrecycled oils (used cooking oil and commercial bakery residualsanimal fats) into valuable feed and fuelfeedstock and collects and processes residual bakery products into feed ingredients. In addition, the Company provides environmental services, such as grease trap collection and disposal services to food service establishments, environmental services to food processors and sells restaurant cooking oil delivery and collection equipment.establishments. The Company sells its products domestically and internationally and operates within three industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients.
The Feed Ingredients operating segment includes the Company's global activities related to (i) the collection and processing of beef, poultry fish and pork animal by-products in North America, Europe and EuropeSouth America into non-food grade oils and protein meals;meals, (ii) the collection and processing of bakery residuals in North America into Cookie Meal®, which is predominantly used in poultry and swine rations;rations, (iii) the collection and processing of used cooking oil in North America and South America into non-food grade fats, as well as the production and sale of cooking oil collection systems; (iv) the collection and processing of porcine and bovine blood in China, Europe, North America and Australia into blood plasma powder and hemoglobin;hemoglobin, (v) the processing of selected portions of slaughtered animals into a variety of meat products for use in pet food in Europe, North America and South America, (vi) the processing of cattle hides and hog skins in North America, and cattle hides in Europe; (vi)(vii) the production of organic fertilizers using protein produced from the Company’s animal by-products processing activities in North America and Europe;Europe, (viii) the rearing and (vii)processing of black soldier fly larvae into specialty proteins for use in animal feed and pet food in North America, and (ix) the provision of grease trap services to food service establishments and environmental services to food processors in North America. Non-food grade oils and fats produced and marketed by the Company are principally sold to third parties to be used as ingredients in animal feed and pet food, as an ingredient for the production of biodieselrenewable diesel and renewable diesel,biodiesel, or to the oleo-chemical industry to be used as an ingredient in a wide variety of industrial applications. Protein meals, blood plasma powder and hemoglobin produced and marketed by the Company are sold to third parties to be used as ingredients in animal feed, pet food and aquaculture.
The Food Ingredients operating segment includes the Company's global activities related to (i) the purchase and processing of beef and pork bone chips, beef hides, pig skins, and fish skins into gelatin and hydrolyzed collagen in Europe, China, South America and North America;America, (ii) the collection and processing of porcine and bovine intestines into natural casings in Europe, China and North America;America, (iii) the extraction and processing of porcine mucosa into crude heparin in Europe;Europe, (iv) the collection and refining of animal fat into food grade fat in Europe;Europe, and (v) the processing of bones to bone chips for the gelatincollagen industry and bone ash. Gelatinsash in Europe. Collagens produced and marketed by the Company are sold to third parties to be used as ingredients in the pharmaceutical, nutraceutical, food, pet food and technical (i.e.(e.g., photographic) industries. Natural casings produced and marketed by the Company are sold to third parties to be used as an ingredient in the production of sausages and other similar food products.
The Fuel Ingredients operating segment includes the Company's global activities related to (i) the conversionCompany’s share of the results of its equity investment in Diamond Green Diesel Holdings LLC, a joint venture with Valero Energy Corporation (“Valero”) to convert animal fats, and recycled greases, used cooking oil, inedible corn oil, soybean oil, or other feedstocks that become economically and commercially viable into biodieselrenewable diesel (“DGD” or the “DGD Joint Venture”) as described in North America;Note 3 (Investment in Unconsolidated Subsidiaries) to the Company's Consolidated Financial Statements for the period ended July 1, 2023 included herein, (ii) the conversion of organic sludge and food waste into biogas in Europe;
Europe, (iii) the collection and conversion of fallen stock and certain animal by-products pursuant to applicable E.U. regulations into low-grade energy sources to be used in industrial applications;applications, and (iv) the processing of manure into natural bio-phosphate in Europe; and (v) the Company’s share of the results of its equity investment in Diamond Green Diesel Holdings LLC, a joint venture with Valero Energy Corporation (the “DGD Joint Venture”), to convert animal fats, recycled greases, used cooking oil, inedible corn oil, soybean oil, or other feedstocks that become economically and commercially viable intoEurope.
renewable diesel as described in Note 7 to the Company's Consolidated Financial Statement for the period ended September 30, 2017 included herein.
Corporate activitiesActivities principally includesinclude unallocated corporate overhead expenses, acquisition-related expenses, interest expense net of interest income, and other non-operating income and expenses.
BusinessEconomic Conditions and Regulatory DevelopmentsUncertainties
Various strains of highly pathogenic avian influenza (or “Bird Flu”)Global Economic Conditions
We operate globally and have operations in numerous countries. As such, we are exposed to, and impacted by global macroeconomic factors, U.S. and foreign government policies and foreign exchange fluctuations. Global economic conditions continue to be reportedhighly volatile due to, among other things, the conflict in wild fowlUkraine and commercial poultry flocks across Europe, the Middle East, parts of Asiaits impact on volatility in energy and other commodity prices, inflation, cost and supply chain pressures and availability, and disruption in North America. New confirmed outbreaks of Bird Flu have been confirmedbanking systems and capital markets. Disturbances in commercial poultry flocks in Asia, Africaworld financial, credit, commodities and Italy since August 1, 2017 but not in North America or other parts of Europe. On May 2, 2017, the first new cases of porcine epidemic diarrhea virus (“PEDV”) since September 2016 were reported on hog farms in Manitoba, Canada. The disease had spread to 89 commercial hog operations by October 12, 2017. On July 18, 2017,stock markets, including inflationary, deflationary and recessionary conditions and an eleven-year-old cow on an Alabama farm was confirmed positive with atypical bovine spongiform encephalopathy, which is commonly referred to as “mad cow” disease (“BSE”). This was the first such case since 2012 and the fifth case of BSE reportedincrease in the U.S. The last four cases were allrecent turmoil in the atypical form. Confirmation of atypical BSE will not affect the “negligible BSE risk” status ofworld banking markets, could have a country because the World Organization for Animal Health (“OIE”) recognizes that atypical BSE can occur spontaneously in older cattle. For a more detailed discussion of these and other factors that cannegative impact on the Company’s business and results of operations, seeoperations. Any such disturbances or disruptions may also magnify the Risk Factors discussionimpact of other risks described in Item 1A of Part I of the Company’sthis Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2022, as filed with the SEC on February 27, 2023.
Energy Policies of U.S. and Foreign Governments
Prices for our finished products, including those of DGD, may be impacted by worldwide government policies relating to renewable fuels and greenhouse gas emissions (“GHG”). Programs like the National Renewable Fuel Standard Program (“RFS”) and low carbon fuel standards (“LCFS”) (such as in the state of California) and tax credits for biofuels both in the United States and abroad are subject to revision and change which may impact the demand for our finished products. Legal challenges or changes to, a failure to enforce, reductions in the mandated volumes under, or discontinuing or suspension of any of these programs could have a negative impact on our business and results of operations. However, such rules and the regulatory environment are continuing to evolve and change, and we cannot predict the ultimate effect that such changes may have on our business.
Climate Change
There is a growing global concern that carbon dioxide and other GHG in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency of extreme weather and natural disasters. We are subject to physical, operational, transitional and financial risks associated with climate change and global, regional and local weather conditions, as well as legal, regulatory and market responses to climate change. Certain jurisdictions in which we operate have either imposed, or are considering imposing, new or increasingly stringent legal and regulatory requirements to reduce or mitigate the potential effects of climate change, including regulation and reduction of GHG and potential carbon pricing programs. These new or increasingly stringent legal or regulatory requirements could result in significantly increased costs of compliance and additional investments in facilities and equipment, and reduced raw material supplies in areas where these requirements limit or eliminate livestock operations. While we assess climate related regulatory risks as part of our risk management process, we are unable to predict the scope, nature and timing of any new or increasingly stringent environmental laws and regulations and therefore cannot predict the ultimate impact of such laws and regulations on our business or financial results. We continue to monitor existing and proposed laws and regulations in the jurisdictions in which we operate and to consider actions we may take to potentially mitigate the unfavorable impact, if any, of such laws or regulations. Furthermore, emerging legislation seeks to regulate corporate ESG practices, including practices related to the causes and impacts of climate change as well as supply chain control and compliance with human rights. These new rules, which apply to all large companies and to listed small and medium-sized enterprises, require companies to report on how sustainability issues (environmental, social, and governance) affect their business and about their own impact on people and the environment. There has also been increased focus from our stakeholders, including consumers, employees and investors, on our ESG practices. We expect that stakeholder expectations with respect to ESG expectations will continue to evolve rapidly, which may necessitate additional resources to monitor, report on, and adjust our operations.
For additional information on risk factors that could impact our results, please refer to “Risk Factors” in Part I, Item 1A of the Company's Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on February 27, 2023.
Operating Performance Indicators
The Company monitors the performance of its business segments using key financial metrics such as results of operations, non-GAAP measurements (Adjusted EBITDA), segment operating income, raw material processed, gross margin percentage, foreign currency translation, and corporate activities. The Company’s operating results can vary significantly due to changes in factors such as the fluctuation in commodity prices and energy prices, weather conditions, crop harvests, government policies and programs, changes in global demand, changes in standards of living, protein consumption, and global production of competing ingredients. Due to these unpredictable factors that are beyond the control of the Company, forward-looking financial or operational estimates are not provided. The Company is exposed to certain risks associated with a business that is influenced by agricultural-based commodities. These risks are further described in Item 1A of Part I, “Risk Factors” included in the Company’s Form 10-K for the fiscal year ended December 31, 2016.2022.
The Company’s Feed Ingredients segment animal by-products, bakery residuals, used cooking oil recovery, and blood operations are each influenced by prices for agricultural-based alternative ingredients such as corn oil, soybean oil, soybean meal, and palm oil. In these operations, the costs of the Company's raw materials change with, or in certain cases are indexed to, the selling price or the anticipated selling price of the finished goods produced from the acquired raw materials and/or in some cases, the price spread between various types of finished products. The Company believes that this methodology of procuring raw materials generally establishes a relatively stable gross margin upon the acquisition of the raw material. Although the costs of raw materials for the Feed Ingredients segment are generally based upon actual or anticipated finished goods selling prices, rapid and material changes in finished goods prices, including competing agricultural-based alternative ingredients, generally have an immediate, and often times, material impact on the Company’s gross margin and profitability resulting from the brief lapse of time between the procurement of the raw materials and the sale of the finished goods. In addition, the amountvolume of raw material volume acquired, which has a direct impact on the amount of finished goods produced, can also have a material effect on the gross margin reported, as the Company has a substantial amount of fixed operating costs.
The Company’s Food Ingredients segment gelatincollagen and natural casings products are influenced by other competing ingredients including plant-based and synthetic hydrocolloids and artificial casings. In the gelatincollagen operation, in particular, the cost of the Company's animal-based raw material moves in relationship to the selling price of the finished goods. The processing time for the Food Ingredients segment gelatincollagen and casings is generally 30 to 60 days, which is substantially longer than the Company's Feed Ingredients segment animal by-products operations. Consequently, the Company’s gross margin and profitability in this segment can be influenced by the movement of finished goods prices from the time the raw materials were procured until the finished goods are sold.
The Company’s Fuel Ingredients segment converts fats into renewable diesel, organic sludge and food waste into biogas, and fallen stock into low-grade energy sources. The Company's gross margin and profitability in this segment are impacted by world energy prices for oil, electricity and natural gas.gas, global feed stock prices and governmental subsidies.
The reporting currency for the Company's financial statements is the U.S. dollar. The Company operates in over 15 countries and therefore, certain of the Company's assets, liabilities, revenues and expenses are denominated in functional currencies other than the U.S. dollar, primarily in the euro,Euro, Brazilian real, Chinese renminbi, Canadian dollar Argentine peso, Japanese yen and Polish zloty. To prepare the Company's consolidated financial statements, assets, liabilities, revenues, and expenses must be translated into U.S. dollars at the applicable exchange rate. As a result, increases or decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items recorded in the Company's consolidated
financial statements, even if their value has not changed in the functional currency. This could have a significant impact on the Company's results, if such increase or decrease in the value of the U.S. dollar relative to these other currencies is substantial.
The Company monitors the performance of its business segments using key financial metrics such as results of operations, non-GAAP measurements (Adjusted EBITDA), segment operating income, raw material processed, gross margin percentage, foreign currency translation, and corporate activities. The Company’s operating results can vary significantly due to changes in factors such as the fluctuation in energy prices, weather conditions, crop harvests, government policies and programs, changes in global demand, changes in standards of living, protein consumption, and global production of competing ingredients. Due to these unpredictable factors that are beyond the control of the Company forward-looking financial or operational estimates are not provided.
Results of Operations
Three Months Ended September 30, 2017July 1, 2023 Compared to Three Months Ended October 1, 2016July 2, 2022
Operating Performance Metrics
Operating performance metrics which management routinely monitors as an indicator of operating performance include:
•Finished product commodity prices
•Segment results
•Foreign currency exchange
•Corporate activities
•Non-U.S. GAAP measures
These indicators and their importance are discussed below.
Finished Product Commodity Prices
Prices for finished product commodities that the Company produces in the Feed Ingredients segment are reported each business day on the Jacobsen indexIndex (the “Jacobsen”), an established North American trading exchange price publisher. The Jacobsen reports industry sales from the prior day's activity by product. TheIncluded on the Jacobsen includesare reported prices for finished products such as protein (primarily meat and bone meal (“MBM”), poultry meal (“PM”) and feather meal (“FM”)), hides, fats (primarily bleachable fancy tallow (“BFT”) and yellow grease (“YG”)) and corn, which is a substitute commodity for the Company's bakery by-product (“BBP”) as well as a range of other branded and value-added products, which are products of the Company's Feed Ingredients segment. In the U.S.United States and South America, the Company regularly monitors the Jacobsen for MBM, PM, FM, BFT, YG and corn because they provideit provides a daily indication of the Company's U.S. and Brazilian revenue performance against business plan benchmarks. In Europe and South America, the Company regularly monitors Thomson Reuters (“Reuters”) to track the competing commodities palm oil and soy meal.
Although the Jacobsen and Reuters provide useful metrics of performance, the Company's finished products are commodities that compete with other commodities such as corn, soybean oil, palm oil complex, soybean meal and heating oil on nutritional and functional values. Therefore, actual pricing for the Company's finished products, as well as competing products, can be quite volatile. In addition, neither the Jacobsen nor Reuters provides forward or future period pricing for the Company's commodities. The Jacobsen and Reuters prices quoted below are for delivery of the finished product at a specified location. Although the Company's prices generally move in concert with reported Jacobsen and Reuters prices, the Company's actual sales prices for its finished products may vary significantly from the Jacobsen and Reuters because of production and delivery timing differences and because the Company's finished products are delivered to multiple locations in different geographic regions which utilize alternative price indexes. In addition, certain of the Company's premium branded finished products may sell at prices that may be higher than the closest product on the related Jacobsen or Reuters index. During the thirdsecond quarter of fiscal 2017,2023, the Company's actual sales prices by product trended with the disclosed Jacobsen and Reuters prices.
Average Jacobsen and Reuters prices (at the specified delivery point) for the thirdsecond quarter of fiscal 2017,2023, compared to average Jacobsen and Reuters prices for the thirdsecond quarter of fiscal 20162022 are as follows:
|
| | | | | | | | | | | | | |
| Avg. Price 3rd 2nd Quarter
2017
2023 | Avg. Price 3rd 2nd Quarter
2016
2022 | Increase/(Decrease) | % Increase/(Decrease)
|
Jacobsen: | | | | |
MBM (Illinois) | $ 292.83/464.27/ton | $ 325.56/366.62/ton | $ (32.73)/97.65/ton | (10.126.6 | )% |
Feed Grade PM (Mid-South) | $ 285.14/485.56/ton | $ 364.37/385.83/ton | $ (79.23)/99.73/ton | (21.725.8 | )% |
Pet Food PM (Mid-South) | $ 577.02/934.67/ton | $ 593.47/801.37/ton | $ (16.45)/133.30/ton | (2.816.6 | )% |
Feather meal (Mid-South) | $ 408.82/577.87/ton | $ 432.57/571.58/ton | $ (23.75)/6.29/ton | (5.51.1 | )% |
BFT (Chicago) | $ 35.36/56.61/cwt | $ 28.59/79.51/cwt | $ 6.77/(22.90)/cwt | 23.7(28.8) | % |
YG (Illinois) | $ 27.20/46.06/cwt | $ 24.01/60.11/cwt | $ 3.19/(14.05)/cwt | 13.3(23.4) | % |
Corn (Illinois) | $ 3.56/6.68/bushel | $ 3.42/8.20/bushel | $ 0.14/(1.52)/bushel | 4.1(18.5) | % |
Reuters: | | | | |
Palm Oil (CIF Rotterdam) | $ 687.00/958.00/MT | $ 705.00/1,662.00/MT | $ (18.00)(704.00)/MT | (2.6(42.4) | )% |
Soy meal (CIF Rotterdam) | $ 337.00/516.00/MT | $ 403.00/550.00/MT | $ (66.00)(34.00)/MT | (16.4(6.2) | )% |
The following table shows the average Jacobsen and Reuters prices for the thirdsecond quarter of fiscal 2017,2023, compared to the average Jacobsen and Reuters prices for the secondfirst quarter of fiscal 2017.
2023.
|
| | | | | | | | | | | | | |
| Avg. Price 3rd 2nd Quarter
2017
2023 | Avg. Price 2nd 1st Quarter
2017
2023 | Increase/(Decrease) | % Increase/(Decrease)
|
Jacobsen: | | | | |
MBM (Illinois) | $ 292.83/464.27/ton | $ 251.91/435.85/ton | $ 40.92/28.42/ton | 16.26.5 | % |
Feed Grade PM (Mid-South) | $ 285.14/485.56/ton | $ 284.90/406.94/ton | $ 0.24/78.62/ton | 0.119.3 | % |
Pet Food PM (Mid-South) | $ 577.02/934.67/ton | $ 688.91/743.75/ton | $ (111.89)/190.92/ton | (16.225.7 | )% |
Feather meal (Mid-South) | $ 408.82/577.87/ton | $ 390.14/596.73/ton | $ 18.68/(18.86)/ton | 4.8(3.2) | % |
BFT (Chicago) | $ 35.36/56.61/cwt | $ 33.61/61.39/cwt | $ 1.75/(4.78)/cwt | 5.2(7.8) | % |
YG (Illinois) | $ 27.20/46.06/cwt | $ 25.64/51.10/cwt | $ 1.56/(5.04)/cwt | 6.1(9.9) | % |
Corn (Illinois) | $ 3.56/6.68/bushel | $ 3.73/6.84/bushel | $ (0.17)(0.16)/bushel | (4.6(2.3) | )% |
Reuters: | | | | |
Palm Oil (CIF Rotterdam) | $ 687.00/958.00/MT | $ 690.00/993.00/MT | $ (3.00)(35.00)/MT | (0.4(3.5) | )% |
Soy meal (CIF Rotterdam) | $ 337.00/516.00/MT | $ 341.00/595.00/MT | $ (4.00)(79.00)/MT | (1.2(13.3) | )% |
Segment Results
Segment operating income for the three months ended September 30, 2017July 1, 2023 was $33.3$356.7 million, which reflects a decreasean increase of $2.2$78.1 million or (6.2)%28.0% as compared to the three months ended October 1, 2016.July 2, 2022.
| | | | | | | | | | | | | | | | | |
(in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
Three Months Ended July 1, 2023 | | | | | |
Net Sales | $ | 1,141,661 | | $ | 476,093 | | $ | 139,867 | | $ | — | | $ | 1,757,621 | |
Cost of sales and operating expenses | 876,413 | | 371,095 | | 112,194 | | — | | 1,359,702 | |
Gross Margin | 265,248 | | 104,998 | | 27,673 | | — | | 397,919 | |
| | | | | |
Gross Margin % | 23.2 | % | 22.1 | % | 19.8 | % | — | % | 22.6 | % |
| | | | | |
Loss/(gain) on sale of assets | 322 | | 2 | | (65) | | — | | 259 | |
Selling, general and administrative expenses | 77,406 | | 33,684 | | 4,971 | | 20,690 | | 136,751 | |
Restructuring and asset impairment charges | — | | 896 | | — | | — | | 896 | |
Acquisition and integration costs | — | | — | | — | | 1,706 | | 1,706 | |
Change in fair value of contingent consideration | (7,499) | | — | | — | | — | | (7,499) | |
Depreciation and amortization | 82,575 | | 28,445 | | 8,567 | | 2,499 | | 122,086 | |
Equity in net income of Diamond Green Diesel | — | | — | | 212,964 | | — | | 212,964 | |
Segment operating income/(loss) | 112,444 | | 41,971 | | 227,164 | | (24,895) | | 356,684 | |
| | | | | |
Equity in net income of other unconsolidated subsidiaries | 1,849 | | — | | — | | — | | 1,849 | |
Segment income/(loss) | 114,293 | | 41,971 | | 227,164 | | (24,895) | | 358,533 | |
| | (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
Three Months Ended September 30, 2017 | | |
Three Months Ended July 2, 2022 | | Three Months Ended July 2, 2022 | |
Net Sales | $ | 575,543 |
| $ | 300,282 |
| $ | 61,856 |
| $ | — |
| $ | 937,681 |
| Net Sales | $ | 1,170,347 | | $ | 369,181 | | $ | 110,660 | | $ | — | | $ | 1,650,188 | |
Cost of sales and operating expenses | 449,608 |
| 240,160 |
| 54,260 |
| — |
| 744,028 |
| Cost of sales and operating expenses | 864,306 | | 280,964 | | 86,237 | | — | | 1,231,507 | |
Gross Margin | 125,935 |
| 60,122 |
| 7,596 |
| — |
| 193,653 |
| Gross Margin | 306,041 | | 88,217 | | 24,423 | | — | | 418,681 | |
| | | |
Gross Margin % | 21.9 | % | 20.0 | % | 12.3 | % | — | % | 20.7 | % | Gross Margin % | 26.1 | % | 23.9 | % | 22.1 | % | — | % | 25.4 | % |
| | | |
Selling, general and administrative expense | 45,471 |
| 25,633 |
| (461 | ) | 12,498 |
| 83,141 |
| |
Gain on sale of assets | | Gain on sale of assets | (964) | | (73) | | (18) | | — | | (1,055) | |
Selling, general and administrative expenses | | Selling, general and administrative expenses | 64,863 | | 22,855 | | 4,277 | | 15,781 | | 107,776 | |
Restructuring and asset impairment charges | | Restructuring and asset impairment charges | 8,557 | | — | | — | | — | | 8,557 | |
Acquisition and integration costs | | Acquisition and integration costs | — | | — | | — | | 5,358 | | 5,358 | |
Depreciation and amortization | 46,860 |
| 19,506 |
| 7,912 |
| 2,924 |
| 77,202 |
| Depreciation and amortization | 68,938 | | 14,449 | | 6,936 | | 2,790 | | 93,113 | |
Equity in net income of Diamond Green Diesel | | Equity in net income of Diamond Green Diesel | — | | — | | 73,680 | | — | | 73,680 | |
Segment operating income/(loss) | 33,604 |
| 14,983 |
| 145 |
| (15,422 | ) | 33,310 |
| Segment operating income/(loss) | 164,647 | | 50,986 | | 86,908 | | (23,929) | | 278,612 | |
| | | |
Equity in net income of unconsolidated subsidiaries | 523 |
| — |
| 7,180 |
| — |
| 7,703 |
| |
Equity in net income of other unconsolidated subsidiaries | | Equity in net income of other unconsolidated subsidiaries | 2,272 | | — | | — | | — | | 2,272 | |
Segment income/(loss) | 34,127 |
| 14,983 |
| 7,325 |
| (15,422 | ) | 41,013 |
| Segment income/(loss) | 166,919 | | 50,986 | | 86,908 | | (23,929) | | 280,884 | |
|
| | | | | | | | | | | | | | | |
(in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
Three Months Ended October 1, 2016 | | | | | |
Net Sales | $ | 531,413 |
| $ | 261,997 |
| $ | 60,446 |
| $ | — |
| $ | 853,856 |
|
Cost of sales and operating expenses | 413,602 |
| 211,318 |
| 46,247 |
| — |
| 671,167 |
|
Gross Margin | 117,811 |
| 50,679 |
| 14,199 |
| — |
| 182,689 |
|
| | | | | |
Gross Margin % | 22.2 | % | 19.3 | % | 23.5 | % | — | % | 21.4 | % |
| | | | | |
Selling, general and administrative expense | 38,943 |
| 25,352 |
| 1,332 |
| 10,881 |
| 76,508 |
|
Depreciation and amortization | 43,614 |
| 17,383 |
| 6,896 |
| 2,760 |
| 70,653 |
|
Segment operating income/(loss) | 35,254 |
| 7,944 |
| 5,971 |
| (13,641 | ) | 35,528 |
|
| | | | | |
Equity in net income of unconsolidated subsidiaries | (36 | ) | — |
| 18,174 |
| — |
| 18,138 |
|
Segment income/(loss) | 35,218 |
| 7,944 |
| 24,145 |
| (13,641 | ) | 53,666 |
|
Feed Ingredients Segment
Raw material volume. Overall, in In the three months ended September 30, 2017,July 1, 2023, the raw material processed by the Company's Feed Ingredients segment totaled 2.04approximately 3.1 million metric tons. Compared to the three months ended October 1, 2016July 2, 2022, overall raw material volume processed in the Feed Ingredients segment increased approximately 3.8%.
Sales. During the three months ended September 30, 2017 net sales for the Feed Ingredients segment were $575.5 million as compared to $531.4 million during the three months ended October 1, 2016, an increase of approximately $44.1 million or 8.3%15.2%. Net sales for fats were approximately $166.0 million and $145.3 million for the three months ended September 30, 2017 and October 1, 2016, respectively. Protein net sales were approximately $218.8 million and $205.4 million for the three months ended September 30, 2017 and October 1, 2016, respectively. Other rendering net sales, which include hides, pet food and service charges, were approximately $68.7 million and $63.0 million for the three months ended September 30, 2017 and October 1, 2016, respectively. Total rendering net sales were approximately $453.5 million and $413.7 million for the three months ended September 30, 2017 and October 1, 2016, respectively. Used cooking oil net sales were approximately $46.6 million and $41.4 million for the three months ended September 30, 2017 and October 1, 2016, respectively. Bakery net sales were approximately $51.9 million and $53.8 million for the three months ended September 30, 2017 and October 1, 2016, respectively, and other sales, which includes trap services, industrial residual services and organic fertilizer net sales were approximately $23.5 million and $22.5 million for the three months ended September 30, 2017 and October 1, 2016, respectively.
The increase was primarily due to the Valley Acquisition and the FASA Acquisition.
Sales. The decrease in net sales for the Feed Ingredients segment was primarily due to the following (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fats | Proteins | Other Rendering | Total Rendering | Used Cooking Oil | Bakery | Other | Total |
Net sales three months ended July 2, 2022 | $ | 498.8 | | $ | 351.1 | | $ | 64.2 | | $ | 914.1 | | $ | 152.6 | | $ | 89.7 | | $ | 13.9 | | $ | 1,170.3 | |
Increase (decrease) in sales volumes | 43.7 | | 59.6 | | — | | 103.3 | | 39.9 | | (11.6) | | — | | 131.6 | |
Increase (decrease) in finished product prices | (138.3) | | 21.9 | | — | | (116.4) | | (45.7) | | (10.8) | | — | | (172.9) | |
Increase (decrease) due to currency exchange rates | (0.2) | | 1.4 | | 0.1 | | 1.3 | | (0.5) | | — | | — | | 0.8 | |
Other change | — | | — | | 9.1 | | 9.1 | | — | | — | | 2.7 | | 11.8 | |
Total change | (94.8) | | 82.9 | | 9.2 | | (2.7) | | (6.3) | | (22.4) | | 2.7 | | (28.7) | |
Net sales three months ended July 1, 2023 | $ | 404.0 | | $ | 434.0 | | $ | 73.4 | | $ | 911.4 | | $ | 146.3 | | $ | 67.3 | | $ | 16.6 | | $ | 1,141.6 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fats | Proteins | Other Rendering | Total Rendering | Used Cooking Oil | Bakery | Other | Total |
Net sales three months ended October 1, 2016 | $ | 145.3 |
| $ | 205.4 |
| $ | 63.0 |
| $ | 413.7 |
| $ | 41.4 |
| $ | 53.8 |
| $ | 22.5 |
| $ | 531.4 |
|
Increase/(decrease) in sales volumes | 8.1 |
| 7.5 |
| — |
| 15.6 |
| 0.5 |
| (2.7 | ) | — |
| 13.4 |
|
Increase/(decrease) in finished product prices | 10.6 |
| 1.3 |
| — |
| 11.9 |
| 4.6 |
| 0.8 |
| — |
| 17.3 |
|
Increase/(decrease) due to currency exchange rates | 2.0 |
| 4.6 |
| 2.2 |
| 8.8 |
| 0.1 |
| — |
| — |
| 8.9 |
|
Other change | — |
| — |
| 3.5 |
| 3.5 |
| — |
| — |
| 1.0 |
| 4.5 |
|
Total change | 20.7 |
| 13.4 |
| 5.7 |
| 39.8 |
| 5.2 |
| (1.9 | ) | 1.0 |
| 44.1 |
|
Net sales three months ended September 30, 2017 | $ | 166.0 |
| $ | 218.8 |
| $ | 68.7 |
| $ | 453.5 |
| $ | 46.6 |
| $ | 51.9 |
| $ | 23.5 |
| $ | 575.5 |
|
Margins. In the Feed Ingredients segment for the three months ended September 30, 2017,July 1, 2023, the gross margin percentage decreased slightly to 21.9%23.2% as compared to 22.2%26.1% for the samecomparable period of fiscal 2016.2022. The decrease in margin is primarily due to lower overall finished product prices as well as lower overall margins from the Valley Acquisition and the FASA Acquisition as compared to fiscal 2022.
Segment operating income. Feed Ingredients operating income for the three months ended September 30, 2017July 1, 2023 was $33.6$112.4 million, a decrease of $1.7$(52.2) million or (4.8)(31.7)% as compared to the three months ended October 1, 2016.July 2, 2022. The decrease was primarily due to lower overall finished product prices and an increase in selling, general and administrative expenses and depreciation and amortization from the Valley Acquisition and FASA Acquisition as compared to fiscal 2022.
Food Ingredients Segment operating income was down in
Raw material volume. In the three months ended September 30, 2017 as compared to the same period in fiscal 2016 due to higher payroll related benefits and higher depreciation from new plant locations that were not operating in the three months ended OctoberJuly 1, 2016 that more than offset increased raw material volumes and increased finished fat product prices.
Food Ingredients Segment
Raw material volume. Overall, for the three months ended September 30, 2017,2023, the raw material processed by the Company's Food Ingredients segment totaled 285,000approximately 331,000 metric tons. As comparedCompared to the three months ended October 1, 2016,July 2, 2022, overall raw material volume processed in the Food Ingredients segment increased by approximately 9.2%21.7%. The increase was primarily due to the Gelnex Acquisition.
Sales. Overall Net sales increased in the Food Ingredients segment as a result of higher gelatin, edible fat and casingprimarily due to the increased sales volumes.recognized from the Gelnex Acquisition.
Margins. In the Food Ingredients segment for the three months ended September 30, 2017,July 1, 2023, the gross margin percentage increaseddecreased to 20.0%22.1% as compared to 19.3% during23.9% for the comparable period of fiscal 2016.2022. The increasedecrease was primarily due to improved performanceslower margins from the Gelnex Acquisition as a result of a step up of inventory value in the China, South American and North American markets for gelatin and increased supply volumes and prices for edible fats.purchase accounting as compared to fiscal 2022.
Segment operating income. Food Ingredients operating income was $15.0$42.0 million for the three months ended September 30, 2017, an increaseJuly 1, 2023, a decrease of $7.1$9.0 million or 89.9%17.6% as compared to the three months ended October 1, 2016.July 2, 2022. The earningsdecrease was primarily due to a decrease in margins and an increase in selling, general and administrative expenses and depreciation and amortization expense from the gelatin business were upGelnex Acquisition as compared to the prior year primarily due to improved performance in the Company's China, North American and South American markets. The Company's edible fat markets improved due to increased volumes and fat prices. The casings business delivered an improved performance due to higher supply volumes and higher demand for casings.fiscal 2022.
Fuel Ingredients Segment
Raw material volume. Overall, in In the three months ended September 30, 2017,July 1, 2023, the raw material processed by the Company's Fuel Ingredients segment totaled 284,000approximately 347,000 metric tons. As comparedCompared to the three months ended October 1, 2016July 2, 2022, overall raw material volume processed in the Fuel Ingredients segment decreased by approximately (2.2)%1.1%.
Sales. Overall Net sales increased in the Fuel Ingredients segment primarily due to generally higher fat prices going to biofuelssales volumes in the three months ended September 30, 2017 as compared to the same period in fiscal 2016.Europe.
Margins. In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the three months ended September 30, 2017,July 1, 2023, the gross margin percentage decreased to 12.3%19.8% as compared to 23.5%22.1% for the comparable period of fiscal 2016. This2022. The decrease was primarily due to the lackimpact of blenders tax creditsdecreases in North Americasales prices for our products sold into the energy markets that negatively impacted margins.
Segment operating income. The Company's Fuel Ingredients segment operating income (inclusive of the equity contribution from the DGD Joint Venture) for the three months ended September 30, 2017July 1, 2023 was $227.2 million, an increase of $140.3 million or 161.4% as compared to the same period in fiscal 2016 and lower supply2022. The increase was primarily due to increased volumes and curtailed operationsfrom production at Ecoson to address current regulatory requirements.
Segment operating income. Exclusive of the DGD Joint Venture, the Company's Fuel Ingredients segment income for the three months ended September 30, 2017 was $0.1 million, a decrease of $5.9 million or (98.3)% as compared to the same period in fiscal 2016. For the three months ended September 30, 2017, the North American region results did not include the blenders tax credit, while fiscal 2016 included the blenders tax credit. Higher earnings in Rendac due to increased supply volumes for the three months ended September 30, 2017 were offset by decreased earnings in Ecoson due toVenture's Port Arthur plant and lower supply volumes and curtailed operationsraw material prices at Ecoson to address current regulatory requirements as compared to the same period in the prior year. In addition, selling, general and administrative costs were improved for the three months ended September 30, 2017, mainly due to business interruption insurance of approximately $5.1 million related to a fire incident at a Rendac operation during the period.
Including the DGD Joint Venture, the Fuel Ingredients segment income for the three months ended September 30, 2017 was $7.3 million, as compared to segment income of $24.1 million in the same period of 2016. The decrease of $16.8 million was primarily related to the lack of blenders tax credits for the three months ended September 30, 2017 as compared to the same period in fiscal 2016.Venture.
Foreign Currency Exchange
During the thirdsecond quarter of fiscal 2017,2023, overall the euro andstrengthened while the Canadian dollar strengthenedweakened and the Brazilian real remained unchanged against the U.S. dollar as compared to the same period in fiscal 2016.2022. Using actual results for the three months ended September 30, 2017July 1, 2023 and using the prior year's average currency rate for the three months ended October 1, 2016,July 2, 2022, foreign currency translation would result in a decrease in operating income of approximately $3.6$1.6 million. The average rates assumptions used in this calculation were the actual fiscal average rate for the three months ended OctoberJuly 1, 2016 of2023 were €1.00:USD$1.12$1.09, R$1.00:$0.20 and CAD$C$1.00:USD$0.77$0.74 as compared to the average raterates for the three months ended September 30, 2017July 2, 2022 of €1.00:USD$1.18$1.06, R$1.00:$0.20 and CAD$C$1.00:USD$0.80,$0.78, respectively.
Corporate Activities
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $12.5approximately $20.7 million during the three months ended September 30, 2017,July 1, 2023, compared to $10.9approximately $15.8 million during the three months ended October 1, 2016,July 2, 2022, an increase of $1.6$4.9 million. The increase wasis primarily due to higher costs for corporate payroll related benefits as compared to the three months ended October 1, 2016. compensation and benefits.
DepreciationAcquisition and Amortization. DepreciationIntegration costs. Acquisition and amortization charges increased slightly by $0.1 million to $2.9integration costs were approximately $1.7 million during the three months ended September 30, 2017,July 1, 2023 as compared to $5.4 million for the same period in fiscal 2022. These costs decreased as we moved into the integration phase on the most recent acquisitions as compared to the prior year acquisition costs incurred on several acquisitions in the three months ended July 2, 2022.
Depreciation and Amortization. Depreciation and amortization charges were approximately $2.5 million for the three months ended July 1, 2023 as compared to $2.8 million for the three months ended July 2, 2022.
Interest Expense. Interest expense was $70.2 million during the three months ended October 2, 2016. The increase was due to additions to the Company's corporate assets in the third quarter of fiscal 2017 asJuly 1, 2023, compared to fiscal 2016.
Interest Expense. Interest expense was $22.5$24.0 million during the three months ended September 30, 2017, compared to $23.9 million during the three months ended October 1, 2016, a decreaseJuly 2, 2022, an increase of $1.4$46.2 million. The decrease wasincrease in interest expense is primarily due to loweran increase in debt balances foroutstanding, including increased interest expense from the Companyissuance of the 6% Senior Notes due 2030, the borrowing of all amounts under the term A-1, term A-2, term A-3 and term A-4 facilities, all of which were borrowed to fund acquisitions, and higher borrowings under the revolving credit facility as compared to the same period in fiscal 2016.2022.
Foreign Currency Gains/(Losses)Gain/(Loss). Foreign currency lossesgains were $2.1$2.5 million during the three months ended September 30, 2017, as compared to no loss for the three months ended OctoberJuly 1, 2016.2023 as compared to foreign currency losses of $4.4 million for the three months ended July 2, 2022. The increase in currency gains is due primarily to an increase in gains on the revaluation of an intercompany note as compared to losses from non-functional currency assets and liabilities in the same period of fiscal 2022.
Other Income/(Expense), net. Other income was $5.1 million in the three months ended July 1, 2023, compared to other expense of $(0.3) million for the three months ended July 2, 2022. The increase in other income was primarily due to losses on non-designated foreign exchange hedge contractscasualty loss insurance proceeds received for the prior year Ward plant fire and an increase in interest income that was partially offset by an increase in the non-service component of pension expense and other miscellaneous non-operating expenses as compared to the same period in fiscal 2016.2022.
Other Income/Expense. Other expense was $1.4 million in the three months ended September 30, 2017, compared to $2.0 million in the three months ended October 1, 2016. The decrease in other expense in the three months ended September 30, 2017 as compared to the same period in fiscal 2016 was primarily due to corn hedge ineffectiveness gains on the Company's cash flow hedges and an increase in interest income that more than offset a legal settlement charge.
Equity in Net Income in Investment of Other Unconsolidated Subsidiaries. This The change in this line item is not significant and primarily represents the Company's pro rata share of the income of the DGD Joint Venture for the three months ended September 30, 2017. The net income for the three months ended September 30, 2017 was $7.7 million compared to $18.1 million for the three months ended October 1, 2016. The $10.4 million decrease was primarily due to not recording the blenders tax credits in fiscal 2017 as compared to blenders tax credits recorded at the DGD Joint Venture in the third quarter of fiscal 2016.from foreign unconsolidated subsidiaries.
Income Taxes. The Company recorded income tax expense of $6.3$40.7 million for the three months ended September 30, 2017,July 1, 2023, compared to $0.7$47.3 million of income tax benefit recorded in the three months ended October 1, 2016, an increase of $7.0 million. The increase in tax expense is primarily due to the expiration of the biofuel tax incentives. The quarterly income tax expense is based on the Company’s estimate of its expected tax rate for the full year and any discrete items recognized during the period. The quarterly income tax expense for the three months ended September 30, 2017 and October 1, 2016 is calculated as the difference in the income tax provision for the nine months ended September 30, 2017 and October 1, 2016 and the income tax provision for the six months ended July 1, 2017 and July 2, 2016, respectively.
2022, a decrease of $6.6 million. The effective tax rate for the three months ended September 30, 2017 was 42.0%.July 1, 2023 and July 2, 2022 is 13.8% and 18.8%, respectively. The effective tax rate for the three months ended September 30, 2017July 1, 2023 differs from the federal statutory rate of 35%21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes) and biofuel tax incentives. The effective tax rate for the three months ended July 2, 2022 differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), Subpart F income, losses that provided no tax benefit and discrete items.
The effective tax rate for the three months ended October 1, 2016 was (2.6)%. The effective tax rate for the three months ended October 1, 2016 differed from the statutory rate of 35% due primarily to biofuel tax incentives, the relative mix of earnings among jurisdictions with differentand discrete items, including excess tax rates (including foreign withholding taxes and state income taxes) Subpart F income and losses that provided no tax benefit. In addition, the effective tax rate for the three months ended October
1, 2016 was impacted due to changes in the relative proportion of pre-tax income and losses by jurisdiction used in determining the Company’s estimated annual effective tax rate for the 2016 fiscal year.
benefits from stock compensation. The Company's effective tax rate excluding biofuel tax incentives and discrete items is 49%25.8% for the three months ended September 30, 2017,July 1, 2023, compared to (1.1)%26.6% for the three months ended October 1, 2016, an increase of 501 basis points primarily due to the expiration of the biofuel tax incentive and losses that provided no tax benefit.July 2, 2022.
Non-U.S. GAAP Measures
Adjusted EBITDA is not a recognized accounting measurement under GAAP; it should not be considered as an alternative to net income, as a measure of operating results, or as an alternative to cash flow as a measure of liquidity. It is presented here not as an alternative to net income, but rather as a measure of the Company's operating performance. Since EBITDA (generally, net income plus interest expenses,expense, taxes, depreciation and amortization) is not calculated identically by all companies, the presentation in this report may not be comparable to EBITDA or adjustedAdjusted EBITDA presentations disclosed by other companies. Adjusted EBITDA is calculated below and represents for any relevant period, net income/(loss) plus depreciation and amortization, restructuring, acquisition and integration costs, goodwill and long-lived asset impairment, change in fair value of contingent consideration, interest expense, (income)/loss from discontinued operations, net of tax, income tax provision, other income/(expense) and equity in net (income)/loss of unconsolidated subsidiary. Management believes that Adjusted EBITDA is useful in evaluating the Company's operating performance compared to that of other companies in its industry because the calculation of Adjusted EBITDA generally eliminates the effects of financing, income taxes and certain non-cash and other items that may vary for different companies for reasons unrelated to overall operating performance.
AsPro forma Adjusted EBITDA to Foreign Currency is not a result,recognized accounting measurement under GAAP. The Company evaluates the impact of foreign currency on its adjusted EBITDA. DGD Joint Venture Adjusted EBITDA (Darling's share) is not reflected in the Adjusted EBITDA or the Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP).
The Company’s management uses Adjusted EBITDA as a measure to evaluate performance and for other discretionary purposes. In addition to the foregoing, management also uses or will use Adjusted EBITDA to measure compliance with certain financial covenants under the Company’s Senior Secured Credit Facilities, 5.375%6% Notes, 5.25% Notes and 4.75%3.625% Notes that were outstanding at September 30, 2017.July 1, 2023. However, the amounts shown below for Adjusted EBITDA differ
from the amounts calculated under similarly titled definitions in the Company’s Senior Secured Credit Facilities, 5.375%6% Notes, 5.25% Notes and 4.75%3.625% Notes, as those definitions permit further adjustments to reflect certain other non-recurring costs, non-cash charges and cash dividends from the DGD Joint Venture. Additionally, the Company evaluates the impact of foreign exchange on operating cash flow, which is defined as segment operating income (loss) plus depreciation and amortization.
DGD Joint Venture Adjusted EBITDA (Darling's share) is not a recognized accounting measurement under GAAP; it should not be considered as an alternative to net income or equity in net income of Diamond Green Diesel, as a measure of operating results, or as an alternative to cash flow as a measure of liquidity and is not intended to be a presentation in accordance with GAAP. The Company calculates DGD Joint Venture Adjusted EBITDA (Darling's share) by taking DGD's operating income plus DGD's depreciation, amortization and accretion expense and then multiplying by 50% to get Darling's share of DGD's EBITDA.
Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA and (Non-GAAP) Pro Forma Adjusted EBITDA
ThirdSecond Quarter 2017 As2023 as Compared to ThirdSecond Quarter 20162022
| | | | | | | | |
| Three Months Ended |
(dollars in thousands) | July 1, 2023 | July 2, 2022 |
Net income attributable to Darling | $ | 252,383 | | $ | 201,996 | |
Depreciation and amortization | 122,086 | | 93,113 | |
Interest expense | 70,193 | | 24,008 | |
Income tax expense | 40,712 | | 47,333 | |
Restructuring and asset impairment charges | 896 | | 8,557 | |
Acquisition and integration costs | 1,706 | | 5,358 | |
Change in fair value of contingent consideration | (7,499) | | — | |
Foreign currency loss/(gain) | (2,490) | | 4,412 | |
Other expense/(income), net | (5,079) | | 302 | |
| | |
Equity in net income of Diamond Green Diesel | (212,964) | | (73,680) | |
Equity in net income of other unconsolidated subsidiaries | (1,849) | | (2,272) | |
Net income attributable to non-controlling interests | 2,814 | | 2,833 | |
Darling's Adjusted EBITDA | $ | 260,909 | | $ | 311,960 | |
| | |
Foreign currency exchange impact (1) | (1,550) | | — | |
Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) | $ | 259,359 | | $ | 311,960 | |
| | |
DGD Joint Venture Adjusted EBITDA (Darling's Share) | $ | 247,398 | | $ | 90,611 | |
| | |
Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA | $ | 508,307 | | $ | 402,571 | |
|
| | | | | | |
| Three Months Ended |
(dollars in thousands) | September 30, 2017 | October 1, 2016 |
Net income/(loss) attributable to Darling | $ | 7,761 |
| $ | 28,694 |
|
Depreciation and amortization | 77,202 |
| 70,653 |
|
Interest expense | 22,531 |
| 23,867 |
|
Income tax expense/(benefit) | 6,296 |
| (744 | ) |
Foreign currency loss/(gain) | 2,055 |
| (354 | ) |
Other expense/(income), net | 1,447 |
| 2,007 |
|
Equity in net (income)/loss of unconsolidated subsidiaries | (7,703 | ) | (18,138 | ) |
Net income attributable to non-controlling interests | 923 |
| 196 |
|
Adjusted EBITDA | $ | 110,512 |
| $ | 106,181 |
|
| | |
Foreign currency exchange impact (1) | (3,574 | ) | — |
|
Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) | $ | 106,938 |
| $ | 106,181 |
|
| | |
DGD Joint Venture Adjusted EBITDA (Darling's Share) | $ | 10,570 |
| $ | 22,543 |
|
(1) The average rates assumption used in this calculation was the actual fiscal average rate for the three months ended September 30, 2017 ofJuly 1, 2023 were €1.00:USD$1.18$1.09, R$1.00:$0.20 and CAD$C$1.00:USD$0.80$0.74 as compared to the average rate for the three months ended October 1, 2016July 2 of €1.00:USD$1.12$1.06, R$1.00:$0.20 and CAD$C$1.00:USD$0.77,$0.78, respectively.
For the three months ended September 30, 2017, the Company generated Adjusted EBITDA of $110.5 million, as compared to $106.2 million in the same period in fiscal 2016. The increase was primarily attributable to higher earnings in the Food Ingredients segment in fiscal 2017 as compared to the same period in fiscal 2016.
On a Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) basis, the Company generated $106.9 million in the three months ended September 30, 2017, as compared to a Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) of $106.2 million in the same period in fiscal 2016.
DGD Joint Venture Adjusted EBITDA (Darling's share) is not reflected in the Adjusted EBITDA, the Pro forma Adjusted EBITDA, or the Pro forma Adjusted EBITDA to Foreign Currency. See Note 7 to the Company's Consolidated Financial Statements included herein for financial information regarding the DGD Joint Venture.
NineSix Months Ended September 30, 2017July 1, 2023 Compared to NineSix Months Ended October 1, 2016July 2, 2022
Operating Performance Metrics
Operating performance metrics which management routinely monitors as an indicator of operating performance include:
•Finished product commodity prices
•Segment results
•Foreign currency exchange
•Corporate activities
•Non-U.S. GAAP measures
These indicators and their importance are discussed below.
Finished Product Commodity Prices
During the first ninesix months of fiscal 2017,2023, the Company's actual sales prices by product trended with the disclosed Jacobsen and Reuters prices.
Average Jacobsen and Reuters prices (at the specified delivery point) for the first ninesix months of fiscal 2017,2023, compared to average Jacobsen and Reuters prices for the first ninesix months of fiscal 20162022 are as follows:
|
| | | | | | | | | | | | | |
| Avg. Price First NineSix Months
2017
2023 | Avg. Price First NineSix Months
2016
2022 | Increase/(Decrease) | % Increase/(Decrease)
|
Jacobsen: | | | | |
MBM (Illinois) | $ 271.81/450.06/ton | $ 291.60/341.92/ton | $ (19.79)/108.14/ton | (6.831.6 | )% |
Feed Grade PM (Mid-South) | $ 285.82/446.25/ton | $ 306.35/376.43/ton | $ (20.53)/69.82/ton | (6.718.5 | )% |
Pet Food PM (Mid-South) | $ 633.94/839.21/ton | $ 552.53/781.53/ton | $ 81.41/57.68/ton | 14.77.4 | % |
Feather meal (Mid-South) | $ 407.30/587.30/ton | $ 356.23/548.45/ton | $ 51.07/38.85/ton | 14.37.1 | % |
BFT (Chicago) | $ 33.44/59.00/cwt | $ 29.41/75.45/cwt | $ 4.03/(16.45)/cwt | 13.7(21.8) | % |
YG (Illinois) | $ 25.54/48.58/cwt | $ 24.01/57.01/cwt | $ 1.53/(8.43)/cwt | 6.4(14.8) | % |
Corn (Illinois) | $ 3.66/6.76/bushel | $ 3.74/7.55/bushel | $ (0.08)(0.79)/bushel | (2.1(10.5) | )% |
Reuters: | | | | |
Palm Oil (CIF Rotterdam) | $ 714.00/976.00/MT | $ 680.00/1,608.00/MT | $ 34.00/(632.00)/MT | 5.0(39.3) | % |
Soy meal (CIF Rotterdam) | $ 349.00/556.00/MT | $ 380.00/563.00/MT | $ (31.00)(7.00)/MT | (8.2(1.2) | )% |
Segment Results
Segment operating income for the ninesix months ended September 30, 2017July 1, 2023 was $101.8$612.5 million, which reflects a decreasean increase of $14.9$101.0 million or (12.8)%19.7% as compared to the ninesix months ended October 1, 2016. Adjusting the segment operating income for the nine months ended October 1, 2016 to reflect the net change due to the acquisition and integration costs, operating income would have been $117.1 million in the nine months ended October 1, 2016.July 2, 2022.
| | | | | | | | | | | | | | | | | |
(in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
Six Months Ended July 1, 2023 | | | | | |
Net Sales | $ | 2,379,155 | | $ | 872,485 | | $ | 297,153 | | $ | — | | $ | 3,548,793 | |
Cost of sales and operating expenses | 1,826,485 | | 661,210 | | 238,980 | | — | | 2,726,675 | |
Gross Margin | 552,670 | | 211,275 | | 58,173 | | — | | 822,118 | |
| | | | | |
Gross Margin % | 23.2 | % | 24.2 | % | 19.6 | % | — | % | 23.2 | % |
| | | | | |
Gain on sale of assets | (20) | | (19) | | (29) | | — | | (68) | |
Selling, general and administrative expenses | 152,097 | | 66,806 | | 11,163 | | 42,151 | | 272,217 | |
Restructuring and asset impairment charges | 92 | | 5,328 | | — | | — | | 5,420 | |
Acquisition and integration costs | — | | — | | — | | 8,728 | | 8,728 | |
Change in fair value of contingent consideration | (7,499) | | — | | — | | — | | (7,499) | |
Depreciation and amortization | 172,895 | | 42,918 | | 16,960 | | 5,319 | | 238,092 | |
Equity in net income of Diamond Green Diesel | — | | — | | 307,301 | | — | | 307,301 | |
Segment operating income/(loss) | 235,105 | | 96,242 | | 337,380 | | (56,198) | | 612,529 | |
| | | | | |
Equity in net income of other unconsolidated subsidiaries | 1,969 | | — | | — | | — | | 1,969 | |
Segment income/(loss) | 237,074 | | 96,242 | | 337,380 | | (56,198) | | 614,498 | |
| | (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
Nine Months Ended September 30, 2017 | | |
Six Months Ended July 2, 2022 | | Six Months Ended July 2, 2022 | |
Net Sales | $ | 1,677,286 |
| $ | 847,897 |
| $ | 188,918 |
| $ | — |
| $ | 2,714,101 |
| Net Sales | $ | 2,049,785 | | $ | 723,995 | | $ | 242,742 | | $ | — | | $ | 3,016,522 | |
Cost of sales and operating expenses | 1,304,454 |
| 674,991 |
| 154,974 |
| — |
| 2,134,419 |
| Cost of sales and operating expenses | 1,509,829 | | 551,276 | | 190,979 | | — | | 2,252,084 | |
Gross Margin | 372,832 |
| 172,906 |
| 33,944 |
| — |
| 579,682 |
| Gross Margin | 539,956 | | 172,719 | | 51,763 | | — | | 764,438 | |
| | | |
Gross Margin % | 22.2 | % | 20.4 | % | 18.0 | % | — | % | 21.4 | % | Gross Margin % | 26.3 | % | 23.9 | % | 21.3 | % | — | % | 25.3 | % |
| | | |
Selling, general and administrative expense | 134,444 |
| 77,480 |
| 5,732 |
| 38,933 |
| 256,589 |
| |
Gain on sale of assets | | Gain on sale of assets | (1,305) | | (82) | | (57) | | — | | (1,444) | |
Selling, general and administrative expenses | | Selling, general and administrative expenses | 121,072 | | 49,699 | | 8,197 | | 30,840 | | 209,808 | |
Restructuring and asset impairment charges | | Restructuring and asset impairment charges | 8,557 | | — | | — | | — | | 8,557 | |
Acquisition and integration costs | | Acquisition and integration costs | — | | — | | — | | 9,131 | | 9,131 | |
Depreciation and amortization | 134,933 |
| 55,291 |
| 22,472 |
| 8,610 |
| 221,306 |
| Depreciation and amortization | 123,288 | | 29,899 | | 13,610 | | 5,562 | | 172,359 | |
Equity in net income of Diamond Green Diesel | | Equity in net income of Diamond Green Diesel | — | | — | | 145,484 | | — | | 145,484 | |
Segment operating income/(loss) | 103,455 |
| 40,135 |
| 5,740 |
| (47,543 | ) | 101,787 |
| Segment operating income/(loss) | 288,344 | | 93,203 | | 175,497 | | (45,533) | | 511,511 | |
| | | |
Equity in net income of unconsolidated subsidiaries | 763 |
| — |
| 15,906 |
| — |
| 16,669 |
| |
Equity in net income of other unconsolidated subsidiaries | | Equity in net income of other unconsolidated subsidiaries | 3,632 | | — | | — | | — | | 3,632 | |
Segment income/(loss) | 104,218 |
| 40,135 |
| 21,646 |
| (47,543 | ) | 118,456 |
| Segment income/(loss) | 291,976 | | 93,203 | | 175,497 | | (45,533) | | 515,143 | |
|
| | | | | | | | | | | | | | | |
(in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total |
Nine Months Ended October 1, 2016 | | | | | |
Net Sales | $ | 1,550,539 |
| $ | 782,014 |
| $ | 178,285 |
| $ | — |
| $ | 2,510,838 |
|
Cost of sales and operating expenses | 1,202,404 |
| 611,151 |
| 133,620 |
| — |
| 1,947,175 |
|
Gross Margin | 348,135 |
| 170,863 |
| 44,665 |
| — |
| 563,663 |
|
| | | | | |
Gross Margin % | 22.5 | % | 21.8 | % | 25.1 | % | — | % | 22.4 | % |
| | | | | |
Selling, general and administrative expense | 127,513 |
| 69,566 |
| 4,986 |
| 32,070 |
| 234,135 |
|
Acquisition and integration costs | — |
| — |
| — |
| 401 |
| 401 |
|
Depreciation and amortization | 130,110 |
| 51,823 |
| 20,999 |
| 9,508 |
| 212,440 |
|
Segment operating income/(loss) | 90,512 |
| 49,474 |
| 18,680 |
| (41,979 | ) | 116,687 |
|
| | | | | |
Equity in net income of unconsolidated subsidiaries | 290 |
| — |
| 37,343 |
| — |
| 37,633 |
|
Segment income/(loss) | 90,802 |
| 49,474 |
| 56,023 |
| (41,979 | ) | 154,320 |
|
Feed Ingredients Segment
Raw material volume. Overall, in In the ninesix months ended September 30, 2017,July 1, 2023, the raw material processed by the Company's Feed Ingredients segment totaled 6.11approximately 6.3 million metric tons. Compared to the ninesix months ended October 1, 2016July 2, 2022, overall raw material volume processed in the Feed Ingredients segment increased approximately 10.4%26.2%. The increase was primarily due to the Valley Acquisition and the FASA Acquisition.
Sales. During the nine months ended September 30, 2017 net sales for the Feed Ingredients segment were $1,677.3 million as compared to $1,550.5 million during the nine months ended October 1, 2016, an increase of approximately $126.8 million or 8.2%. Net sales for fats were approximately $484.4 million and $423.5 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. Protein net sales were approximately $612.7 million and $576.5 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. Other rendering net sales, which include hides, pet food and service charges, were approximately $215.8 million and $200.0 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. Total rendering net sales were approximately $1,312.9 million and $1,200.0 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. Used cooking oil net sales were approximately $136.1 million and $117.4 million for the nine months ended September 30, 2017 and October 1, 2016, respectively. Bakery net sales were approximately $159.5 million and $164.7 million for the nine months ended September 30, 2017 and October 1, 2016, respectively, and other sales, which includes trap services, industrial residual services and organic fertilizer net sales were approximately $68.8 million and $68.4 million for the nine months ended September 30, 2017 and October 1, 2016, respectively.
The increase in net sales for the Feed Ingredients segment was primarily due to the following (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fats | Proteins | Other Rendering | Total Rendering | Used Cooking Oil | Bakery | Other | Total |
Net sales six months ended July 2, 2022 | $ | 867.3 | | $ | 621.3 | | $ | 121.7 | | $ | 1,610.3 | | $ | 247.6 | | $ | 168.1 | | $ | 23.8 | | $ | 2,049.8 | |
Increase (decrease) in sales volumes | 153.3 | | 177.4 | | — | | 330.7 | | 62.2 | | (18.4) | | — | | 374.5 | |
Increase (decrease) in finished product prices | (124.8) | | 81.4 | | — | | (43.4) | | (24.5) | | (7.5) | | — | | (75.4) | |
Increase (decrease) due to currency exchange rates | (0.2) | | 3.0 | | 0.2 | | 3.0 | | (1.3) | | — | | — | | 1.7 | |
Other change | — | | — | | 18.2 | | 18.2 | | — | | — | | 10.4 | | 28.6 | |
Total change | 28.3 | | 261.8 | | 18.4 | | 308.5 | | 36.4 | | (25.9) | | 10.4 | | 329.4 | |
Net sales six months ended July 1, 2023 | $ | 895.6 | | $ | 883.1 | | $ | 140.1 | | $ | 1,918.8 | | $ | 284.0 | | $ | 142.2 | | $ | 34.2 | | $ | 2,379.2 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fats | Proteins | Other Rendering | Total Rendering | Used Cooking Oil | Bakery | Other | Total |
Net sales nine months ended October 1, 2016 | $ | 423.5 |
| $ | 576.5 |
| $ | 200.0 |
| $ | 1,200.0 |
| $ | 117.4 |
| $ | 164.7 |
| $ | 68.4 |
| $ | 1,550.5 |
|
Increase/(decrease) in sales volumes | 28.1 |
| 26.0 |
| — |
| 54.1 |
| (0.3 | ) | (4.2 | ) | — |
| 49.6 |
|
Increase/(decrease) in finished product prices | 32.7 |
| 9.8 |
| — |
| 42.5 |
| 18.9 |
| (1.0 | ) | — |
| 60.4 |
|
Increase/(decrease) due to currency exchange rates | 0.1 |
| 0.4 |
| (0.7 | ) | (0.2 | ) | 0.1 |
| — |
| — |
| (0.1 | ) |
Other change | — |
| — |
| 16.5 |
| 16.5 |
| — |
| — |
| 0.4 |
| 16.9 |
|
Total change | 60.9 |
| 36.2 |
| 15.8 |
| 112.9 |
| 18.7 |
| (5.2 | ) | 0.4 |
| 126.8 |
|
Net sales nine months ended September 30, 2017 | $ | 484.4 |
| $ | 612.7 |
| $ | 215.8 |
| $ | 1,312.9 |
| $ | 136.1 |
| $ | 159.5 |
| $ | 68.8 |
| $ | 1,677.3 |
|
Margins. In the Feed Ingredients segment for the ninesix months ended September 30, 2017,July 1, 2023, the gross margin percentage decreased slightly to 22.2%23.2% as compared to 22.5%.26.3% for the comparable period of fiscal 2022. The decrease in margin is primarily due to lower overall finished product prices as well as lower overall margins from the Valley Acquisition and the FASA Acquisition as compared to fiscal 2022.
Segment operating income.income. Feed Ingredients operating income for the ninesix months ended September 30, 2017July 1, 2023 was $103.5$235.1 million, an increasea decrease of $13.0$(53.2) million or 14.4%(18.5)% as compared to the ninesix months ended October 1, 2016. Earnings for the Feed Ingredients segment were higherJuly 2, 2022. The decrease was primarily due to anthe lower overall increase in sales volumes, finished product prices and higher raw material volumesan increase in selling, general and administrative expenses and depreciation and amortization from the Valley Acquisition and FASA Acquisition as compared to the same period in fiscal 2016.2022.
Food Ingredients Segment
Raw material volume. Overall, for In the ninesix months ended September 30, 2017,July 1, 2023, the raw material processed by the Company's Food Ingredients segment totaled 836,000approximately 596,000 metric tons. As comparedCompared to the ninesix months ended October 1, 2016,July 2, 2022, overall raw material volume processed in the Food Ingredients segment increased by approximately 9.9%8.4%. The increase was primarily due to the Gelnex Acquisition.
Sales. Overall Net sales increased in the Food Ingredients segment as a result of higherprimarily due to the increased sales volumes in bothrecognized from the gelatin and casing businesses.Gelnex Acquisition.
Margins. In the Food Ingredients segment for the ninesix months ended September 30, 2017,July 1, 2023, the gross margin percentage decreasedincreased to 20.4%24.2% as compared to 21.8% during23.9% for the comparable period of fiscal 2016.2022. The decreaseincrease was primarily due to increased sales of higher margin hydrolyzed collagen that was partially offset by lower margins from the Gelnex Acquisition as a result of operational inefficiencies and macroeconomic factorsa step up of inventory value in the South American gelatin market.purchase accounting as compared to fiscal 2022.
Segment operating income. Food Ingredients operating income was $40.1$96.2 million for the ninesix months ended September 30, 2017, a decreaseJuly 1, 2023, an increase of $9.4$3.0 million or (19.0)%3.2% as compared to the ninesix months ended October 1, 2016.July 2, 2022. The earnings in the gelatin business were down as compared to the prior yearincrease was primarily due to lower earnings in the Company's South American gelatin business due toincreased sales of higher margin compression influenced by operating inefficiencies and macroeconomic factors. The casings business delivered improved performance due to overall high demandhydrolyzed collagen that slightlymore than offset lower earningsmargins from the Gelnex Acquisition and an increase in the gelatin business. Additionally, selling, general and administrative expenseexpenses, an increase in the Food Ingredients segment increased approximately $5.1 million primarily due to a reduction of currency hedge gains in the nine months ended September 30, 2017depreciation and amortization and restructuring and asset impairment costs as compared to the same period in fiscal 2016.2022.
Fuel Ingredients Segment
Raw material volume. Overall, in In the ninesix months ended September 30, 2017,July 1, 2023, the raw material processed by the Company's Fuel Ingredients segment totaled 872,000approximately 696,000 metric tons. As comparedCompared to the ninesix months ended October 1, 2016July 2, 2022, overall raw material volume processed in the Fuel Ingredients segment increased by approximately 2.4%0.6%.
Sales. Overall Net sales increased in the Fuel Ingredients segment primarily due to generally higher fat prices going into the biofuels market for the first nine months ended September 30, 2017 as compared to the same period in fiscal 2016.sales volumes.
Margins. In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the ninesix months ended September 30, 2017,July 1, 2023, the gross margin percentage decreased to 18.0%19.6% as compared to 25.1%21.3% for the comparable period of fiscal 2016. This2022. The decrease was primarily due to the lackimpact of decreases in sales prices for our products sold into the energy markets that negatively impacted margins.
Segment operating income. The Company's Fuel Ingredients segment operating income (inclusive of the blenders tax credits in North Americaequity contribution from the DGD Joint Venture) for the nine
six months ended September 30, 2017July 1, 2023 was $337.4 million, an increase of $161.9 million or 92.3% as compared to the same period in fiscal 2016 and curtailed operations2022. The increase was primarily due to increased volumes from production at Ecoson to address current regulatory requirements.
Segment operating income. Exclusive of the DGD Joint Venture, the Company's Fuel Ingredients segment income for the nine months ended September 30, 2017 was $5.7 million, a decrease of $13.0 million or (69.5)% as compared to the same period in fiscal 2016. The decrease for the nine months ended September 30, 2017 is primarily a result of the North American region results not including the blenders tax creditVenture's Port Arthur plant and curtailed operationslower raw material prices at Ecoson to address current regulatory requirements, while fiscal 2016 included blenders tax credit.
Including the DGD Joint Venture, the Fuel Ingredients segment income for the nine months ended September 30, 2017 was $21.6 million, as compared to segment income of $56.0 million in the same period of 2016. The decrease of $34.4 million was primarily related to the lack of blenders tax credits in North America for the nine months ended September 30, 2017 as compared to the same period in fiscal 2016.Venture.
Foreign Currency Exchange
During the first ninesix months of fiscal 2017,2023, overall the euro and Canadian dollar weakened against the U.S. dollar and the Canadian dollar strengthenedBrazilian real remained unchanged against the U.S. dollar as compared to the same period in fiscal 2016.2022. Using actual results for the ninesix months ended September 30, 2017July 1, 2023 and using the prior year's average currency rate for the ninesix months ended October 1, 2016, thisJuly 2, 2022, foreign currency translation would result in an increase in operating income of approximately $0.2$5.8 million. The average rates assumptions used in this calculation were the actual fiscal average rate for the ninesix months ended OctoberJuly 1, 2016 of2023 were €1.00:USD$1.12$1.08, R$1.00:$0.20 and CAD$C$1.00:USD$0.76$0.74 as compared to the average raterates for the ninesix months ended September 30, 2017July 2, 2022 of €1.00:USD$1.11$1.09, R$1.00:$0.20 and CAD$C$1.00:USD$0.77,$0.79, respectively.
Corporate Activities
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $38.9approximately $42.2 million during the ninesix months ended September 30, 2017,July 1, 2023, compared to $32.1approximately $30.8 million during the ninesix months ended October 1, 2016,July 2, 2022, an increase of $6.8$11.4 million. The increase wasis primarily due to higher costs for corporate related benefitscompensation and benefits.
Acquisition and Integration costs. Acquisition and integration costs were approximately $8.7 million during the six months ended July 1, 2023 as compared to $9.1 million for the same period in fiscal 2022. These costs primarily relate to the Gelnex Acquisition, FASA Acquisition and Valley Acquisition for the six months ended July 1, 2023 as compared to the nine months ended October 1, 2016.
prior year acquisition costs that primarily related to the Valley Acquisition, and Integration Costs. There were noOp de Beeck acquisition and integration costs during the nine months ended September 30, 2017, as compared to $0.4 million in the nine months ended October 1, 2016.FASA Acquisition.
Depreciation and Amortization. Depreciation and amortization charges decreased $0.9were approximately $5.3 million for the six months ended July 1, 2023 as compared to $8.6$5.6 million for the six months ended July 2, 2022.
Interest Expense. Interest expense was $120.5 million during the ninesix months ended September 30, 2017, asJuly 1, 2023, compared to $9.5$39.6 million during the ninesix months ended October 1, 2016.July 2, 2022, an increase of $80.9 million. The decrease wasincrease in interest expense is primarily due to certainan increase in debt outstanding, including increased interest expense from the issuance of the Company's corporate assets becoming fully depreciated6% Senior Notes due 2030, the borrowing of all amounts under the term A-1, term A-2, term A-3 and term A-4 facilities, all of which were borrowed to fund acquisitions, and higher borrowings under the revolving credit facility as compared to the same period in fiscal 2016.2022.
Interest Expense. Interest expense was $66.7Foreign Currency Gain/(Loss). Foreign currency gains were $7.5 million duringfor the ninesix months ended September 30, 2017,July 1, 2023 as compared to $71.7foreign currency losses of $5.5 million duringfor the ninesix months ended OctoberJuly 2, 2022. The increase in currency gains is due primarily to an increase in gains on the revaluation of an intercompany note as compared to losses from non-functional currency assets and liabilities in the same period of fiscal 2022.
Other Income/(Expense), net. Other income was $11.2 million in the six months ended July 1, 2016, a decrease2023, compared to other expense of $5.0 million.$(1.0) million for the six months ended July 2, 2022. The decreaseincrease in other income was primarily due to lower debt balancescasualty loss insurance proceeds received for the Companyprior year Tacoma and Ward plant fires and an increase in interest income that was partially offset by an increase in the non-service component of pension expense and other miscellaneous non-operating expenses as compared to the same period in fiscal 2016.2022.
Foreign Currency Gains/(Losses). Foreign currency losses were $4.4 million during the nine months ended September 30, 2017, as compared to foreign currency losses of approximately $2.2 million for the nine months ended October 1, 2016. The increase in currency losses was primarily due to losses on non-designated foreign exchange hedge contracts as compared to the same period in fiscal 2016.
Other Income/Expense. Other expense was $5.1 million in the nine months ended September 30, 2017, compared to $5.7 million and October 1, 2016. The decrease in other expense in the nine months ended September 30, 2017 as compared to the same period in fiscal 2016 was primarily due to a decrease in bank service charges and an increase in interest income that more than offset a legal settlement charge.
Equity in Net Income in Investment of Other Unconsolidated Subsidiaries. This The change in this line item is not significant and primarily represents the Company's pro rata share of the income of the DGD Joint Venture for the nine months ended September 30, 2017. The net income for the nine months ended September 30, 2017 was $16.7 million compared to $37.6 million for the nine months ended October 1, 2016. The $20.9 million decrease was primarily due to not recording the North American blenders tax credits in fiscal 2017 as compared to blenders tax credits recorded at the DGD Joint Venture in the same period in fiscal 2016.from foreign unconsolidated subsidiaries.
Income Taxes. The Company recorded income tax expense of $15.9$67.7 million for the ninesix months ended September 30, 2017,July 1, 2023, compared to $9.1$73.4 million of income tax expense recorded in the ninesix months ended October 1, 2016, an increaseJuly 2, 2022, a decrease of $6.8$5.7 million. The increase in tax expense is primarily due to the expiration of the biofuel tax incentives.
The effective tax rate for the ninesix months ended September 30, 2017 was 37.5%.July 1, 2023 and July 2, 2022 is 13.2% and 15.7%, respectively. The effective tax rate for the ninesix months ended September 30, 2017 differedJuly 1, 2023 differs from the federal statutory rate of 35%21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes) and biofuel tax incentives. The effective tax rate for the six months ended July 2, 2022 differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), Subpart F income, losses that provided nobiofuel tax benefitincentives, and discrete items, including the favorable settlement of an audit.
The effectiveexcess tax rate for the nine months ended October 1, 2016 was 12.2%. The effective tax rate for the nine months ended October 1, 2016 differedbenefits from the statutory rate of 35% due primarily to biofuel tax incentives, the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), Subpart F income and losses that provided no tax benefit.
stock compensation. The Company's effective tax rate excluding biofuel tax incentives and discrete items is 47.5%25.7% for the ninesix months ended September 30, 2017,July 1, 2023, compared to 12.8%26.2% for the ninesix months ended October 1, 2016, an increase of 347 basis points primarily due to the expiration of the biofuel tax incentive and losses that provided no tax benefit.July 2, 2022.
Non-U.S. GAAP Measures
For a discussion of the reasons the Company's management believes the following Non-GAAP financial measures provide useful information to investors and the purposes for which the Company's management uses such measures, see "Results“Results of Operations - Three Months Ended September 30, 2017July 1, 2023 Compared to the Three Months Ended October 1, 2016July 2, 2022 - Non-U.S.Non-U.S GAAP Measures."”
Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA and (Non-GAAP) Pro Forma Adjusted EBITDA
First NineSix Months of Fiscal 2017 As2023 as Compared to First NineSix Months of Fiscal 20162022
| | | Nine Months Ended | | Six Months Ended |
(dollars in thousands) | September 30, 2017 | October 1, 2016 | (dollars in thousands) | July 1, 2023 | July 2, 2022 |
Net income/(loss) attributable to Darling | $ | 22,739 |
| $ | 61,772 |
| |
Net income attributable to Darling | | Net income attributable to Darling | $ | 438,184 | | $ | 390,049 | |
Depreciation and amortization | 221,306 |
| 212,440 |
| Depreciation and amortization | 238,092 | | 172,359 | |
Interest expense | 66,657 |
| 71,748 |
| Interest expense | 120,492 | | 39,611 | |
Income tax expense/(benefit) | 15,856 |
| 9,102 |
| |
Income tax expense | | Income tax expense | 67,686 | | 73,416 | |
Restructuring and asset impairment charges | | Restructuring and asset impairment charges | 5,420 | | 8,557 | |
Acquisition and integration costs | | Acquisition and integration costs | 8,728 | | 9,131 | |
Change in fair value of contingent consideration | | Change in fair value of contingent consideration | (7,499) | | — | |
Foreign currency loss/(gain) | 4,430 |
| 2,241 |
| Foreign currency loss/(gain) | (7,494) | | 5,512 | |
Other expense/(income), net | 5,103 |
| 5,685 |
| Other expense/(income), net | (11,238) | | 1,044 | |
Equity in net (income)/loss of unconsolidated subsidiaries | (16,669 | ) | (37,633 | ) | |
| Equity in net income of Diamond Green Diesel | | Equity in net income of Diamond Green Diesel | (307,301) | | (145,484) | |
Equity in net income of other unconsolidated subsidiaries | | Equity in net income of other unconsolidated subsidiaries | (1,969) | | (3,632) | |
Net income attributable to non-controlling interests | 3,671 |
| 3,772 |
| Net income attributable to non-controlling interests | 6,868 | | 5,511 | |
Adjusted EBITDA | $ | 323,093 |
| $ | 329,127 |
| |
| | |
Acquisition and integration-related expenses | — |
| 401 |
| |
Pro forma Adjusted EBITDA (Non-GAAP) | $ | 323,093 |
| $ | 329,528 |
| |
Darling's Adjusted EBITDA | | Darling's Adjusted EBITDA | $ | 549,969 | | $ | 556,074 | |
| | | |
Foreign currency exchange impact (1) | 231 |
| — |
| Foreign currency exchange impact (1) | 5,779 | | — | |
Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) | $ | 323,324 |
| $ | 329,528 |
| Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) | $ | 555,748 | | $ | 556,074 | |
| | | |
DGD Joint Venture Adjusted EBITDA (Darling's Share) | $ | 28,013 |
| $ | 50,503 |
| DGD Joint Venture Adjusted EBITDA (Darling's Share) | $ | 376,721 | | $ | 177,171 | |
| Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA | | Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA | $ | 926,690 | | $ | 733,245 | |
(1) The average rates assumption used in this calculation was the actual fiscal average rate for the ninesix months ended September 30, 2017 ofJuly 1, 2023 were €1.00:USD$1.11$1.08, R$1.00:$0.20 and CAD$C$1.00:USD$0.77$0.74 as compared to the average rate for the ninesix months ended October 1, 2016July 2, 2022 of €1.00:USD$1.12$1.09, R$1.00:$0.20 and CAD$C$1.00:USD$0.76,$0.79, respectively.
For the nine months ended September 30, 2017, the Company generated Adjusted EBITDA of $323.1 million, as compared to $329.1 million in the same period in fiscal 2016. The decrease was primarily attributable to lower earnings in the Food Ingredients and Fuel Ingredients segment.
On a Pro forma Adjusted EBITDA (Non-GAAP) basis, the Company would have generated $323.1 million in the nine months ended September 30, 2017, as compared to a Pro forma Adjusted EBITDA (Non-GAAP) of $329.5 million in the same period in fiscal 2016.
On a Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) basis, the Company would have generated $323.3 million in the nine months ended September 30, 2017, as compared to a Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) of $329.5 million in the same period in fiscal 2016.
DGD Joint Venture Adjusted EBITDA (Darling's share) is not reflected in the Adjusted EBITDA, the Pro forma Adjusted EBITDA, or the Pro forma Adjusted EBITDA to Foreign Currency. See Note 7 to the Company's Consolidated Financial Statements included herein for financial information regarding the DGD Joint Venture.
FINANCING, LIQUIDITY AND CAPITAL RESOURCES
Credit Facilities
Indebtedness
Certain Debt Outstanding at September 30, 2017. July 1, 2023. On September 30, 2017,July 1, 2023, debt outstanding under the Company's Amended Credit Agreement, the Company's 5.375%6% Notes, the Company's 5.25% Notes and the Company's 4.75%3.625% Notes consists of the following (in thousands):
|
| | | |
Senior Notes: | |
5.375 % Notes due 2022 | $ | 500,000 |
|
Less unamortized deferred loan costs | (6,655 | ) |
Carrying value of 5.375% Notes due 2022 | $ | 493,345 |
|
| |
4.75 % Notes due 2022 - Denominated in euros | $ | 608,318 |
|
Less unamortized deferred loan costs | (8,769 | ) |
Carrying value of 4.75% Notes due 2022 | $ | 599,549 |
|
| |
Amended Credit Agreement: | |
Term Loan A | $ | 108,053 |
|
Less unamortized deferred loan costs | (814 | ) |
Carrying value of Term Loan A | 107,239 |
|
| |
Term Loan B | $ | 537,500 |
|
Less unamortized deferred loan costs | (4,874 | ) |
Carrying value of Term Loan B | $ | 532,626 |
|
| |
Revolving Credit Facility: | |
Maximum availability | $ | 1,000,000 |
|
Borrowings outstanding | — |
|
Letters of credit issued | 24,017 |
|
Availability | $ | 975,983 |
|
| |
Other Debt | $ | 19,632 |
|
| | | | | |
Senior Notes: | |
6 % Notes due 2030 | $ | 1,000,000 | |
Less unamortized deferred loan costs net of bond premium | (6,841) | |
Carrying value of 6% Notes due 2030 | $ | 993,159 | |
| |
5.25 % Notes due 2027 | $ | 500,000 | |
Less unamortized deferred loan costs | (3,694) | |
Carrying value of 5.25% Notes due 2027 | $ | 496,306 | |
| |
3.625 % Notes due 2026 - Denominated in euros | $ | 562,329 | |
Less unamortized deferred loan costs | (3,274) | |
Carrying value of 3.625% Notes due 2026 | $ | 559,055 | |
| |
Amended Credit Agreement: | |
Term A-1 facility | $ | 400,000 | |
Less unamortized deferred loan costs | (635) | |
Carrying value of Term A-1 facility | $ | 399,365 | |
| |
Term A-2 facility | $ | 487,500 | |
Less unamortized deferred loan costs | (902) | |
Carrying value of Term A-2 facility | $ | 486,598 | |
| |
Term A-3 facility | $ | 300,000 | |
Less unamortized deferred loan costs | (964) | |
Carrying value of Term A-3 facility | $ | 299,036 | |
| |
Term A-4 facility | $ | 496,875 | |
Less unamortized deferred loan costs | (1,168) | |
Carrying value of Term A-4 facility | $ | 495,707 | |
| |
Term Loan B | $ | 200,000 | |
Less unamortized deferred loan costs | (981) | |
Carrying value of Term Loan B | $ | 199,019 | |
| |
Revolving Credit Facility: | |
Maximum availability | $ | 1,500,000 | |
Ancillary Facilities | 48,253 | |
Borrowings outstanding | 491,921 | |
Letters of credit issued | 3,871 | |
Availability | $ | 955,955 | |
| |
Other Debt | $ | 126,716 | |
During the first ninesix months of fiscal 2017,2023, the U.S. dollar weakened as compared to the euro and Canadian dollar.at December 31, 2022. Using the euro and Canadian dollar based debt outstanding at September 30, 2017July 1, 2023 and comparing the closing balance sheet ratesrate at September 30, 2017July 1, 2023 to thosethe balance sheet rate at December 31, 2016,2022, the U.S. dollar debt balances of euro based debt and Canadian based debt increased by approximately $63.6$17.4 million and $5.1 million, respectively, at September 30, 2017.July 1, 2023. The closing balance sheet rate assumptionsassumption used in this calculation werewas the actual fiscal closing balance sheet rate at September 30, 2017July 1, 2023 of €1.00:USD$1.18120 and CAD$1.00:USD$0.804386$1.0919 as compared to the closing balance sheet rate at December 31, 20162022 of €1.00:USD$1.05600 and CAD$1.00:USD$0.742094, respectively.$1.0676.
Senior Secured Credit Facilities. On January 6, 2014, Darling, Darling International Canada Inc. (“Darling Canada”) and Darling International NL Holdings B.V. (“Darling NL”) entered into a Second Amended and Restated Credit Agreement (as subsequently amended, the “Amended Credit Agreement”), restating its then existing Amended and Restated Credit Agreement dated September 27, 2013, with the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents from time to time party thereto. EffectiveThe Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of $3.725 billion comprised of (i) the Company's $525.0 million term B facility, (ii) the Company's $400.0 million term A-1 facility, (iii) the Company's $500.0 million term A-2 facility, (iv) the Company's $300.0 million Term A-3 facility, (v) the Company's $500.0 million Term A-4 facility and (vi) the Company's $1.5 billion five-year revolving credit facility (up to $150.0 million of which will be available for a letter of credit subfacility and $50.0 million of which will be available for a swingline sub-facility) (collectively, the “Senior Secured Credit Facilities”). The Amended Credit Agreement also permits Darling and the other
borrowers thereunder to incur ancillary facilities provided by any revolving lender party to the Senior Secured Credit Facilities (with certain restrictions). Up to $1.46 billion of the revolving credit facility is available to be borrowed by Darling, Darling Canada, Darling NL, Darling Ingredients International Holding B.V. (“Darling BV”), Darling GmbH, and Darling Belgium in U.S. dollars, Canadian dollars, euros, Sterling and other currencies to be agreed and available to each applicable lender. The remaining $40.0 million must be borrowed in U.S. dollars only by Darling. The revolving credit facility will mature on December
16, 2016, the Company, 9, 2026. The revolving credit facility will be used for working capital needs, general corporate purposes and certain of its subsidiaries entered into an amendment (the “Fourth Amendment”) with its lenders toother purposes not prohibited by the Amended Credit Agreement. Among other things, the Fourth Amendment extended the maturity date of the term A loans and revolving credit facility loans under the Amended Credit Agreement from September 27, 2018 to December 16, 2021, subject to a 91-day “springing” adjustment if the term B loans are outstanding 91 days prior to the maturity date (January 6, 2021) of the term B loans. For a description of the terms of the Amended Credit Agreement, including the revolving loan, term loan A and term loan B facilities provided thereunder, see Note 8 to the Company's Consolidated Financial Statements included herein.
•As of September 30, 2017,July 1, 2023, the Company had unused capacityavailability of $976.0$956.0 million under the revolving loancredit facility, taking into account that the Company had no$491.9 million in outstanding borrowings, $48.3 million in ancillary facilities and letters of credit issued of $24.0$3.9 million.
•As of September 30, 2017,July 1, 2023, the Company has borrowed all $350.0$400.0 million under the term loan A facility and repaid approximately CAD$69.4 million and $156.8 million, which when repaid, cannot be reborrowed. The term loan A facility is repayable in quarterly installments which commenced on March 31, 2017 as follows: for the first eight quarters following December 16, 2016, 1.25% of the original principal amount of the term loan A facility outstanding on the Fourth Amendment date, for the ninth through sixteenth quarters following December 16, 2016, 1.875% of the original principal amount of the term loan A facility outstanding on the Fourth Amendment date, and for each quarterly installment after such sixteenth installment until December 16, 2021, 3.75% of the original principal amount of the term loan A facility outstanding on the Fourth Amendment date. The term loan A facility will mature on December 16, 2021, subject to a 91-day “springing” adjustment if the term B loans are outstanding 91 days prior to the maturity date (January 6, 2021) of the term B loans.
As of September 30, 2017, the Company has borrowed all $1.3 billion under the terms of the term loan BA-1 facility and has made no repayments. Amounts borrowed under the term A-1 facility that are repaid approximately €510.0 million and $62.5 million, which when repaid,by the Company cannot be reborrowed. The term loan BA-1 facility isborrowings are repayable in quarterly installments of 0.25% of the aggregate principalprinciple amount of the relevant term loan BA-1 facility on the last day of each March, June, September and December of each year commencing on the last day of eachsuch month falling on or after the last day of the first full fiscal quarter following January 6, 2014,the second anniversary of December 9, 2021 and continuing until the last day of each quartersuch quarterly period ending immediately prior to January 6, 2021;the term A-1 facility maturity date of December 9, 2026 and one final installment in the amount of the term A-1 facility then outstanding, due and payable on December 9, 2026.
•As of July 1, 2023, the Company has borrowed all $500.0 million under the terms of the term A-2 facility and has repaid $12.5 million, which when repaid by the Company cannot be reborrowed. The term A-2 facility borrowings are repayable in quarterly installments of 0.625% of the aggregate principle amount of the relevant term loanA-2 facility on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter following the borrowings or September 30, 2022 and continuing until the last day of such quarterly period ending March 31, 2025, and quarterly installments of 1.25% of the aggregate principle amount of the relevant term A-2 facility due and payable on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter ending June 30, 2025 and continuing until the last day of such quarterly period ending immediately prior to the term A-2 facility maturity date of December 9, 2026 and one final installment in the amount of the term A-2 facility then outstanding, due and payable on December 9, 2026.
•As of July 1, 2023, the Company has borrowed all $300.0 million under the terms of the term A-3 facility and has made no repayments. Amounts borrowed under the term A-3 facility that are repaid by the Company cannot be reborrowed. The term A-3 facility borrowings are repayable in quarterly installments of 0.25% of the aggregate principle amount of the relevant term A-3 facility on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter following the second anniversary of December 9, 2021 and continuing until the last day of such quarterly period ending immediately prior to the term A-3 facility maturity date of December 9, 2026 and one final installment in the amount of the term A-3 facility then outstanding, due and payable on December 9, 2026.
•As of July 1, 2023, the Company has borrowed all $500.0 million under the terms of the term A-4 facility and has repaid $3.1 million, which when repaid by the Company cannot be reborrowed. The Term A-4 facility borrowings are repayable in quarterly installments of 0.625% of the aggregate principle amount of the relevant term A-4 facility on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter following the borrowings or June 30, 2023 and continuing until the last day of such quarterly period ending March 31, 2025, and quarterly installments of 1.25% of the aggregate principle amount of the relevant term A-4 facility due and payable on the last day of each March, June, September and December of each year commencing on the last day of such month falling on or after the last day of the first full fiscal quarter ending June 30, 2025 and continuing until the last day of such quarterly period ending immediately prior to the term A-4 facility maturity date of December 9, 2026 and one final installment in the amount of the term A-4 facility then outstanding, due and payable on December 9, 2026.
•As of July 1, 2023, the Company has borrowed all $525.0 million under the terms of the term B facility and repaid $325.0 million, which when repaid, cannot be reborrowed. As a result of early payments made by the Company under the term B facility only one final installment of the relevant term B facility then outstanding is due on January 6, 2021.December 18, 2024. The term loan B facility will mature on January 6, 2021.December 18, 2024.
•The interest rate applicable to any borrowings under the term loan A facility and the revolving loancredit facility will equal either LIBOR/the adjusted term secured overnight financing rate (SOFR) for U.S. dollar borrowings or the adjusted euro interbank offered rate/rate (EURIBOR) for euro borrowings or the adjusted daily simple Sterling overnight index average (SONIA) for British pound borrowings or CDOR for Canadian dollar borrowings plus 2.00%1.375% per annum or base rate/rate or the adjusted term SOFR for U.S. dollar borrowings or Canadian prime rate for Canadian dollar borrowings or the adjusted daily simple European short term rate (ESTR) for euro borrowings or the adjusted daily SONIA rate for British pound borrowings plus 1.00%0.375% per annum subject to certain step-ups or step-downs orbased on the Company's total leverage ratio. The interest rate applicable to any borrowing under the term A-1 facility and the term A-3 facility will equal the adjusted term SOFR plus a minimum of 1.50% per annum subject to certain step-ups based on the Company's total leverage ratio. The interest rate applicable to any borrowing under the term A-2 facility and term A-4 facility will equal the adjusted term SOFR plus 1.375% per annum subject to certain step-ups and step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal (a) for U.S. dollar term loans, either the base rate plus 1.50%1.00% or LIBOR plus 2.50%, and (b) for euro revolving loans, the euro interbank offered rate plus 2.75%, in each case subject to a step-down based on Darling’s total leverage ratio. For term loan B loans, the LIBOR rate shall not be less than 0.75%2.00%.
5.375%6% Senior Notes due 2022. 2030. On January 2, 2014, Darling Escrow Sub, a Delaware corporation and wholly-owned subsidiary ofJune 9, 2022, Darling issued and sold $500.0$750.0 million aggregate principal amount of its 5.375% Notes. The 5.375% Notes, which were offered in a private offering in connection with the VION Acquisition, were issued pursuant to the Original 5.375% Indenture, (as supplemented, the “5.375% Indenture”), among Darling Escrow Sub, the Subsidiary Guarantors (as defined in the Original 5.375% Indenture) party thereto from time to time and U.S. Bank National Association, as trustee (the “5.375% Trustee”).
4.75 %6% Senior Notes due 2022. On June 3, 2015, Darling Global Finance B.V.2030 (the “4.75% Issuer”“6% Initial Notes”), a wholly-owned indirect finance subsidiary of Darling incorporated as a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) under the laws of. The Netherlands issued and sold €515.0 million aggregate principal amount of its 4.75% Notes. The 4.75%6% Initial Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of June 3, 20159, 2022 (the “4.75%“6% Base Indenture”), among Darling, the 4.75% Issuer,subsidiary guarantors party thereto from time to time, and Truist Bank, as trustee. On August 17, 2022, Darling issued an additional $250.0 million in aggregate principal amount of its 6% Senior Notes due 2030 (the “add-on notes” and, together with the 6% Initial Notes, the “6% Notes”). The add-on notes and related guarantees, which were offered in a private offering, were issued as additional notes under the 6% Base Indenture, as supplemented by a supplemental indenture, dated as of August 17, 2022 (the “supplemental indenture” and, together with the 6% Base Indenture, the “6% Indenture”). The add-on notes have the same terms as the 6% Initial Notes (other than issue date and issue price) and, together with the 6% Initial Notes, constitute a single class of securities under the 6% Indenture. The 6% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than foreign subsidiaries) that are borrowers under or that guarantee the Senior Secured Credit Facilities.
5.25 % Senior Notes due 2027. On April 3, 2019, Darling issued and sold $500.0 million aggregate principal amount of 5.25% Senior Notes due 2027 (the “5.25% Notes”). The 5.25% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of April 3, 2019 (the “5.25% Indenture”), among Darling, the subsidiary guarantors party thereto from time to time, and Regions Bank, as trustee. The 5.25% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than foreign subsidiaries) that are borrowers under or that guarantee the Senior Secured Credit Facilities.
3.625% Senior Notes due 2026. On May 2, 2018, Darling Global Finance B.V. issued and sold €515.0 million aggregate principal amount of 3.625% Senior Notes due 2026 (the “3.625% Notes”). The 3.625% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of May 2, 2018 (the “3.625% Indenture”), among Darling Global Finance B.V., Darling, the subsidiary guarantors party thereto from time to time, Citibank, N.A., London Branch, as trustee (the “4.75% Trustee”) and principal paying agent, and Citigroup Global Markets Deutschland AG, as principal registrar. The 3.625% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than any foreign subsidiary or any receivable entity) that guarantee the Senior Secured Credit Facilities.
Other debt consists of CanadianU.S., European and European capitalBrazil overdraft ancillary facilities and finance lease obligations, note arrangements in Argentina,U.S., Brazil, China and Japan and European and U.S. notes that are not part of the Company's Amended Credit Agreement, 5.375%6% Notes, 5.25% Notes or 4.75%3.625% Notes.
The classification of long-term debt in the Company’s September 30, 2017July 1, 2023 consolidated balance sheet is based on the contractual repayment terms of the 5.375%6% Notes, the 4.75%5.25% Notes, the 3.625% Notes and debt issued under the Amended Credit Agreement.
As a result of the Company's borrowings under its Amended Credit Agreement, the 5.375%6% Indenture, the 5.25% Indenture and the 4.75%3.625% Indenture, the Company is highly leveraged. Investors should note that, in order to make scheduled payments on the indebtedness outstanding under the Amended Credit Agreement, the 5.375%6% Notes, the 5.25% Notes and the 4.75%3.625% Notes, and otherwise, the Company will rely in part on a combination of dividends, distributions and intercompany loan repayments from the Company's direct and indirect U.S. and foreign subsidiaries. The Company is prohibited under the Amended Credit Agreement, the 5.375%6% Indenture, the 5.25% Indenture and the 4.75%3.625% Indenture from entering (or allowing such subsidiaries to enter) into contractual limitations on the Company's subsidiaries’ ability to declare dividends or make other payments or distributions to the Company. The Company has also attempted to structure the Company's consolidated indebtedness in such a way as to maximize the Company's ability to move cash from the
Company's subsidiaries to Darling or another subsidiary that will have fewer limitations on the ability to make upstream payments, whether to Darling or directly to the Company's lenders as a Guarantor. Nevertheless, applicable laws under which the Company's direct and indirect subsidiaries are formed may provide limitations on such dividends, distributions and other payments. In addition, regulatory authorities in various countries where the Company operates or where the Company imports or exports products may from time to time impose import/export limitations, foreign exchange controls or currency devaluations that may limit the Company's access to profits from the Company's subsidiaries or otherwise negatively impact the Company's financial condition and therefore reduce the Company's ability to make required payments under the Amended Credit Agreement, the 5.375%6% Notes, the 5.25% Notes and the 4.75%3.625% Notes, or otherwise. In addition, fluctuations in foreign exchange values may have a negative impact on the Company's ability to repay indebtedness denominated in U.S. or Canadian dollars or euros. See “Risk“Risk Factors - Our business may be adversely impacted by fluctuations in exchange rates, which could affect our ability to comply with our financial covenants” and “- Our ability to repay our indebtedness depends in part on the performance of our subsidiaries, including our non-guarantor subsidiaries, and their ability to make payments” in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 20162022 as filed with the SEC on February 28, 2017.27, 2023.
As of September 30, 2017,July 1, 2023, the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 5.375%6% Indenture, the 5.25% Indenture and the 4.75%3.625% Indenture.
Working Capital and Capital Expenditures
On September 30, 2017,July 1, 2023, the Company had working capital of $416.0$862.4 million and its working capital ratio was 1.761.85 to 1 compared to working capital of $441.5$569.7 million and a working capital ratio of 1.981.53 to 1 on December 31, 2016.2022. As of September 30, 2017,July 1, 2023, the Company had unrestricted cash of $110.1$111.5 million and funds available under the revolving credit facility of $976.0$956.0 million, compared to unrestricted cash of $114.6$127.0 million and funds available under the revolving credit facility of $968.1$1,313.0 million at December 31, 2016.2022. The Company diversifies its cash investments by limiting the amounts deposited with any one financial institution and invests primarily in government-backed securities.institution.
Net cash provided by operating activities was $268.8$405.7 million for the first ninesix months ended September 30, 2017,July 1, 2023, as compared to net cash provided by operating activities of $280.6$361.0 million for the first ninesix months ended October 1, 2016, a decreaseJuly 2, 2022, an increase of $11.8$44.7 million due primarily to a decrease in net income of approximately $39.1 million and changes in operating assets and liabilities that include an increase in cash provided by income tax refundable/payable of approximately $16.9distributions received from the DGD Joint Venture. Cash used in investing activities was $1,348.4 million an increase in accounts payable and accrued expenses of approximately $12.5for the first six months ended July 1, 2023, compared to $1,624.8 million andfor the first six months ended July 2, 2022, a decrease in cash used by inventory and prepaid expense of approximately $19.7 million. Cash used byin investing activities of $276.4 million, primarily due to a decrease in payments for acquisitions and capital contributions to the DGD Joint Venture that more than offset an increase in capital expenditures. Net cash provided by financing activities was $210.7$1,020.1 million for the first ninesix months ended September 30, 2017,July 1, 2023, compared to $170.7$1,357.6 million for the first ninesix months ended October 1, 2016, an increase of $40.0 million, primarily due to an increase in capital asset spending, an increase in cash paid for acquisition, an additional investment in a unconsolidated subsidiary and payments for intangibles. Net cash used by financing activities was $79.2 million for the first nine months ended September 30, 2017, compared to net cash used by financing activities of $117.2 million for the first nine months ended October 1, 2016,July 2, 2022, a decrease in net cash usedprovided by financing activities of $38.0$337.5 million, primarily due to an overalla decrease in debt and debt related paymentsborrowings utilized to fund acquisitions in the first ninesix months ended September 30, 2017 asJuly 1, 2023 compared to the first ninesix months ended October 1, 2016.July 2, 2022.
Capital expenditures of $196.4$234.3 million were made during the first ninesix months of fiscal 2017,2023, compared to $168.2$151.5 million in the first ninesix months of fiscal 2016, for a net increase of $28.2 million (16.8%).2022. The Company expects to incur additional capital expenditures of approximately $43.0$330 million for the remainder of fiscal 2017.2023 including compliance and expansion projects and spending related to acquired companies. The Company intends to finance these costs using cash flows from operations. Capital expenditures related to compliance with environmental regulations were $16.0$26.7 million and $9.8$16.9 million during the first ninesix months ended September 30, 2017July 1, 2023 and October 1, 2016,July 2, 2022, respectively.
Accrued Insurance and Pension Plan Obligations
Based upon the annual actuarial estimate, current year accruals and claims paid during the first ninesix months of fiscal 2017,2023, the Company has an accrued balance of approximately $13.8$20.2 million it expects will become due during the next twelve months in order to meet obligations related to the Company’s self insuranceself-insurance reserves and accrued insurance obligations, which are included in current accrued expenses at September 30, 2017.July 1, 2023. The self insurance reserve is composed of estimated liability for claims arising for workers’ compensation, and for auto liability and general liability claims. The self insuranceself-insurance reserve liability is determined annually, based upon a third party actuarial estimate. The actuarial estimate may vary from year to year due to changes in cost of health care, the pending number of claims or other factors beyond the control of management of the Company.
Based upon current actuarial estimates, the Company expects to contribute approximately $1.0$0.2 million to its domestic pension plans in order to meet minimum pension funding requirements during the next twelve months. In
addition, the Company expects to make payments of approximately $3.6$3.5 million under its foreign pension plans in the next twelve months. The minimum pension funding requirements are determined annually, based upon a third party actuarial estimate. The actuarial estimate may vary from year to year due to fluctuations in return on investments or other factors beyond the control of management of the Company or the administrator of the Company’s pension funds. No assurance can be given that the minimum pension funding requirements will not increase in the future. The Company has made tax deductible discretionary and required contributions to its domestic pension plans for the first ninesix months ended September 30, 2017July 1, 2023 of approximately $0.8$0.1 million. Additionally, the Company has made required and tax deductible discretionary contributions to its foreign pension plans for the first ninesix months ended September 30, 2017July 1, 2023 of approximately $1.8$1.5 million.
The U.S. Pension Protection Act of 2006 (“PPA”) went into effect in January 2008. The stated goal of the PPA is to improve the funding of U.S. pension plans. U.S. plans in an under-funded status are required to increase employer contributions to improve the funding level within PPA timelines. Volatility in the world equity and other financial markets, including that associated with the recent turmoil in the world banking markets and the Russia-Ukraine war, could have a material negative impact on U.S. pension plan assets and the status of required funding under the PPA. The Company participates in various U.S. multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants. The Company's contributions to each individual U.S. multiemployer plan represent less than 5% of the total contributions to each such plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities for two of the U.S. plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone under PPA guidelines. With respect to the otherThe Company currently has withdrawal liabilities recorded on four U.S. multiemployer pension plans in which the Company participates and which are not individually significant, six plans have certified as critical or red zone and one has certified as endangered or yellow zone as defined by the PPA. The Company has received notices of withdrawal liability from two U.S. multiemployer pension plans in which it participated. During the second quarter of fiscal 2023, the Company was notified by one of their multiemployer plans that an additional partial withdrawal liability was incurred and the Company also received a notification that another one of its multiemployer plans liabilities was being reduced. As a result of these events, the Company recorded an additional liability of approximately $2.8 million. As of July 1, 2023, the Company has an aggregate accrued aggregate liability of approximately $1.8$6.6 million representing the present value of scheduled withdrawal liability payments under theseon the multiemployer plans.plans that have given notice of withdrawal. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could requireadditional funding under the PPA,Pension Protection Act of 2006, the amounts could be material.
DGD Joint Venture
The Company announced on January 21, 2011 that a wholly-owned subsidiary of Darling entered into a limited liability company agreement with Valero to form the DGD Joint Venture. The DGD Joint Venture is owned 50% / 50%currently operates two renewable diesel plants, one located adjacent to Valero’s St. Charles Refinery in Norco, Louisiana (the “DGD St. Charles Plant”) and one located adjacent to Valero’s Port Arthur Refinery in Port Arthur, Texas (the “DGD Port Arthur Plant” and, together with Valero andthe DGD St. Charles Plant, the “DGD Facilities”). The DGD Joint Venture was formed in January 2011 to design, engineer, construct and operate the DGD Facility,St. Charles Plant, which is capable of processing approximately 12,000 barrels per day of input feedstock to produce renewable diesel fuel and certain other co-products, and is located adjacent to Valero's refinery in Norco, Louisiana. The DGD Facility reached mechanical completion and began the production of renewable diesel and certain other co-products in late June 2013.
On May 31, 2011, In October 2021, the DGD Joint Venture completed an expansion of the DGD St. Charles Plant that increased its renewable diesel production capability to up to 750 million gallons per year of renewable diesel, as well as separating renewable naphtha (approximately 30 million gallons) and Diamond Green Diesel LLC,other light end renewable hydrocarbons for sale into low carbon fuel markets, at a wholly-owned subsidiarytotal cost, including naphtha production and improved logistics capability, of approximately $1.1 billion. Additionally, in November 2022, the DGD Joint Venture (“Opco”), entered into (i)completed the construction of the DGD Port Arthur Plant, with a facility agreement (the “Facility Agreement”) with Diamond Alternative Energy, LLC,name plate capacity to produce 470 million gallons per year of renewable diesel and 20 million gallons per year of renewable naphtha and having similar logistics flexibilities as those of the DGD St. Charles Plant. The DGD Port Arthur Plant was completed at a wholly-owned subsidiarytotal cost of Valero (the “Lender”), and (ii)approximately $1.43 billion. The DGD Facilities have a loan agreement (the “Loan Agreement”) with the Lender, which providedcombined renewable diesel production capacity of approximately 1.2 billion gallons per year. Furthermore, in January 2023, the DGD Joint Venture withpartners approved a 14 year multiple advance term loan facility of approximately $221.3 million (the “JV Loan”) to support the design, engineering and construction ofcapital project at the DGD Facility, which is now in production. The Facility Agreement andPort Arthur Plant to provide the Loan Agreement prohibitplant with the Lender from assigning all or any portion of the Facility Agreement or the Loan Agreementcapability to unaffiliated third parties. Opco has also pledged substantially allupgrade approximately fifty percent (50%) of its assets, consisting of substantially all of the plant, property and equipment of the DGD Facility, to the Lender, and the DGD Joint Venture has pledged all of Opco's equity interests to the Lender, until the JV Loan has been paid in full and the JV Loan has terminated in accordance with its terms.
Based on the sponsor support agreements executed in connection with the Facility Agreement and the Loan Agreement relating to the DGD Joint Venture with Valero, the Company has contributed a total of approximately $111.7current 470 million for completion of the DGD Facility including the Company's portion of cost overruns and working capital funding. As of the date of this report, it is anticipated that substantially all contributions have been made, except for possible additional working capital funding, which is not expected to be material to the Company if it occurs. As of September 30, 2017, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $261.6 million included on the consolidated balance sheet. Distribution of earnings to the venture partners is prohibited until certain conditions required under the DGD Joint Venture’s Loan Agreement are satisfied, including prepayments of principal by the DGD Joint Venture upon qualifying events. In addition, the DGD Joint Venture has no mandatory distributions to its joint venture partners. During the nine months ended September 30, 2017, the DGD Joint Venture made dividend distributions to each partner in the amount of $25.0 million.
In April 2016, the Company announced the planned expansion of the DGD Facility'sgallon annual production capacity from 160 million gallons of renewable diesel to 275 million gallons. Final engineering and cost analysis forsustainable aviation fuel (SAF). Work on the project were completed during the third quarteris underway, with completion expected in 2025 at a total estimated cost of 2016. The estimated construction costs for the project are $190approximately $315 million, which is expected to be primarily funded by DGD Joint Venture cash flow. Theflow; however, if the DGD Joint Venture estimates completion of construction and commissioning ofcash flow is not sufficient to fund the remaining project incosts, the second quarter of 2018. The DGD Joint Venture expectsmay need to operate at full capacity throughoutborrow funds or the expansion phase, excluding 18 days of normal downtime maintenance in 2017, which occurred injoint venture partners may be required to contribute additional funds to complete the first quarter of 2017, and an estimated 40 days of necessary downtime for final tie-ins in 2018. The planned expansion will also include expanded outbound logistics for servicing the many developing low carbon fuel markets around North America and worldwide.project.
On February 23, 2015,May 1, 2019, Darling, through its wholly owned subsidiary Darling Green Energy LLC, ("(“Darling Green"Green”), and a third party Diamond Alternative Energy, LLC, ("a wholly owned subsidiary of Valero (“Diamond Alternative"Alternative” and together with Darling Green, the "DGD Lenders"“DGD Lenders”), entered into a revolving loan agreement (the "DGD“2019 DGD Loan Agreement"Agreement”) with the DGD Joint Venture, Opco. Thepursuant to which the DGD Lenders have committed to makemaking loans available to Opcothe DGD Joint Venture in the total amount of $10.0$50.0 million, with each lender committed to $5.0$25.0 million of the total commitment. Any borrowings
by Opcothe DGD Joint Venture under the 2019 DGD Loan Agreement arewere at the applicable annum rate equal to the sum of (a) the LIBO Rate (meaning Reuters BBA Libor Rates Page 3750) on such day plus (b) 2.50%. TheOn June 15, 2023, the DGD Lenders entered into a new revolving loan agreement (the “2023 DGD Loan Agreement”) with the DGD Joint Venture that replaced and superseded in its entirety the 2019 DGD Loan Agreement maturesand pursuant to which the DGD Lenders have committed to making loans available to the DGD Joint Venture in the total amount of $200.0 million with each lender committed to $100.0 million of the total commitment. Any borrowings by the DGD Joint Venture under the 2023 DGD Loan Agreement are at the applicable annum rate equal to the sum of (a) Term SOFR on such day plus (b) 2.50%. The 2023 DGD Loan Agreement expires on June 15, 2026. In September 2022 and again in December 2022, the DGD Joint Venture borrowed all $50.0 million available under the 2019 DGD Loan Agreement, including the Company's full $25.0 million commitment. The Company received interest from the DGD Joint Venture for the three months ended July 1, 2023 and July 2, 2022 of approximately $0.1 million and $0.2 million, respectively and received interest from the DGD Joint Venture for the six months ended July 1, 2023 and July 2, 2022 of approximately $0.6 million and $0.4 million, respectively. As of July 1, 2023 and December 31, 2017, unless extended by agreement of the parties. As of September 30, 2017, no amounts are2022, zero and $25.0 million, respectively, was owed to Darling Green under the 2023 DGD Loan Agreement. TheAgreement and the 2019 DGD Loan Agreement, as applicable. This note receivable amount is included in other current assets on the balance sheet and is included in investing activities on the cash flow statement.
On June 23, 2023, the DGD Joint Venture togetherentered into an amended and restated credit agreement for $400.0 million senior, unsecured revolving credit facility, with itsCoBank ACB acting as lead arranger and the administrative agent for the lending group, which is comprised of Farm Credit System institutions. The revolving credit facility matures June 23, 2026 and is non-recourse to the joint venture partners, evaluatespartners. As of July 1, 2023, the DGD Joint Venture has borrowings outstanding of $50.0 million under this unsecured revolving credit facility.
Based on the sponsor support agreements executed in connection with the initial construction of the DGD St. Charles Plant, the Company contributed a total of approximately $111.7 million for initial completion of the DGD St Charles Plant, and each partner has subsequently made $528.8 million in additional capital contributions to the DGD Joint Venture. As of July 1, 2023, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $2,144.0 million included on the consolidated balance sheet.
The Company’s original investment in DGD has expanded since 2011 to the point that it is now integral to how Darling operates its capitalbusiness. Darling traditionally collected and converted used cooking oil and animal fats into feed ingredients which were sold on a caloric value to feed animals as well as for industrial technical uses. Over the past decade, the world’s increasing focus on climate change and greenhouse gas has provided a new finished market for the Company’s finished fats ingredients. With Darling’s significant fats ownership, this has and continues to transform how Darling operates. In 2022, a large portion of Darling’s total U.S. finished fats products were sold to the DGD Joint Venture as feedstock for renewable diesel. In 2022, DGD was Darling’s largest finished product customer in terms of net sales, with Darling recording sales of approximately $1.1 billion to DGD or 17% of total net sales.
From a procurement, production and distribution standpoint, DGD has become integral to Darling’s base business. DGD is integrated to the Company’s operations via the combined vertical operating structure from timecollecting raw fats, to time, including opportunitiesprocessing collected fats at Darling facilities worldwide to refinancetransporting the joint venture.refined fats to the DGD St. Charles and Port Arthur Plants as feedstock. The Darling supply chain has become more efficient and sustainable with transparency for verification to obtain full value to low carbon intensity markets. The development of the low carbon markets in North America and Europe has influenced how Darling operates its core business and has also been a driver for the recent DGD expansions, which are making DGD much more relevant to Darling’s earnings. Since 2011 when construction began on DGD, Darling has invested substantially to increase its U.S. railcar fleet to efficiently manage nationwide transportation of Darling fats to DGD. Additionally, Darling acquired an Iowa location on the Mississippi River that further enhances the ability of the Company's Midwest network of facilities to collect and deliver feedstocks to DGD via water, rail or truck from a centralized location. In fiscal 2022, Darling acquired both Valley Proteins and FASA, each of which supply additional feedstocks to DGD. Darling has also stepped up collection efforts by providing indoor used cooking oil collection units in exchange for extended collection contracts at eating establishments and has moved to more of a centralized digital marketing effort with restaurant chains and franchise groups and invested in internet search engine key words to improve visibility with restaurants. The Company also includes DGD in marketing efforts to emphasize environmental sustainability that restaurants participate in when their used cooking oil is collected by Darling. From a production standpoint, Darling now isolates used cooking oil from other fats to preserve identification to qualify for a higher carbon intensity value. As a result, the Company includes its equity in net income of the DGD Joint Venture as operating income.
Financial Impact of Significant Debt Outstanding
The Company has a substantial amount of indebtedness, which could make it more difficult for the Company to satisfy its obligations to its financial lenders and its contractual and commercial commitments, limit the Company's ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements on commercially reasonable terms or at all, require the Company to use a substantial portion of its cash flows from operations to pay principal and interest on its indebtedness instead of other purposes, thereby reducing the amount of the Company's cash flows from operations available for working capital, capital expenditures, acquisitions and other general corporate purposes, increase the Company's vulnerability to adverse economic, industry and business conditions, expose the Company to the risk of increased interest rates as certain of the Company's borrowings are at variable rates of interest, limit the Company's flexibility in planning for, or reacting to, changes in the Company's business and the industry in which the Company operates, place the Company at a competitive disadvantage compared to other, less leveraged competitors, and/or increase the Company's cost of borrowing.
Cash Flows and Liquidity Risks
Management believes that the Company’s cash flows from operating activities, consistent with the level generated in the first nine months of fiscal 2017, unrestricted cash and funds available under the Amended Credit Agreement, will be sufficient to meet the Company’s working capital needs and maintenance and compliance-related capital expenditures, scheduled debt and interest payments, income tax obligations, and other contemplated needs through the next twelve months. Numerous factors could have adverse consequences to the Company that cannot be estimated at this time, such as negative impacts from the COVID-19 outbreak and the Russia-Ukraine war and those other factors discussed below under the heading “Forward Looking Statements”. These factors, coupled with volatile prices for natural gas and diesel fuel, currency exchange fluctuations, general performance of the U.S. and global economies, disturbances in world financial, credit, commodities and stock markets, and any decline in consumer confidence, including the inability of consumers and companies to obtain credit due to lack of liquidity in the financial markets, among others, could negatively impact the Company’s results of operations in fiscal 2017year 2023 and thereafter. The Company reviews the appropriate use of unrestricted cash periodically. As of the date of this report, other than the Company's previously announced acquisition of Miropasz for approximately €110.0 million in cash, which will be financed through borrowings under the Company's Amended Credit Agreement, no decision has been made as to non-ordinary course material cash usages
at this time; however, potential usages could include: opportunistic capital expenditures and/or acquisitions and joint ventures; investments relating to the Company’s renewable energy strategy, including, without limitation, potential required funding obligations with respect to the DGD Joint Venture SAF project or potential investments in additional renewable diesel and/or biodiesel projects; investments in response to governmental regulations relating to human and animal food safety or other regulations; unexpected funding required by the legislation, regulation or mass termination of multiemployer plans; and paying dividends or repurchasing stock, subject to limitations under the Amended Credit Agreement, the 5.375 %6% Notes, the 5.25% Notes and the 4.75%3.625% Notes, as well as suitable cash conservation to withstand adverse commodity cycles. In August 2015, theThe Company's Board of Directors has approved a share repurchase program of up to an aggregate of $100.0$500.0 million of the Company's Common Stock depending on market conditions. The repurchases may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. The program initially approved by the Board of Directors was for a 24 month period; however, the Board has subsequently extended the program for an additional 24 month period and reset the amount of the program to $100.0 million. Accordingly, repurchases may occurruns through August 13, 2019,2024, unless further extended or shortened by the Board of Directors. SinceDuring the inceptionfirst six months of the share repurchase program,fiscal 2023, the Company has repurchased approximately $10.9$52.9 million of its common stock in the open market purchases and, asmarket. As of July 1, 2023, the date of this report, has $100.0Company had approximately $321.6 million remaining in its share repurchase program.
Each of the factors described above has the potential to adversely impact the Company's liquidity in a variety of ways, including through reduced raw materials availability, reduced finished product prices, reduced sales, potential inventory buildup, increased bad debt reserves, potential impairment charges and/or higher operating costs.
Sales prices for the principal products that the Company sells are typically influenced by the demand and pricing of renewable diesel and sales prices for agricultural-based alternative ingredients, the prices of which are based on established commodity markets and are subject to volatile changes. Any decline in these prices has the potential to adversely impact the Company's liquidity. Any of a decline in raw material availability, a decline in agricultural-based alternative ingredients prices, increases in energy prices or the impact of U.S. and foreign regulation (including, without limitation, China), changes in foreign exchange rates, imposition of currency controls and currency devaluations has the potential to adversely impact the Company's liquidity. A decline in commodities prices, a rise in energy prices, a slowdown in the U.S. or international economy, high inflation rates or other factors could cause the Company to fail to meet management's expectations or could cause liquidity concerns.
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Based upon the underlying purchase agreements, the Company has commitments to purchase $89.8$299.7 million of commodity products consisting of approximately $27.6$96.4 million of finished products, approximately $58.6$186.4 million of natural gas and diesel fuel and approximately $3.6$16.9 million of other commitments during the next twelve months,five years, which are not included in liabilities on the Company’s balance sheet at September 30, 2017. TheseJuly 1, 2023. The Company intends to take physical delivery of the commodities under the forward purchase agreements are entered into in the normal course of the Company’s business and accordingly, these contracts are not subject to derivative accounting.the requirements of fair value accounting because they qualify as normal purchases. The commitments will be recorded on the balance sheet of the Company when delivery of these commodities or products occurs and ownership passes to the Company during the remainder of fiscal 2017,2023 and through fiscal 2027, in accordance with accounting principles generally accepted in the U.S.United States.
Based upon the underlying lease agreements, the Company expects to pay approximately $41.1 million in operating lease obligations during the next twelve months, which are not included in liabilities on the Company’s balance sheet at September 30, 2017. These lease obligations are included in cost of sales or selling, general and administrative expense as the underlying lease obligation comes due, in accordance with GAAP.
The following table summarizes the Company’s other commercial commitments, including both on- and off-balance sheet arrangements that are part of the Company's Amended Credit Agreement and other foreign and domestic bank guarantees that are not a part of the Company's Amended Credit Agreement at September 30, 2017July 1, 2023 (in thousands):
| | | | | |
Other commercial commitments: | |
Standby letters of credit | $ | 3,871 | |
Standby letters of credit (ancillary facility) | 25,672 | |
Foreign and domestic bank guarantees | 23,871 | |
Total other commercial commitments: | $ | 53,414 | |
|
| | | |
Other commercial commitments: | |
Standby letters of credit | $ | 24,017 |
|
Foreign bank guarantees | 12,209 |
|
Total other commercial commitments: | $ | 36,226 |
|
CRITICAL ACCOUNTING POLICIES
The Company follows certain significant accounting policies when preparing its consolidated financial statements. A complete summary of these policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2022, filed with the SEC on February 28, 2017.27, 2023.
Based on the Company’s annual impairment testing at October 29, 2016, the fair values of the Company’s reporting units containing goodwill exceeded the related carrying value. However, the fair value of six of the Company's nine reporting units was less than 30% in excess of its carrying value and one reporting unit (ERS Feed) was approximately 8% in excess of its carrying value, with goodwill of approximately $200.6 million on this reporting unit. The Company determined the fair value of reporting units with the assistance of a valuation expert who assisted the Company and primarily used the Income Approach to determine the fair value of the Company's reporting units. Key assumptions that impacted the discounted cash flow model were raw material volumes, gross margins, terminal growth rates and discount rates. It is possible, depending upon a number of factors that are not determinable at this time or within the control of the Company, that the fair value of these six reporting units could decrease in the future and result in an impairment to goodwill. The amount of goodwill allocated to these six reporting units was approximately $770.3 million. The Company's management believes the biggest risk to these reporting units is decreasing finished product prices impacting gross margins and an economic slowdown that would impact raw material suppliers. As of September 30, 2017, there were no triggering events noted that would indicate that the goodwill allocated to any of the Company's reporting units is impaired.
NEW ACCOUNTING PRONOUNCEMENTS
In August 2017,See Note 23, “New Accounting Pronouncements,” to the FASB issued ASU No. 2017-12, Targeted Improvement to Accounting for Hedging Activities. This ASU amends Topic 815, Derivatives and Hedging, which is intended to more closely align hedge accounting with companies' risk management strategies and simplify the application of hedge accounting. The guidance includes certain targeted improvements to ease the operational burden of applying hedge accounting. The ASU is effective for fiscal years beginning after December 15, 2018 and for interim periods therein with early adoption permitted. The Company will be required to apply the guidance on a cumulative-effect basis with adjustment to retained earnings as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this standard.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU amends Topic 715, Compensation - Retirement Benefits, which requires that an employer report the service cost component of net benefit costs to be disaggregated from all other components and reported in the same line item or items as other compensation costs. The other components of net benefit cost are required to be presented in the income statement separately from the service cost. The ASU is effective for fiscal years beginning after December 15, 2017 and for interim periods therein. The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.statements for a description of new accounting pronouncements.
In January 2017, the FASB issued ASU No. 2017-04 Simplifying the Test for Goodwill Impairment. This ASU amends Topic 350, Intangibles-Goodwill and Other, which will simplify the goodwill impairment calculation by eliminating Step 2 from the current goodwill impairment test. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of the assets and liabilities as if that reporting unit had been acquired in a business combination. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. This ASU amends Topic 805, Business Combinations, which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. This ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities (collectively, the set) is not a business. In order to be considered a business, the set would need to include an input and a substantive process that together significantly contribute to the ability to create outputs. This ASU is effective for fiscal year beginning after December 15, 2017 and interim periods within those fiscal years. The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash. This ASU amends Topic 230, Statement of Cash Flows, which includes new guidance on the classification and presentation of restricted cash in the statement of cash flows in order to eliminate the discrepancies that currently exist in how companies present these changes. This ASU requires restricted cash to be included with cash and cash equivalents when explaining the changes in cash in the statement of cash
flows. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This ASU amends Topic 230, Statement of Cash Flows, which is intended to reduce the existing diversity in practice for classifying various types of cash flows including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interest in securitizations. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The initial adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new ASU, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance lessor accounting is largely unchanged. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. This ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is assessing the impact of this new standard, specifically on its consolidated balance sheets, and does not expect adoption to significantly change the recognition, measurement or presentation of lease expense within the consolidated statements of operations or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which will supersede nearly all existing revenue recognition guidance under GAAP. The new ASU introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this ASU requires disclosures sufficient to enable the users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. In July 2015, the FASB deferred the elective date of the standard by one year. This ASU allows for either full retrospective or modified retrospective adoption and will become effective for the Company for the fiscal years beginning after December 15, 2017. The Company has completed its assessment of this ASU to identify any potential changes in the amount and timing of revenue recognition for its current contracts and the expected impact on the Company's business processes, systems and controls. Based on this assessment, the Company has elected to adopt this standard on a modified retrospective basis effective in fiscal 2018. The adoption will not change the timing of revenues as the Company's revenues have been determined to be recognized at a point in time and not over time. The Company has elected not to capitalize contract fulfillment costs as the recovery of such costs are for less than one year's time and are not material to the Company. Additionally, the Company has elected to treat shipping and handling as fulfillment costs and to report sales taxes net, which will result in a reduction of revenue and a reduction of cost of sales for fiscal 2016 of approximately $155.1 million and expects the reduction of revenue and cost of sales in fiscal 2017 to be similar to fiscal 2016 with no impact on overall earnings. The Company is currently reviewing the expanded incremental disclosures and the disaggregation of revenues disclosures as required under ASU No. 2014-09.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking” statements that involveare subject to risks and uncertainties. The wordsuncertainties that could cause actual results to differ materially from those expressed or implied in the statements. Statements that are not statements of historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “planned,” “contemplate,” “potential,” “possible,” “proposed,” “intend,” “believe,” “anticipate,” “expect,” “estimate,” “intend,” “could,” “may,” “will,” “would,” “should,” “planned,” “potential,“could,” and similar expressions are intended to identify forward-looking statements. All statements other than statements of historical facts included in this report are forward looking statements, including, without limitation, the statements under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding industry prospects, the Company’s financial position andor the Company's use of cash. ActualForward-looking statements are based on the Company's current expectations and assumptions regarding its business, the economy and other future conditions. The Company cautions readers that any such forward-looking statements it makes are not guarantees of future performance and that actual results couldmay differ materially from those discussedanticipated results or expectations expressed in theits forward-looking statements as a result of certaina variety of factors, including many that are beyond the control of the Company. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that these expectations will prove to be correct.Company's control.
In addition to those factors discussed elsewhere in this report and in the Company's other public filings with the SEC, important factors that could cause actual results to differ materially from the Company’s expectations include: existing and unknown future limitations on the ability of the Company's direct and indirect subsidiaries to make their cash flow available to the Company for payments on the Company's indebtedness or other purposes; global demands for bio-fuels and grain and oilseed commodities, which have exhibited volatility, and can impact the cost of feed for cattle, hogs and poultry, thus affecting available rendering feedstock and selling prices for the Company’s products; reductions in raw material volumes available to the Company due to weak margins in the meat production industry as a result of higher feed costs, reduced consumer demand or other factors, reduced volume from food service establishments, or
otherwise; reduced demand for animal feed; reduced finished product prices, including a decline in fat and used cooking oil finished product prices; changes to worldwide government policies around the world relating to renewable fuels and green housegreenhouse gas (“GHG”) emissions that adversely affect programs like the U.S. government's renewable fuel standard, low carbon fuel standards (“LCFS”) and tax credits for biofuels both in the United States and abroad; possible product recall resulting from developments relating to the discovery of unauthorized adulterations to food or food additives; the occurrence of Bird Flu including, but not limited to H5N12009 H1N1 flu (initially known as “Swine Flu”), highly pathogenic strains of avian influenza (collectively known as “Bird Flu”), severe acute respiratory syndrome (“SARS”), bovine spongiform encephalopathy (or “BSE”), porcine epidemic diarrhea (“PED”) or other diseases associated with animal origin in the United States or elsewhere, such as the outbreak of African Swine Fever in China and elsewhere; the occurrence of pandemics, epidemics or disease outbreaks, such as the COVID-19 outbreak; unanticipated costs and/or reductions in raw material volumes related to the Company’s compliance with the existing or unforeseen new U.S. or foreign (including, without limitation, China) regulations (including new or modified animal feed, Bird Flu, SARS, PED, BSE or BSEASF or similar or unanticipated regulations) affecting the industries in which the Company operates or its value added products; risks associated with the DGD Joint Venture, including possible unanticipated operating disruptions, a decline in margins on the products produced by the DGD Joint Venture and issues relating to the announced expansionSAF upgrade project; risks and uncertainties relating to international sales and operations, including imposition of tariffs, quotas, trade barriers and other trade protections imposed by foreign countries; tax changes, such as the introduction of a global minimum tax; difficulties or a significant disruption in ourthe Company's information systems or failure to implement new systems and software successfully, including our ongoing enterprise resource planning project;successfully; risks relating to possible third party claims of intellectual property infringement; increased contributions to the Company’s pension and benefit plans, including multiemployer and employer-sponsored defined benefit pension plans as required by legislation, regulation or other applicable U.S. or foreign law or resulting from a U.S. mass withdrawal event; bad debt write-offs; loss of or failure to obtain necessary permits and registrations; continued or escalated conflict in the Middle East, North Korea, Ukraine or elsewhere;elsewhere, including the Russia-Ukraine war; uncertainty regarding the exit of the U.K. from the European Union; and/or unfavorable export or import markets. These factors, coupled with volatile prices for natural gas and diesel fuel, inflation rates, climate conditions, currency exchange fluctuations, general performance of the U.S. and global economies, disturbances in world financial, credit, commodities and stock markets, such as the recent turmoil in the world banking markets, and any decline in consumer confidence and discretionary spending, including the inability of consumers and companies to obtain credit due to lack of liquidity in the financial markets, among others, could cause actual results to vary materially from the forward-looking statements included in this report or negatively impact the Company's results of operations. Among other things, future profitability may be affected by the Company’s ability to grow its business, which faces competition from companies that may have substantially greater resources than the Company. The Company's announced share repurchase program may be suspended or discontinued at any time and purchases of shares under the program are subject to market conditions and other factors, which are likely to change from time to time. For more detailed discussion of these factors see the Risk Factors discussion in Item 1A of Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2022. The Company cautions readers that all forward-looking statements speak only as of the date made, and the Company undertakes no obligation to update any forward lookingforward-looking statements, whether as a result of changes in circumstances, new events or otherwise.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risks affecting the Company include exposures to changes in prices of the finished products the Company sells, interest rates on debt, availability of raw material supplies and the price of natural gas and diesel fuel used in the Company's plants. Raw materials available to the Company are impacted by seasonal factors, including holidays, when raw material volume declines; warm weather, which can adversely affect the quality of raw material processed and finished products produced; and cold weather, which can impact the collection of raw material. Predominantly all of the Company’s finished products are commodities that are generally sold at prices prevailing at the time of sale. Additionally, with the acquisition of foreign entities we are exposed to foreign currency exchange risks, imposition of currency controls and the possibility of currency devaluation.
The Company makes limited use of derivative instruments to manage cash flow risks related to interest rates, natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Interest rate swaps are entered into with the intent of managing overall borrowing costs by reducing the potential impact of increases in interest rates on floating-rate long-term debt. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Soybean meal forwards and options are entered into with the intent of managing the impact of changing prices for poultry meal sales. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of BBP by reducing the impact of changing prices. Foreign
currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. The interest rate swaps andCompany intends to take physical delivery of the natural gas swaps are subject to the requirements of FASB authoritative guidance. Somecommodities under certain of the Company's natural gas and diesel fuel instruments and accordingly, these contracts are not subject
to the requirements of FASB authoritative guidancefair value accounting because some of the natural gas and diesel fuel instrumentsthey qualify as normal purchases as defined in FASB authoritative guidance.purchases. At September 30, 2017,July 1, 2023, the Company had natural gas swapsoybean meal forward and option contracts, foreign exchange forward and option contracts and corn option contractsinterest rate swaps outstanding that qualified and were designated for hedge accounting as well as corn option and forward contracts, soybean meal forward and option contracts and foreign currency forward contracts and soybean meal option contracts that did not qualify and were not designated for hedge accounting.
In the first nine monthsand second quarter of fiscal 2017,2023, the Company entered into natural gas swap contractsinterest rate swaps that are considereddesignated as cash flow hedges. The notional amount of these swaps totaled $900.0 million. Under the contracts, the Company is obligated to pay a weighted average rate of 4.007% while receiving the 1-Month SOFR rate, which excludes margin. Under the terms of the natural gas swap contracts,interest rate swaps, the Company fixed the expected purchase cost ofhedged a portion of its U.S. plants' forecasted natural gas usagevariable rate debt into the first quarter of fiscal 2018. As of September 30, 2017,2026. At July 1, 2023, the aggregate fair value of these natural gas contractsinterest rate swaps was approximately $0.1 million and is$13.3 million. These amounts are included in other current assets and other assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
In the first quarter of fiscal 2023, the Company also entered into cross currency swaps that are designated as cash flow hedges. The notional amount of these swaps was €519.2 million. Under the contracts, the Company is obligated to pay a 4.6% fixed rate while receiving a weighted average fixed rate of 5.799%. Under the terms of the cross currency swaps, the Company hedged its intercompany notes receivable into the first quarter of 2025. Accordingly, changes in the fair value of the cash flow hedge are initially recorded as gains and/or losses as a component of accumulated other comprehensive loss. We immediately reclassify from accumulated other comprehensive loss to earnings an amount to offset the remeasurement recognized in earnings associated with the respective intercompany loan. Additionally, we reclassify amounts from accumulated other comprehensive income for(loss) associated with the effective portion.interest rate differential between the U.S. dollar and a Euro denominated intercompany loan to interest expense. At July 1, 2023, the aggregate fair value of these cross currency swaps was approximately $4.1 million. These amounts are included in other current assets and other non-current liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
In fiscal 2016 and the first nine months of fiscal 2017,2022, the Company entered into corn option contracts on the Chicago Board of Trade that are considereddesignated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the fourthsecond quarter of fiscal 2018.2023. There are not any open designated corn option contracts at July 1, 2023. As of September 30, 2017,July 1, 2023 and December 31, 2022 the aggregate fair value of these corn option contracts was approximately $3.0$0.0 million and is$0.9 million, respectively. The amounts outstanding as of December 31, 2022 are included in other current assets and other assets on the balance sheet, with an offset recorded in accumulated other comprehensive income for the effective portion. From time to time, theloss. The Company may enter into corn option contracts in the future. Gainsfuture from time to time.
In fiscal 2022 and losses arising from openthe first quarter of fiscal 2023, the Company entered into foreign exchange forward and closed portionsoption contracts that are considered cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2024. As of July 1, 2023 and December 31, 2022, the aggregate fair value of these foreign exchange contracts may have a significant impactwas approximately $33.6 million and $13.8 million, respectively. As of July 1, 2023, approximately $28.7 million is included in other current assets and approximately $4.9 million is included in other assets, with an offset recorded in accumulated other comprehensive loss. As of December 31, 2022, approximately $15.6 million is included in other current assets, approximately $1.0 million is included in accrued expenses and approximately $0.8 million is included in other non-current liabilities on the Company's income if there is significant volatilitybalance sheet, with an offset recorded in accumulated other comprehensive loss.
In fiscal 2022 and fiscal 2023, the priceCompany entered into soybean meal forward and option contracts to hedge a portion of corn.its forecasted poultry meal sales into the fourth quarter of fiscal 2023. As of July 1, 2023 and December 31, 2022, the aggregate fair value of the soybean meal contracts was $0.1 million and $0.6 million, respectively. The amounts are included in other current assets and accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
As of September 30, 2017,July 1, 2023, the Company had the following outstanding forward contractsand option contract amounts that were entered into to hedge the future payments of intercompany note transactions, foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency. All of these transactions are currently not designated for hedge accountingcurrency (in thousands):
| | Functional Currency | Functional Currency | | Contract Currency | | Range of | U.S. | Functional Currency | | Contract Currency | | Range of | U.S. |
Type | Amount | | Type | Amount | | Hedge rates | Equivalent | Type | Amount | | Type | Amount | | Hedge rates | Equivalent |
Brazilian real | 33,790 |
| | Euro | 9,030 |
| | 3.49 - 3.99 | $ | 10,605 |
| Brazilian real | 36,462 | | | Euro | 6,778 | | | 5.24 - 5.76 | $ | 7,567 | |
Brazilian real | 80,286 |
| | U.S. dollar | 24,430 |
| | 3.16 - 3.53 | 24,430 |
| Brazilian real | 3,073,819 | | | U.S. dollar | 742,803 | | | 3.35 - 6.63 | 742,803 | |
Brazilian real | 953 |
| | Mexican peso | 5,472 |
| | 0.17 - 0.18 | 299 |
| |
| Euro | 82,573 |
| | U.S. dollar | 97,985 |
| | 1.06 - 1.19 | 97,985 |
| Euro | 26,862 | | | U.S. dollar | 29,329 | | | 1.08 - 1.11 | 29,329 | |
Euro | 7,463 |
| | Polish zloty | 32,000 |
| | 4.25 - 4.29 | 8,815 |
| Euro | 33,017 | | | Polish zloty | 147,500 | | | 4.45 - 4.50 | 36,052 | |
Euro | 4,040 |
| | Japanese yen | 526,400 |
| | 128.91 - 132.86 | 4,772 |
| Euro | 10,790 | | | Japanese yen | 1,661,510 | | | 146.39 - 156.83 | 11,781 | |
Euro | 60,758 |
| | Chinese renminbi | 474,901 |
| | 7.49 - 7.86 | 71,767 |
| Euro | 20,614 | | | Chinese renminbi | 158,683 | | | 7.33 - 7.89 | 22,508 | |
Euro | 11,455 |
| | Australian dollar | 17,200 |
| | 1.50 | 13,530 |
| Euro | 18,250 | | | Australian dollar | 29,691 | | | 1.62 - 1.64 | 19,927 | |
Euro | 2,281 |
| | British pound | 2,000 |
| | 0.88 | 2,694 |
| Euro | 4,842 | | | British pound | 4,162 | | | 0.86 | 5,287 | |
Euro | | Euro | 35 | | | Canadian dollar | 50 | | | 1.44 | 38 | |
| Polish zloty | 35,960 |
| | Euro | 8,383 |
| | 4.22 - 4.33 | 9,845 |
| Polish zloty | 1,380 | | | U.S. dollar | 339 | | | 4.07 | 339 | |
Polish zloty | | Polish zloty | 31,858 | | | Euro | 7,170 | | | 4.44 - 4.46 | 7,816 | |
British pound | | British pound | 69 | | | Euro | 81 | | | 0.86 | 88 | |
| Japanese yen | 40,395 |
| | U.S. dollar | 362 |
| | 109.66 - 113.02 | 362 |
| Japanese yen | 371,817 | | | U.S. dollar | 2,716 | | | 132.67 - 142.51 | 2,716 | |
U.S. dollar | | U.S. dollar | 1,094 | | | Japanese yen | 156,000 | | | 142.54 | 1,094 | |
U.S. dollar | | U.S. dollar | 562,340 | | | Euro | 519,182 | | | 1.08 | 562,340 | |
| | | | | $ | 245,104 |
| |
| | | | $ | 1,449,685 | |
The above foreign currency contracts mature within one year and includethat are not designated as hedges on approximately $83.0 million of intercompany notes. The above foreign currency contracts had an aggregate fair value of approximately $0.1$1.9 million and are included in other current assets and accrued expenses at September 30, 2017.July 1, 2023.
Additionally, the Company had corn options contracts and forward contracts and soybean meal forward and option contracts that are marked to market because they did not qualify for hedge accounting at September 30, 2017.July 1, 2023. These contracts have an aggregate fair value of less than $1.2approximately $0.5 million and $0.3 million, respectively and are included in other current assets and accrued expenses at September 30, 2017.July 1, 2023.
As of September 30, 2017,July 1, 2023, the Company had forward purchase agreements in place for purchases of approximately $58.6$186.4 million of natural gas and diesel fuel and approximately $3.6$16.9 million of other commitments in fiscal 2017.during the next five years. As of September 30, 2017,July 1, 2023, the Company had forward purchase agreements in place for purchases of approximately $27.6$96.4 million of finished product in fiscal 2017.during the next five years.
Foreign Exchange
The Company now has significant international operations and is subject to certain opportunities and risks, including currency fluctuations. As a result, the Company is affected by changes in foreign currency exchange rates, particularly with
respect to the euro, British pound,Brazilian real, Canadian dollar, Australian dollar, Chinese renminbi, Brazilian real,British pound, Polish zloty, and Japanese yen and the Argentine peso.yen.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As required by Rule 13a-15(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), the Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. As defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of itsThere are inherent limitations internal control over financial reporting may not
prevent or detect misstatements. Projectionsto the effectiveness of any evaluationsystem of effectiveness to future periods are subject todisclosure controls and procedures, including the risk thatpossibility of human error and circumvention or overriding of the controls may become inadequate becauseand procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.achieving their control objectives.
Based on management’s evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting. As required by Exchange Act Rule 13a-15(d), the Company’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any change occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Based on that evaluation, there has been no change in the Company’s internal control over financial reporting during the last fiscal quarter of the period covered by this report other than SOX control changes related to the upgrade of accounting software in North American and at its international operations that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting.
reporting other than internal controls being implemented at Group Op de Beeck, Valley Proteins and FASA.
During the first quarter of 2023, the Company acquired Gelnex. The Company is currently in the process of integrating this acquisition pursuant to the Sarbanes-Oxley Act of 2002. The Company is evaluating changes to processes, information technology systems and other components of internal controls over financial reporting as part of the ongoing integration activities, and as a result, certain controls will be periodically changed. The Company believes, however, it will be able to maintain sufficient controls over the substantive results of its financial reporting throughout the integration process. Due to the timing of the Gelnex Acquisition, the internal control over financial reporting of Gelnex will be excluded from management's assessment of the Company's internal control over financial reporting for fiscal 2023, as permitted under SEC regulations.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017JULY 1, 2023
PART II: Other Information
Item 1. LEGAL PROCEEDINGS
The information required by this Item 1 is contained within Note 1518 (Contingencies) on pages 2129 through 2230 of this Form 10-Q and is incorporated herein by reference.
Item 1A. RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discusseddescribed in Part I, “Item 1A. Risk Factors” in the Company'sour Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2022, which could materially affect the Company'sour business, financial condition or future results. The risks described in this report and in the Company'sour Annual Report on Form 10-K are not the only risks facing the Company.we face. Additional risks and uncertainties that are not currently known to the Company or that the Companyare currently deemdeemed to be immaterial may also may materially and adversely affect the Company'sour business operations and financial condition or future results.the market price of our common stock.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On December 9, 2021, the Company’s Board of Directors approved the extension for an additional two years ending August 13, 2024 of its previously announced share repurchase program and refreshed and increased the amount of the program up to an aggregate of $500.0 million of the Company's common stock depending on market conditions. During the first six months of fiscal 2023, the Company repurchased approximately $52.9 million, including commissions, worth of its common stock in the open market. As of July 1, 2023, the Company had approximately $321.6 million remaining under the share repurchase program initially approved in August 2017 and subsequently extended to August 13, 2024.
The following table is a summary of equity securities purchased by the Company during the second quarter of fiscal 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
ISSUER PURCHASES OF EQUITY SECURITIES |
Period | | Total Number of Shares Purchased (1) | | Average Price Paid per Share (2) | | Total Number of Shares Purchased as part of Publicly Announced Plans or Programs (4) | | Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plan or Programs at End of Period. |
April 2023: | | | | | | | | |
April 2, 2023 through April 29, 2023 | | 194 | | | 58.30 | | | — | | | $ | 330,728,221 | |
May 2023: | | | | | | | | |
April 30, 2023 through May 27, 2023 | | 5,650 | | | 61.52 | | | — | | | 330,728,221 | |
June 2023: | | | | | | | | |
May 28, 2023 through July 1, 2023 | | 158,518 | | | 62.13 | | | 153,202 | | | 321,584,728 | |
Total | | 164,362 | | (3) | 61.62 | | | 153,202 | | | $ | 321,584,728 | |
(1) All shares purchased during the second quarter were acquired by the Company pursuant to the announced share repurchase program (other than shares withheld for taxes on restricted stock, restricted stock units, performance units and exercised options and the strike price on exercised options).
(2) The average price paid per share is calculated on a trade date basis and excludes commissions.
(3) Includes 11,160 shares withheld for the exercise of options and taxes on restricted stock, restricted stock units, performance units and options. The 153,202 shares were repurchased at an average of $59.57 per share.
(4) Represents purchases made during the quarter under the authorization from the Company's Board of Directors, as announced, to repurchase up to an aggregate of $500.0 million of the Company's common stock over the period ending August 13, 2024, unless extended or shortened by the Board of Directors.
Item 5. OTHER INFORMATION
Rule 10b5-1 Plan Adoptions and Modifications
None.
Item 6. EXHIBITS
The following exhibits are filed herewith:
|
| | | | | | | | | | | | | |
| 31.14.1 | |
| 4.2 | |
| 4.3 | |
| 10.1 | |
| 31.1 | |
| 31.2 | |
| 32 | |
| 101 | Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2017July 1, 2023 and December 31, 2016;2022; (ii) Consolidated Statements of Operations for the three and ninesix months ended September 30, 2017July 1, 2023 and October 1, 2016;July 2, 2022; (iii) Consolidated Statements of Comprehensive IncomeIncome/(Loss) for the three and ninesix months ended September 30, 2017July 1, 2023 and OctoberJuly 2, 2022; (iv) Consolidated Statements of Stockholders' Equity for the six months ended July 1, 2016; (iv)2023 and July 2, 2022; (v) Consolidated Statements of Cash Flows for the ninesix months ended September 30, 2017July 1, 2023 and October 1, 2016; (v)July 2, 2022; (vi) Notes to the Consolidated Financial Statements. |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | DARLING INGREDIENTS INC. |
| | | |
| | | |
Date: | August 8, 2023 | DARLING INGREDIENTS INC.By: | /s/ Brad Phillips |
| | | Brad Phillips |
| | | Chief Financial Officer |
Date: | November 7, 2017 | By: | /s/ Randall C. Stuewe |
| | | Randall C. Stuewe |
| | | Chairman(Principal Financial Officer and |
| | | Chief Executive Officer Duly Authorized Officer) |
|
| | | |
Date: | November 7, 2017 | By: | /s/ Patrick C. Lynch |
| | | Patrick C. Lynch |
| | | Executive Vice President |
| | | Chief Financial Officer |
| | | (Principal Financial Officer) |