UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 April 3, 1999
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 0-24620
DARLING INTERNATIONAL 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 No.)
251 O'CONNOR RIDGE BLVD., SUITE 300, IRVING, TEXAS 75038
(Address of principal executive offices)
(972) 717-0300
(Registrant's telephone number)
Not applicable
(Former name, address and fiscal year, if changed since last report)
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 report(s)), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
The number of shares outstanding of the Registrant's common stock, $0.01 par
value, was 15,568,362 as of May 13, 1999.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 3, 1999
TABLE OF CONTENTS
Page No.
PART I: Financial Information
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets. . . . . . . . . . . . 3
April 3, 1999 (unaudited) and January 2, 1999
Consolidated Statements of Operations (unaudited). . . . . 4
Three Months Ended April 3, 1999 and April 4, 1998
Consolidated Statements of Cash Flows (unaudited). . . . . 5
Three Months Ended April 3, 1999 and April 4, 1998
Notes to Consolidated Financial Statements (unaudited). . . 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . 11
PART II: Other Information
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS . . . . . . . . . . . . . . . 16
Item 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 17
Signatures. . . . . . . . . . . . . . . . . . . 18
Index to Exhibits. . . . . . . . . . . . . . . . . 19
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 3, 1999 and January 2, 1999
(in thousands, except shares and per share data)
April 3, January 2,
1999 1999
---------- ----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,625 $ 12,317
Accounts receivable 20,204 16,615
Inventories 9,057 11,707
Prepaid expenses 7,725 3,977
Deferred income tax assets 4,006 3,928
Other 603 671
-------- -------
Total current assets 43,220 49,215
Property, plant and equipment, less accumulated depreciation
of $106,510 at April 3, 1999 and $100,713 at January 2, 1999 133,311 140,074
Collection routes and contracts, less accumulated
amortization of $13,549 at April 3, 1999 and
$12,101 at January 2, 1999 41,530 42,978
Goodwill, less accumulated amortization of $570
at April 3, 1999 and $513 at January 2, 1999 5,434 5,461
Other assets 5,246 5,438
Net assets of discontinued operations 20,000 20,000
-------- --------
$ 248,741 $ 263,166
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Current portion of long-term debt $ 8,318 $ 7,717
Accounts payable, principally trade 9,525 15,517
Accrued expenses 20,369 22,255
Accrued interest 158 656
-------- --------
Total current liabilities 38,370 46,145
Long-term debt, less current portion 139,526 140,613
Other non-current liabilities 23,640 24,836
Deferred income taxes 13,767 13,626
-------- --------
Total liabilities 215,303 225,220
-------- --------
Stockholders' equity
Common stock, $.01 par value; 25,000,000 shares authorized;
15,589,077 and 15,589,077 shares issued and outstanding at
April 3, 1999 and at January 2, 1999, respectively 156 156
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, none issued - -
Additional paid-in capital 35,063 35,063
Retained earnings/(deficit) (1,781) 2,727
Total stockholders' equity 33,438 37,946
-------- --------
Contingencies (note 3)
$ 248,741 $ 263,166
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS Three months
ended April 3, 1999 and April 4, 1998
(in thousands, except per share data)
Three Months Ended
April 3 , April 4,
1999 1998
----------- ---------
(unaudited)
Net sales $ 69,846 $ 94,407
Costs and expenses:
Cost of sales and operating expenses 57,719 76,593
Selling, general and administrative expenses 6,945 8,824
Depreciation and amortization 7,807 8,100
-------- --------
Total costs and expenses 72,471 93,517
-------- --------
Operating income/(loss) (2,625) 890
-------- --------
Other income/(expense):
Interest expense (3,581) (2,926)
Other, net (401) (157)
-------- --------
Total other income/(expense) (3,982) (3,083)
-------- --------
Loss from continuing operations
before income taxes (6,607) (2,193)
Income tax benefit (2,416) (819)
-------- --------
Loss from continuing operations (4,191) (1,374)
Discontinued operations:
Loss from discontinued operations, net of tax - (30)
Estimated loss on disposal of discontinued operations, net of tax (317) -
-------- --------
Net loss $ (4,508) $ (1,404)
======== ========
Basic loss per share:
Continuing operations $(0.27) $(0.09)
Discontinued operations:
Loss from operations - -
Estimated loss on disposal (0.02) -
Total $ (0.29) $ (0.09)
======== ========
Diluted loss per share:
Continuing operations $(0.27) $(0.09)
Discontinued operations:
Loss from operations - -
Estimated loss on disposal (0.02) -
Total $ (0.29) $ (0.09)
======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS Three months
ended April 3, 1999 and April 4, 1998
(in thousands)
Three Months Ended
April 3, April 4,
1999 1998
----------- -----------
(unaudited)
Cash flows from operating activities:
Loss from continuing operations $ (4,191) $ (1,374)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 7,807 8,100
Deferred income tax 63 (915)
(Gain)/Loss on sales of assets (209) 15
Changes in operating assets and liabilities:
Accounts receivable (3,589) 8,737
Inventories and prepaid expenses (1,096) 2,713
Accounts payable and accrued expenses (7,878) (4,337)
Accrued interest (498) 22
Other (163) (394)
------- -------
Net cash provided/(used) by continuing operations (9,754) 12,567
Net cash provided/(used) by discontinued operations 119 (875)
------- -------
Net cash provided /(used) by operating activities (9,635) 11,692
------- -------
Cash flows from investing activities:
Recurring capital expenditures (763) (5,140)
Gross proceeds from sale of property, plant and equipment and
other assets 1,429 87
Payments related to routes and other intangibles (83) (387)
Net cash used in discontinued operations (330) (793)
------- -------
Net cash provided/(used) by investing activities 253 (6,233)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 40,194 23,499
Payments on long-term debt (40,625) (27,472)
Contract payments (773) (895)
Issuance of common stock - 50
Net cash used in discontinued operations (150) (102)
------- --------
Net cash used in financing activities (1,354) (4,920)
------- --------
Net increase/(decrease) in cash and cash equivalents from
discontinued operations 44 (147)
------- --------
Net increase/(decrease) in cash and cash equivalents (10,692) 392
Cash and cash equivalents at beginning of period 12,317 2,949
------- --------
Cash and cash equivalents at end of period $ 1,625 $ 3,341
======= ========
Supplemental disclosure of cash flow information: Cash paid during the quarter
for:
Interest $ 4,234 $ 3,086
------- --------
Income taxes, net of refunds $ (120) $ 106
------- --------
The accompanying notes are an integral part
of these consolidated financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
April 3, 1999
(unaudited)
(1) General
The accompanying consolidated financial statements for the three month
periods ended April 3, 1999 and April 4, 1998 have been prepared by
Darling International Inc. (Company) 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) which 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 full fiscal year. Certain information and footnote
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations. However, management of
the Company believes 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 January 2, 1999.
(2) Certain Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
The operations of International Processing Corporation have been
reclassified as discontinued operations. As such, certain prior
year balances have been reclassified in order to conform to
current year presentation.
(b) Fiscal Periods
The Company has a 52/53 week fiscal year ending on the Saturday
nearest December 31.
Fiscal periods for the consolidated financial statements included
herein are as of January 2, 1999, and include the 13 weeks ended
April 3, 1999 and the 13 weeks ended April 4, 1998.
(c) Earnings/(Loss) Per Common Share
Basic earnings/(loss) per common share are computed by dividing
net earnings/(loss) attributable to outstanding common stock by
the weighted average number of common stock shares outstanding
during the year. Diluted earnings/(loss) per common share are
computed by dividing net earnings/(loss) attributable to
outstanding common stock by the weighted average number of common
shares outstanding during the year increased by dilutive common
equivalent shares (stock options) determined using the treasury
stock method, based on the average market price exceeding the
exercise price of the stock options.
The weighted average common shares used for basic earnings per
common share was 15,589,000 and 15,567,000 for April 3, 1999 and
April 4, 1998 respectively. The effect of all outstanding stock
options were excluded from diluted earnings/(loss) per common
share for both years because the effect was anti-dilutive.
(3) Contingencies
(a) ENVIRONMENTAL
Chula Vista
The Company is the owner of an undeveloped property located in
Chula Vista, California (the "Site"). A rendering plant was
operated on the Site until 1982. From 1959 to 1978, a portion of
the Site was used as an industrial waste disposal facility, which
was closed pursuant to Closure Order No. 80-06, issued by the State
of California Regional Water Quality Control Board for the San
Diego Region (the "RWQCB"). In June 1982, RWQCB staff approved a
completed closure plan which included construction of a containment
cell (the "Containment Cell") on a portion (approximately 5 acres)
of the Site to isolate contaminated soil excavated from the Site.
The Site has been listed by the State of California as a site for
which expenditures for removal and remedial actions may be made by
the State pursuant to the California Hazardous Substances Account
Act, California Health & Safety Code Section 25300 et seq.
Technical consultants retained by the Company have conducted
various investigations of the environmental conditions at the Site,
and in 1996, requested that the RWQCB issue a "no further action"
letter with respect to the Site. In 1997, the RWQCB issued Order
No. 97-40 prescribing a maintenance and monitoring program for the
Containment Cell. In June 1998, the RWQCB provided a letter to
assure potential purchasers and lenders of limitations on their
liability connected to the balance of the Site (approximately 30
acres) in order to facilitate a potential sale. The Company
continues to work with the RWQCB to define the scope of an
additional order which will address the Company's future
obligations for that remaining portion of the Site.
Cleveland
In August, 1997, the Company received a Notice of Violation ("NOV")
from the United States Environmental Protection Agency ("EPA") for
alleged violations of the Ohio Air Quality Rules as they relate to
odor emissions. The NOV asserted that the Cleveland, OH facility
was in violation of the State's nuisance rule based on a City of
Cleveland record of complaints associated with odors emanating from
its facility. Since December, 1992, the Company has been working
with the City of Cleveland under a Consent Agreement to address
such complaints and concerns of the neighborhood in close proximity
to the Plant. Upon receipt of the NOV the Company initiated a
cooperative effort with EPA to address the NOV. In August, 1998,
the Company received a second NOV from EPA which encompassed the
alleged violations from the first NOV and alleged several
violations of terms and conditions found in the Cleveland plant's
air permit. The Company again met with EPA to seek an amicable
resolution. Although rendering of animal by-products has been
discontinued at the Cleveland plant, EPA is not satisfied with this
as a resolution of the NOV and is seeking a monetary penalty. The
Company has challenged EPA's approach to resolution of the NOV as
well as EPA's authority to be involved with an enforcement action
connected with a state nuisance rule. The Company continues to seek
an amicable resolution.
(b) LITIGATION
Melvindale
A group of residents living near the Company's Melvindale, Michigan
plant has filed suit, purportedly on behalf of a class of persons
similarly situated. The class has not been certified. The suit is
based on legal theories of trespass, nuisance and negligence and/or
gross negligence, and is pending in the United States District
Court, Eastern District of Michigan. Plaintiffs allege that
emissions to the air, particularly odor, from the plant have
reduced the value and enjoyment of Plaintiffs' property, and
Plaintiffs seek damages, including mental anguish, exemplary
damages and injunctive relief. In a lawsuit with similar factual
allegations, also pending in United States District Court, Eastern
District of Michigan, the City of Melvindale has filed suit against
the Company based on legal theories of nuisance, trespass,
negligence and violation of Melvindale nuisance ordinances seeking
damages and declaratory and injunctive relief. The Company or its
predecessors have operated a rendering plant at the Melvindale
location since 1927 in a heavily industrialized area down river
south of Detroit. The Company has taken and is taking all
reasonable steps to minimize odor emissions from its recycling
processes and is defending the lawsuit vigorously.
Other Litigation
The Company is also a party to several other lawsuits, claims and
loss contingencies incidental to its business, including assertions
by regulatory agencies related to the release of unacceptable odors
from some of its processing facilities.
The Company purchases its workers compensation, auto and general
liability insurance on a retrospective basis. The Company accrues
its expected ultimate costs related to claims occurring during each
fiscal year and carries this accrual as a reserve until such claims
are paid by the Company.
The Company has established loss reserves for environmental and
other matters as a result of the matters discussed above. Although
the ultimate liability cannot be determined with certainty,
management of the Company believes that reserves for contingencies
are reasonable and sufficient based upon present governmental
regulations and information currently available to management. The
Company estimates the range of possible losses related to
environmental and litigation matters, based on certain assumptions,
is between $2.4 million and $8.4 million at April 3, 1999. The
accrued expenses and other noncurrent liabilities classifications
in the Company's consolidated balance sheets include reserves for
insurance, environmental and litigation contingencies of $21.4
million and $19.2 million at April 3, 1999 and January 2, 1999,
respectively. There can be no assurance, however, that final costs
will not exceed current estimates. The Company believes that any
additional liability relative to such lawsuits and claims which may
not be covered by insurance would not likely have a material
adverse effect on the Company's financial position, although it
could potentially have a material impact on the results of
operations in any one year.
(4) Business Segments
The Company operated on a worldwide basis within four industry
segments: Rendering, Restaurant Services, Esteem Products and Bakery
By-Products Recycling. The measure of segment profit (loss) includes
all revenues, operating expenses (excluding certain amortization of
intangibles), and selling, general and administrative expenses
incurred at all operating locations and exclude general corporate
expenses. Bakery Py-Products Recycling segment has been classified as
a discontinued operation since the fourth quarter of Fiscal 1998 (see
Note 2a).
Included in corporate activities are general corporate expenses and the
amortization of intangibles related to "Fresh Start Reporting." Assets
of corporate activities include cash, unallocated prepaid expenses,
deferred tax assets, prepaid pension, and miscellaneous other assets.
Rendering
Rendering consists of the collection and processing of animal
by-products from butcher shops, grocery stores and independent meat and
poultry processors, converting these wastes into similar products such
as useable oils and proteins utilized by the agricultural and
oleochemical industries.
Restaurant Services
Restaurant Services consists of the collection of used cooking oils
from restaurants and recycling them into similar products such as
high-energy animal feed ingredients and industrial oils. Restaurant
Services also provides grease trap servicing.
Esteem Products
Esteem Products consists of the development and marketing of enhanced
feed ingredients from existing raw material streams utilizing advanced
biochemistry and animal nutrition technologies.
Business Segment Net Revenues (in thousands):
April 3, 1999 April 4, 1998
--------------- --------------
Rendering:
Trade $ 54,336 $79,595
Intersegment 8,019 8,623
-------- --------
62,355 88,219
-------- --------
Restaurant Services:
Trade 15,327 14,811
Intersegment 1,700 2,216
-------- --------
17,027 17,027
-------- --------
Esteem Products:
Trade 183 -
Intersegment 24 -
207 -
Eliminations (9,743) (10,839)
-------- --------
Total $ 69,846 $ 94,407
======== ========
Business Segment Profit (Loss) (in thousands):
April 3, 1999 April 4, 1998
--------------- --------------
Rendering $ 1,038 $ 5,032
Restaurant Services 187 579
Esteem Products (534) (534)
Corporate Activities (3,717) (4,344)
Interest expense (3,581) (2,926)
------- -------
Loss from continuing operations
before income taxes $ (6,607) $(2,193)
======= ======
Certain assets are not attributable to a single operating segment but
instead relate to multiple operating segments operating out of
individual locations. These assets are utilized by both the Rendering
and Restaurant Services business segments and are identified in the
category Combined Rend./Rest. Svcs. Depreciation of Combined
Rend./Rest. Svcs. assets is allocated based upon an estimate of the
percentage of corresponding activity attributed to each segment.
Additionally, although intangible assets are allocated to operating
segments, the amortization related to the adoption of "Fresh Start
Reporting" is not considered in the measure of operating segment profit
(loss) and is included in Corporate Activities.
Business Segment Assets (in thousands):
April 3, January 2,
1999 1999
------------ ----------
Rendering $80,558 $84,904
Restaurant Services 31,863 32,100
Combined Rend./Rest. Svcs. 91,751 93,080
Esteem Products 3,168 3,097
Corporate Activities 21,401 29,985
Net assets of discontinued operations 20,000 20,000
-------- --------
Total $248,741 $263,166
======= =======
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 3, 1999
PART I
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion summarizes information with respect to the
liquidity and capital resources of the Company at April 3, 1999 and factors
affecting its results of operations for the three months ended April 3, 1999 and
April 4, 1998.
RESULTS OF OPERATIONS
Three Months Ended April 3, 1999 Compared to Three Months Ended April 4, 1998
GENERAL
The Company recorded a loss from continuing operations of $4.2 million
for the first quarter of the fiscal year ending January 1, 2000 ("Fiscal 1999"),
as compared to a loss of $1.4 million for the first quarter of the fiscal year
ended January 2, 1999 ("Fiscal 1998"). Operating income decreased $3.5 million
to an operating loss of $2.6 million in the first quarter of Fiscal 1999 from
operating income of $0.9 million in the first quarter of Fiscal 1998. The
decrease in operating income was primarily due to: 1) Declines in overall
finished goods prices; and 2) Declines in the volume of raw materials processed.
These were partially offset by decreases in operating expenses. Interest expense
increased from $2.9 million in Fiscal 1998 to $3.6 million in Fiscal 1999,
primarily due a higher overall interest rate.
NET SALES
The Company collects and processes animal by-products (fat, bones and
offal) and used restaurant cooking oil to produce finished products of tallow,
meat and bone meal, and yellow grease. In addition, the Company provides grease
trap collection services to Restaurants. Sales are significantly affected by
finished goods prices, quality of raw material, and volume of raw material. Net
sales include the sales of produced finished goods, trap grease services, and
finished goods purchased for resale, which constitute less than 10% of total
sales.
During the first quarter of Fiscal 1999, net sales decreased 26.0%, to
$69.8 million as compared to $94.4 million during the first quarter of Fiscal
1998 primarily due to the following: 1) Decreases in overall finished goods
prices resulted in a $14.5 million decrease in sales in the first quarter of
Fiscal 1999 versus the first quarter of Fiscal 1998. The Company's average
prices for the first quarter of Fiscal 1999 were 16.2% lower than the average
prices for the first quarter of Fiscal 1998; 2) Decreases in the volume of raw
materials processed resulted in a $12.4 million decrease in sales, offset by
$1.2 million in yield gains; 3) Decreases in finished hides sales accounted for
$1.5 million in sales decreases; and 4) Other increases, including service
income and finished product purchased for resale resulted in a $2.6 million
increase in sales.
COST OF SALES AND OPERATING EXPENSES
Cost of sales and operating expenses includes prices paid to raw
material suppliers, the cost of product purchased for resale, and the cost to
collect and process raw material. The Company utilizes both fixed and formula
pricing methods for the purchase of raw materials. Fixed prices are adjusted
where possible as needed for changes in competition and significant changes in
finished goods market conditions, while raw materials purchased under formula
prices are correlated with specific finished goods prices.
During the first quarter of Fiscal 1999, cost of sales and operating
expenses decreased $18.8 million (25.0%) to $57.7 million as compared to $76.6
million during the first quarter of Fiscal 1998 primarily as a result of the
following: 1) Lower raw material prices paid, correlating to decreased prices
for fats and oils, and meat and bone meal resulted in decreases of $14.1 million
in cost of sales; 2) Decreases in the volume of raw materials collected and
processed resulted in a decrease of approximately $2.2 million in cost of sales
and operating expenses; 3) Decreases in steam cost resulted in a $1.2 million
decrease in operating expenses; 4) Decreases in labor costs resulted in a $1.5
million decrease in operating expenses; and 5) Increases in finished goods
purchased for resale offset by various other operating expense decreases
resulted in a net increase of $0.2 million.
SELLING, GENERAL AND ADMINISTRATIVE COSTS
Selling, general and administrative costs were $6.9 million during the
first quarter of Fiscal 1999, a $1.9 million decrease from $8.8 million for the
first quarter of Fiscal 1998. Significant decreases were realized in labor
costs, travel and entertainment, legal costs, and advertising and promotional.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization charges decreased $0.3 million to $7.8
million during the first quarter of Fiscal 1999 as compared to $8.1 million
during the first quarter of Fiscal 1998.
INTEREST EXPENSE
Interest expense increased $0.7 million from $2.9 million during the
first quarter of Fiscal 1998 to $3.6 million during the first quarter of Fiscal
1999, primarily due to an increase in the overall interest rate.
INCOME TAXES
The income tax benefit of $2.4 million for the first quarter of Fiscal
1999 consists of federal tax benefit and various state and foreign taxes. This
is an increase of $1.6 million from the $0.8 million income tax benefit during
the first quarter of Fiscal 1998.
CAPITAL EXPENDITURES
The Company made capital expenditures of $0.8 million during the first
quarter of Fiscal 1999 compared to capital expenditures of $5.1 million during
the first quarter of Fiscal 1998.
DISCONTINUED OPERATIONS
The operations of the Bakery By-Products Recycling segment have been
classified as discontinued operations. The Company recorded an estimated loss on
disposal, net of tax, of $14.7 million to reflect the pending sale of this
business segment in the fourth quarter of Fiscal 1998. During the first quarter
of Fiscal 1999, the Company recorded an additional loss on disposal of $0.3
million.
LIQUIDITY AND CAPITAL RESOURCES
Effective June 5, 1997, the Company entered into a Credit Agreement
(the "Credit Agreement") which originally provided for borrowings in the form of
a $50,000,000 Term Loan and $175,000,000 Revolving Credit Facility. On October
3, 1998, the Company entered into an amendment of the Credit Agreement whereby
BankBoston, N.A., as agent, and the other participant banks in the Credit
Agreement (the "Banks") agreed to forbear from exercising rights and remedies
arising as a result of several existing events of default of certain financial
covenants (the "Defaults") under the Credit Agreement, as amended, until
November 9, 1998.
On November 6, 1998, the Company entered into an extension of the
Amendment whereby the Banks agreed to forbear from exercising rights and
remedies arising as a result of the Defaults until December 14, 1998. The
forbearance period was subsequently extended to January 22, 1999. On January 22,
1999, the Company and the banks entered into an Amended and Restated Credit
Agreement (the "Amended and Restated Credit Agreement").
The Amended and Restated Credit Agreement provides for borrowing in
the form of a $36,702,000 Term Loan and $135,000,000 Revolving Credit Facility.
The Term Loan provides for $36,702,000 of borrowing. Under the Amended
and Restated Credit Agreement, the Term Loan bears interest, payable quarterly,
at a Base Rate (7.75% at April 3, 1999) plus a margin of 1%. Under the Amended
and Restated Credit Agreement, the Term Loan is payable by the Company in
quarterly installments of $1,800,000 on March 31, 1999; $1,200,000 on June 30,
1999; $2,000,000 on September 30 1999; $2,500,000 on December 31, 1999;
$2,500,000 on March 31, 2000; $22,500,000 on June 30, 2000; $2,500,000 on
September 30, 2000; and the balance due on December 31, 2000. As of April 3,
1999, $34,902,000 was outstanding under the Term Loan.
The Revolving Credit Facility provides for borrowings up to a maximum
of $135,000,000 with sublimits available for letters of credit and a swingline.
Under the Amended and Restated Credit Agreement, the Revolving Credit Facility
bears interest, payable quarterly, at a Base Rate (7.75% at April 3, 1999) plus
a margin of 1%. Additionally, the Company must pay a commitment fee equal to
0.375% per annum on the unused portion of the Revolving Credit Facility. Under
the Amended and Restated Credit Agreement, the Revolving Credit Facility
provides for a mandatory reduction of $2,500,000 on March 31, 2001, with the
remaining balance due at maturity on June 30, 2001. As of April 3, 1999,
$112,688,000 was outstanding under the Revolving Credit Facility. As of April 3,
1999, the Company had outstanding irrevocable letters of credit aggregating
$12,401,000.
Substantially all assets of the Company are either pledged or mortgaged
as collateral for borrowings under the Amended and Restated Credit Agreement.
The Amended and Restated Credit Agreement contains certain terms and covenants,
which, among other matters, restrict the incurrence of additional indebtedness,
the payment of cash dividends, the retention of certain proceeds from sales of
assets, and the annual amount of capital expenditures, and requires the
maintenance of certain minimum financial ratios. As of April 3, 1999, no cash
dividends could be paid to the Company's stockholders pursuant to the Amended
and Restated Credit Agreement.
The Company has only very limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap
agreements are used to reduce the potential impact of increases in interest
rates on floating-rate long-term debt. At April 3, 1999, the Company was party
to three interest rate swap agreements, each with a term of five years (all
maturing June 27, 2002). Under terms of the swap agreements, the interest
obligation on $70 million of Credit Agreement floating-rate debt was exchanged
for fixed rate contracts which bear interest, payable quarterly, at an average
rate of 6.6% plus a credit margin.
On April 3, 1999, the Company had working capital of $4.3 million and its
working capital ratio was 1.11 to 1 compared to working capital of $3.1 million
and a working capital ratio of 1.07 to 1 on January 2, 1999.
In 1998, the Company made a strategic decision to dispose of the Bakery
By-Products Recycling segment. The sale took place on April 5, 1999. Net
proceeds from the sale were required to be used to retire debt.
The Company has credit available under the Revolving Credit Facility to
cover its presently foreseeable capital needs, assuming it continues to meet the
certain financial covenant tests under the Amended and Restated Credit Agreement
dated January 22, 1999, which were adjusted downward to reflect the sharp
decline in the prices the Company received for its finished products (meat and
bone meal, yellow grease and tallow) in 1998. Such prices continued to decline
early in 1999. The Company is implementing a plan to modify its business
operations in light of the continued low prices for its finished goods. However,
if prices for finished goods the Company sells were to materially decline below
those prevailing in the first quarter of 1999, the Company might be forced to
seek further covenant waivers under the Amended and Restated Credit Agreement in
the later part of 1999.
ACCOUNTING MATTERS
The Company is assessing the reporting and disclosure requirements of
SFAS No. 133, Accounting For Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. This statement is effective for financial
statements for fiscal years beginning after June 15, 1999. The Company believes
SFAS No. 133 will not have a material impact on its financial statements. The
Company will adopt the provisions of SFAS No.
133 in the first quarter of Fiscal 2000.
YEAR 2000
Readiness
Since many computer systems and other equipment with embedded chips or
processors (collectively, "Business Systems") use only two digits to represent
the year, these business systems may be unable to accurately process certain
data before, during or after the year 2000. As a result, business and
governmental entities are at risk for possible miscalculations or systems
failures causing disruptions in their business operations. This is commonly
known as the Year 2000 issue. The Year 2000 issue can arise at any point in the
Company's supply, manufacturing, distribution and financial chains.
The Company began work on the Year 2000 compliance issue in 1997. The
scope of the project includes: ensuring the compliance of all applications,
operating systems and hardware on PC and LAN platforms; addressing issues
related to non-IT embedded software and equipment; and addressing the compliance
of key suppliers and customers. The project has four phases: assessment of
systems and equipment affected by the Year 2000 issue; definition of strategies
to address affected systems and equipment; remediation or replacement of
affected systems and equipment; and testing that each is Year 2000 compliant.
With respect to ensuring the compliance of all applications, operating
systems and hardware on the Company's various computer platforms, the assessment
phase and definition of strategies phase have been completed. It is estimated
that 80% of the remediation or replacement phase has been completed with the
balance of this phase expected to be completed by mid 1999. The testing phase of
existing applications operating systems and hardware not being remediated or
replaced has been completed.
With respect to addressing issues related to Non-IT embedded software
and equipment, which principally exists in the Company's manufacturing plants,
the assessment phase and definition of strategies phase are expected to be
completed by the end of second quarter 1999. Testing began in 1999, and
remediation and replacement is expected to be completed by the end of third
quarter 1999, if needed.
The Company relies on third party suppliers for raw materials, water,
utilities, transportation and other key services. Interruption of supplier
operations due to Year 2000 issues could affect Company operations. We have
initiated efforts to evaluate the status of our most critical suppliers'
progress. This process of evaluating our critical suppliers is scheduled for
completion by mid-1999. Options to reduce the risks of interruption due to
suppliers failures include identification of alternate suppliers where feasible
or warranted. These activities are intended to provide a means of managing risk,
but cannot eliminate the potential for disruption due to third party failure.
The Company is also dependent upon customers for sales and cash flow.
Year 2000 interruptions in customers' operations could result in reduced sales,
increased inventory or receivable levels, and cash flow reductions. The Company
is in the assessment phase with respect to the evaluation of critical customers'
progress and is scheduled for completion by mid-1999.
Contingency
The Company is in the process of developing contingency plans for those
areas that are critical to our business. These contingency plans will be
designed to mitigate serious disruptions to our business flow beyond the end of
1999, where possible. The major efforts related to contingency planning are
scheduled for completion by the end of the third quarter of 1999.
Costs
The Company does not separately track the internal costs incurred for
the Y2K project. Such costs, however, are principally the related payroll costs
for the Company's information systems group. The Company has incurred
approximately $130,000 in related internal expenses to date. Future expenses are
expected to be approximately $50,000. Such cost estimates are based upon
presently available information and may change as the Company continues with its
Y2K project. All estimated costs have been budgeted and are expected to be
funded through cash flows from operations. These costs do not include any cost
associated with the implementation of contingency plans, which are in the
process of being developed.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements other than statements of historical facts included in the Quarterly
Report on Form 10-Q, including, without limitation, the statements under the
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Legal Proceedings" and located elsewhere herein
regarding industry prospects and the Company's financial position are
forward-looking statements. Although the Company believes that the expectation
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from the Company's
expectations include: the Company's continued ability to obtain sources of
supply for its rendering operations; general economic conditions in the European
and Asian markets; and prices in the competing commodity markets which are
volatile and are beyond the Company's control, and the Year 2000 readiness
issue. Future profitability may be affected by the Company's ability to grow its
restaurant services business and the development of its value-added feed
ingredients, all of which face competition from companies which may have
substantially greater resources than the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The principal market risk affecting the Company is exposure to changes in
interest rates on debt. The Company does not use derivative instruments,
exclusive of interest rate swaps. While the Company does have international
operations, and operates in international markets, it considers its market risks
in such activities to be immaterial.
The Company uses interest rate swaps to hedge adverse interest rate changes
on a portion of its long-term debt. At April 3, 1999, the Company had $70
million notational value of interest rate swaps outstanding. These swaps
effectively changed the interest rate on $70 million in long-term debt to a 9.6%
fixed rate through the period ending June 27, 2002. Assuming variable rates at
the end of the first quarter of Fiscal 1999 and average long-term borrowings for
the first quarter of Fiscal 1999, a one hundred basis point change in interest
rates would impact net interest expense by $0.2 million, net of the effect of
swaps.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 3, 1999
PART II: Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibits No. Description
------------ ------------
11 Statement re-computation of per share earnings.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Registrant filed the following current report[s] on Form 8-K during
the quarter ended April 3, 1999.
1) Current Report on Form 8-K dated January 25, 1999, including
information regarding the extension of the forbearance period to
January 22, 1999, pursuant to a forbearance agreement dated
December 14, 1998, between the Company and the banks.
2) Current Report on Form 8-K dated February 3, 1999, including
information regarding the execution of an Amended and Restated
Credit Agreement dated as of January 22, 1999, between the
Company and the banks.
3) Current Report on Form 8-K dated February 22, 1999, including
information regarding the execution of a Stock Purchase Agreement
dated as of February 9, 1999, with Scope Products, Inc., pursuant
to which the Company agreed to sell all the issued and outstanding
stock of the Company's wholly-owned subsidiary International
Processing Corporation.
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 INTERNATIONAL INC.
Registrant
Date: May 14, 1999 By: /s/ Dennis B. Longmire
-------------------------------
Dennis B. Longmire
Chairman and
Chief Executive Officer
Date: May 14, 1999 By: /s/ John O. Muse
--------------------------------
John O. Muse
Vice President and
Chief Financial Officer
(Principal Financial Officer)
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 3, 1999
INDEX TO EXHIBITS
Exhibits No. Description Page No.
- ------------ ----------- -------
11 Statement re-computation of per share earnings. 20
27 Financial Data Schedule
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS/(LOSS)
The following table details the computation of basic and diluted
earnings/(loss) per common share, in thousands except per share data.
April 3, April 4,
1999 1998
==================================================================== =================== ==================
Earnings (loss) from continuing operations $ (4,191) $ (1,404)
======= ========
Discontinued operations:
Income (loss) from discontinued operations, net of tax - (30)
Estimated loss on disposal of discontinued operations,
net of tax (317) -
------- -------
Net earnings (loss) available to common stock $ (4,508) $ (1,404)
======= =======
- -------------------------------------------------------------------- ------------------- ------------------
Shares (Basic):
Weighted average number of common shares outstanding 15,589 15,567
======= =======
Basic earnings (loss) per share:
Continuing operations (0.27) (0.09)
Discontinued operations:
Income (loss) from operations - -
Estimated loss on disposal (0.02) -
Total $ (0.29) $ (0.09)
====== ======
- -------------------------------------------------------------------- ------------------- ------------------
Shares (Diluted):
Weighted average number of common shares outstanding 15,589 15,567
Additional shares assuming exercise of stock options - -
Average common shares outstanding and equivalents 15,589 15,567
Diluted earnings (loss) per share:
Continuing operations (0.27) (0.09)
Discontinued operations:
Income (loss) from operations - -
Estimated loss on disposal (0.02) -
Total $ (0.29) $ (0.09)
======= =======
- -------------------------------------------------------------------- ------------------- ------------------