Darling Ingredients Inc 10-Q for FY2023 Q3
Darling Ingredients Inc. (DAR)
10-Q
2023-11-07
For: 2023-09-30
View Original
Added on
April 04, 2026
About this 10-Q
Darling Ingredients Inc filed this 10-Q on November 7, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.63B
- down 7.0% from $1.75B a year earlier
- Net income
- $125.03M
- down 34.6% from net income of $191.08M a year earlier
- Diluted EPS
- $0.77
- down 34.2% from $1.17 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | ||||||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE | ||||||||
SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended | ||||||||
| 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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction | (I.R.S. Employer | ||||||||||
| of incorporation or organization) | Identification Number) | ||||||||||
(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 | |||||||||
| (“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 ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 ☒ 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,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||||||||||||||||||||
| Non-accelerated filer | ☐ | 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 ☒
There were 159,532,286 shares of common stock, $0.01 par value, outstanding at November 2, 2023.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
TABLE OF CONTENTS
| Page No. | ||||||||
2
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2023 and December 31, 2022
(in thousands, except share data)
| September 30, 2023 | December 31, 2022 | ||||||||||
| ASSETS | (unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Accounts receivable, less allowance for bad debts of $ September 30, 2023 and $ | |||||||||||
| Inventories | |||||||||||
| Prepaid expenses | |||||||||||
| Income taxes refundable | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
Property, plant and equipment, less accumulated depreciation of $ September 30, 2023 and $ | |||||||||||
Intangible assets, less accumulated amortization of $ September 30, 2023 and $ | |||||||||||
| Goodwill | |||||||||||
| Investment in unconsolidated subsidiaries | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other assets | |||||||||||
| Deferred income taxes | |||||||||||
| $ | $ | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable, principally trade | |||||||||||
| Income taxes payable | |||||||||||
| Current operating lease liabilities | |||||||||||
| Accrued expenses | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net of current portion | |||||||||||
| Long-term operating lease liabilities | |||||||||||
| Other non-current liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ respectively | |||||||||||
| Additional paid-in capital | |||||||||||
Treasury stock, at cost; September 30, 2023 and December 31, 2022, respectively | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Total Darling's stockholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total stockholders' equity | |||||||||||
| $ | $ | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
3
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three and nine months ended September 30, 2023 and October 1, 2022
(in thousands, except per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of sales and operating expenses | |||||||||||||||||||||||
| Loss/(gain) on sale of assets | ( | ( | |||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Restructuring and asset impairment charges | |||||||||||||||||||||||
| Acquisition and integration costs | |||||||||||||||||||||||
| Change in fair value of contingent consideration | ( | ( | |||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Total costs and expenses | |||||||||||||||||||||||
Equity in net income of Diamond Green Diesel | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Other expense: | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Foreign currency gain/(loss) | ( | ( | |||||||||||||||||||||
| Other income/(expense), net | ( | ( | |||||||||||||||||||||
| Total other expense | ( | ( | ( | ( | |||||||||||||||||||
| Equity in net income of other unconsolidated subsidiaries | |||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense/(benefit) | ( | ||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net income attributable to noncontrolling interests | ( | ( | ( | ( | |||||||||||||||||||
| Net income attributable to Darling | $ | $ | $ | $ | |||||||||||||||||||
| Basic income per share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted income per share | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Three and nine months ended September 30, 2023 and October 1, 2022
(in thousands)
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income/(loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | ||||||||||||||||||||
| Pension adjustments | |||||||||||||||||||||||
| Commodities derivative adjustments | ( | ( | |||||||||||||||||||||
| Interest rate swap adjustments | |||||||||||||||||||||||
| Foreign exchange derivative adjustments | ( | ( | |||||||||||||||||||||
| Total other comprehensive income/(loss), net of tax | ( | ( | ( | ||||||||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
Comprehensive income attributable to noncontrolling interests | |||||||||||||||||||||||
| Comprehensive income attributable to Darling | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine months ended September 30, 2023 and October 1, 2022
(in thousands, except share data)
(unaudited)
| Common Stock | |||||||||||||||||||||||||||||
| Number of Outstanding Shares | $ | 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 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||
Deductions to noncontrolling interests | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||
| Addition to noncontrolling interests | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Pension adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Commodities derivative adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Interest rate swap adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | ( | |||||||||||||||||||||||
| Issuance of non-vested stock | — | — | — | — | — | — | |||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
| Treasury stock | ( | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||
| Issuance of common stock | — | — | — | — | |||||||||||||||||||||||||
| Balances at April 1, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||
Distribution of noncontrolling interest earnings | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||
| Addition to noncontrolling interests | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Pension adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Commodities derivative adjustments, net of tax | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||
| Interest rate swap adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | ( | |||||||||||||||||||||||
| Issuance of non-vested stock | — | — | — | — | — | — | |||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
| Treasury stock | ( | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||
| Issuance of common stock | — | — | — | — | |||||||||||||||||||||||||
| Balances at July 1, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||
| Pension adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Commodities derivative adjustments, net of tax | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||
| Interest rate swap adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||
| Issuance of non-vested stock | — | — | — | — | — | — | |||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
| Treasury stock | ( | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||
| Issuance of common stock | — | — | — | — | |||||||||||||||||||||||||
| Balances at September 30, 2023 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine months ended September 30, 2023 and October 1, 2022
(in thousands, except share data)
(unaudited)
| Common Stock | |||||||||||||||||||||||||||||
| Number of Outstanding Shares | $ | 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 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||
| Pension adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Commodities derivative adjustments, net of tax | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | — | ||||||||||||||||||||||||
| Issuance of non-vested stock | — | — | — | — | — | ||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
| Treasury stock | ( | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||
| Issuance of common stock | — | — | — | — | |||||||||||||||||||||||||
| Balances at April 2, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||
| Pension adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Commodities derivative adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||
| Issuance of non-vested stock | — | — | — | — | — | — | |||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
| Treasury stock | ( | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||
| Issuance of common stock | — | — | — | — | |||||||||||||||||||||||||
| Balances at July 2, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
| Acquisitionn of noncontrolling interests | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||
Distribution of noncontrolling interest earnings | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||
| Pension adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Commodities derivative adjustments, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||
| Issuance of non-vested stock | — | — | — | — | — | ||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||
| Treasury stock | ( | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | ||||||||||||||||||||||||
| Balances at October 1, 2022 | $ | $ | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2023 and October 1, 2022
(in thousands)
(unaudited)
| September 30, 2023 | October 1, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net Income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Loss/(gain) on sale of assets | ( | ||||||||||
| Asset impairment | |||||||||||
| Change in fair value of contingent consideration | ( | ||||||||||
| Gain on insurance proceeds from insurance settlements | ( | ||||||||||
| Deferred taxes | ( | ||||||||||
| Increase/(decrease) in long-term pension liability | ( | ||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred loan cost amortization | |||||||||||
| Equity in net income of Diamond Green Diesel and other unconsolidated subsidiaries | ( | ( | |||||||||
| Distributions of earnings from Diamond Green Diesel and other unconsolidated subsidiaries | |||||||||||
| Changes in operating assets and liabilities, net of effects from acquisitions: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Income taxes refundable/payable | ( | ( | |||||||||
| Inventories and prepaid expenses | ( | ( | |||||||||
| Accounts payable and accrued expenses | ( | ||||||||||
| Other | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Investment in Diamond Green Diesel | ( | ( | |||||||||
| Investment in other unconsolidated subsidiaries | ( | ||||||||||
| Loan to Diamond Green Diesel | ( | ||||||||||
| Loan repayment from Diamond Green Diesel | |||||||||||
| Gross proceeds from disposal of property, plant and equipment and other assets | |||||||||||
| Proceeds from insurance settlement | |||||||||||
| Payments related to routes and other intangibles | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from long-term debt | |||||||||||
| Payments on long-term debt | ( | ( | |||||||||
| Borrowings from revolving credit facility | |||||||||||
| Payments on revolving credit facility | ( | ( | |||||||||
| Net cash overdraft financing | |||||||||||
| Deferred loan costs | ( | ( | |||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Minimum withholding taxes paid on stock awards | ( | ( | |||||||||
| Distributions to noncontrolling interests | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash | ( | ||||||||||
| Net increase in cash, cash equivalents and restricted cash | |||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
DARLING INGREDIENTS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2023
(unaudited)
(1)General
(2)Summary of Significant Accounting Policies
(a)Basis of Presentation
(b)Fiscal Periods
(c) Cash and Cash Equivalents
9
| September 30, 2023 | December 31, 2022 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Restricted cash included in other long-term assets | |||||||||||
| Total cash, cash equivalents and restricted cash shown in the statement of cash flows | $ | $ | |||||||||
(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 September 30, 2023 and October 1, 2022, the Company sold approximately $110.2 million and $162.7 million of its trade receivables and incurred approximately $1.7 million and $1.2 million in fees, respectively, which are recorded as interest expense. For the nine months ended September 30, 2023 and October 1, 2022, the Company sold approximately $402.2 million and $434.0 million of its trade receivables and incurred approximately $5.4 million and $2.3 million in fees, which are recorded as interest expense.
(e) Revenue Recognition
(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 reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
If it is at least reasonably possible that the estimate of the effect on the financial statements of a 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 assets may be impaired. Through the nine months ended September 30, 2023, the Company has not observed any impairments of the Company's assets or a significant change in their fair value due to the Russia-Ukraine war or inflation.
(g) Out-of-Period Correction
10
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 was 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 included in the Feed Ingredients segment.
(h) Reclassifications
(i) Earnings Per Share
| Net Income per Common Share (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||||||||||||||
| Income | Shares | Per Share | Income | Shares | Per Share | ||||||||||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||||||||||||||
| Net Income attributable to Darling | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||||||||||||||
| Add: Option shares in the money and dilutive effect of non-vested stock awards | |||||||||||||||||||||||||||||||||||
| Less: Pro forma treasury shares | ( | ( | |||||||||||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Net income attributable to Darling | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Net Income per Common Share (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||||||||||||||||||||||||||
| Income | Shares | Per Share | Income | Shares | Per Share | ||||||||||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||||||||||||||
| Net Income attributable to Darling | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||||||||||||||
| Add: Option shares in the money and dilutive effect of non-vested stock awards | |||||||||||||||||||||||||||||||||||
| Less: Pro forma treasury shares | ( | ( | |||||||||||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Net income attributable to Darling | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
11
For the three months ended September 30, 2023 and October 1, 2022, respectively, no 382,404 and 223,157 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, 2023 and October 1, 2022, respectively, no 470,213 and 249,618 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.
(3) 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 (“DGD” or the “DGD Joint Venture”). The DGD Joint Venture is owned 50 % / 50 % with Valero.
Selected financial information for the Company's DGD Joint Venture is as follows:
| (in thousands) | September 30, 2023 | December 31, 2022 | |||||||||
| Assets: | |||||||||||
| Total current assets | $ | $ | |||||||||
| Property, plant and equipment, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and members' equity: | |||||||||||
| Total current portion of long term debt | $ | $ | |||||||||
| Total other current liabilities | |||||||||||
| Total long term debt | |||||||||||
| Total other long term liabilities | |||||||||||
| Total members' equity | |||||||||||
| Total liabilities and members' equity | $ | $ | |||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| (in thousands) | September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Operating revenues | $ | $ | $ | $ | ||||||||||||||||
| Expenses: | ||||||||||||||||||||
Total costs and expenses less depreciation, amortization and accretion expense | ||||||||||||||||||||
Depreciation, amortization and accretion expense | ||||||||||||||||||||
| Total costs and expenses | ||||||||||||||||||||
| Operating income | ||||||||||||||||||||
| Other income | ||||||||||||||||||||
| Interest and debt expense, net | ( | ( | ( | ( | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||
As of September 30, 2023, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $2,096.9 million on the consolidated balance sheet. The Company has recorded equity in net income from the DGD Joint Venture of approximately $54.4 million and $103.4 million for the three months ended September 30, 2023 and October 1, 2022, respectively. The Company has recorded equity in net income from the DGD Joint Venture of approximately $361.7 million and $248.9 million for the nine months ended September 30, 2023 and October 1, 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 IR Act, the blender tax credits were extended as is until 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
12
percentage as long as it is produced at a qualifying facility and it meets prevailing wage requirements and apprenticeship requirements. In contrast to the blenders tax credits, the CFPC requires that production must take place in the United States. For the three months ended September 30, 2023 and September 30, 2022, the DGD Joint Venture recorded approximately $266.4 million and $190.3 million of blenders tax credits, respectively. For the nine months ended September 30, 2023 and September 30, 2022, the DGD Joint Venture recorded approximately $900.0 million and $544.6 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 nine months ended September 30, 2023 and October 1, 2022, respectively, the Company made $75.0 million and $239.8 million capital contributions to the DGD Joint Venture. In the nine months ended September 30, 2023 and October 1, 2022, the Company received $163.6 million and $90.5 million dividend distributions from the DGD Joint Venture, respectively. As of September 30, 2023, the DGD Joint Venture has borrowings outstanding of $200.0 million under their unsecured revolving credit facility.
In addition to the DGD Joint Venture, the Company has investments in other unconsolidated subsidiaries that are insignificant to the Company.
(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$5.08 :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. During the third quarter of fiscal 2023, 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 $14.1 million with an offset to goodwill. In addition, the Company obtained new information about facts and circumstances that existed at the acquisition date during the third quarter of 2023 that resulted in measurement period adjustments to increase property, plant and equipment by approximately $15.7 million, increase intangible assets by approximately $66.5 million, decrease goodwill by approximately $75.8 million, increase deferred tax liabilities by approximately $6.2 million and a decrease in other assets and liabilities of approximately $0.2 million.
13
| Accounts receivable | $ | ||||
| Inventories | |||||
| Other current assets | |||||
| Property, plant and equipment | |||||
| Identifiable intangible assets | |||||
| Goodwill | |||||
| Operating lease right-of-use assets | |||||
| Other assets | |||||
| Deferred tax asset | |||||
| Accounts payable | ( | ||||
| Current operating lease liabilities | ( | ||||
| Current portion of long-term debt | ( | ||||
| Accrued expenses | ( | ||||
| Long-term debt, net of current portion | ( | ||||
| Long-term operating lease liabilities | ( | ||||
| Deferred tax liability | ( | ||||
| Other noncurrent liabilities | ( | ||||
| Purchase price, net of cash acquired | $ | ||||
| Less hold-back | |||||
| Cash paid for acquisition, net of cash acquired | $ | ||||
The $564.5 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 $446.5 million is expected to be deductible for tax purposes. The identifiable intangible assets include $342.5 million in customer relationships with a weighted average life of 11.4 years and $8.0 million in trade name with a life of 5 years for a total weighted average life of approximately 11.3 years. The Company is still assessing the provisional amounts recorded for assets acquired and liabilities assumed including possible future price adjustments to property, plant and equipment, intangible assets and taxes, thus the final determination of the value of assets acquired and liabilities assumed may result in retrospective adjustments to the values presented in the above table with a corresponding adjustment 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 the three months ended September 30, 2023 was $88.8 million and $1.1 million, respectively. The amount of net sales and net income (loss) from the Gelnex Acquisition included in the Company's consolidated statement of operations for the nine months ended September 30, 2023 was $180.0 million and $(18.0 ) million, respectively. The Company incurred acquisition costs related to the Gelnex Acquisition for the three and nine months ended September 30, 2023 of approximately $0.6 million and $6.5 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 -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.
14
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 noncash investing activities 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 | $ | ||||
| Inventories | |||||
| Other current assets | |||||
| Property, plant and equipment | |||||
| Identifiable intangible assets | |||||
| Goodwill (1) | |||||
| Operating lease right-of-use assets | |||||
| Other assets | |||||
| Deferred tax asset | |||||
| Accounts payable | ( | ||||
| Current portion of long-term debt | ( | ||||
| Accrued expenses | ( | ||||
| Long-term debt, net of current portion | ( | ||||
| Long-term operating lease liabilities | ( | ||||
| Deferred tax liability | ( | ||||
| Other noncurrent liabilities | ( | ||||
| Non-controlling interests | ( | ||||
| Purchase price, net of cash acquired | $ | ||||
| Less hold-back | |||||
| Less contingent consideration (1) | |||||
| Cash paid for acquisition, net of cash acquired | $ | ||||
(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
15
intangible assets include $108.6 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 months ended September 30, 2023 was $75.8 million and $(3.5 ) million, respectively. The amount of net sales and net income (loss) from the FASA Acquisition included in the Company's consolidated statement of operations for the nine months ended September 30, 2023 was $259.6 million and $(1.7 ) 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 | $ | ||||
| Inventories | |||||
| Other current assets | |||||
| Property, plant and equipment | |||||
| Identifiable intangible assets | |||||
| Goodwill | |||||
| Operating lease right-of-use assets | |||||
| Other assets | |||||
| Deferred tax asset | |||||
| Accounts payable | ( | ||||
| Current portion of long-term debt | ( | ||||
| Current operating lease liabilities | ( | ||||
| Accrued expenses | ( | ||||
| Long-term debt, net of current portion | ( | ||||
| Long-term operating lease liabilities | ( | ||||
| Other noncurrent liabilities | ( | ||||
| Purchase price, net of cash acquired | $ | ||||
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 (loss) from the Valley Acquisition included in the Company's consolidated statement of operations for the three months ended September 30, 2023 was $197.1 million and $(11.3 ) million, respectively. The amount of net sales and net income (loss) from the Valley Acquisition included in the Company's consolidated statement of operations for the nine months ended September 30, 2023 was $623.4 million and $(7.7 ) million, respectively.
16
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 Gelnex Acquisition, the FASA Acquisition and the Valley Acquisition had occurred on January 2, 2022 for the periods presented (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Net income | |||||||||||||||||||||||
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 nine 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 first quarter of 2024.
The Company incurred acquisition costs and integration costs of approximately $3.4 million and $4.5 million for the three months ended September 30, 2023 and October 1, 2022, respectively. The Company incurred acquisition and integration costs of approximately $12.2 million and $13.6 million for the nine months ended September 30, 2023 and October 1, 2022, respectively.
(5) Inventories
A summary of inventories follows (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Finished product | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw material | |||||||||||
| Supplies and other | |||||||||||
| $ | $ | ||||||||||
(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):
17
| September 30, 2023 | December 31, 2022 | ||||||||||
| Indefinite Lived Intangible Assets: | |||||||||||
| Trade names | $ | $ | |||||||||
| Finite Lived Intangible Assets: | |||||||||||
| Routes | |||||||||||
| Customer relationships | |||||||||||
| Permits | |||||||||||
| Non-compete agreements | |||||||||||
| Trade names | |||||||||||
| Royalty, consulting, land use rights and leasehold | |||||||||||
| Accumulated Amortization: | |||||||||||
| Routes | ( | ( | |||||||||
| Customer relationships | ( | ( | |||||||||
| Permits | ( | ( | |||||||||
| Non-compete agreements | ( | ( | |||||||||
| Trade names | ( | ( | |||||||||
| Royalty, consulting, land use rights and leasehold | ( | ( | |||||||||
| ( | ( | ||||||||||
| Total Intangible assets, less accumulated amortization | $ | $ | |||||||||
Gross intangible assets changed due to net acquisition activity in the first nine months of fiscal 2023 by approximately $311.6 million and the remaining change is due to foreign currency translation and retirements. Amortization expense for the three months ended September 30, 2023 and October 1, 2022, was approximately $32.2 million and $25.4 million, respectively, and for the nine months ended September 30, 2023 and October 1, 2022 was approximately $91.7 million and $62.8 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 | $ | $ | $ | $ | ||||||||||
| Accumulated impairment losses | ( | ( | ( | ( | ||||||||||
| Goodwill acquired during year | ||||||||||||||
| Measurement period adjustments | ( | ( | ( | ( | ||||||||||
| Out-of-period correction (1) | ( | ( | ||||||||||||
| Foreign currency translation | ( | |||||||||||||
| Balance at September 30, 2023 | ||||||||||||||
| Goodwill | ||||||||||||||
| Accumulated impairment losses | ( | ( | ( | ( | ||||||||||
| $ | $ | $ | $ | |||||||||||
(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, which is included in the Feed Ingredients segment.
(8) Accrued Expenses
18
| September 30, 2023 | December 31, 2022 | ||||||||||
Compensation and benefits | $ | $ | |||||||||
Accrued operating expenses | |||||||||||
Other accrued expense | |||||||||||
| $ | $ | ||||||||||
(9) Debt
Debt consists of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Amended Credit Agreement: | |||||||||||
Revolving Credit Facility ($ | $ | $ | |||||||||
| Term A-1 facility | |||||||||||
| Less unamortized deferred loan costs | ( | ( | |||||||||
| Carrying value Term A-1 facility | |||||||||||
| Term A-2 facility | |||||||||||
| Less unamortized deferred loan costs | ( | ( | |||||||||
| Carrying value Term A-2 facility | |||||||||||
| Term A-3 facility | |||||||||||
| Less unamortized deferred loan costs | ( | ||||||||||
| Carrying value Term A-3 facility | |||||||||||
| Term A-4 facility | |||||||||||
| Less unamortized deferred loan costs | ( | ||||||||||
| Carrying value Term A-4 facility | |||||||||||
Term Loan B | |||||||||||
| Less unamortized deferred loan costs | ( | ( | |||||||||
| Carrying value Term Loan B | |||||||||||
| Less unamortized deferred loan costs net of bond premium | ( | ( | |||||||||
Carrying value | |||||||||||
| Less unamortized deferred loan costs | ( | ( | |||||||||
Carrying value | |||||||||||
| Less unamortized deferred loan costs - Denominated in euro | ( | ( | |||||||||
Carrying value | |||||||||||
| Other Notes and Obligations | |||||||||||
| Less Current Maturities | |||||||||||
| $ | $ | ||||||||||
As of September 30, 2023, the Company had outstanding debt under the revolving credit facility denominated in euros of €112.0 million and outstanding debt under the Company's 3.625 % Senior Notes due 2026 denominated in euros of €515.0 million. In addition, at September 30, 2023, the Company had finance lease obligations denominated in euros of approximately €7.5 million.
19
As of September 30, 2023, the Company had other notes and obligations of $106.6 million that consist of various overdraft facilities of approximately $30.6 million, Brazilian notes of approximately $43.1 million, a China working capital line of credit of approximately $1.9 million and other debt of approximately $31.0 million, including U.S. finance lease obligations of approximately $4.6 million.
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.
The interest rate applicable to any borrowings under the revolving credit facility equals the adjusted term secured overnight financing rate (SOFR) for U.S. dollar borrowings or the adjusted euro interbank 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 1.375 % per annum or base 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 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 equals the base rate plus 1.00 % or LIBOR plus 2.00 %.
As of September 30, 2023, the Company had (i) $21.0 million outstanding under the revolving credit facility at base rate plus a margin of 0.375 % per annum for a total of 8.875 % per annum, (ii) $260.0 million outstanding under the revolver at SOFR plus a margin of 1.375 % per annum for a total of 6.79108 % per annum, (iii) $400.0 million outstanding under the term A-1 facility at SOFR plus a margin of 1.50 % per annum for a total of 6.91608 % per annum, (iv) $484.4 million outstanding under the term A-2 facility at SOFR plus a margin of 1.375 % per annum for a total of 6.79108 % 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 6.91608 % per annum, (vi) $493.8 million outstanding under the term A-4 facility at SOFR plus a margin 1.375 % per annum for a total of 6.79108 % 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 7.44 % per annum and (viii) €112.0 million outstanding under the revolving credit facility at EURIBOR plus a margin of 1.375 % per annum for a total of 5.17646 % per annum. As of September 30, 2023, the Company had revolving credit facility availability of $1,044.0 million, under the Amended Credit Agreement taking into account amounts borrowed, ancillary facilities of $52.6 million and letters of credit issued of $3.9 million. The Company also had foreign bank guarantees of approximately $11.5 million and U.S. bank guarantees of approximately $10.9 million that are not part of the Company's Amended Credit Agreement at September 30, 2023.
As of September 30, 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 6 % Senior Notes due 2030, the 5.25 % Senior Notes due 2027 and the 3.625 % Senior Notes due 2026.
(10) Other Noncurrent Liabilities
Other noncurrent liabilities consist of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accrued pension liability | $ | $ | |||||||||
| Reserve for self-insurance, litigation, environmental and tax matters | |||||||||||
| Long-term acquisition hold-backs | |||||||||||
| Long-term contingent consideration (1) | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
20
(11) Income Taxes
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, 2023 and October 1, 2022, the Company had $17.0 million and $12.8 million, respectively of gross unrecognized tax benefits and $1.3 million and $1.1 million, respectively of related accrued interest and penalties. The Company's gross unrecognized tax benefits are not expected to decrease significantly within the next twelve months.
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 CFPC, a transferable income tax credit, 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 evaluate the applicability and effect of the IR Act as more guidance is issued.
(12) Other Comprehensive Income/(Loss)
21
| Three Months Ended | ||||||||||||||||||||
| Before-Tax | Tax (Expense) | Net-of-Tax | ||||||||||||||||||
| Amount | or Benefit | Amount | ||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||
| Defined benefit pension plans | ||||||||||||||||||||
Amortization of prior service (cost)/benefit | $ | ( | $ | $ | $ | ( | $ | ( | $ | |||||||||||
| Amortization of actuarial loss | ( | ( | ||||||||||||||||||
| Total defined benefit pension plans | ( | ( | ||||||||||||||||||
| Soybean meal option derivatives | ||||||||||||||||||||
| Reclassified to earnings | ( | ( | ( | |||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | ( | ( | ( | |||||||||||||||||
| Total soybean meal option derivatives | ( | ( | ( | |||||||||||||||||
| Corn option derivatives | ||||||||||||||||||||
| Reclassified to earnings | ( | |||||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | ( | ( | ||||||||||||||||||
| Total corn option derivatives | ( | |||||||||||||||||||
| Heating oil derivatives | ||||||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | ( | ( | ( | |||||||||||||||||
| Total heating oil derivatives | ( | ( | ( | |||||||||||||||||
| Interest swap derivatives | ||||||||||||||||||||
| Reclassified to earnings | ( | ( | ||||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | ( | |||||||||||||||||||
| Total interest swap derivatives | ( | |||||||||||||||||||
| Foreign exchange derivatives | ||||||||||||||||||||
| Reclassified to earnings | ( | ( | ( | ( | ||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | ( | ( | ( | |||||||||||||||||
| Total foreign exchange derivatives | ( | ( | ( | ( | ||||||||||||||||
| Foreign currency translation | ( | ( | ( | ( | ||||||||||||||||
| Other comprehensive income/(loss) | $ | ( | $ | ( | $ | $ | ( | $ | ( | $ | ( | |||||||||
22
| Nine Months Ended | ||||||||||||||||||||
| Before-Tax | Tax (Expense) | Net-of-Tax | ||||||||||||||||||
| Amount | or Benefit | Amount | ||||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | |||||||||||||||
| Defined benefit pension plans | ||||||||||||||||||||
Amortization of prior service (cost)/benefit | $ | ( | $ | $ | $ | ( | $ | ( | $ | |||||||||||
| Amortization of actuarial loss | ( | ( | ||||||||||||||||||
| Total defined benefit pension plans | ( | ( | ||||||||||||||||||
| Soybean meal option derivatives | ||||||||||||||||||||
| Reclassified to earnings | ( | ( | ( | ( | ||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | ( | ( | ( | |||||||||||||||||
| Total soybean meal option derivatives | ( | ( | ( | ( | ||||||||||||||||
| Corn option derivatives | ||||||||||||||||||||
| Reclassified to earnings | ( | ( | ( | |||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | ( | ( | ( | |||||||||||||||||
| Total corn option derivatives | ( | ( | ||||||||||||||||||
| Heating oil derivatives | ||||||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | ( | ( | ( | |||||||||||||||||
| Total heating oil derivatives | ( | ( | ( | |||||||||||||||||
| Interest swap derivatives | ||||||||||||||||||||
| Reclassified to earnings | ( | ( | ||||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | ( | |||||||||||||||||||
| Total interest swap derivatives | ( | |||||||||||||||||||
| Foreign exchange derivatives | ||||||||||||||||||||
| Reclassified to earnings | ( | ( | ( | ( | ||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | ( | ( | ||||||||||||||||||
| Total foreign exchange derivatives | ( | ( | ||||||||||||||||||
| Foreign currency translation | ( | ( | ||||||||||||||||||
| Other comprehensive income/(loss) | $ | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||
23
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | Statement of Operations Classification | |||||||||||||
| Derivative instruments | |||||||||||||||||
| Soybean meal option derivatives | $ | ( | $ | $ | $ | Net sales | |||||||||||
| Foreign exchange contracts | Net sales | ||||||||||||||||
| Corn option derivatives | ( | ( | Cost of sales and operating expenses | ||||||||||||||
| Interest swaps | Foreign currency gain/(loss) and interest expense | ||||||||||||||||
| ( | Total before tax | ||||||||||||||||
| ( | ( | ( | ( | Income taxes | |||||||||||||
| ( | Net of tax | ||||||||||||||||
| Defined benefit pension plans | |||||||||||||||||
Amortization of prior service cost | $ | $ | ( | $ | $ | ( | (a) | ||||||||||
Amortization of actuarial loss | ( | ( | ( | ( | (a) | ||||||||||||
| ( | ( | ( | ( | Total before tax | |||||||||||||
| Income taxes | |||||||||||||||||
| ( | ( | ( | ( | Net of tax | |||||||||||||
| Total reclassifications | $ | $ | $ | $ | ( | Net of tax | |||||||||||
(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/(loss) as of September 30, 2023 as follows (in thousands):
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||
| Foreign | Defined | |||||||||||||||||||
| Currency | Derivative | Benefit | ||||||||||||||||||
| Translation | Instruments | Pension Plans | Total | |||||||||||||||||
| Accumulated Other Comprehensive loss December 31, 2022, attributable to Darling, net of tax | $ | ( | $ | $ | ( | $ | ( | |||||||||||||
| Other comprehensive loss before reclassifications | ||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | ( | ( | ||||||||||||||||||
| Net current-period other comprehensive income | ( | |||||||||||||||||||
Noncontrolling interest | ( | ( | ||||||||||||||||||
| Accumulated Other Comprehensive loss September 30, 2023, attributable to Darling, net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||
(13) Stockholders' Equity
24
(14) Employee Benefit Plans
Net pension cost for the three and nine months ended September 30, 2023 and October 1, 2022 includes the following components (in thousands):
| Pension Benefits | Pension Benefits | ||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||
| Interest cost | |||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||
| Amortization of prior service cost | ( | ( | |||||||||||||||
| Amortization of actuarial loss | |||||||||||||||||
| Net pension cost | $ | $ | $ | $ | |||||||||||||
Based on actuarial estimates at September 30, 2023, the Company expects to contribute approximately $3.6 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 nine months ended September 30, 2023 and October 1, 2022 of approximately $2.3 million and $4.1 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 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, five plans have certified as critical or red zone as defined by the Pension Protection Act of 2006.
The Company currently has withdrawal liabilities 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, 2023, the Company has an aggregate accrued liability of approximately $6.6 million representing the present value of scheduled withdrawal liability payments on the multiemployer 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 require additional funding under the Pension Protection Act of 2006, the amounts could be material.
(15) Derivatives
25
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, 2023, the Company had soybean meal forward and option contracts, foreign exchange forward and option contracts and interest rate swaps outstanding that qualified and were designated for hedge accounting as well as corn forward contracts, soybean meal forward and option contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.
In the first nine 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 designated 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. 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 September 30, 2023, the aggregate fair value of these interest rate swaps was approximately $16.4 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 % 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 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/(loss) associated with the interest rate differential between the U.S. dollar and a Euro to interest expense. At September 30, 2023, the aggregate fair value of these cross currency swaps was approximately $12.9 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 fiscal 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 September 30, 2023. At September 30, 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 2024. At September 30, 2023 and December 31, 2022, the aggregate fair value of these foreign exchange contracts was approximately $17.2 million and $13.8 million, respectively. These amounts are included in other current assets,
26
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 September 30, 2023 and December 31, 2022, the aggregate fair value of the soybean meal contracts was approximately $0.1 million and $0.6 million, respectively. These 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, 2023, the Company had the following designated and non-designated outstanding forward and option contract amounts that were entered into to hedge foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency (in thousands):
| Functional Currency | Contract Currency | |||||||||||||
| Type | Amount | Type | Amount | |||||||||||
| Brazilian real | Euro | |||||||||||||
| Brazilian real | U.S. dollar | |||||||||||||
| Euro | U.S. dollar | |||||||||||||
| Euro | Polish zloty | |||||||||||||
| Euro | Japanese yen | |||||||||||||
| Euro | Chinese renminbi | |||||||||||||
| Euro | Australian dollar | |||||||||||||
| Euro | British pound | |||||||||||||
| Euro | Canadian dollar | |||||||||||||
| Polish zloty | U.S. dollar | |||||||||||||
| Polish zloty | Euro | |||||||||||||
| British pound | Euro | |||||||||||||
| British pound | U.S. dollar | |||||||||||||
| Japanese yen | U.S. dollar | |||||||||||||
| U.S. dollar | Japanese yen | |||||||||||||
| U.S. dollar | Euro | |||||||||||||
| Australian dollar | Euro | |||||||||||||
| Australian dollar | U.S. dollar | |||||||||||||
The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at September 30, 2023 into earnings over the next 12 months for all cash flow hedges will be approximately $18.6 million. As of September 30, 2023, no amounts have been reclassified into earnings as a result of the discontinuance of cash flow hedges.
27
| 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, 2023 | October 1, 2022 | September 30, 2023 | October 1, 2022 | ||||||||||||||||||
| Foreign exchange | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Foreign exchange | ( | ||||||||||||||||||||||
| Foreign exchange | ( | ( | ( | ( | |||||||||||||||||||
| Foreign exchange | ( | ( | |||||||||||||||||||||
| Corn options and futures | ( | ( | |||||||||||||||||||||
| Corn options and futures | ( | ( | |||||||||||||||||||||
Heating Oil swaps and options | |||||||||||||||||||||||
Soybean meal | |||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
At September 30, 2023, the Company had forward purchase agreements in place for purchases of approximately $199.7 million of natural gas and diesel fuel. The Company intends to take physical delivery of the commodities under the forward purchase agreements and accordingly, these contracts are not subject to the requirements of fair value accounting because they qualify as normal purchases.
(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, 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 September 30, 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 | $ | $ | $ | $ | ||||||||||
| Total Assets | $ | $ | $ | $ | ||||||||||
| Liabilities | ||||||||||||||
| Derivative instruments | $ | $ | $ | $ | ||||||||||
| Contingent consideration | ||||||||||||||
| 6% Senior notes | ||||||||||||||
| 5.25% Senior notes | ||||||||||||||
| 3.625% Senior notes | ||||||||||||||
| Term loan A-1 | ||||||||||||||
| Term loan A-2 | ||||||||||||||
| Term loan A-3 | ||||||||||||||
| Term loan A-4 | ||||||||||||||
| Term loan B | ||||||||||||||
| Revolver debt | ||||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||
28
| 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 | $ | $ | $ | $ | ||||||||||
| Total Assets | $ | $ | $ | $ | ||||||||||
| Liabilities | ||||||||||||||
| Derivative instruments | $ | $ | $ | $ | ||||||||||
| Contingent consideration | ||||||||||||||
| 6% Senior notes | ||||||||||||||
| 5.25% Senior notes | ||||||||||||||
| 3.625% Senior notes | ||||||||||||||
| Term loan A-1 | ||||||||||||||
| Term loan A-2 | ||||||||||||||
| Term loan B | ||||||||||||||
| Revolver debt | ||||||||||||||
| Total Liabilities | $ | $ | $ | $ | ||||||||||
Derivative assets and liabilities consist of the Company’s corn option and future contracts, foreign currency forward and option contracts, soybean meal forward contracts, interest rate swap contracts and cross currency swap contracts which represent 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 15 (Derivatives) to the Company's Consolidated Financial Statements included herein for 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 fair value of the senior notes, term loan 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:
| (in thousands of dollars) | Contingent Consideration | ||||
| Balance as of December 31, 2022 | $ | ||||
| Out-of-period correction (1) | ( | ||||
| Total included in earnings during period | ( | ||||
| Exchange rate changes | |||||
| Balance as of September 30, 2023 | $ | ||||
(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
29
(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 various matters including labor and employment, employees benefits, occupational safety and health, wage and hour, compliance, sustainability, permitting requirements, environmental matters, including air, wastewater and storm water discharges from the Company’s processing facilities and other federal, state and local issues, 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, 2023 and December 31, 2022, the reserves for insurance, environmental, litigation and tax contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities was approximately $90.0 million and $92.1 million, respectively. The Company has insurance recovery receivables reflected on the balance sheet in other assets of approximately $36.0
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 Corporation) is considered a potentially responsible party (a “PRP”) with respect to alleged contamination in the lower 17-mile area of the Passaic River (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 former plant sites located in Newark and Kearny, New Jersey by The Standard Tallow Corporation, an entity that the Company acquired in 1996. 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 Lower Passaic River area at an estimated cost of $1.38 billion. The EPA letter made no demand on the Company and laid out a framework for remedial design/remedial action implementation under which the EPA would first seek funding from major PRPs. The letter indicated that the EPA had 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 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
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(19) Business Segments
The Company sells its products domestically and internationally, operating within three industry segments: Feed Ingredients, Food Ingredients and Fuel Ingredients. The measure of segment 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 corporate 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, Darling Canada, and the ingredients and specialty products businesses conducted by Darling Ingredients International under the Sonac and FASA names (proteins, fats, and blood products) and (ii) the Company's bakery residuals business. Feed Ingredients operations process animal by-products and used cooking oil into fats, proteins and hides.
Food Ingredients
Food Ingredients consists principally of (i) the collagen business conducted by Darling Ingredients International under the Rousselot 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 investment in the DGD Joint Venture and (ii) the bioenergy business conducted by Darling Ingredients International under the Ecoson and Rendac names.
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| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |||||||||||||
| Three Months Ended September 30, 2023 | |||||||||||||||||
| Net Sales | $ | $ | $ | $ | $ | ||||||||||||
| Cost of sales and operating expenses | |||||||||||||||||
| Gross Margin | |||||||||||||||||
| Loss/(gain) on sale of assets | ( | ||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||
| Acquisition and integration costs | |||||||||||||||||
| Change in fair value of contingent consideration | ( | ( | |||||||||||||||
| Depreciation and amortization | |||||||||||||||||
Equity in net income of Diamond Green Diesel | |||||||||||||||||
| Segment operating income/(loss) | ( | ||||||||||||||||
Equity in net income of other unconsolidated subsidiaries | |||||||||||||||||
| Segment income/(loss) | ( | ||||||||||||||||
| Total other expense | ( | ||||||||||||||||
| Income before income taxes | $ | ||||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |||||||||||||
| Three Months Ended October 1, 2022 | |||||||||||||||||
| Net Sales | $ | $ | $ | $ | $ | ||||||||||||
| Cost of sales and operating expenses | |||||||||||||||||
| Gross Margin | |||||||||||||||||
| Gain on sale of assets | ( | ( | ( | ( | |||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||
| Acquisition and integration costs | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
Equity in net income of Diamond Green Diesel | |||||||||||||||||
| Segment operating income/(loss) | ( | ||||||||||||||||
| Equity in net income of other unconsolidated subsidiaries | |||||||||||||||||
| Segment income/(loss) | ( | ||||||||||||||||
| Total other expense | ( | ||||||||||||||||
| Income before income taxes | $ | ||||||||||||||||
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| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||
| Net Sales | $ | $ | $ | $ | $ | ||||||||||||
| Cost of sales and operating expenses | |||||||||||||||||
| Gross Margin | |||||||||||||||||
| Loss/(gain) on sale of assets | ( | ||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||
| Restructuring and asset impairment charges | |||||||||||||||||
| Acquisition and integration costs | |||||||||||||||||
| Change in fair value of contingent consideration | ( | ( | |||||||||||||||
| Depreciation and amortization | |||||||||||||||||
Equity in net income of Diamond Green Diesel | |||||||||||||||||
| Segment operating income/(loss) | ( | ||||||||||||||||
Equity in net income of other unconsolidated subsidiaries | |||||||||||||||||
| Segment income/(loss) | ( | ||||||||||||||||
| Total other expense | ( | ||||||||||||||||
| Income before income taxes | $ | ||||||||||||||||
| Segment assets at September 30, 2023 | $ | $ | $ | $ | $ | ||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |||||||||||||
| Nine Months Ended October 1, 2022 | |||||||||||||||||
| Net Sales | $ | $ | $ | $ | $ | ||||||||||||
| Cost of sales and operating expenses | |||||||||||||||||
| Gross Margin | |||||||||||||||||
| Gain on sale of assets | ( | ( | ( | ( | |||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||
| Restructuring and asset impairment charges | |||||||||||||||||
| Acquisition and integration costs | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
Equity in net income of Diamond Green Diesel | |||||||||||||||||
| Segment operating income/(loss) | ( | ||||||||||||||||
| Equity in net income of other unconsolidated subsidiaries | |||||||||||||||||
| Segment income/(loss) | ( | ||||||||||||||||
| Total other expense | ( | ||||||||||||||||
| Income before income taxes | $ | ||||||||||||||||
| Segment assets at December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||
(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
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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 nine months ended September 30, 2023 and October 1, 2022 (in thousands):
| Three Months Ended September 30, 2023 | ||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Geographic Area | ||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||
| Europe | ||||||||||||||
| China | ||||||||||||||
| South America | ||||||||||||||
| Other | ||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||
| Major product types | ||||||||||||||
| Fats | $ | $ | $ | $ | ||||||||||
| Used cooking oil | ||||||||||||||
| Proteins | ||||||||||||||
| Bakery | ||||||||||||||
| Other rendering | ||||||||||||||
| Food ingredients | ||||||||||||||
| Bioenergy | ||||||||||||||
| Other | ||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Geographic Area | ||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||
| Europe | ||||||||||||||
| China | ||||||||||||||
| South America | ||||||||||||||
| Other | ||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||
| Major product types | ||||||||||||||
| Fats | $ | $ | $ | $ | ||||||||||
| Used cooking oil | ||||||||||||||
| Proteins | ||||||||||||||
| Bakery | ||||||||||||||
| Other rendering | ||||||||||||||
| Food ingredients | ||||||||||||||
| Bioenergy | ||||||||||||||
| Other | ||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||
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| Three Months Ended October 1, 2022 | ||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Geographic Area | ||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||
| Europe | ||||||||||||||
| China | ||||||||||||||
| South America | ||||||||||||||
| Other | ||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||
| Major product types | ||||||||||||||
| Fats | $ | $ | $ | $ | ||||||||||
| Used cooking oil | ||||||||||||||
| Proteins | ||||||||||||||
| Bakery | ||||||||||||||
| Other rendering | ||||||||||||||
| Food ingredients | ||||||||||||||
| Bioenergy | ||||||||||||||
| Other | ||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||
| Nine Months Ended October 1, 2022 | ||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Geographic Area | ||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||
| Europe | ||||||||||||||
| China | ||||||||||||||
| South America | ||||||||||||||
| Other | ||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||
| Major product types | ||||||||||||||
| Fats | $ | $ | $ | $ | ||||||||||
| Used cooking oil | ||||||||||||||
| Proteins | ||||||||||||||
| Bakery | ||||||||||||||
| Other rendering | ||||||||||||||
| Food ingredients | ||||||||||||||
| Bioenergy | ||||||||||||||
| Other | ||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||
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 $133.7 million, with the remaining performance obligations to be recognized in future periods (generally four years ) of approximately $803.7 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, 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, 2023 and October 1, 2022, the Company recorded sales to the DGD Joint Venture of
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approximately $276.6 million and $287.4 million, respectively. For the nine months ended September 30, 2023 and October 1, 2022, the Company recorded sales to the DGD Joint Venture of approximately $940.2 million and $797.5 million, respectively. At September 30, 2023 and December 31, 2022, the Company had $79.1 million and $116.9 million in outstanding receivables due from the DGD Joint Venture, respectively. In addition, the Company has eliminated approximately $73.8 million and $31.1 million of additional sales for the nine months ended September 30, 2023 and October 1, 2022, respectively to defer the Company's portion of profit of approximately $17.5 million and $7.6 million on those sales relating to inventory assets remaining on the DGD Joint Venture's balance sheet at September 30, 2023 and October 1, 2022, respectively.
Revolving Loan Agreement
On May 1, 2019, Darling, through its wholly owned subsidiary Darling Green Energy LLC, (“Darling Green”), and 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 “2019 DGD Loan Agreement”) with the DGD Joint Venture, pursuant to which the DGD Lenders committed to making loans available to the DGD Joint Venture in the total amount of $50.0 million, with each lender committed to $25.0 million of the total commitment. Any borrowings by the DGD Joint Venture under the 2019 DGD Loan Agreement were 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 %. On 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 and 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 September 30, 2023 and October 1, 2022 of approximately zero and $0.1 million, respectively and received interest from the DGD Joint Venture for the nine months ended September 30, 2023 and October 1, 2022 of approximately $0.6 million and $0.5 million, respectively. As of September 30, 2023 and December 31, 2022, zero and $25.0 million, respectively, was owed to Darling Green under the 2023 DGD Loan 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.
Guarantee Agreements
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
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| Nine Months Ended | |||||||||||
| September 30, 2023 | October 1, 2022 | ||||||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Change in accrued capital expenditures | $ | ( | $ | ||||||||
| Cash paid during the period for: | |||||||||||
| Interest, net of capitalized interest | $ | $ | |||||||||
| Income taxes, net of refunds | $ | $ | |||||||||
| Non-cash operating activities | |||||||||||
| Operating lease right of use asset obtained in exchange for new lease liabilities | $ | $ | |||||||||
| Non-cash financing activities | |||||||||||
| Debt issued for assets | $ | $ | |||||||||
(23) New Accounting Pronouncements
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2022, filed with the SEC on February 27, 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
Darling 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 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 recycled oils (used cooking oil and animal fats) into valuable feed and feedstock 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. 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 and pork animal by-products in North America, Europe and South America into non-food grade oils and protein meals, (ii) the collection and processing of bakery residuals in North America into Cookie Meal®, which is predominantly used in poultry and swine rations, (iii) the collection and processing of used cooking oil in North America and South America into non-food grade fats, (iv) the collection and processing of porcine and bovine blood in China, Europe, North America and Australia into blood plasma powder and 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, (vii) the production of organic fertilizers using protein produced from the Company’s animal by-products processing activities in North America and Europe, (viii) the rearing and 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 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 renewable diesel and 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 collagen in Europe, China, South America and North America, (ii) the collection and processing of porcine and bovine intestines into natural casings in Europe, China and North America, (iii) the extraction and processing of porcine mucosa into crude heparin in Europe, (iv) the collection and refining of animal fat into food grade fat in Europe, and (v) the processing of bones to bone chips for the collagen industry and bone ash 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 (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 Company’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, recycled greases, used cooking oil, inedible corn oil, soybean oil, or other feedstocks that become economically and commercially viable into renewable diesel (“DGD” or the “DGD Joint Venture”) as described in Note 3 (Investment in Unconsolidated Subsidiaries) to the Company's Consolidated Financial Statements for the period ended September 30, 2023 included herein, (ii) the conversion of organic sludge and food waste into biogas
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in 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, and (iv) the processing of manure into natural bio-phosphate in Europe.
Corporate Activities principally include unallocated corporate overhead expenses, acquisition-related expenses, interest expense net of interest income, and other non-operating income and expenses.
Economic Conditions and Uncertainties
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 highly volatile due to, among other things, the conflicts in Ukraine and the Middle East and their impacts on volatility in energy and other commodity prices, inflation, cost and supply chain pressures and availability, and disruption in banking systems and capital markets. Disturbances in world financial, credit, commodities and stock markets, including inflationary, deflationary and recessionary conditions, could have a negative impact on the Company’s results of operations. Any such disturbances or disruptions may also magnify the impact of other risks described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 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 and/or price of 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 environmental, social and governance (“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.
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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, 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 volume of raw material 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 collagen and natural casings products are influenced by other competing ingredients including plant-based and synthetic hydrocolloids and artificial casings. In the collagen operation, 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 collagen 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, 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, Brazilian real, Chinese renminbi, Canadian dollar 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.
Results of Operations
Three Months Ended September 30, 2023 Compared to Three Months Ended October 1, 2022
Operating Performance Metrics
Operating performance metrics which management routinely monitors as an indicator of operating performance include:
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•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 Index (the “Jacobsen”), an established North American trading exchange price publisher. The Jacobsen reports industry sales from the prior day's activity by product. Included on the Jacobsen are 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 United States and South America, the Company regularly monitors the Jacobsen for MBM, PM, FM, BFT, YG and corn because it 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 third quarter of fiscal 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 third quarter of fiscal 2023, compared to average Jacobsen and Reuters prices for the third quarter of fiscal 2022 are as follows:
| Avg. Price 3rd Quarter 2023 | Avg. Price 3rd Quarter 2022 | Increase/(Decrease) | % Increase/(Decrease) | |||||||||||
| Jacobsen: | ||||||||||||||
| MBM (Illinois) | $ 455.04/ton | $ 404.41/ton | $ 50.63/ton | 12.5 | % | |||||||||
| Feed Grade PM (Mid-South) | $ 488.13/ton | $ 388.85/ton | $ 99.28/ton | 25.5 | % | |||||||||
| Pet Food PM (Mid-South) | $ 796.10/ton | $ 762.30/ton | $ 33.80/ton | 4.4 | % | |||||||||
| Feather meal (Mid-South) | $ 572.30/ton | $ 574.07/ton | $ (1.77)/ton | (0.3) | % | |||||||||
| BFT (Chicago) | $ 68.66/cwt | $ 80.04/cwt | $ (11.38)/cwt | (14.2) | % | |||||||||
| YG (Illinois) | $ 52.39/cwt | $ 61.09/cwt | $ (8.70)/cwt | (14.2) | % | |||||||||
| Corn (Illinois) | $ 5.32/bushel | $ 7.01/bushel | $ (1.69)/bushel | (24.1) | % | |||||||||
| Reuters: | ||||||||||||||
| Palm Oil (CIF Rotterdam) | $ 963.00/MT | $ 1,130.00/MT | $ (167.00)/MT | (14.8) | % | |||||||||
| Soy meal (CIF Rotterdam) | $ 513.00/MT | $ 535.00/MT | $ (22.00)/MT | (4.1) | % | |||||||||
The following table shows the average Jacobsen and Reuters prices for the third quarter of fiscal 2023, compared to average Jacobsen and Reuters prices for the second quarter of fiscal 2023.
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| Avg. Price 3rd Quarter 2023 | Avg. Price 2nd Quarter 2023 | Increase/(Decrease) | % Increase/(Decrease) | |||||||||||
| Jacobsen: | ||||||||||||||
| MBM (Illinois) | $ 455.04/ton | $ 464.27/ton | $ (9.23)/ton | (2.0) | % | |||||||||
| Feed Grade PM (Mid-South) | $ 488.13/ton | $ 485.56/ton | $ 2.57/ton | 0.5 | % | |||||||||
| Pet Food PM (Mid-South) | $ 796.10/ton | $ 934.67/ton | $ (138.57)/ton | (14.8) | % | |||||||||
| Feather meal (Mid-South) | $ 572.30/ton | $ 577.87/ton | $ (5.57)/ton | (1.0) | % | |||||||||
| BFT (Chicago) | $ 68.66/cwt | $ 56.61/cwt | $ 12.05/cwt | 21.3 | % | |||||||||
| YG (Illinois) | $ 52.39/cwt | $ 46.06/cwt | $ 6.33/cwt | 13.7 | % | |||||||||
| Corn (Illinois) | $ 5.32/bushel | $ 6.68/bushel | $ (1.36)/bushel | (20.4) | % | |||||||||
| Reuters: | ||||||||||||||
| Palm Oil (CIF Rotterdam) | $ 963.00/MT | $ 958.00/MT | $ 5.00/MT | 0.5 | % | |||||||||
| Soy meal (CIF Rotterdam) | $ 513.00/MT | $ 516.00/MT | $ (3.00)/MT | (0.6) | % | |||||||||
Segment Results
Segment operating income for the three months ended September 30, 2023 was $178.4 million, which reflects a decrease of $(89.9) million or (33.5)% as compared to the three months ended October 1, 2022.
| (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | ||||||||||||
| Three Months Ended September 30, 2023 | |||||||||||||||||
| Net Sales | $ | 1,047,796 | $ | 455,744 | $ | 121,664 | $ | — | $ | 1,625,204 | |||||||
| Cost of sales and operating expenses | 804,312 | 338,208 | 96,213 | — | 1,238,733 | ||||||||||||
| Gross Margin | 243,484 | 117,536 | 25,451 | — | 386,471 | ||||||||||||
| Gross Margin % | 23.2 | % | 25.8 | % | 20.9 | % | — | % | 23.8 | % | |||||||
| Loss/(gain) on sale of assets | 833 | 117 | (21) | — | 929 | ||||||||||||
| Selling, general and administrative expenses | 80,985 | 31,463 | 5,666 | 19,583 | 137,697 | ||||||||||||
| Acquisition and integration costs | — | — | — | 3,430 | 3,430 | ||||||||||||
| Change in fair value of contingent consideration | (5,559) | — | — | — | (5,559) | ||||||||||||
| Depreciation and amortization | 88,954 | 25,418 | 9,026 | 2,596 | 125,994 | ||||||||||||
Equity in net income of Diamond Green Diesel | — | — | 54,389 | — | 54,389 | ||||||||||||
| Segment operating income/(loss) | 78,271 | 60,538 | 65,169 | (25,609) | 178,369 | ||||||||||||
Equity in net income of other unconsolidated subsidiaries | 1,534 | — | — | — | 1,534 | ||||||||||||
| Segment income/(loss) | 79,805 | 60,538 | 65,169 | (25,609) | 179,903 | ||||||||||||
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| (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | ||||||||||||
| Three Months Ended October 1, 2022 | |||||||||||||||||
| Net Sales | $ | 1,273,142 | $ | 347,902 | $ | 126,555 | $ | — | $ | 1,747,599 | |||||||
| Cost of sales and operating expenses | 1,012,899 | 256,557 | 101,781 | — | 1,371,237 | ||||||||||||
| Gross Margin | 260,243 | 91,345 | 24,774 | — | 376,362 | ||||||||||||
| Gross Margin % | 20.4 | % | 26.3 | % | 19.6 | % | — | % | 21.5 | % | |||||||
| Gain on sale of assets | (2,290) | (809) | (17) | — | (3,116) | ||||||||||||
| Selling, general and administrative expenses | 63,973 | 23,909 | 1,724 | 15,474 | 105,080 | ||||||||||||
| Acquisition and integration costs | — | — | — | 4,503 | 4,503 | ||||||||||||
| Depreciation and amortization | 80,679 | 14,408 | 7,284 | 2,607 | 104,978 | ||||||||||||
Equity in net income of Diamond Green Diesel | — | — | 103,414 | — | 103,414 | ||||||||||||
| Segment operating income/(loss) | 117,881 | 53,837 | 119,197 | (22,584) | 268,331 | ||||||||||||
| Equity in net income of other unconsolidated subsidiaries | 2,301 | — | — | — | 2,301 | ||||||||||||
| Segment income/(loss) | 120,182 | 53,837 | 119,197 | (22,584) | 270,632 | ||||||||||||
Feed Ingredients Segment
Raw material volume. In the three months ended September 30, 2023, the raw material processed by the Company's Feed Ingredients segment totaled approximately 3.1 million metric tons. Compared to the three months ended October 1, 2022, overall raw material volume processed in the Feed Ingredients segment decreased 0.3%.
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 October 1, 2022 | $ | 543.3 | $ | 413.8 | $ | 51.1 | $ | 1,008.2 | $ | 163.6 | $ | 84.8 | $ | 16.5 | $ | 1,273.1 | ||||||||||
| Increase (decrease) in sales volumes | (31.9) | (13.2) | — | (45.1) | 20.3 | (8.2) | — | (33.0) | ||||||||||||||||||
| Decrease in finished product prices | (97.3) | (2.6) | — | (99.9) | (80.4) | (13.4) | — | (193.7) | ||||||||||||||||||
| Increase (decrease) due to currency exchange rates | 3.8 | 7.4 | 0.5 | 11.7 | (0.4) | — | — | 11.3 | ||||||||||||||||||
| Other change | — | — | (9.0) | (9.0) | — | — | (0.9) | (9.9) | ||||||||||||||||||
| Total change | (125.4) | (8.4) | (8.5) | (142.3) | (60.5) | (21.6) | (0.9) | (225.3) | ||||||||||||||||||
| Net sales three months ended September 30, 2023 | $ | 417.9 | $ | 405.4 | $ | 42.6 | $ | 865.9 | $ | 103.1 | $ | 63.2 | $ | 15.6 | $ | 1,047.8 | ||||||||||
Margins. In the Feed Ingredients segment for the three months ended September 30, 2023, the gross margin percentage increased to 23.2% as compared to 20.4% for the comparable period of fiscal 2022. The increase in margin was primarily due to improved 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, 2023 was $78.3 million, a decrease of $(39.6) million or (33.6)% as compared to the three months ended October 1, 2022. The decrease was primarily due to lower overall fat finished product prices, lower sales volumes and an increase in selling, general and administrative expenses as compared to fiscal 2022.
Food Ingredients Segment
Raw material volume. In the three months ended September 30, 2023, the raw material processed by the Company's Food Ingredients segment totaled approximately 324,000 metric tons. Compared to the three months ended October 1, 2022, overall raw material volume processed in the Food Ingredients segment increased approximately 18.3%. The increase was primarily due to the Gelnex Acquisition.
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Sales. Net sales increased in the Food Ingredients segment primarily due to the increased sales recognized from the Gelnex Acquisition partially offset by lower collagen prices.
Margins. In the Food Ingredients segment for the three months ended September 30, 2023, the gross margin percentage decreased to 25.8% as compared to 26.3% for the comparable period of fiscal 2022. The decrease was primarily due to declining prices in the collagen market and higher raw material costs as compared to fiscal 2022.
Segment operating income. Food Ingredients operating income was $60.5 million for the three months ended September 30, 2023, an increase of $6.7 million or 12.5% as compared to the three months ended October 1, 2022. The increase was primarily due to an increase in sales volumes from the Gelnex Acquisition, which more than offset an increase in selling, general and administrative expense and depreciation and amortization from the Gelnex Acquisition as compared to fiscal 2022.
Fuel Ingredients Segment
Raw material volume. In the three months ended September 30, 2023, the raw material processed by the Company's Fuel Ingredients segment totaled approximately 344,000 metric tons. Compared to the three months ended October 1, 2022, overall raw material volume processed in the Fuel Ingredients segment decreased approximately 5.0%.
Sales. Net sales decreased in the Fuel Ingredients segment primarily due to lower sales prices and sales volumes in Europe.
Margins. In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the three months ended September 30, 2023, the gross margin percentage increased to 20.9% as compared to 19.6% for the comparable period of fiscal 2022. The increase was primarily due to the impact of higher margins on sales into the biofuel market as compared to fiscal 2022.
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, 2023 was $65.2 million, a decrease of $(54.0) million or (45.3)% as compared to the same period in fiscal 2022. The decrease was primarily due to an anticipated catalyst turnaround at the DGD Joint Venture's St. Charles plant, an unexpected shut down at the DGD Joint Venture's St. Charles plant due to a minor fire, a decrease in renewable identification number (RIN) prices, lower values for LCFS credits and an unfavorable impact from commodity derivative instruments at the DGD Joint Venture as compared to fiscal 2022.
Foreign Currency Exchange
During the third quarter of fiscal 2023, overall the euro and Brazilian real strengthened while the Canadian dollar weakened against the U.S. dollar as compared to the same period in fiscal 2022. Using actual results for the three months ended September 30, 2023 and using the prior year's average currency rate for the three months ended October 1, 2022, foreign currency translation would result in a decrease in operating income of approximately $8.7 million. The average rates for the three months ended September 30, 2023 were €1.00:$1.09, R$1.00:$0.21 and C$1.00:$0.75 as compared to the average rates for the three months ended October 1, 2022 of €1.00:$1.01, R$1.00:$0.19 and C$1.00:$0.77, respectively.
Corporate Activities
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $19.6 million during the three months ended September 30, 2023, compared to approximately $15.5 million during the three months ended October 1, 2022, an increase of $4.1 million. The increase was primarily due to higher costs for corporate related compensation and benefits.
Acquisition and Integration costs. Acquisition and integration costs were approximately $3.4 million during the three months ended September 30, 2023 as compared to $4.5 million for the same period in fiscal 2022. These costs are decreasing as we moved into the integration phase on the most recent acquisitions, including costs related to the Gelnex Acquisition, FASA Acquisition and Valley Acquisition as compared to the prior year acquisition costs that primarily related to the Valley Acquisition, Op de Beeck acquisition and the FASA Acquisition.
Depreciation and Amortization. Depreciation and amortization charges were approximately $2.6 million for each of the three months ended September 30, 2023 and October 1, 2022.
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Interest Expense. Interest expense was $70.3 million during the three months ended September 30, 2023, compared to $39.8 million during the three months ended October 1, 2022, an increase of $30.5 million. The increase in interest expense was primarily due to an increase in debt outstanding, including increased interest expense from the issuance 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 2022.
Foreign Currency Gain/(Loss). Foreign currency gains were $0.8 million for the three months ended September 30, 2023 as compared to foreign currency losses of $(0.5) million for the three months ended October 1, 2022. The increase in currency gains is due primarily to an increase in gains on the revaluation of non-functional currency assets and liabilities as compared to the same period of fiscal 2022.
Other Income/(Expense), net. Other income was $2.2 million in the three months ended September 30, 2023, compared to other expense of $(2.8) million for the three months ended October 1, 2022. The increase in other income was primarily due to an increase in interest income and a decrease in casualty losses as compared to the same period in fiscal 2022.
Equity in Net Income in Investment of Other Unconsolidated Subsidiaries. The change in this line item is not significant and primarily represents the Company's pro rata share of the net income from foreign unconsolidated subsidiaries.
Income Taxes. The Company recorded an income tax benefit of $15.4 million for the three months ended September 30, 2023, compared to income tax expense of $35.2 million recorded in the three months ended October 1, 2022, a decrease of $50.6 million, which was primarily due to decreased pre-tax earnings of the Company and the relative impact of biofuel tax incentives for the three months ended September 30, 2023. The effective tax rate for the three months ended September 30, 2023 and October 1, 2022 is (13.6)% and 15.5%, respectively. The effective tax rate for the three months ended September 30, 2023 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), biofuel tax incentives and discrete items including the tax effects of IRS Notice 2023-55, which delays the effective date of the foreign tax credit regulations finalized in 2022 by allowing taxpayers to determine whether a foreign tax qualifies for a credit based on the former regulations. The effective tax rate for the three months ended October 1, 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) and biofuel tax incentives. The Company's effective tax rate excluding the federal and state tax impact of the biofuel tax incentives and discrete items is 25.9% for the three months ended September 30, 2023, compared to 27.4% for the three months ended October 1, 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 expense, taxes, depreciation and amortization) is not calculated identically by all companies, the presentation in this report may not be comparable to EBITDA or Adjusted 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 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.
Pro forma Adjusted EBITDA to Foreign Currency is not a 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, 6% Notes, 5.25% Notes and 3.625% Notes that were outstanding at September 30, 2023. However, the amounts shown below for Adjusted
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EBITDA differ from the amounts calculated under similarly titled definitions in the Company’s Senior Secured Credit Facilities, 6% Notes, 5.25% Notes and 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
Third Quarter 2023 as Compared to Third Quarter 2022
| Three Months Ended | ||||||||
| (dollars in thousands) | September 30, 2023 | October 1, 2022 | ||||||
| Net income attributable to Darling | $ | 125,026 | $ | 191,081 | ||||
| Depreciation and amortization | 125,994 | 104,978 | ||||||
| Interest expense | 70,278 | 39,816 | ||||||
| Income tax expense/(benefit) | (15,364) | 35,215 | ||||||
| Acquisition and integration costs | 3,430 | 4,503 | ||||||
| Change in fair value of contingent consideration | (5,559) | — | ||||||
| Foreign currency loss/(gain) | (845) | 493 | ||||||
| Other expense/(income), net | (2,247) | 2,807 | ||||||
| Equity in net income of Diamond Green Diesel | (54,389) | (103,414) | ||||||
| Equity in net income of other unconsolidated subsidiaries | (1,534) | (2,301) | ||||||
| Net income attributable to non-controlling interests | 3,055 | 1,220 | ||||||
| Darling's Adjusted EBITDA | $ | 247,845 | $ | 274,398 | ||||
| Foreign currency exchange impact (1) | (8,677) | — | ||||||
| Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) | $ | 239,168 | $ | 274,398 | ||||
| DGD Joint Venture Adjusted EBITDA (Darling's Share) | $ | 86,450 | $ | 120,333 | ||||
| Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA | $ | 334,295 | $ | 394,731 | ||||
(1) The average rates for the three months ended September 30, 2023 were €1.00:$1.09, R$1.00:$0.21 and C$1.00:$0.75 as compared to the average rates for the three months ended October 1, 2022 of €1.00:$1.01, R$1.00:$0.19 and C$1.00:$0.77, respectively.
Nine Months Ended September 30, 2023 Compared to Nine Months Ended October 1, 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
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During the first nine months of fiscal 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 nine months of fiscal 2023, compared to average Jacobsen and Reuters prices for the first nine months of fiscal 2022 are as follows:
| Avg. Price First Nine Months 2023 | Avg. Price First Nine Months 2022 | Increase/(Decrease) | % Increase/(Decrease) | |||||||||||
| Jacobsen: | ||||||||||||||
| MBM (Illinois) | $ 451.72/ton | $ 362.75/ton | $ 88.97/ton | 24.5 | % | |||||||||
| Feed Grade PM (Mid-South) | $ 460.21/ton | $ 380.57/ton | $ 79.64/ton | 20.9 | % | |||||||||
| Pet Food PM (Mid-South) | $ 824.84/ton | $ 775.12/ton | $ 49.72/ton | 6.4 | % | |||||||||
| Feather meal (Mid-South) | $ 582.30/ton | $ 556.99/ton | $ 25.31/ton | 4.5 | % | |||||||||
| BFT (Chicago) | $ 62.22/cwt | $ 76.98/cwt | $ (14.76)/cwt | (19.2) | % | |||||||||
| YG (Illinois) | $ 49.85/cwt | $ 58.37/cwt | $ (8.52)/cwt | (14.6) | % | |||||||||
| Corn (Illinois) | $ 6.28/bushel | $ 7.37/bushel | $ (1.09)/bushel | (14.8) | % | |||||||||
| Reuters: | ||||||||||||||
| Palm Oil (CIF Rotterdam) | $ 971.00/MT | $ 1,449.00/MT | $ (478.00)/MT | (33.0) | % | |||||||||
| Soy meal (CIF Rotterdam) | $ 541.00/MT | $ 554.00/MT | $ (13.00)/MT | (2.3) | % | |||||||||
Segment Results
Segment operating income for the nine months ended September 30, 2023 was $790.9 million, which reflects an increase of $11.1 million or 1.4% as compared to the nine months ended October 1, 2022.
| (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | ||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||
| Net Sales | $ | 3,426,950 | $ | 1,328,229 | $ | 418,818 | $ | — | $ | 5,173,997 | |||||||
| Cost of sales and operating expenses | 2,630,797 | 999,418 | 335,193 | — | 3,965,408 | ||||||||||||
| Gross Margin | 796,153 | 328,811 | 83,625 | — | 1,208,589 | ||||||||||||
| Gross Margin % | 23.2 | % | 24.8 | % | 20.0 | % | — | % | 23.4 | % | |||||||
| Loss/(gain) on sale of assets | 813 | 99 | (51) | — | 861 | ||||||||||||
| Selling, general and administrative expenses | 233,082 | 98,269 | 16,829 | 61,734 | 409,914 | ||||||||||||
| Restructuring and asset impairment charges | 92 | 5,328 | — | — | 5,420 | ||||||||||||
| Acquisition and integration costs | — | — | — | 12,158 | 12,158 | ||||||||||||
| Change in fair value of contingent consideration | (13,058) | — | — | — | (13,058) | ||||||||||||
| Depreciation and amortization | 261,849 | 68,336 | 25,986 | 7,915 | 364,086 | ||||||||||||
Equity in net income of Diamond Green Diesel | — | — | 361,690 | — | 361,690 | ||||||||||||
| Segment operating income/(loss) | 313,375 | 156,779 | 402,551 | (81,807) | 790,898 | ||||||||||||
Equity in net income of other unconsolidated subsidiaries | 3,503 | — | — | — | 3,503 | ||||||||||||
| Segment income/(loss) | 316,878 | 156,779 | 402,551 | (81,807) | 794,401 | ||||||||||||
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| (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | ||||||||||||
| Nine Months Ended October 1, 2022 | |||||||||||||||||
| Net Sales | $ | 3,322,927 | $ | 1,071,897 | $ | 369,297 | $ | — | $ | 4,764,121 | |||||||
| Cost of sales and operating expenses | 2,522,728 | 807,833 | 292,760 | — | 3,623,321 | ||||||||||||
| Gross Margin | 800,199 | 264,064 | 76,537 | — | 1,140,800 | ||||||||||||
| Gross Margin % | 24.1 | % | 24.6 | % | 20.7 | % | — | % | 23.9 | % | |||||||
| Gain on sale of assets | (3,595) | (891) | (74) | — | (4,560) | ||||||||||||
| Selling, general and administrative expenses | 185,045 | 73,608 | 9,921 | 46,314 | 314,888 | ||||||||||||
| Restructuring and asset impairment charges | 8,557 | — | — | — | 8,557 | ||||||||||||
| Acquisition and integration costs | — | — | — | 13,634 | 13,634 | ||||||||||||
| Depreciation and amortization | 203,967 | 44,307 | 20,894 | 8,169 | 277,337 | ||||||||||||
Equity in net income of Diamond Green Diesel | — | — | 248,898 | — | 248,898 | ||||||||||||
| Segment operating income/(loss) | 406,225 | 147,040 | 294,694 | (68,117) | 779,842 | ||||||||||||
| Equity in net income of other unconsolidated subsidiaries | 5,933 | — | — | — | 5,933 | ||||||||||||
| Segment income/(loss) | 412,158 | 147,040 | 294,694 | (68,117) | 785,775 | ||||||||||||
Feed Ingredients Segment
Raw material volume. In the nine months ended September 30, 2023, the raw material processed by the Company's Feed Ingredients segment totaled approximately 9.4 million metric tons. Compared to the nine months ended October 1, 2022, overall raw material volume processed in the Feed Ingredients segment increased approximately 16.1%. The increase was primarily due to the Valley Acquisition and the FASA Acquisition.
Sales. 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 nine months ended October 1, 2022 | $ | 1,410.6 | $ | 1,035.1 | $ | 172.8 | $ | 2,618.5 | $ | 411.2 | $ | 252.9 | $ | 40.3 | $ | 3,322.9 | ||||||||||
| Increase (decrease) in sales volumes | 121.4 | 164.2 | — | 285.6 | 82.5 | (26.6) | — | 341.5 | ||||||||||||||||||
| Increase (decrease) in finished product prices | (222.1) | 78.9 | — | (143.2) | (104.9) | (20.9) | — | (269.0) | ||||||||||||||||||
| Increase (decrease) due to currency exchange rates | 3.6 | 10.3 | 0.7 | 14.6 | (1.7) | — | — | 12.9 | ||||||||||||||||||
| Other change | — | — | 9.2 | 9.2 | — | — | 9.5 | 18.7 | ||||||||||||||||||
| Total change | (97.1) | 253.4 | 9.9 | 166.2 | (24.1) | (47.5) | 9.5 | 104.1 | ||||||||||||||||||
| Net sales nine months ended September 30, 2023 | $ | 1,313.5 | $ | 1,288.5 | $ | 182.7 | $ | 2,784.7 | $ | 387.1 | $ | 205.4 | $ | 49.8 | $ | 3,427.0 | ||||||||||
Margins. In the Feed Ingredients segment for the nine months ended September 30, 2023, the gross margin percentage decreased to 23.2% as compared to 24.1% for the comparable period of fiscal 2022. The decrease in margin was primarily due to lower fat finished product prices as compared to fiscal 2022.
Segment operating income. Feed Ingredients operating income for the nine months ended September 30, 2023 was $313.4 million, a decrease of $(92.8) million or (22.8)% as compared to the nine months ended October 1, 2022. The decrease was primarily due to the lower fat 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.
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Food Ingredients Segment
Raw material volume. In the nine months ended September 30, 2023, the raw material processed by the Company's Food Ingredients segment totaled approximately 920,000 metric tons. Compared to the nine months ended October 1, 2022, overall raw material volume processed in the Food Ingredients segment increased approximately 11.7%. The increase was primarily due to the Gelnex Acquisition.
Sales. Net sales increased in the Food Ingredients segment primarily due to the increased sales recognized from the Gelnex Acquisition.
Margins. In the Food Ingredients segment for the nine months ended September 30, 2023, the gross margin percentage increased to 24.8% as compared to 24.6% for the comparable period of fiscal 2022. The increase 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 a step up of inventory value in purchase accounting as compared to fiscal 2022.
Segment operating income. Food Ingredients operating income was $156.8 million for the nine months ended September 30, 2023, an increase of $9.8 million or 6.7% as compared to the nine months ended October 1, 2022. The increase was due primarily to an increase in sales volumes from the Gelnex Acquisition and an increase in sales of higher margin hydrolyzed collagen that more than offset an increase in selling, general and administrative expense and depreciation and amortization from the Gelnex Acquisition as compared to fiscal 2022.
Fuel Ingredients Segment
Raw material volume. In the nine months ended September 30, 2023, the raw material processed by the Company's Fuel Ingredients segment totaled approximately 1.04 million metric tons. Compared to the nine months ended October 1, 2022, overall raw material volume processed in the Fuel Ingredients segment decreased approximately 1.3%.
Sales. Net sales increased in the Fuel Ingredients segment primarily due to higher sales volumes partially offset by lower sales prices.
Margins. In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the nine months ended September 30, 2023, the gross margin percentage decreased to 20.0% as compared to 20.7% for the comparable period of fiscal 2022. The decrease was primarily due to the impact of decreases in sales prices for our products sold into the electric 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 nine months ended September 30, 2023 was $402.6 million, an increase of $107.9 million or 36.6% as compared to the same period in fiscal 2022. The increase was primarily due to increased volumes from production at the DGD Joint Venture's Port Arthur plant that more than offset third quarter decreases from an anticipated catalyst turnaround at the DGD Joint Venture's St. Charles plant, an unexpected shut down at the DGD Joint Venture's St. Charles plant due to a minor fire, a decrease in RIN prices and lower values for LCFS credits as compared to fiscal 2022.
Foreign Currency Exchange
During the first nine months of fiscal 2023, overall the euro and Brazilian real strengthened while the Canadian dollar weakened against the U.S. dollar as compared to the same period in fiscal 2022. Using actual results for the nine months ended September 30, 2023 and using the prior year's average currency rate for the nine months ended October 1, 2022, foreign currency translation would result in a decrease in operating income of approximately $2.9 million. The average rates for the nine months ended September 30, 2023 were €1.00:$1.08, R$1.00:$0.20 and C$1.00:$0.74 as compared to the average rates for the nine months ended October 1, 2022 of €1.00:$1.07, R$1.00:$0.19 and C$1.00:$0.78, respectively.
Corporate Activities
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $61.7 million during the nine months ended September 30, 2023, compared to approximately $46.3 million during the nine months ended October 1, 2022, an increase of $15.4 million. The increase is primarily due to higher costs for corporate related compensation and benefits.
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Acquisition and Integration costs. Acquisition and integration costs were approximately $12.2 million during the nine months ended September 30, 2023 as compared to $13.6 million for the same period in fiscal 2022. These costs primarily relate to the Gelnex Acquisition, FASA Acquisition and Valley Acquisition for the nine months ended September 30, 2023 as compared to the prior year acquisition costs that primarily related to the Valley Acquisition, Op de Beeck acquisition, FASA Acquisition and the Gelnex Acquisition.
Depreciation and Amortization. Depreciation and amortization charges were approximately $7.9 million for the nine months ended September 30, 2023 as compared to $8.2 million for the nine months ended October 1, 2022.
Interest Expense. Interest expense was $190.8 million during the nine months ended September 30, 2023, compared to $79.4 million during the nine months ended October 1, 2022, an increase of $111.4 million. The increase in interest expense was primarily due to an increase in debt outstanding, including increased interest expense from the issuance 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 2022.
Foreign Currency Gain/(Loss). Foreign currency gains were $8.3 million for the nine months ended September 30, 2023 as compared to foreign currency losses of $(6.0) million for the nine months ended October 1, 2022. The increase in currency gains is due primarily to an increase in gains on the revaluation of an intercompany note and non-functional currency assets and liabilities 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 $13.5 million in the nine months ended September 30, 2023, compared to other expense of $(3.9) million for the nine months ended October 1, 2022. The increase in other income was primarily due to casualty loss insurance proceeds received for the prior 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 2022.
Equity in Net Income in Investment of Other Unconsolidated Subsidiaries. The change in this line item is not significant and primarily represents the Company's pro rata share of the net income from foreign unconsolidated subsidiaries.
Income Taxes. The Company recorded income tax expense of $52.3 million for the nine months ended September 30, 2023, compared to $108.6 million recorded in the nine months ended October 1, 2022, a decrease of $56.3 million, which was primarily due to decreased pre-tax earnings of the Company and the relative impact of biofuel tax incentives for the nine months ended September 30, 2023. The effective tax rate for the nine months ended September 30, 2023 and October 1, 2022 is 8.4% and 15.6%, respectively. The effective tax rate for the nine months ended September 30, 2023 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) and biofuel tax incentives. The effective tax rate for the nine months ended October 1, 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), biofuel tax incentives, and discrete items, including excess tax benefits from stock compensation. The Company's effective tax rate excluding the federal and state impact of the biofuel tax incentives and discrete items is 28.4% for the nine months ended September 30, 2023, compared to 27.6% for the nine months ended October 1, 2022.
Non-U.S. GAAP Measures
For 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 of Operations - Three Months Ended September 30, 2023 Compared to the Three Months Ended October 1, 2022 - Non-U.S GAAP Measures.”
Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA and (Non-GAAP) Pro Forma Adjusted EBITDA
First Nine Months of Fiscal 2023 as Compared to First Nine Months of Fiscal 2022
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| Nine Months Ended | ||||||||
| (dollars in thousands) | September 30, 2023 | October 1, 2022 | ||||||
| Net income attributable to Darling | $ | 563,210 | $ | 581,130 | ||||
| Depreciation and amortization | 364,086 | 277,337 | ||||||
| Interest expense | 190,770 | 79,427 | ||||||
| Income tax expense | 52,322 | 108,631 | ||||||
| Restructuring and asset impairment charges | 5,420 | 8,557 | ||||||
| Acquisition and integration costs | 12,158 | 13,634 | ||||||
| Change in fair value of contingent consideration | (13,058) | — | ||||||
| Foreign currency loss/(gain) | (8,339) | 6,005 | ||||||
| Other expense/(income), net | (13,485) | 3,851 | ||||||
| Equity in net income of Diamond Green Diesel | (361,690) | (248,898) | ||||||
| Equity in net income of other unconsolidated subsidiaries | (3,503) | (5,933) | ||||||
| Net income attributable to non-controlling interests | 9,923 | 6,731 | ||||||
| Darling's Adjusted EBITDA | $ | 797,814 | $ | 830,472 | ||||
| Foreign currency exchange impact (1) | (2,898) | — | ||||||
| Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) | $ | 794,916 | $ | 830,472 | ||||
| DGD Joint Venture Adjusted EBITDA (Darling's Share) | $ | 463,171 | $ | 297,503 | ||||
| Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA | $ | 1,260,985 | $ | 1,127,975 | ||||
(1) The average rates for the nine months ended September 30, 2023 were €1.00:$1.08, R$1.00:$0.20 and C$1.00:$0.74 as compared to the average rates for the nine months ended October 1, 2022 of €1.00:$1.07, R$1.00:$0.19 and C$1.00:$0.78, respectively.
FINANCING, LIQUIDITY AND CAPITAL RESOURCES
Credit Facilities
Indebtedness
Certain Debt Outstanding at September 30, 2023. On September 30, 2023, debt outstanding under the Company's Amended Credit Agreement, the Company's 6% Notes, the Company's 5.25% Notes and the Company's 3.625% Notes consists of the following (in thousands):
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| Senior Notes: | |||||
| 6 % Notes due 2030 | $ | 1,000,000 | |||
| Less unamortized deferred loan costs net of bond premium | (6,642) | ||||
| Carrying value of 6% Notes due 2030 | $ | 993,358 | |||
| 5.25 % Notes due 2027 | $ | 500,000 | |||
| Less unamortized deferred loan costs | (3,471) | ||||
| Carrying value of 5.25% Notes due 2027 | $ | 496,529 | |||
| 3.625 % Notes due 2026 - Denominated in euros | $ | 544,973 | |||
| Less unamortized deferred loan costs | (2,912) | ||||
| Carrying value of 3.625% Notes due 2026 | $ | 542,061 | |||
| Amended Credit Agreement: | |||||
| Term A-1 facility | $ | 400,000 | |||
| Less unamortized deferred loan costs | (590) | ||||
| Carrying value of Term A-1 facility | $ | 399,410 | |||
| Term A-2 facility | $ | 484,375 | |||
| Less unamortized deferred loan costs | (837) | ||||
| Carrying value of Term A-2 facility | $ | 483,538 | |||
| Term A-3 facility | $ | 300,000 | |||
| Less unamortized deferred loan costs | (898) | ||||
| Carrying value of Term A-3 facility | $ | 299,102 | |||
| Term A-4 facility | $ | 493,750 | |||
| Less unamortized deferred loan costs | (1,085) | ||||
| Carrying value of Term A-4 facility | $ | 492,665 | |||
| Term Loan B | $ | 200,000 | |||
| Less unamortized deferred loan costs | (818) | ||||
| Carrying value of Term Loan B | $ | 199,182 | |||
| Revolving Credit Facility: | |||||
| Maximum availability | $ | 1,500,000 | |||
| Ancillary Facilities | 52,614 | ||||
| Borrowings outstanding | 399,518 | ||||
| Letters of credit issued | 3,871 | ||||
| Availability | $ | 1,043,997 | |||
Other Debt | $ | 106,625 | |||
During the first nine months of fiscal 2023, the U.S. dollar increased as compared to the euro at December 31, 2022. Using the euro based debt outstanding at September 30, 2023 and comparing the closing balance sheet rate at September 30, 2023 to the balance sheet rate at December 31, 2022, the U.S. dollar debt balances of euro based debt decreased by approximately $5.9 million at September 30, 2023. The closing balance sheet rate assumption used in this calculation was the actual fiscal closing balance sheet rate at September 30, 2023 of €1.00:$1.0582 as compared to the closing balance sheet rate at December 31, 2022 of €1.00:$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. The 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
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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 9, 2026. The revolving credit facility will be used for working capital needs, general corporate purposes and other purposes not prohibited by the Amended Credit Agreement.
•As of September 30, 2023, the Company had availability of $1,044.0 million under the revolving credit facility, taking into account that the Company had $399.5 million in outstanding borrowings, $52.6 million in ancillary facilities and letters of credit issued of $3.9 million.
•As of September 30, 2023, the Company has borrowed all $400.0 million under the terms of the term A-1 facility and has made no repayments. Amounts borrowed under the term A-1 facility that are repaid by the Company cannot be reborrowed. The term A-1 facility borrowings are repayable in quarterly installments of 0.25% of the aggregate principle amount of the relevant term A-1 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-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 September 30, 2023, the Company has borrowed all $500.0 million under the terms of the term A-2 facility and has repaid $15.6 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 A-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 September 30, 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 September 30, 2023, the Company has borrowed all $500.0 million under the terms of the term A-4 facility and has repaid $6.3 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 September 30, 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
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Company under the term B facility only one final installment of the relevant term B facility then outstanding is due on December 18, 2024. The term B facility will mature on December 18, 2024.
•The interest rate applicable to any borrowings under the revolving credit facility will equal the adjusted term secured overnight financing rate (SOFR) for U.S. dollar borrowings or the adjusted euro interbank 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 1.375% per annum or base 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 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 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 the base rate plus 1.00% or LIBOR plus 2.00%.
6% Senior Notes due 2030. On June 9, 2022, Darling issued and sold $750.0 million aggregate principal amount of 6% Senior Notes due 2030 (the “6% Initial Notes”). The 6% Initial Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of June 9, 2022 (the “6% Base Indenture”), among Darling, the 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 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 U.S., European, China and Brazil overdraft ancillary facilities, U.S., European and Brazil finance lease obligations and note arrangements in U.S., Brazil, China and European notes that are not part of the Company's Amended Credit Agreement, 6% Notes, 5.25% Notes or 3.625% Notes.
The classification of long-term debt in the Company’s September 30, 2023 consolidated balance sheet is based on the contractual repayment terms of the 6% Notes, the 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 6% Indenture, the 5.25% Indenture and the 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 6% Notes, the 5.25% Notes and the 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 6% Indenture, the 5.25% Indenture and the 3.625% Indenture from
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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 6% Notes, the 5.25% Notes and the 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 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, 2022 as filed with the SEC on February 27, 2023.
As of September 30, 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 6% Indenture, the 5.25% Indenture and the 3.625% Indenture.
Working Capital and Capital Expenditures
On September 30, 2023, the Company had working capital of $809.3 million and its working capital ratio was 1.78 to 1 compared to working capital of $569.7 million and a working capital ratio of 1.53 to 1 on December 31, 2022. As of September 30, 2023, the Company had unrestricted cash of $119.0 million and funds available under the revolving credit facility of $1,044.0 million, compared to unrestricted cash of $127.0 million and funds available under the revolving credit facility of $1,313.0 million at December 31, 2022. The Company diversifies its cash investments by limiting the amounts deposited with any one financial institution.
Net cash provided by operating activities was $682.3 million for the first nine months ended September 30, 2023, as compared to net cash provided by operating activities of $638.4 million for the first nine months ended October 1, 2022, an increase of $43.9 million due primarily to an increase in cash distributions received from the DGD Joint Venture. Cash used in investing activities was $1,506.6 million for the first nine months ended September 30, 2023, compared to $2,222.8 million for the first nine months ended October 1, 2022, a decrease in cash used in investing activities of $716.2 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 $902.2 million for the first nine months ended September 30, 2023, compared to $1,682.9 million for the first nine months ended October 1, 2022, a decrease in net cash provided by financing activities of $780.7 million, primarily due to a decrease in debt borrowings utilized to fund acquisitions in the first nine months ended September 30, 2023 compared to the first nine months ended October 1, 2022.
Capital expenditures of $380.6 million were made during the first nine months of fiscal 2023, compared to $257.1 million in the first nine months of fiscal 2022. The Company expects to incur additional capital expenditures of approximately $184 million for the remainder of fiscal 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 $43.4 million and $29.2 million during the first nine months ended September 30, 2023 and October 1, 2022, respectively.
Accrued Insurance and Pension Plan Obligations
Based upon the annual actuarial estimate, current year accruals and claims paid during the first nine months of fiscal 2023, the Company has an accrued balance of approximately $22.4 million it expects will become due during the next twelve months in order to meet obligations related to the Company’s self-insurance reserves and accrued insurance obligations, which are included in current accrued expenses at September 30, 2023. The self insurance reserve is composed of estimated liability for claims arising for workers’ compensation, auto liability and general liability claims. The self-insurance reserve liability is determined annually, based upon a third party actuarial estimate. The
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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 $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 $3.4 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 nine months ended September 30, 2023 of approximately $0.2 million. Additionally, the Company has made required and tax deductible discretionary contributions to its foreign pension plans for the first nine months ended September 30, 2023 of approximately $2.1 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 Russia-Ukraine war and the Israeli-Palestinian conflict, 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 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. The Company currently has withdrawal liabilities 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, 2023, the Company has an aggregate accrued liability of approximately $6.6 million representing the present value of scheduled withdrawal liability payments on the multiemployer 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 require additional funding under the Pension Protection Act of 2006, the amounts could be material.
DGD Joint Venture
The DGD Joint Venture 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 the DGD St. Charles Plant, the “DGD Facilities”). The DGD Joint Venture was formed in January 2011 to design, engineer, construct and operate the DGD St. Charles Plant, which reached mechanical completion and began production of renewable diesel and certain other co-products in late June 2013. 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 other light end renewable hydrocarbons for sale into low carbon fuel markets, at a total cost, including naphtha production and improved logistics capability, of approximately $1.1 billion. Additionally, in November 2022, the DGD Joint Venture completed the construction of the DGD Port Arthur Plant, with a 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 total cost of approximately $1.43 billion. The DGD Facilities have a combined renewable diesel production capacity of approximately 1.2 billion gallons per year. Furthermore, in January 2023, the DGD Joint Venture partners approved a capital project at the DGD Port Arthur Plant to provide the plant with the capability to upgrade approximately fifty percent (50%) of its current 470 million gallon annual production capacity to sustainable aviation fuel (SAF). Work on the project is underway, with completion expected in 2025 at a total estimated cost of approximately $315 million, which is expected to be primarily funded by DGD Joint Venture cash flow; however, if the DGD Joint Venture cash flow is not sufficient to fund the remaining project costs, the DGD Joint Venture may need to borrow funds or the joint venture partners may be required to contribute additional funds to complete the project.
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On May 1, 2019, Darling, through its wholly owned subsidiary Darling Green Energy LLC, (“Darling Green”), and 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 “2019 DGD Loan Agreement”) with the DGD Joint Venture, pursuant to which the DGD Lenders committed to making loans available to the DGD Joint Venture in the total amount of $50.0 million, with each lender committed to $25.0 million of the total commitment. Any borrowings by the DGD Joint Venture under the 2019 DGD Loan Agreement were 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%. On 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 and 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 September 30, 2023 and October 1, 2022 of approximately zero and $0.1 million, respectively and received interest from the DGD Joint Venture for the nine months ended September 30, 2023 and October 1, 2022 of approximately $0.6 million and $0.5 million, respectively. As of September 30, 2023 and December 31, 2022, zero and $25.0 million, respectively, was owed to Darling Green under the 2023 DGD Loan 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.
On June 23, 2023, the DGD Joint Venture entered into an amended and restated credit agreement for $400.0 million senior, unsecured revolving credit facility, with CoBank 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. As of September 30, 2023, the DGD Joint Venture has borrowings outstanding of $200.0 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 September 30, 2023, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $2,096.9 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 business. 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 collecting raw fats, to processing collected fats at Darling facilities worldwide to transporting the 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
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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, 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 Russia-Ukraine war and the Israeli-Palestinian conflict 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 year 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 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 6% Notes, the 5.25% Notes and the 3.625% Notes, as well as suitable cash conservation to withstand adverse commodity cycles. The Company's Board of Directors has approved a share repurchase program of up to an aggregate of $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 runs through August 13, 2024, unless further extended or shortened by the Board of Directors. During the first nine months of fiscal 2023, the Company has repurchased approximately $52.9 million of its common stock in the open market. As of September 30, 2023, the Company 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, which is dependent on governmental energy policies and programs, 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
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commodities prices, adverse changes to governmental energy policies and programs, 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 $325.7 million of commodity products consisting of approximately $92.6 million of finished products, approximately $199.7 million of natural gas and diesel fuel and approximately $33.4 million of other commitments during the next five years, which are not included in liabilities on the Company’s balance sheet at September 30, 2023. The Company intends to take physical delivery of the commodities under the forward purchase agreements and accordingly, these contracts are not subject to 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 2023 and through fiscal 2028, in accordance with accounting principles generally accepted in the United States.
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, 2023 (in thousands):
| Other commercial commitments: | |||||
| Standby letters of credit | $ | 3,871 | |||
| Standby letters of credit (ancillary facility) | 30,177 | ||||
| Foreign and domestic bank guarantees | 22,335 | ||||
| Total other commercial commitments: | $ | 56,383 | |||
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, 2022, filed with the SEC on February 27, 2023.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 23, “New Accounting Pronouncements,” to the consolidated financial statements for a description of new accounting pronouncements.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes “forward-looking” statements that are subject to risks and uncertainties 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,” “may,” “will,” “would,” “should,” “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 or the Company's use of cash. Forward-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 may differ materially from anticipated results or expectations expressed in its forward-looking statements as a result of a variety of factors, including many that are beyond the 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
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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 government policies around the world relating to renewable fuels and greenhouse 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 2009 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 ASF 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 SAF 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 the Company's information systems or failure to implement new systems and software 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, including the Russia-Ukraine war and the Israeli-Palestinian conflict; 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, 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-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
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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 Company intends to take physical delivery of the commodities under certain of the Company's natural gas and diesel fuel instruments and accordingly, these contracts are not subject to the requirements of fair value accounting because they qualify as normal purchases. At September 30, 2023, the Company had soybean meal forward and option contracts, foreign exchange forward and option contracts and interest rate swaps outstanding that qualified and were designated for hedge accounting as well as corn forward contracts, soybean meal forward and option contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.
In the first and second quarter of fiscal 2023, the Company entered into interest rate swaps that are designated 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 interest rate swaps, the Company hedged a portion of its variable rate debt into the first quarter of 2026. At September 30, 2023, the aggregate fair value of these interest rate swaps was approximately $16.4 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 (loss) associated with the interest rate differential between the U.S. dollar and a Euro denominated intercompany loan to interest expense. At September 30, 2023, the aggregate fair value of these cross currency swaps was approximately $12.9 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 fiscal 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 September 30, 2023. As of September 30, 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. The Company may enter into corn option contracts in the future from time to time.
In fiscal 2022 and the first quarter of fiscal 2023, the Company entered into foreign exchange forward and option 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 September 30, 2023 and December 31, 2022, the aggregate fair value of these foreign exchange contracts was approximately $17.2 million and $13.8 million, respectively. As of September 30, 2023, approximately $15.4 million is included in other current assets, approximately $0.3 million is included in accrued expenses, approximately $2.2 million is included in other assets and approximately $0.1 million is included in other non-current liabilities on the balance sheet, 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 balance sheet, with an offset recorded in accumulated other comprehensive loss.
In fiscal 2022 and fiscal 2023, the Company entered into soybean meal forward and option contracts to hedge a portion of its forecasted poultry meal sales into the fourth quarter of fiscal 2023. As of September 30, 2023 and December 31, 2022, the aggregate fair value of the soybean meal contracts was approximately $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.
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As of September 30, 2023, the Company had the following outstanding forward and option contract amounts that were entered into to hedge foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency (in thousands):
| Functional Currency | Contract Currency | Range of | U.S. | ||||||||||||||||||||
| Type | Amount | Type | Amount | Hedge rates | Equivalent | ||||||||||||||||||
| Brazilian real | 154,113 | Euro | 28,202 | 5.28 - 5.66 | $ | 30,780 | |||||||||||||||||
| Brazilian real | 3,152,853 | U.S. dollar | 768,550 | 3.35 - 6.63 | 768,550 | ||||||||||||||||||
| Euro | 49,053 | U.S. dollar | 52,542 | 1.06 - 1.11 | 52,542 | ||||||||||||||||||
| Euro | 36,246 | Polish zloty | 165,500 | 4.49 - 4.63 | 38,356 | ||||||||||||||||||
| Euro | 14,300 | Japanese yen | 2,241,486 | 151.57 - 157.85 | 15,133 | ||||||||||||||||||
| Euro | 25,240 | Chinese renminbi | 196,576 | 7.69 - 7.82 | 26,709 | ||||||||||||||||||
| Euro | 19,001 | Australian dollar | 31,860 | 1.64 - 1.69 | 20,106 | ||||||||||||||||||
| Euro | 5,997 | British pound | 5,213 | 0.86 - 0.87 | 6,346 | ||||||||||||||||||
| Euro | 104 | Canadian dollar | 150 | 1.43 - 1.48 | 110 | ||||||||||||||||||
| Polish zloty | 678 | U.S. dollar | 157 | 4.32 | 157 | ||||||||||||||||||
| Polish zloty | 34,443 | Euro | 7,497 | 4.59 - 4.60 | 7,863 | ||||||||||||||||||
| British pound | 159 | Euro | 183 | 0.87 | 195 | ||||||||||||||||||
| British pound | 231 | U.S. dollar | 282 | 0.82 | 282 | ||||||||||||||||||
| Japanese yen | 242,161 | U.S. dollar | 1,716 | 132.67 - 147.86 | 1,716 | ||||||||||||||||||
| U.S. dollar | 440 | Japanese yen | 65,000 | 147.87 | 440 | ||||||||||||||||||
| U.S. dollar | 562,340 | Euro | 519,182 | 1.08 | 562,340 | ||||||||||||||||||
| Australian dollar | 174 | Euro | 105 | 1.66 | 113 | ||||||||||||||||||
| Australian dollar | 164 | U.S. dollar | 105 | 1.56 | 105 | ||||||||||||||||||
| $ | 1,531,843 | ||||||||||||||||||||||
The above foreign currency contracts that are not designated as hedges had an aggregate fair value of approximately $3.2 million and are included in other current assets and accrued expenses at September 30, 2023.
Additionally, the Company had corn 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, 2023. These contracts have an aggregate fair value of approximately $0.2 million and less than $0.1 million, respectively and are included in other current assets and accrued expenses at September 30, 2023.
As of September 30, 2023, the Company had forward purchase agreements in place for purchases of approximately $199.7 million of natural gas and diesel fuel and approximately $33.4 million of other commitments during the next five years. As of September 30, 2023, the Company had forward purchase agreements in place for purchases of approximately $92.6 million of finished product during the next five years.
Foreign Exchange
The Company 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, Brazilian real, Canadian dollar, Australian dollar, Chinese renminbi, British pound, Polish zloty, and Japanese 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
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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. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of 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 that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial 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.
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DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023
PART II: Other Information
Item 1. LEGAL PROCEEDINGS
The information required by this Item 1 is contained within Note 18 (Contingencies) on pages 30 through 31 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 described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties that are not currently known or that are currently deemed to be immaterial may also materially and adversely affect our business operations and financial condition or the market price of our common stock.
Item 5. OTHER INFORMATION
Rule 10b5-1 Plan Adoptions and Modifications
Item 6. EXHIBITS
The following exhibits are filed herewith:
| 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, 2023 and December 31, 2022; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and October 1, 2022; (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and nine months ended September 30, 2023 and October 1, 2022; (iv) Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 2023 and October 1, 2022; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and October 1, 2022 and (vi) Notes to the Consolidated Financial Statements. | |||||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||||||||
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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: | November 7, 2023 | By: | /s/ Brad Phillips | ||||||||
| Brad Phillips | |||||||||||
| Chief Financial Officer | |||||||||||
(Principal Financial Officer and Duly Authorized Officer) | |||||||||||
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EXHIBIT 31.1
CERTIFICATION
I, Randall C. Stuewe, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Darling Ingredients Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstance under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: | November 7, 2023 | ||||
/s/ Randall C. Stuewe
-----------------------------------------------
Randall C. Stuewe
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Brad Phillips, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Darling Ingredients Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstance under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: | November 7, 2023 | ||||
/s/ Brad Phillips
-----------------------------------------------
Brad Phillips
Chief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Darling Ingredients Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Randall C. Stuewe, Chief Executive Officer of the Company and Brad Phillips, Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 (the “Act”), that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
This certification is being furnished solely for purposes of compliance with the Act.
| /s/ Randall C. Stuewe | /s/ Brad Phillips | ||||||||||
| Randall C. Stuewe | Brad Phillips | ||||||||||
| Chief Executive Officer | Chief Financial Officer | ||||||||||
| Date: November 7, 2023 | Date: November 7, 2023 | ||||||||||