The consolidated financial statements include the accounts of Darling and its consolidated subsidiaries. Noncontrolling interests represent the outstanding ownership interest in the Company’s consolidated subsidiaries that are not owned by the Company. In the accompanying Consolidated Statements of Operations, the noncontrolling interest in net income of the consolidated subsidiaries is shown as an allocation of the Company’s net income and is presented separately as “Net income attributable to noncontrolling interests.” In the Company’s Consolidated Balance Sheets, noncontrolling interests represent the ownership interests in the Company’s consolidated subsidiaries' net assets held by parties other than the Company. These ownership interests are presented separately as “Noncontrolling interests” within “Stockholders' Equity.” All intercompany balances and transactions have been eliminated in consolidation.
(b)Fiscal Periods
The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31. Fiscal periods for the consolidated financial statements included herein are as of September 28, 2024, and include the 13 and 39 weeks ended September 28, 2024, and the 13 and 39 weeks ended September 30, 2023.
(c) Cash and Cash Equivalents
The Company considers all short-term highly liquid instruments, with an original maturity of three months or less, to be cash equivalents. Cash balances are recorded net of book overdrafts when a bank right-of-offset exists. All other book overdrafts are recorded in accounts payable and the change in the related balance is reflected in operating activities on the Consolidated Statement of Cash Flows. In addition, the Company has bank overdrafts, which are considered a form of short-term financing with changes in the related balance reflected in financing activities in the Consolidated Statement of Cash Flows. Restricted cash shown on the Consolidated Balance Sheet as of September 28, 2024, primarily represents the current portion of 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. At December 30, 2023, restricted cash primarily represents amounts set aside as collateral for foreign construction projects and U.S. environmental claims and was insignificant to the Company. Restricted cash included in other long term assets on the Consolidated Balance Sheet as of September 28, 2024 and December 30, 2023, primarily represents the long term 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
9
arise. A reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same such amounts shown in the Consolidated Statement of Cash flows is as follows (in thousands):
September 28, 2024
December 30, 2023
Cash and cash equivalents
$
114,778
$
126,502
Restricted cash
39,387
292
Restricted cash included in other long-term assets
106,775
137,656
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
$
260,940
$
264,450
(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 28, 2024 and September 30, 2023, the Company sold approximately $125.1 million and $110.2 million of its trade receivables and incurred approximately $1.8 million and $1.7 million in fees, respectively, which are recorded as interest expense. For the nine months ended September 28, 2024 and September 30, 2023, the Company sold approximately $420.7 million and $402.2 million of its trade receivables and incurred approximately $6.3 million and $5.4 million in fees, respectively, which are recorded as interest expense.
(e) Revenue Recognition
The Company recognizes revenue on sales when control of the promised finished product is transferred to the Company’s customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for the finished product. Service revenues are recognized when the service occurs. Certain customers may be required to prepay prior to shipment in order to maintain payment protection related to certain foreign and domestic sales. These amounts are recorded as unearned revenue in accrued expenses and recognized when control of the promised finished product is transferred to the Company’s customer. See Note 20 (Revenue) to the Company’s Consolidated Financial Statements included herein.
(f) Earnings Per Share
Basic income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares including non-vested and restricted shares outstanding during the period. Diluted income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares outstanding during the period increased by dilutive common equivalent shares determined using the treasury stock method.
Net Income per Common Share (in thousands, except per share data)
Three Months Ended
September 28, 2024
September 30, 2023
Income
Shares
Per Share
Income
Shares
Per Share
Basic:
Net Income attributable to Darling
$
16,949
159,200
$
0.11
$
125,026
159,727
$
0.78
Diluted:
Effect of dilutive securities:
Add: Option shares in the money and dilutive effect of non-vested stock awards
2,875
3,409
Less: Pro forma treasury shares
(1,084)
(711)
Diluted:
Net income attributable to Darling
$
16,949
160,991
$
0.11
$
125,026
162,425
$
0.77
10
Net Income per Common Share (in thousands, except per share data)
Nine Months Ended
September 28, 2024
September 30, 2023
Income
Shares
Per Share
Income
Shares
Per Share
Basic:
Net Income attributable to Darling
$
176,972
159,609
$
1.11
$
563,210
159,894
$
3.52
Diluted:
Effect of dilutive securities:
Add: Option shares in the money and dilutive effect of non-vested stock awards
2,937
3,378
Less: Pro forma treasury shares
(1,012)
(735)
Diluted:
Net income attributable to Darling
$
176,972
161,534
$
1.10
$
563,210
162,537
$
3.47
For the three months ended September 28, 2024 and September 30, 2023, respectively, no outstanding stock options were excluded from diluted income per common share as the effect would be antidilutive. For the three months ended September 28, 2024 and September 30, 2023, respectively, 578,342 and 382,404 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 28, 2024 and September 30, 2023, respectively, no outstanding stock options were excluded from diluted income per common share as the effect would be antidilutive. For the nine months ended September 28, 2024 and September 30, 2023, respectively, 585,511 and 470,213 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.
(g) Out-of-Period Adjustment
During the quarter ended March 30, 2024, the Company determined the inventory balance at its recently acquired Gelnex subsidiary was overstated by approximately $25.1 million at December 30, 2023. The overstatement was the result of an error in calculating the elimination of deferred profit in inventory on intercompany product sales from South America.
During the first quarter of fiscal 2024, the Company recorded an adjustment to earnings of approximately $17.9 million, net of tax. The Company assessed the impact of this out-of-period adjustment and concluded that it was not material to the financial statements previously issued for any interim or annual period during 2023, and the adjustment during the quarter ended March 30, 2024 is not expected to be material to the annual financial statements for fiscal 2024.The out-of-period adjustment is included in the Food Ingredients segment results.
(h) 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, the Israeli-Palestinian conflict, other associated or emerging conflicts in the Middle East and the current inflationary environment we have evaluated the potential impact to the
11
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 28, 2024, 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, the Israeli-Palestinian conflict, other associated or emerging conflicts in the Middle East or inflation.
(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, 2024
December 31, 2023
Assets:
Cash
$
195,666
$
236,794
Total other current assets
1,472,709
1,640,636
Property, plant and equipment, net
3,886,783
3,838,800
Other assets
104,317
89,697
Total assets
$
5,659,475
$
5,805,927
Liabilities and members' equity:
Revolver
$
—
$
250,000
Total other current portion of long term debt
29,496
28,639
Total other current liabilities
384,496
417,918
Total long term debt
714,783
737,097
Total other long term liabilities
17,043
16,996
Total members' equity
4,513,657
4,355,277
Total liabilities and members' equity
$
5,659,475
$
5,805,927
Three Months Ended
Nine Months Ended
(in thousands)
September 30, 2024
September 30, 2023
September 30, 2024
September 30, 2023
Revenues:
Operating revenues
$
1,224,679
$
1,430,666
$
3,819,870
$
5,356,827
Expenses:
Total costs and expenses less lower of cost or market inventory valuation adjustment and depreciation, amortization and accretion expense
1,126,200
1,257,766
3,300,483
4,430,485
Lower of cost or market (LCM) inventory valuation adjustment
20,310
—
57,814
—
Depreciation, amortization and accretion expense
68,303
55,118
195,503
172,040
Total costs and expenses
1,214,813
1,312,884
3,553,800
4,602,525
Operating income
9,866
117,782
266,070
754,302
Other income
5,058
2,701
14,336
6,863
Interest and debt expense, net
(10,093)
(11,705)
(30,372)
(37,785)
Income before income tax expense
4,831
108,778
$
250,034
$
723,380
Income tax benefit
(29)
—
(58)
—
Net income
$
4,860
$
108,778
$
250,092
$
723,380
As of September 28, 2024, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $2,260.2 million on the consolidated balance sheet. The Company has recorded equity in net income from the DGD Joint Venture of approximately $2.4 million and $54.4 million for the three months ended September 28, 2024 and September 30, 2023, respectively. The Company has recorded equity in net income from the DGD Joint Venture of approximately $125.0 million and $361.7 million for the nine months ended September 28, 2024 and September 30, 2023, respectively. In December 2019, the blenders tax credit of $1.00 per gallon was 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 blenders tax credits were extended as is until December 31,
12
2024, a new Sustainable Aviation Fuel (“SAF”) blenders tax credit was introduced effective for 2023 and 2024, and a new Clean Fuels Production Credit (the “CFPC”) was created effective from 2025 through 2027. Under the IR Act, Section 40B, SAF, blended with Jet A and sold on or before December 31, 2024, receives a base credit of $1.25 per gallon plus $0.01 for each percentage point by which the lifecycle greenhouse gas (“GHG”) emissions reduction percentage exceeds 50% up to a maximum supplementary amount of $0.50. Under the CFPC, on-road transportation fuel receives a base credit of up to $1.00 per gallon of renewable diesel (adjusted for inflation each calendar year) multiplied by the fuel's emission reduction percentage as long as it is produced at a qualifying facility and it meets prevailing wage requirements and apprenticeship requirements. Similarly, SAF produced at a qualified facility that meets the apprenticeship and prevailing wage requirements receives a base credit of $1.75 (adjusted for inflation each calendar year) multiplied by the GHG emissions factor for SAF. In contrast to the blenders tax credit, the CFPC requires that production must take place in the United States. For the three months ended September 30, 2024 and September 30, 2023, the DGD Joint Venture recorded approximately $313.0 million and $266.4 million of blenders tax credits, respectively. For the nine months ended September 30, 2024 and September 30, 2023, the DGD Joint Venture recorded approximately $952.2 million and $900.0 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 28, 2024 and September 30, 2023, respectively, the Company made $90.0 million and $75.0 million capital contributions to the DGD Joint Venture. In the nine months ended September 28, 2024 and September 30, 2023, the Company received approximately $111.2 million and $163.6 million in dividend distributions from the DGD Joint Venture, respectively.
In addition to the DGD Joint Venture, the Company has investments in other unconsolidated subsidiaries that are insignificant to the Company.
(4) Acquisitions
Miropasz Group
On January 31, 2024, a wholly owned international subsidiary of the Company acquired all of the shares of the Miropasz Group (the “Miropasz Acquisition”), a rendering company in Poland that is now in our Feed Ingredients segment, for a cash purchase price of approximately €105.6 million (approximately $114.3 million USD at the exchange rate of €1.0:USD$1.082198 on the closing date). In addition, the Company incurred a liability of approximately €7.0 million (approximately $7.6 million USD at the exchange rate on the closing date) for acquisition consideration hold-back amount that is 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. During the third quarter of fiscal 2024, the Company received approximately $0.2 million from the sellers as a reduction of the purchase price and other immaterial adjustments. The Company recorded assets and liabilities on a preliminary basis consisting of property, plant and equipment of approximately $21.2 million, identifiable intangibles which includes routes and immaterial land use rights of approximately $34.9 million with a weighted average life of 17 years, other net assets of approximately $2.8 million which includes cash, working capital and net debt, and goodwill of approximately $62.8 million. Due to the complexity of acquiring foreign entities, the Company is still in the process of reviewing the provisional amounts recorded for taxes, and thus the final determination of the value of assets acquired and liabilities assumed may result in retrospective adjustment to taxes with a corresponding adjustment to goodwill. Goodwill is expected to strengthen the Company’s base Feed Ingredients business and is nondeductible for tax purposes.
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 $853.3 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, 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
13
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 a cash payment for working capital purchase price adjustment per the stock purchase agreement of approximately $14.1 million with an offset to goodwill. The Company obtained new information about facts and circumstances that existed at the acquisition date during the first quarter of fiscal 2024 that resulted in measurement period adjustments to increase property, plant and equipment by approximately $13.7 million, decrease intangible assets by approximately $9.5 million, decrease goodwill by approximately $9.1 million, increase deferred tax liabilities by approximately $5.1 million, increase deferred tax assets by approximately $8.1 million and a decrease in other assets and liabilities of approximately $0.1 million.
The following table summarizes the final fair value of the assets acquired and the liabilities assumed in the Gelnex Acquisition as of March 31, 2023 (in thousands):
Accounts receivable
$
81,025
Inventories
140,865
Other current assets
3,143
Property, plant and equipment
169,205
Identifiable intangible assets
339,500
Goodwill
542,572
Operating lease right-of-use assets
134
Other assets
2,703
Deferred tax asset
9,067
Accounts payable
(15,059)
Current operating lease liabilities
(26)
Current portion of long-term debt
(44,692)
Accrued expenses
(18,826)
Long-term debt, net of current portion
(1,407)
Long-term operating lease liabilities
(123)
Deferred tax liability
(12,870)
Other noncurrent liabilities
(19)
Purchase price, net of cash acquired
$
1,195,192
Less hold-back
104,145
Cash paid for acquisition, net of cash acquired
$
1,091,047
The $542.6 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 goodwill booked in the Gelnex Acquisition approximately $425.0 million is expected to be deductible for tax purposes. The identifiable intangible assets include $331.0 million in customer relationships with a weighted average life of 11.4 years and $8.5 million in trade name with a life of five years for a total weighted average life of approximately 11.3 years.
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 and nine months ended September 28, 2024 was $66.9 million and $1.0 million, and $201.7 million and $(50.8) million, respectively.
As a result of the Gelnex Acquisition, effective March 31, 2023, the Company began including the operations of the Gelnex Acquisition in the Company’s consolidated financial statements. The following table presents selected pro forma information, for comparative purposes, assuming the Gelnex Acquisition had occurred on January 1, 2023, for the periods presented (in thousands):
Nine Months Ended
September 30, 2023
Net sales
$
5,272,264
Net income
575,912
14
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 of R$5.16:USD$1.00 on the closing date) for all the shares of the FASA Group, subject to certain post-closing adjustments and a contingent payment based on future earnings growth in accordance with the terms set forth in the stock purchase agreement. Under the stock purchase agreement, such contingent payment could range from R$0 to a maximum of R$1.0 billion if future earnings growth reaches certain levels over a three-year period. The Company completed an analysis as of the acquisition date for this contingency and recorded a liability of approximately R$428.2 million (approximately $83.0 million USD at the exchange rate in effect on the closing date of the acquisition) representing the present value of the contingency utilizing assistance from external valuation experts and the use of a Monte Carlo model representing the probability weighted present value of the expected payment to be made under the agreement using the income approach. The Company analyzes the contingent consideration liability using a Monte Carlo model each quarter and any change in fair value is recorded through operating income as changes in fair value of contingent consideration.
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 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 following table summarizes the final fair value of the assets acquired and the liabilities assumed in the FASA Acquisition as of August 1, 2022 (in thousands):
Accounts receivable
$
76,640
Inventories
43,058
Other current assets
33,327
Property, plant and equipment
224,384
Identifiable intangible assets
119,477
Goodwill
301,937
Operating lease right-of-use assets
583
Other assets
62,388
Deferred tax asset
2,315
Accounts payable
(15,920)
Current portion of long-term debt
(18,680)
Accrued expenses
(38,708)
Long-term debt, net of current portion
(41,926)
Long-term operating lease liabilities
(583)
Deferred tax liability
(95,653)
Other noncurrent liabilities
(503)
Non-controlling interests
(21,704)
Purchase price, net of cash acquired
$
630,432
Less hold-back
21,705
Less contingent consideration
82,984
Cash paid for acquisition, net of cash acquired
$
525,743
The $301.9 million of goodwill from the FASA Acquisition, which is expected to strengthen the Company’s base business and expand its ability to provide additional low carbon intensity feedstocks to fuel the growing demand for renewable diesel, was assigned to the Feed Ingredients segment and is nondeductible for tax purposes. The identifiable intangible assets include $108.6 million in routes with a weighted average life of 12 years and $10.9 million in trade name with a life of five years for a total weighted average life of approximately 11.4 years.
15
The Company completed other immaterial acquisitions in the first nine months of fiscal 2024 and fiscal 2023. The Company notes that pro forma results of operations discussed above do not include the Miropasz Acquisition or other acquisitions individually or in the aggregate as those acquisitions are not deemed material to net sales, total assets and net income of the Company for any period presented.
The Company incurred acquisition and integration costs of approximately $0.2 million and $3.4 million for the three months ended September 28, 2024 and September 30, 2023, respectively. The Company incurred acquisition and integration costs of approximately $5.4 million and $12.2 million for the nine months ended September 28, 2024 and September 30, 2023, respectively.
(5) Inventories
A summary of inventories follows (in thousands):
September 28, 2024
December 30, 2023
Finished product
$
356,491
$
448,245
Work in process
101,814
110,299
Raw material
39,406
68,188
Supplies and other
120,136
132,007
$
617,847
$
758,739
(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):
September 28, 2024
December 30, 2023
Indefinite Lived Intangible Assets:
Trade names
$
52,758
$
52,507
52,758
52,507
Finite Lived Intangible Assets:
Routes
744,808
746,868
Customer relationships
310,048
359,111
Permits
328,014
559,483
Non-compete agreements
60
395
Trade names
84,181
85,561
Royalty, consulting, land use rights and leasehold
22,924
20,613
1,490,035
1,772,031
Accumulated Amortization:
Routes
(252,885)
(241,960)
Customer relationships
(42,790)
(29,270)
Permits
(192,538)
(407,713)
Non-compete agreements
(30)
(345)
Trade names
(70,808)
(63,660)
Royalty, consulting, land use rights and leasehold
(6,381)
(5,698)
(565,432)
(748,646)
Total Intangible assets, less accumulated amortization
$
977,361
$
1,075,892
Gross intangible assets changed due to net acquisition and retirement activity in the first nine months of fiscal 2024 by approximately $28.2 million and $249.1 million, respectively, and the remaining change is due to foreign currency translation impact. Amortization expense for the three months ended September 28, 2024 and September 30, 2023, was approximately $27.9 million and $32.2 million, respectively, and for the nine months ended September 28, 2024 and September 30, 2023 was approximately $84.3 million and $91.7 million, respectively.
16
(7) Goodwill
Changes in the carrying amount of goodwill (in thousands):
Feed Ingredients
Food Ingredients
Fuel Ingredients
Total
Balance at December 30, 2023
Goodwill
$
1,487,236
$
900,707
$
147,223
$
2,535,166
Accumulated impairment losses
(15,914)
(3,170)
(31,580)
(50,664)
1,471,322
897,537
115,643
2,484,502
Goodwill acquired during year
62,797
—
4,493
67,290
Measurement period adjustments
—
(9,147)
—
(9,147)
Foreign currency translation
(33,755)
(53,805)
863
(86,697)
Balance at September 28, 2024
Goodwill
1,516,278
837,755
152,579
2,506,612
Accumulated impairment losses
(15,914)
(3,170)
(31,580)
(50,664)
$
1,500,364
$
834,585
$
120,999
$
2,455,948
(8) Accrued Expenses
Accrued expenses consist of the following (in thousands):
September 28, 2024
December 30, 2023
Compensation and benefits
$
144,885
$
156,357
Accrued operating expenses
71,957
86,278
Short-term acquisition hold-backs
39,409
—
Short-term contingent consideration
37,851
—
Other accrued expense
247,777
198,364
$
541,879
$
440,999
(9) Debt
Debt consists of the following (in thousands):
17
September 28, 2024
December 30, 2023
Amended Credit Agreement:
Revolving Credit Facility ($68.1 million and $82.9 million denominated in € at September 28, 2024 and December 30, 2023, respectively)
$
418,064
$
610,875
Term A-1 facility
398,000
400,000
Less unamortized deferred loan costs
(411)
(546)
Carrying value Term A-1 facility
397,589
399,454
Term A-2 facility
475,000
481,250
Less unamortized deferred loan costs
(574)
(771)
Carrying value Term A-2 facility
474,426
480,479
Term A-3 facility
298,500
300,000
Less unamortized deferred loan costs
(629)
(832)
Carrying value Term A-3 facility
297,871
299,168
Term A-4 facility
484,375
490,625
Less unamortized deferred loan costs
(749)
(1,002)
Carrying value Term A-4 facility
483,626
489,623
6% Senior Notes due 2030 with effective interest of 6.12%
1,000,000
1,000,000
Less unamortized deferred loan costs net of bond premium
(5,818)
(6,441)
Carrying value 6% Senior Notes due 2030
994,182
993,559
5.25% Senior Notes due 2027 with effective interest of 5.47%
500,000
500,000
Less unamortized deferred loan costs
(2,557)
(3,249)
Carrying value 5.25% Senior Notes due 2027
497,443
496,751
3.625% Senior Notes due 2026 - Denominated in euro with effective interest of 3.83%
574,637
569,075
Less unamortized deferred loan costs - Denominated in euro
(1,941)
(2,763)
Carrying value 3.625% Senior Notes due 2026
572,696
566,312
Other Notes and Obligations
110,320
90,852
4,246,217
4,427,073
Less Current Maturities
114,326
60,703
$
4,131,891
$
4,366,370
As of September 28, 2024, the Company had outstanding debt under the revolving credit facility denominated in euros of €61.0 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 28, 2024, the Company had finance lease obligations denominated in euros of approximately €6.6 million.
As of September 28, 2024, the Company had other notes and obligations of $110.3 million that consist of various overdraft facilities of approximately $55.2 million, Brazilian notes of approximately $25.6 million, a China working capital line of credit of approximately $1.4 million and other debt of approximately $28.1 million, including U.S. finance lease obligations of approximately $3.5 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 plus 1.75% 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 0.75% 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
18
facility and term A-3 facility equals the adjusted term SOFR plus 1.875% per annum subject to certain step-ups and step-downs 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 1.75% per annum subject to certain step-ups or step-downs based on the Company’s total leverage ratio.
As of September 28, 2024, the Company had (i) $350.0 million outstanding under the revolver at SOFR plus a margin of 1.75% per annum for a total of 6.70528% per annum, (ii) $398.0 million outstanding under the term A-1 facility at SOFR plus a margin of 1.875% per annum for a total of 7.22174% per annum, (iii) $475.0 million outstanding under the term A-2 facility at SOFR plus a margin of 1.75% per annum for a total of 7.09674% per annum, (iv) $298.5 million outstanding under the term A-3 facility at SOFR plus a margin 1.875% per annum for a total of 7.22174% per annum, (v) $484.4 million outstanding under the term A-4 facility at SOFR plus a margin 1.75% per annum for a total of 7.09674% per annum, (vi) €53.0 million outstanding under the revolving credit facility at EURIBOR plus a margin of 1.75% per annum for a total of 5.14651% per annum, and (vii) €8.0 million outstanding under the revolving credit facility at ESTR plus a margin of 0.25% per annum for a total of 3.664% per annum. As of September 28, 2024, the Company had revolving credit facility availability of $1,008.3 million, under the Amended Credit Agreement taking into account amounts borrowed, ancillary facilities of $73.0 million and letters of credit issued of $0.7 million. The Company also had foreign bank guarantees of approximately $11.8 million that are not part of the Company’s Amended Credit Agreement at September 28, 2024.
As of September 28, 2024, the Company is in compliance with all of the financial covenants under the Amended Credit Agreement, and believes it is in compliance with 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 28, 2024
December 30, 2023
Accrued pension liability
$
21,455
$
20,721
Reserve for self-insurance, litigation, environmental and tax matters
76,626
100,354
Long-term acquisition hold-backs
108,855
137,913
Long-term contingent consideration
—
86,495
Other
4,075
4,326
$
211,011
$
349,809
(11) Income Taxes
The Company has provided income taxes for the three and nine month periods ended September 28, 2024 and September 30, 2023, based on its estimate of the effective tax rate for the entire 2024 and 2023 fiscal years. The Company’s estimated annual effective tax rate is based on forecasts of income by jurisdiction, permanent differences between book and tax income, the relative proportion of income and losses by jurisdiction, and statutory income tax rates. Discrete events such as the assessment of the ultimate outcome of tax audits, audit settlements, recognizing previously unrecognized tax benefits due to the lapsing of statutes of limitation, recognizing or derecognizing deferred tax assets due to projections of income or loss and changes in tax laws are recognized in the period in which they occur.
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 28, 2024 and September 30, 2023, the Company had $10.4 million and $17.0 million, respectively, of gross unrecognized tax benefits and $2.0 million and $1.3 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 blenders tax credits, which are refundable excise tax credits, have been extended 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
19
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.
The Company’s major taxing jurisdictions include the United States (federal and state), Canada, the Netherlands, Belgium, Brazil, Germany, France and China. The Company is subject to regular examination by various tax authorities and although the final outcome of these examinations is not yet determinable, the Company does not anticipate that any of the examinations will have a significant impact on the Company’s results of operations or financial position.The statute of limitations for the Company’s major tax jurisdictions is open for varying periods, but is generally closed through the 2013 tax year.
(12) Other Comprehensive Income/(Loss)
The components of other comprehensive income/(loss) and the related tax impacts for the three and nine months ended September 28, 2024 and September 30, 2023 are as follows (in thousands):
Three Months Ended
Before-Tax
Tax (Expense)
Net-of-Tax
Amount
or Benefit
Amount
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
Defined benefit pension plans
Amortization of prior service (cost)/benefit
$
(6)
$
(1)
$
3
$
—
$
(3)
$
(1)
Amortization of actuarial loss
349
434
(84)
(106)
265
328
Total defined benefit pension plans
343
433
(81)
(106)
262
327
Soybean meal option derivatives
Reclassified to earnings
—
322
—
(82)
—
240
Activity recognized in other comprehensive income/(loss)
—
(361)
—
92
—
(269)
Total soybean meal option derivatives
—
(39)
—
10
—
(29)
Corn option derivatives
Reclassified to earnings
(605)
—
147
—
(458)
—
Activity recognized in other comprehensive income/(loss)
(193)
—
47
—
(146)
—
Total corn option derivatives
(798)
—
194
—
(604)
—
Heating oil derivatives at DGD (Note 15)
Activity recognized in other comprehensive income/(loss)
21,798
(39,221)
(5,297)
9,962
16,501
(29,259)
Total heating oil derivatives
21,798
(39,221)
(5,297)
9,962
16,501
(29,259)
Interest swap derivatives
Reclassified to earnings
18,069
(22,072)
(4,391)
5,606
13,678
(16,466)
Activity recognized in other comprehensive income/(loss)
(25,777)
24,633
6,264
(6,256)
(19,513)
18,377
Total interest swap derivatives
(7,708)
2,561
1,873
(650)
(5,835)
1,911
Foreign exchange derivatives
Reclassified to earnings
924
(11,677)
(305)
3,973
619
(7,704)
Activity recognized in other comprehensive income/(loss)
8,200
(4,124)
(2,752)
1,403
5,448
(2,721)
Total foreign exchange derivatives
9,124
(15,801)
(3,057)
5,376
6,067
(10,425)
Foreign currency translation
57,147
(82,571)
(1,697)
1,074
55,450
(81,497)
Other comprehensive income/(loss)
$
79,906
$
(134,638)
$
(8,065)
$
15,666
$
71,841
$
(118,972)
20
Nine Months Ended
Before-Tax
Tax (Expense)
Net-of-Tax
Amount
or Benefit
Amount
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
Defined benefit pension plans
Amortization of prior service (cost)/benefit
$
(18)
$
(1)
$
8
$
—
$
(10)
$
(1)
Amortization of actuarial loss
1,047
1,302
(251)
(320)
796
982
Total defined benefit pension plans
1,029
1,301
(243)
(320)
786
981
Soybean meal option derivatives
Reclassified to earnings
(33)
(182)
8
46
(25)
(136)
Activity recognized in other comprehensive income/(loss)
—
(448)
—
114
—
(334)
Total soybean meal option derivatives
(33)
(630)
8
160
(25)
(470)
Corn option derivatives
Reclassified to earnings
(605)
(1,537)
147
390
(458)
(1,147)
Activity recognized in other comprehensive income/(loss)
1,211
1,627
(294)
(412)
917
1,215
Total corn option derivatives
606
90
(147)
(22)
459
68
Heating oil derivatives at DGD (Note 15)
Activity recognized in other comprehensive income/(loss)
(24,628)
(34,081)
5,984
8,657
(18,644)
(25,424)
Total heating oil derivatives
(24,628)
(34,081)
5,984
8,657
(18,644)
(25,424)
Interest swap derivatives
Reclassified to earnings
(8,716)
(21,206)
2,118
5,386
(6,598)
(15,820)
Activity recognized in other comprehensive income/(loss)
2,114
37,609
(514)
(9,552)
1,600
28,057
Total interest swap derivatives
(6,602)
16,403
1,604
(4,166)
(4,998)
12,237
Foreign exchange derivatives
Reclassified to earnings
(6,471)
(23,950)
2,203
8,149
(4,268)
(15,801)
Activity recognized in other comprehensive income/(loss)
(23,219)
30,720
7,906
(10,453)
(15,313)
20,267
Total foreign exchange derivatives
(29,690)
6,770
10,109
(2,304)
(19,581)
4,466
Foreign currency translation
(176,481)
56,984
(777)
328
(177,258)
57,312
Other comprehensive income/(loss)
$
(235,799)
$
46,837
$
16,538
$
2,333
$
(219,261)
$
49,170
The following table presents the amounts reclassified out of each component of other comprehensive income/(loss), net of tax for the three and nine months ended September 28, 2024 and September 30, 2023 as follows (in thousands):
21
Three Months Ended
Nine Months Ended
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
Statement of Operations Classification
Derivative instruments
Soybean meal option derivatives
$
—
$
(322)
$
33
$
182
Net sales
Foreign exchange contracts
(924)
11,677
6,471
23,950
Net sales
Corn option derivatives
605
—
605
1,537
Cost of sales and operating expenses
Interest swaps
(18,069)
22,072
8,716
21,206
Foreign currency gain/(loss) and interest expense
(18,388)
33,427
15,825
46,875
Total before tax
4,549
(9,497)
(4,476)
(13,971)
Income taxes
(13,839)
23,930
11,349
32,904
Net of tax
Defined benefit pension plans
Amortization of prior service cost
$
6
$
1
$
18
$
1
(a)
Amortization of actuarial loss
(349)
(434)
(1,047)
(1,302)
(a)
(343)
(433)
(1,029)
(1,301)
Total before tax
81
106
243
320
Income taxes
(262)
(327)
(786)
(981)
Net of tax
Total reclassifications
$
(14,101)
$
23,603
$
10,563
$
31,923
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 28, 2024 as follows (in thousands):
Nine Months Ended September 28, 2024
Foreign
Defined
Currency
Derivative
Benefit
Translation
Instruments
Pension Plans
Total
Accumulated Other Comprehensive income/ (loss) December 30, 2023, attributable to Darling, net of tax
$
(231,678)
$
47,730
$
(14,398)
$
(198,346)
Other comprehensive loss before reclassifications
(177,258)
(31,440)
—
(208,698)
Amounts reclassified from accumulated other comprehensive income/ (loss)
—
(11,349)
786
(10,563)
Net current-period other comprehensive income/ (loss)
(177,258)
(42,789)
786
(219,261)
Noncontrolling interest
278
—
—
278
Accumulated Other Comprehensive income/ (loss) September 28, 2024, attributable to Darling, net of tax
$
(409,214)
$
4,941
$
(13,612)
$
(417,885)
(13) Stockholders' Equity
Fiscal 2024 Long-Term Incentive Opportunity Awards (2024 LTIP). On December 15, 2023, the Compensation Committee (the “Committee”) of the Company’s Board of Directors adopted the 2024 LTIP pursuant to which on January 3, 2024 the Company awarded certain of the Company’s key employees, 162,913 restricted stock units and 244,376 performance share units (the “PSUs”) under the Company’s 2017 Omnibus Incentive Plan. The restricted stock units vest 33.33% on the first, second and third anniversaries of the grant date. The PSUs are tied to a three-year forward-looking performance period and will be earned based on the Company’s average return on gross investment (“ROGI”), as calculated in accordance with the terms of the award agreement, relative to the average ROGI of the Company’s performance peer group companies, with the earned award to be determined in the first quarter of fiscal 2027, after the final results for the relevant performance period are determined. The PSUs were granted at a target of 100%, but each PSU will reduce or increase (up to 225%) depending on the Company’s ROGI relative to that of the performance peer group companies and is also subject to the application of a total shareholder return (“TSR”) cap/
22
collar modifier depending on the Company’s TSR during the performance period relative to that of the performance peer group companies.
The Company’s Board of Directors approved a share repurchase program in August 2017, then refreshed the program on June 21, 2024 back up to an aggregate of $500.0 million of the Company’s Common Stock depending on market conditions, and extended the program to August 13, 2026. During the first nine months of fiscal 2024 (prior to the latest refresh), $29.2 million of Common Stock was repurchased under the share repurchase program. As of September 28, 2024, the Company had approximately $500.0 million remaining under the share repurchase program.
(14) Employee Benefit Plans
Net pension cost for the three and nine months ended September 28, 2024 and September 30, 2023 includes the following components (in thousands):
Pension Benefits
Pension Benefits
Three Months Ended
Nine Months Ended
September 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
Service cost
$
795
$
683
$
2,369
$
2,041
Interest cost
1,914
1,964
5,731
5,881
Expected return on plan assets
(1,810)
(1,805)
(5,426)
(5,413)
Amortization of prior service cost
(6)
(1)
(18)
(1)
Amortization of actuarial loss
349
434
1,047
1,302
Net pension cost
$
1,242
$
1,275
$
3,703
$
3,810
Based on annual actuarial estimates, at September 28, 2024 the Company expects to contribute approximately $4.4 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 28, 2024 and September 30, 2023 of approximately $1.8 million and $2.3 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 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. As of September 28, 2024, the Company has an aggregate accrued liability of approximately $4.5 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 requireadditional funding under the Pension Protection Act of 2006, the amounts could be material.
15) Derivatives
The Company’s operations are exposed to market risks relating to commodity prices that affect the Company’s cost of raw materials, finished product prices, energy costs and the risk of changes in interest rates and foreign currency exchange rates.
The Company makes limited use of derivative instruments to manage cash flow risks related to interest rates, natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Interest rate swaps are entered into with the intent of managing overall borrowing costs by reducing the potential impact of increases in interest rates on floating-rate long-term debt. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and
23
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 28, 2024, the Company had corn option and forward contracts, foreign exchange forward contracts and interest rate swaps outstanding that qualified and were designated for hedge accounting as well as corn option and forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.
In fiscal 2024 and 2023, 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 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 28, 2024 and December 30, 2023, the aggregate fair value of these interest rate swaps was approximately $3.4 million and $3.7 million, respectively. These amounts are included in other current assets, accrued expenses and noncurrent liabilities 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 the Euro to interest income. At September 28, 2024 and December 30, 2023, the aggregate fair value of these cross currency swaps was approximately $15.5 million and $10.8 million, respectively. At September 28, 2024, these amounts are included in accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss. At December 30, 2023, these amounts are included in other current assets and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
In the second and third quarters of fiscal 2024, the Company entered into corn option and forward 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 2025. At September 28, 2024 and December 30, 2023, the aggregate fair value of these corn option contracts was approximately $0.7 million and zero, 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.
In fiscal 2023 and fiscal 2024, the Company entered into foreign exchange forward contracts that are designated as cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted sales in currencies other than the functional currency through the fourth quarter of fiscal 2025. At September 28, 2024 and December 30, 2023, the aggregate fair value of these foreign exchange contracts was approximately $6.9 million and $15.9 million, respectively. These amounts are included in other current assets, other long term assets, accrued expenses and other non-current liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
24
The Company may enter into soybean meal forward contracts and heating oil swap and option contracts from time to time. There were not any open designated soybean meal forward or heating oil swap and option contracts entered into by the Company at September 28, 2024 and December 30, 2023, respectively.
As of September 28, 2024, 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
505,977
Euro
81,943
Brazilian real
2,062,326
U.S. dollar
371,815
Euro
58,012
U.S. dollar
64,621
Euro
71,038
Polish zloty
303,946
Euro
10,979
Japanese yen
1,757,858
Euro
29,648
Chinese renminbi
231,820
Euro
17,912
Australian dollar
29,450
Euro
4,446
British pound
3,721
Polish zloty
60,733
Euro
14,187
British pound
136
Euro
163
British pound
275
U.S. dollar
367
Japanese yen
106,948
U.S. dollar
743
U.S. dollar
94
Japanese yen
13,476
U.S. dollar
562,340
Euro
519,182
Australian dollar
179
Euro
110
The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at September 28, 2024 into earnings over the next 12 months for all cash flow hedges will be approximately $11.3 million. As of September 28, 2024, no amounts have been reclassified into earnings as a result of the discontinuance of cash flow hedges.
The table below summarizes the effect of derivatives not designated as hedges on the Company’s consolidated statements of operations for the three and nine months ended September 28, 2024 and September 30, 2023 (in thousands):
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 28, 2024
September 30, 2023
September 28, 2024
September 30, 2023
Foreign exchange
Foreign currency loss/(gain)
$
(1,459)
$
(237)
$
(2,309)
$
(1,473)
Foreign exchange
Net sales
(298)
709
344
(268)
Foreign exchange
Cost of sales and operating expenses
173
(329)
(126)
(449)
Foreign exchange
Selling, general and administrative expenses
(1,289)
1,096
8,283
(2,962)
Corn options and futures
Net sales
106
373
652
1,755
Corn options and futures
Cost of sales and operating expenses
319
(35)
(1,917)
(2,643)
Heating Oil swaps and options
Selling, general and administrative expenses
—
—
—
49
Soybean meal
Net sales
—
179
—
487
Total
$
(2,448)
$
1,756
$
4,927
$
(5,504)
At September 28, 2024, the Company had forward purchase agreements in place for purchases of approximately $145.7 million of natural gas and diesel fuel. The Company intends to take physical delivery of the commodities
25
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 28, 2024 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 28, 2024 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 assets
$
8,000
$
—
$
8,000
$
—
Total Assets
$
8,000
$
—
$
8,000
$
—
Liabilities
Derivative liabilities
$
35,421
$
—
$
35,421
$
—
Contingent consideration
37,851
—
—
37,851
Total Liabilities
$
73,272
$
—
$
35,421
$
37,851
Fair Value Measurements at December 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 assets
$
29,000
$
—
$
29,000
$
—
Total Assets
$
29,000
$
—
$
29,000
$
—
Liabilities
Derivative liabilities
$
19,997
$
—
$
19,997
$
—
Contingent consideration
86,495
—
—
86,495
Total Liabilities
$
106,492
$
—
$
19,997
$
86,495
Derivative assets and liabilities consist of the Company’s corn option and future contracts, foreign currency forward and option 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 fair value measurement of contingent consideration liability uses significant unobservable inputs (level 3). We estimated the fair value of the FASA contingent consideration using a Monte Carlo simulation methodology from a third-party that includes simulating the forecasted net income or earnings plus interest expense, taxes, depreciation and amortization (“EBITDA”) using a Geometric Brownian Motion in a risk-neutral framework. The assumptions used in the FASA contingent consideration analysis as of September 28, 2024 included the EBITDA forecast through the remaining term of the contingent consideration, an EBITDA discount rate, an EBITDA volatility, credit spread, risk-free rate and exchange rate. Significant increases and decreases in these inputs could result in a significantly lower or higher fair value measurement of the FASA contingent consideration. The changes in contingent consideration are due to the following:
26
(in thousands of dollars)
Contingent Consideration
Balance as of December 30, 2023
$
86,495
Total included in earnings during period
(42,215)
Exchange rate changes
(6,429)
Balance as of September 28, 2024
$
37,851
Fair value of financial instruments that are not carried at fair value are as follows:
Fair Value Measurements at September 28, 2024 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)
Liabilities
6% Senior notes
$
1,010,400
$
—
$
1,010,400
$
—
5.25% Senior notes
497,500
—
497,500
—
3.625% Senior notes
571,247
—
571,247
—
Term loan A-1
396,010
—
396,010
—
Term loan A-2
472,625
—
472,625
—
Term loan A-3
297,008
—
297,008
—
Term loan A-4
481,953
—
481,953
—
Revolver debt
413,883
—
413,883
—
Total Liabilities
$
4,140,626
$
—
$
4,140,626
$
—
Fair Value Measurements at December 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)
Liabilities
6% Senior notes
$
1,000,000
$
—
$
1,000,000
$
—
5.25% Senior notes
493,100
—
493,100
—
3.625% Senior notes
560,994
—
560,994
—
Term loan A-1
398,000
—
398,000
—
Term loan A-2
478,844
—
478,844
—
Term loan A-3
298,500
—
298,500
—
Term loan A-4
488,172
—
488,172
—
Revolver debt
604,766
—
604,766
—
Total Liabilities
$
4,322,376
$
—
$
4,322,376
$
—
The fair value of the senior notes, term loan A-1, term loan A-2, term loan A-3, term loan A-4 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 carrying amount of cash, cash equivalents and restricted cash, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments and as such has been excluded from the table above.
(17) Restructuring and Asset Impairment Charges
In December 2022, the Company’s management reviewed our global network of collagen plants for optimization opportunities and decided to close our Peabody, Massachusetts plant in 2023. In addition to charges incurred in fiscal 2022, the Company incurred additional restructuring charges in the first nine months of fiscal 2023 in the Food Segment for employee termination costs of approximately $5.3 million. In addition, the Company incurred
27
approximately $0.1 million of employee termination costs in the first nine months of fiscal 2023 in the Feed Segment related to closing down of a processing location in Europe and transferring the material to another processing location in Europe.
(18) Contingencies
The Company is a party to various lawsuits, claims and loss contingencies arising in the ordinary course of its business, including insured worker's compensation, auto, and general liability claims, assertions by certain regulatory and governmental agencies related to 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, regulatory, governmental, environmental, litigation and tax contingencies. At September 28, 2024 and December 30, 2023, the reserves for insurance, regulatory, governmental, environmental, litigation and tax contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities was approximately $96.6 million and $95.1 million, respectively. The Company has insurance recovery receivables reflected on the balance sheet in other assets of approximately $36.0 million as of September 28, 2024 and December 30, 2023, related to the insurance contingencies. The Company’s management believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these contingencies will not exceed current estimates. The Company believes that the likelihood is remote that any additional liability from the pending lawsuits and claims that may not be covered by insurance would have a material effect on the Company’s financial position, results of operations or cash flows.
Lower Passaic River Area. In December 2009, the Company, along with numerous other entities, received notice from the United States Environmental Protection Agency (“EPA”) that the Company (as alleged successor-in-interest to The Standard Tallow 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 million for each of the former plant sites in question) for liabilities relating to the lower 8.3 miles of the Lower Passaic River area. The Company accepted this settlement offer, and the settlement became effective on April 16, 2021 following the completion of the EPA's administrative approval process. In September 2021, the EPA released a ROD selecting an interim remedy for the upper nine miles of the Lower Passaic River at an expected additional cost of $441 million. In October 2022, the Company, along with other settling defendants, entered into a Consent Decree with the EPA pursuant to which the Company paid $0.3 million to settle liabilities for both of the former plant sites in question related to the upper nine miles of the Lower Passaic River.The Company paid this amount into escrow, as the settlement is subject to the EPA’s administrative approval process, which includes publication, a public comment period and court approval. On September 30, 2016, Occidental Chemical Corporation (“OCC”) entered into an agreement with the EPA to perform
28
the remedial design for the cleanup plan for the lower 8.3 miles of the Lower Passaic River. On June 30, 2018, OCC filed a complaint in the United States District Court for the District of New Jersey against over 100 companies, including the Company, seeking cost recovery or contribution for costs under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) relating to various investigations and cleanups OCC has conducted or is conducting in connection with the Lower Passaic River. According to the complaint, OCC has incurred or is incurring costs which include the estimated cost to complete the remedial design for the cleanup plan for the lower 8.3 miles of the Lower Passaic River. OCC is also seeking a declaratory judgment to hold the defendants liable for their proper shares of future response costs, including the remedial action for the lower 8.3 miles of the Lower Passaic River. The Company, along with 40 of the other defendants, had previously received a release from OCC of its CERCLA contribution claim of $165 million associated with the costs to design the remedy for the lower 8.3 miles of the Lower Passaic River. Furthermore, the Company’s settlements with the EPA described above could preclude certain of the claims alleged by OCC against the Company. The Company’s ultimate liability, if any, for investigatory costs, remedial costs and/or natural resource damages in connection with the Lower Passaic River area cannot be determined at this time; however, as of the date of this report, the Company has found no definitive evidence that the former Standard Tallow Corporation plant sites contributed any of the COCs to the Passaic River and, therefore, there is nothing that leads the Company to believe that this matter will have a material effect on the Company’s financial position, results of operations or cash flows.
(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.
Business Segments (in thousands):
29
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended September 28, 2024
Total net sales
$
927,457
$
357,292
$
137,142
$
—
$
1,421,891
Cost of sales and operating expenses
727,642
271,861
108,816
—
1,108,319
Gross margin
199,815
85,431
28,326
—
313,572
Loss/(gain) on sale of assets
204
49
(2)
—
251
Selling, general and administrative expenses
67,445
28,351
7,757
12,164
115,717
Acquisition and integration costs
—
—
—
218
218
Change in fair value of contingent consideration
16,156
—
—
—
16,156
Depreciation and amortization
85,480
26,743
9,297
2,033
123,553
Equity in net income of Diamond Green Diesel
—
—
2,430
—
2,430
Segment operating income/(loss)
30,530
30,288
13,704
(14,415)
60,107
Equity in net income of other unconsolidated subsidiaries
3,782
—
—
—
3,782
Segment income/(loss)
34,312
30,288
13,704
(14,415)
63,889
Total other expense
(62,245)
Income before income taxes
$
1,644
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended September 30, 2023
Total 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
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
Total other expense
(67,186)
Income before income taxes
$
112,717
30
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Nine Months Ended September 28, 2024
Total net sales
$
2,751,452
$
1,127,415
$
418,615
$
—
$
4,297,482
Cost of sales and operating expenses
2,171,282
846,766
335,358
—
3,353,406
Gross margin
580,170
280,649
83,257
—
944,076
Loss/(gain) on sale of assets
541
(208)
(434)
—
(101)
Selling, general and administrative expenses
218,598
88,939
24,911
52,143
384,591
Acquisition and integration costs
—
—
—
5,402
5,402
Change in fair value of contingent consideration
(42,215)
—
—
—
(42,215)
Depreciation and amortization
259,493
82,983
26,687
6,504
375,667
Equity in net income of Diamond Green Diesel
—
—
125,046
—
125,046
Segment operating income/(loss)
143,753
108,935
157,139
(64,049)
345,778
Equity in net income of other unconsolidated subsidiaries
9,109
—
—
—
9,109
Segment income/(loss)
152,862
108,935
157,139
(64,049)
354,887
Total other expense
(185,609)
Income before income taxes
$
169,278
Segment assets at September 28, 2024
$
4,318,626
$
2,219,932
$
2,611,464
$
1,422,697
$
10,572,719
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Nine Months Ended September 30, 2023
Total 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
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
Total other expense
(168,946)
Income before income taxes
$
625,455
Segment assets at December 30, 2023
$
4,702,593
$
2,646,702
$
2,589,145
$
1,122,644
$
11,061,084
(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
31
material to the Company. The Company elected to treat shipping and handling as fulfillment 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 28, 2024 and September 30, 2023 (in thousands):
Three Months Ended September 28, 2024
Feed Ingredients
Food Ingredients
Fuel Ingredients
Total
Geographic Area
North America
$
720,381
$
97,658
$
—
$
818,039
Europe
95,625
161,630
137,142
394,397
China
8,910
53,506
—
62,416
South America
98,980
32,189
—
131,169
Other
3,561
12,309
—
15,870
Total net sales
$
927,457
$
357,292
$
137,142
$
1,421,891
Major product types
Fats
$
346,870
$
40,982
$
—
$
387,852
Used cooking oil
81,674
—
—
81,674
Proteins
369,544
—
—
369,544
Bakery
47,696
—
—
47,696
Other rendering
69,658
—
—
69,658
Food ingredients
—
289,311
—
289,311
Bioenergy
—
—
137,142
137,142
Other
12,015
26,999
—
39,014
Total net sales
$
927,457
$
357,292
$
137,142
$
1,421,891
Nine Months Ended September 28, 2024
Feed Ingredients
Food Ingredients
Fuel Ingredients
Total
Geographic Area
North America
$
2,132,009
$
305,283
$
—
$
2,437,292
Europe
304,195
497,186
418,615
1,219,996
China
21,747
176,901
—
198,648
South America
282,733
109,636
—
392,369
Other
10,768
38,409
—
49,177
Total net sales
$
2,751,452
$
1,127,415
$
418,615
$
4,297,482
Major product types
Fats
$
972,792
$
117,346
$
—
$
1,090,138
Used cooking oil
253,600
—
—
253,600
Proteins
1,119,700
—
—
1,119,700
Bakery
141,100
—
—
141,100
Other rendering
225,900
—
—
225,900
Food ingredients
—
935,659
—
935,659
Bioenergy
—
—
418,615
418,615
Other
38,360
74,410
—
112,770
Total net sales
$
2,751,452
$
1,127,415
$
418,615
$
4,297,482
32
Three Months Ended September 30, 2023
Feed Ingredients
Food Ingredients
Fuel Ingredients
Total
Geographic Area
North America
$
872,493
$
122,594
$
—
$
995,087
Europe
86,007
194,168
121,664
401,839
China
9,748
69,125
—
78,873
South America
75,801
51,639
—
127,440
Other
3,747
18,218
—
21,965
Total net sales
$
1,047,796
$
455,744
$
121,664
$
1,625,204
Major product types
Fats
$
417,856
$
38,242
$
—
$
456,098
Used cooking oil
103,135
—
—
103,135
Proteins
405,411
—
—
405,411
Bakery
63,192
—
—
63,192
Other rendering
42,659
—
—
42,659
Food ingredients
—
390,695
—
390,695
Bioenergy
—
—
121,664
121,664
Other
15,543
26,807
—
42,350
Total net sales
$
1,047,796
$
455,744
$
121,664
$
1,625,204
Nine Months Ended September 30, 2023
Feed Ingredients
Food Ingredients
Fuel Ingredients
Total
Geographic Area
North America
$
2,844,350
$
323,333
$
—
$
3,167,683
Europe
292,323
611,634
418,818
1,322,775
China
21,251
217,910
—
239,161
South America
259,633
116,916
—
376,549
Other
9,393
58,436
—
67,829
Total net sales
$
3,426,950
$
1,328,229
$
418,818
$
5,173,997
Major product types
Fats
$
1,313,461
$
121,437
$
—
$
1,434,898
Used cooking oil
387,103
—
—
387,103
Proteins
1,288,514
—
—
1,288,514
Bakery
205,388
—
—
205,388
Other rendering
182,738
—
—
182,738
Food ingredients
—
1,122,143
—
1,122,143
Bioenergy
—
—
418,818
418,818
Other
49,746
84,649
—
134,395
Total net sales
$
3,426,950
$
1,328,229
$
418,818
$
5,173,997
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 2024 under these long-term supply contracts was approximately $118.6 million, with the remaining performance obligations to be recognized in future periods (generally four years) of approximately $650.1 million.
(21) Related Party Transactions
Raw Material Agreement
The Company entered into a Raw Material Agreement with the DGD Joint Venture in May 2011 pursuant to which the Company will offer to supply certain animal fats and used cooking oil at market prices, 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 28, 2024 and September 30, 2023, the Company recorded net sales to the DGD Joint Venture of approximately $264.8 million and $276.6 million, respectively. For the three months ended September 28, 2024 and
33
September 30, 2023, our net sales to the DGD Joint Venture were approximately 19% and 17%, respectively of Total net sales. For the nine months ended September 28, 2024 and September 30, 2023, the Company recorded net sales to the DGD Joint Venture of approximately $746.1 million and $940.2 million, respectively. For the nine months ended September 28, 2024 and September 30, 2023, our net sales to the DGD Joint Venture were approximately 17% and 18%, respectively of Total net sales. At September 28, 2024 and December 30, 2023, the Company had $18.0 million and $172.3 million in outstanding receivables due from the DGD Joint Venture, respectively. In addition, the Company has eliminated approximately $63.7 million and $73.8 million of additional sales for the nine months ended September 28, 2024 and September 30, 2023, respectively to defer the Company’s portion of profit of approximately $7.9 million and $17.5 million on those sales relating to inventory assets remaining on the DGD Joint Venture's balance sheet at September 28, 2024 and September 30, 2023, 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 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, which was repaid in fiscal 2023. In January 2024, the DGD Joint Venture borrowed all $200.0 million available under the 2023 DGD Loan Agreement, including the Company’s full $100.0 million commitment, which was repaid in March 2024. The DGD Joint Venture paid interest to the Company for the three months ended September 28, 2024 and September 30, 2023 of zero, respectively and paid interest to the Company for the nine months ended September 28, 2024 and September 30, 2023 of approximately $1.6 million and $0.6 million, respectively. As of September 28, 2024 and December 30, 2023, zero was owed to Darling Green under the 2023 DGD Loan Agreement and the 2019 DGD Loan Agreement, respectively. 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.
34
(22) Cash Flow Information
The following table sets forth supplemental cash flow information and non-cash transactions (in thousands):
Nine Months Ended
September 28, 2024
September 30, 2023
Supplemental disclosure of cash flow information:
Change in accrued capital expenditures
$
(23,303)
$
(248)
Cash paid during the period for:
Interest, net of capitalized interest
$
157,627
$
167,050
Income taxes, net of refunds
$
82,414
$
127,729
Non-cash operating activities
Operating lease right of use asset obtained in exchange for new lease liabilities
$
52,184
$
67,634
Non-cash financing activities
Debt issued for assets
$
2,156
$
750
(23) New Accounting Pronouncements
In December 2023, the FASB issued Accounting Standards Update (“ASU”) No. 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures, which expands the disclosures required in an entity's income tax rate reconciliation table and disclosure of income taxes paid both in U.S. and foreign jurisdictions. The amendments are effective for fiscal years beginning after December 15, 2024 and should be applied prospectively. Early adoption is permitted. The Company is currently evaluating this ASU to determine its impact on the Company’s disclosure, but does not expect this update to have a material impact on the Company’s consolidated financial statements other than additional information to be provided in the footnote disclosure.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures. The amendment requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment's profit or loss and assets. The amendments are effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024 and should be applied retrospectively. Early adoption is permitted. The Company is currently evaluating this ASU to determine its impact on the Company’s disclosure, but does not expect this update to have a material impact on the Company’s consolidated financial statements other than additional information to be provided in the footnote disclosure.
35
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 30, 2023, filed with the SEC on February 28, 2024 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 28, 2024 included herein, (ii) the conversion of organic sludge and food waste into biogas
36
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 30, 2023, as filed with the SEC on February 28, 2024.
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, amending, modifying, 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 30, 2023, as filed with the SEC on February 28, 2024.
37
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 and Combined 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 30, 2023.
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 28, 2024 Compared to Three Months Ended September 30, 2023
Operating Performance Metrics
Operating performance metrics which management routinely monitors as an indicator of operating performance include:
38
•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 2024, 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 2024, compared to average Jacobsen and Reuters prices for the third quarter of fiscal 2023 are as follows:
Avg. Price 3rd Quarter 2024
Avg. Price 3rd Quarter 2023
Increase/(Decrease)
% Increase/(Decrease)
Jacobsen:
MBM (Illinois)
$ 296.12/ton
$ 455.04/ton
$ (158.92)/ton
(34.9)
%
Feed Grade PM (Mid-South)
$ 362.42/ton
$ 488.13/ton
$ (125.71)/ton
(25.8)
%
Pet Food PM (Mid-South)
$ 611.13/ton
$ 796.10/ton
$ (184.97)/ton
(23.2)
%
Feather meal (Mid-South)
$ 420.35/ton
$ 572.30/ton
$ (151.95)/ton
(26.6)
%
BFT (Chicago)
$ 50.62/cwt
$ 68.66/cwt
$ (18.04)/cwt
(26.3)
%
YG (Illinois)
$ 37.11/cwt
$ 52.39/cwt
$ (15.28)/cwt
(29.2)
%
Corn (Illinois)
$ 3.97/bushel
$ 5.32/bushel
$ (1.35)/bushel
(25.4)
%
Reuters:
Palm Oil (CIF Rotterdam)
$ 1,081.00/MT
$ 963.00/MT
$ 118.00/MT
12.3
%
Soy meal (CIF Rotterdam)
$ 429.00/MT
$ 513.00/MT
$ (84.00)/MT
(16.4)
%
The following table shows the average Jacobsen and Reuters prices for the third quarter of fiscal 2024, compared to average Jacobsen and Reuters prices for the second quarter of fiscal 2024.
39
Avg. Price 3rd Quarter 2024
Avg. Price 2nd Quarter 2024
Increase/(Decrease)
% Increase/(Decrease)
Jacobsen:
MBM (Illinois)
$ 296.12/ton
$ 290.51/ton
$ 5.61/ton
1.9
%
Feed Grade PM (Mid-South)
$ 362.42/ton
$ 371.25/ton
$ (8.83)/ton
(2.4)
%
Pet Food PM (Mid-South)
$ 611.13/ton
$ 785.69/ton
$ (174.56)/ton
(22.2)
%
Feather meal (Mid-South)
$ 420.35/ton
$ 490.32/ton
$ (69.97)/ton
(14.3)
%
BFT (Chicago)
$ 50.62/cwt
$ 46.29/cwt
$ 4.33/cwt
9.4
%
YG (Illinois)
$ 37.11/cwt
$ 35.85/cwt
$ 1.26/cwt
3.5
%
Corn (Illinois)
$ 3.97/bushel
$ 4.48/bushel
$ (0.51)/bushel
(11.4)
%
Reuters:
Palm Oil (CIF Rotterdam)
$ 1,081.00/MT
$ 1,040.00/MT
$ 41.00/MT
3.9
%
Soy meal (CIF Rotterdam)
$ 429.00/MT
$ 451.00/MT
$ (22.00)/MT
(4.9)
%
Segment Results
Segment operating income for the three months ended September 28, 2024 was $60.1 million, which reflects a decrease of $(118.3) million or (66.3)% as compared to the three months ended September 30, 2023.
(in thousands, except percentages)
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended September 28, 2024
Total net sales
$
927,457
$
357,292
$
137,142
$
—
$
1,421,891
Cost of sales and operating expenses (1)
727,642
271,861
108,816
—
1,108,319
Gross margin
199,815
85,431
28,326
—
313,572
Gross margin %
21.5
%
23.9
%
20.7
%
—
%
22.1
%
Loss/(gain) on sale of assets
204
49
(2)
—
251
Selling, general and administrative expenses (2)
67,445
28,351
7,757
12,164
115,717
Acquisition and integration costs
—
—
—
218
218
Change in fair value of contingent consideration
16,156
—
—
—
16,156
Depreciation and amortization
85,480
26,743
9,297
2,033
123,553
Equity in net income of Diamond Green Diesel
—
—
2,430
—
2,430
Segment operating income/(loss)
30,530
30,288
13,704
(14,415)
60,107
Equity in net income of other unconsolidated subsidiaries
3,782
—
—
—
3,782
Segment income/(loss)
34,312
30,288
13,704
(14,415)
63,889
(1) Cost of sales and operating expenses includes the cost of raw materials, collection costs of the raw materials and factory expenses including direct labor.
(2) Selling, general and administrative expenses include payroll related costs including incentive pay and stock compensation, insurance related costs, professional fees, IT related costs, travel costs and other costs.
40
(in thousands, except percentages)
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended September 30, 2023
Total net sales
$
1,047,796
$
455,744
$
121,664
$
—
$
1,625,204
Cost of sales and operating expenses (1)
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 (2)
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
(1) Cost of sales and operating expenses includes the cost of raw materials, collection costs of the raw materials and factory expenses including direct labor.
(2) Selling, general and administrative expenses include payroll related costs including incentive pay and stock compensation, insurance related costs, professional fees, IT related costs, travel costs and other costs.
Feed Ingredients Segment
Raw material volume. In the three months ended September 28, 2024, the raw material processed by the Company’s Feed Ingredients segment totaled approximately 3.10 million metric tons. Compared to the three months ended September 30, 2023, overall raw material volume processed in the Feed Ingredients segment increased 0.3%.
Sales. Total net sales decreased in the Feed Ingredients segment primarily due to the following (in millions of dollars):
Fats
Proteins
Other Rendering
Total Rendering
Used Cooking Oil
Bakery
Other
Total
Total 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
Increase (decrease) in sales volumes
2.7
11.3
—
14.0
(25.0)
(2.3)
—
(13.3)
Increase (decrease) in finished product prices
(73.9)
(47.8)
—
(121.7)
3.7
(13.2)
—
(131.2)
Increase (decrease) due to currency exchange rates
0.2
0.6
0.1
0.9
(0.2)
—
—
0.7
Other change
—
—
27.0
27.0
—
—
(3.5)
23.5
Total change
(71.0)
(35.9)
27.1
(79.8)
(21.5)
(15.5)
(3.5)
(120.3)
Total net sales three months ended September 28, 2024
$
346.9
$
369.5
$
69.7
$
786.1
$
81.6
$
47.7
$
12.1
$
927.5
Margins. In the Feed Ingredients segment for the three months ended September 28, 2024, the gross margin percentage decreased to 21.5% as compared to 23.2% for the comparable period of fiscal 2023. The decrease in margin was primarily due to lower overall finished product prices as compared to fiscal 2023.
Segment operating income. Feed Ingredients operating income for the three months ended September 28, 2024 was $30.5 million, a decrease of $(47.8) million or (61.0)% as compared to the three months ended September 30, 2023. The decrease was primarily due to lower overall finished product prices and a current period loss from the increase of the recorded FASA contingent consideration liability as compared to the prior year gain that more than offset a decrease in selling, general and administrative costs as compared to fiscal 2023.
41
Food Ingredients Segment
Raw material volume. In the three months ended September 28, 2024, the raw material processed by the Company’s Food Ingredients segment totaled approximately 306,000 metric tons. Compared to the three months ended September 30, 2023, overall raw material volume processed in the Food Ingredients segment decreased approximately 5.6%. This decrease was primarily due to reductions in raw material purchases.
Sales. Total net sales decreased in the Food Ingredients segment primarily due to a decrease in collagen prices that more than offset the increase in collagen sales volumes and increases in fat prices.
Margins. In the Food Ingredients segment for the three months ended September 28, 2024, the gross margin percentage decreased to 23.9% as compared to 25.8% for the comparable period of fiscal 2023. The decrease was primarily due to decreasing collagen prices.
Segment operating income. Food Ingredients operating income was $30.3 million for the three months ended September 28, 2024, a decrease of $(30.2) million or (49.9)% as compared to the three months ended September 30, 2023. The decrease was primarily due to decreasing collagen prices that more than offset lower selling and general and administrative costs as compared to fiscal 2023.
Fuel Ingredients Segment
Raw material volume. In the three months ended September 28, 2024, the raw material processed by the Company’s Fuel Ingredients segment totaled approximately 391,000 metric tons. Compared to the three months ended September 30, 2023, overall raw material volume processed in the Fuel Ingredients segment increased approximately 13.7%. The increase is primarily due to increased volumes from existing suppliers and incremental volumes from a small acquisition.
Sales. Total net sales increased in the Fuel Ingredients segment primarily due to higher sales volumes.
Margins. In the Fuel Ingredients segment for the three months ended September 28, 2024, the gross margin percentage decreased slightly to 20.7% as compared to 20.9% for the comparable period of fiscal 2023.
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 28, 2024 was $13.7 million, a decrease of $(51.5) million or (79.0)% as compared to the same period in fiscal 2023. The decrease in earnings is primarily due to a decrease in renewable identification number (RIN) values, lower values for LCFS credits, lower diesel fuel prices and the recording of a lower-of cost-or-market reserve by the DGD Joint Venture related to lower market prices that more than offset higher sales volumes at the DGD Joint Venture.
Foreign Currency Exchange
During the third quarter of fiscal 2024, the euro strengthened and the Brazilian real and the Canadian dollar weakened against the U.S. dollar as compared to the same period in fiscal 2023. Using actual results for the three months ended September 28, 2024 and using the prior year's average currency rate for the three months ended September 30, 2023, foreign currency translation would result in a decrease in operating income of approximately $(0.6) million. The average rates for the three months ended September 28, 2024 were €1.00:$1.10, R$1.00:$0.18 and C$1.00:$0.73 as compared to the average rates for the three months ended September 30, 2023 of €1.00:$1.09, R$1.00:$0.21 and C$1.00:$0.75, respectively.
Corporate Activities
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $12.2 million during the three months ended September 28, 2024, compared to approximately $19.6 million during the three months ended September 30, 2023, a decrease of $(7.4) million. The decrease is primarily due to a decrease in the Company's incentive based compensation.
Acquisition and Integration costs. Acquisition and integration costs were approximately $0.2 million during the three months ended September 28, 2024 as compared to $3.4 million for the same period in fiscal 2023. These costs primarily relate to the Gelnex Acquisition and the Miropasz Acquisition for the three months ended September 28, 2024 and primarily relate to the FASA Acquisition, Gelnex Acquisition and the Valley Proteins acquisition for the three months ended September 30, 2023.
42
Depreciation and Amortization. Depreciation and amortization charges were approximately $2.0 million for the three months ended September 28, 2024 as compared to $2.6 million for the three months ended September 30, 2023. The decrease is due to certain assets becoming fully depreciated.
Interest Expense. Interest expense was $66.8 million during the three months ended September 28, 2024, compared to $70.3 million during the three months ended September 30, 2023, a decrease of $(3.5) million. The decrease in interest expense was primarily due to the payoff of term loan B, a reduction in term loan A debt and a reduction in other debt interest due to debt repayments that more than offset an increase in interest expense from higher revolver borrowings as compared to the same period in fiscal 2023.
Foreign Currency Gain/(Loss). Foreign currency losses were $(0.1) million for the three months ended September 28, 2024 as compared to foreign currency gains of $0.8 million for the three months ended September 30, 2023. The decrease in currency gains is due primarily to a decrease in gains on the revaluation of non-functional currency assets and liabilities as compared to the same period of fiscal 2023.
Other Income, net. Other income was $4.7 million in the three months ended September 28, 2024, compared to other income of $2.2 million for the three months ended September 30, 2023. The increase in other income was primarily due to an increase in casualty gains that was partially offset by a decrease in interest income as compared to the same period in fiscal 2023.
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 $17.5 million for the three months ended September 28, 2024, compared to an income tax benefit of $15.4 million recorded in the three months ended September 30, 2023, an increase in tax benefit of $2.1 million, which was primarily due to decreased pre-tax earnings of the Company including the relative impact of biofuel tax incentives. The effective tax rates for the three months ended September 28, 2024 and September 30, 2023 were (1,062.7)% and (13.6)%, respectively. The effective tax rate for the three months ended September 28, 2024 differed 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), nontaxable change in FASA contingent consideration, certain taxable income inclusion items in the U.S. based on foreign earnings and biofuel tax incentives. The effective tax rate for the three months ended September 30, 2023 differed 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 effect 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 Company’s effective tax rate excluding the impact of the biofuel tax incentives and discrete items was 125.4% for the three months ended September 28, 2024, compared to 25.9% for the three months ended September 30, 2023. The quarterly income tax provision is based on the Company’s estimate of its expected tax rate for the full year and any discrete items recognized during the period. The quarterly income tax benefit for the three months ended September 28, 2024 is calculated as the difference in the income tax benefit for the nine months ended September 28, 2024 and the income tax expense for the six months ended June 29, 2024. The impact of changes in the annual estimated tax rate and discrete items do not have a direct relationship with the almost break-even pre-tax earnings; therefore, the effective tax rate in percentage terms of pre-tax earnings is not meaningful for the three months ended September 28, 2024.
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 and asset impairment charges, acquisition and integration costs, change in fair value of contingent consideration, foreign currency loss/(gain), net income/(loss) attributable to non-controlling interests, interest expense, income tax provision, other income/(expense) and equity in net (income)/loss of unconsolidated subsidiaries. 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
43
eliminates the effects of financing, income taxes, non-cash and certain other items that may vary for different companies for reasons unrelated to overall operating performance and also believes this information is useful to investors. 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 28, 2024. However, the amounts shown below for Adjusted EBITDA differ from the amounts calculated under similarly titled definitions in the Company’s Senior Secured Credit Facilities, 6% Notes, 5.25% Notes and 3.625% Notes, as those definitions permit further adjustments to reflect certain other nonrecurring 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.
Pro forma Adjusted EBITDA to Foreign Currency 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. Management believes Pro forma Adjusted EBITDA to Foreign Currency is useful in evaluating the Company’s operating performance on a constant currency basis and also believes this information is useful to investors.
DGD Adjusted EBITDA is not reflected in the Adjusted EBITDA or the Pro forma Adjusted EBITDA to Foreign Currency. DGD Adjusted EBITDA is not a recognized accounting measure 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 Adjusted EBITDA by taking DGD’s operating income plus DGD’s depreciation, amortization and accretion expense. Management believes that DGD Adjusted EBITDA is useful in evaluating the Company’s operating performance because the calculation of DGD Adjusted EBITDA generally eliminates non-cash and certain other items at DGD unrelated to overall operating performance and also believes this information is useful to investors. The Company calculates Darling’s Share of DGD Adjusted EBITDA by taking DGD Adjusted EBITDA and then multiplying by 50% to get Darling’s Share of DGD’s Adjusted EBITDA.
Combined 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. Combined Adjusted EBITDA consists of Adjusted EBITDA plus DGD Joint Venture Adjusted EBITDA (Darling’s share). Management believes that Combined 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, non-cash and certain other items that may vary for different companies for reasons unrelated to overall operating performance and also believes this information is useful to investors.
Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA to (Non-GAAP) Pro Forma Adjusted EBITDA to Foreign Currency and to (Non-GAAP) Combined Adjusted EBITDA
Third Quarter 2024 as compared to Third Quarter 2023
44
Three Months Ended
(dollars in thousands)
September 28, 2024
September 30, 2023
Net income attributable to Darling
$
16,949
$
125,026
Depreciation and amortization
123,553
125,994
Interest expense
66,846
70,278
Income tax benefit
(17,471)
(15,364)
Acquisition and integration costs
218
3,430
Change in fair value of contingent consideration
16,156
(5,559)
Foreign currency loss/(gain)
134
(845)
Other income, net
(4,735)
(2,247)
Equity in net income of Diamond Green Diesel
(2,430)
(54,389)
Equity in net income of other unconsolidated subsidiaries
(3,782)
(1,534)
Net income attributable to non-controlling interests
2,166
3,055
Adjusted EBITDA (Non-GAAP)
$
197,604
$
247,845
Foreign currency exchange impact (1)
(601)
—
Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP)
$
197,003
$
247,845
DGD Adjusted EBITDA (Darling’s Share) (Non-GAAP)
$
39,085
$
86,450
Combined Adjusted EBITDA (Non-GAAP)
$
236,689
$
334,295
(1) The average rates for the three months ended September 28, 2024 were €1.00:$1.10, R$1.00:$0.18 and C$1.00:$0.73 as compared to the average rates for the three months ended September 30, 2023 of €1.00:$1.09, R$1.00:$0.21 and C$1.00:$0.75, respectively.
Nine Months Ended September 28, 2024 Compared to Nine Months Ended September 30, 2023
Operating Performance Metrics
Operating performance metrics which management routinely monitors as an indicator of operating performance include:
•Finished product commodity prices
•Segment results
•Foreign currency exchange
•Corporate activities
•Non-U.S. GAAP measures
These indicators and their importance are discussed below.
Finished Product Commodity Prices
During the first nine months of fiscal 2024, 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 2024, compared to average Jacobsen and Reuters prices for the first nine months of fiscal 2023 are as follows:
45
Avg. Price First Nine Months 2024
Avg. Price First Nine Months 2023
Increase/(Decrease)
% Increase/(Decrease)
Jacobsen:
MBM (Illinois)
$ 293.18/ton
$ 451.72/ton
$ (158.54)/ton
(35.1)
%
Feed Grade PM (Mid-South)
$ 380.28/ton
$ 460.21/ton
$ (79.93)/ton
(17.4)
%
Pet Food PM (Mid-South)
$ 711.33/ton
$ 824.84/ton
$ (113.51)/ton
(13.8)
%
Feather meal (Mid-South)
$ 475.21/ton
$ 582.30/ton
$ (107.09)/ton
(18.4)
%
BFT (Chicago)
$ 46.72/cwt
$ 62.22/cwt
$ (15.50)/cwt
(24.9)
%
YG (Illinois)
$ 34.89/cwt
$ 49.85/cwt
$ (14.96)/cwt
(30.0)
%
Corn (Illinois)
$ 4.29/bushel
$ 6.28/bushel
$ (1.99)/bushel
(31.7)
%
Reuters:
Palm Oil (CIF Rotterdam)
$ 1,040.00/MT
$ 971.00/MT
$ 69.00/MT
7.1
%
Soy meal (CIF Rotterdam)
$ 448.00/MT
$ 541.00/MT
$ (93.00)/MT
(17.2)
%
Segment Results
Segment operating income for the nine months ended September 28, 2024 was $345.8 million, which reflects a decrease of $(445.1) million or (56.3)% as compared to the nine months ended September 30, 2023.
(in thousands, except percentages)
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Nine Months Ended September 28, 2024
Total net sales
$
2,751,452
$
1,127,415
$
418,615
$
—
$
4,297,482
Cost of sales and operating expenses (1)
2,171,282
846,766
335,358
—
3,353,406
Gross margin
580,170
280,649
83,257
—
944,076
Gross margin %
21.1
%
24.9
%
19.9
%
—
%
22.0
%
Loss/(gain) on sale of assets
541
(208)
(434)
—
(101)
Selling, general and administrative expenses (2)
218,598
88,939
24,911
52,143
384,591
Acquisition and integration costs
—
—
—
5,402
5,402
Change in fair value of contingent consideration
(42,215)
—
—
—
(42,215)
Depreciation and amortization
259,493
82,983
26,687
6,504
375,667
Equity in net income of Diamond Green Diesel
—
—
125,046
—
125,046
Segment operating income/(loss)
143,753
108,935
157,139
(64,049)
345,778
Equity in net income of other unconsolidated subsidiaries
9,109
—
—
—
9,109
Segment income/(loss)
152,862
108,935
157,139
(64,049)
354,887
(1) Cost of sales and operating expenses includes the cost of raw materials, collection costs of the raw materials and factory expenses including direct labor.
(2) Selling, general and administrative expenses include payroll related costs including incentive pay and stock compensation, insurance related costs, professional fees, IT related costs, travel costs and other costs.
46
(in thousands, except percentages)
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Nine Months Ended September 30, 2023
Total net sales
$
3,426,950
$
1,328,229
$
418,818
$
—
$
5,173,997
Cost of sales and operating expenses (1)
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 (2)
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
(1) Cost of sales and operating expenses includes the cost of raw materials, collection costs of the raw materials and factory expenses including direct labor.
(2) Selling, general and administrative expenses include payroll related costs including incentive pay and stock compensation, insurance related costs, professional fees, IT related costs, travel costs and other costs.
Feed Ingredients Segment
Raw material volume. In the nine months ended September 28, 2024, the raw material processed by the Company’s Feed Ingredients segment totaled approximately 9.3 million metric tons. Compared to the nine months ended September 30, 2023, overall raw material volume processed in the Feed Ingredients segment decreased 0.6%.
Sales. Total net sales decreased in the Feed Ingredients segment primarily due to the following (in millions of dollars):
Fats
Proteins
Other Rendering
Total Rendering
Used Cooking Oil
Bakery
Other
Total
Total 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
Increase (decrease) in sales volumes
(28.3)
13.8
—
(14.5)
(47.3)
(13.4)
—
(75.2)
Decrease in finished product prices
(312.2)
(182.8)
—
(495.0)
(85.8)
(50.9)
—
(631.7)
Increase (decrease) due to currency exchange rates
(0.2)
0.2
—
—
(0.4)
—
—
(0.4)
Other change
—
—
43.2
43.2
—
—
(11.4)
31.8
Total change
(340.7)
(168.8)
43.2
(466.3)
(133.5)
(64.3)
(11.4)
(675.5)
Total net sales nine months ended September 28, 2024
$
972.8
$
1,119.7
$
225.9
$
2,318.4
$
253.6
$
141.1
$
38.4
$
2,751.5
Margins. In the Feed Ingredients segment for the nine months ended September 28, 2024, the gross margin percentage decreased to 21.1% as compared to 23.2% for the comparable period of fiscal 2023. The decrease in margin was primarily due to lower overall finished product prices as compared to fiscal 2023.
Segment operating income. Feed Ingredients operating income for the nine months ended September 28, 2024 was $143.8 million, a decrease of $(169.6) million or (54.1)% as compared to the nine months ended September 30, 2023. The decrease was primarily due to lower overall finished product prices that more than offset a decrease in selling, general and administrative expenses and a gain from the reduction of the recorded FASA contingent consideration liability as compared to fiscal 2023.
47
Food Ingredients Segment
Raw material volume. In the nine months ended September 28, 2024, the raw material processed by the Company’s Food Ingredients segment totaled approximately 911,000 metric tons. Compared to the nine months ended September 30, 2023, overall raw material volume processed in the Food Ingredients segment decreased approximately 1.0%.
Sales. Total net sales decreased in the Food Ingredients segment primarily due to a decrease in collagen prices that more than offset an increase in sales volumes from the Gelnex Acquisition.
Margins. In the Food Ingredients segment for the nine months ended September 28, 2024, the gross margin percentage increased slightly to 24.9% as compared to 24.8% for the comparable period of fiscal 2023.
Segment operating income. Food Ingredients operating income was $108.9 million for the nine months ended September 28, 2024, a decrease of $(47.9) million or (30.5)% as compared to the nine months ended September 30, 2023. The decrease was primarily due to lower prices for collagen, the impact of an out-of-period inventory adjustment and an increase in depreciation and amortization as compared to fiscal 2023.
Fuel Ingredients Segment
Raw material volume. In the nine months ended September 28, 2024, the raw material processed by the Company’s Fuel Ingredients segment totaled approximately 1.1 million metric tons. Compared to the nine months ended September 30, 2023, overall raw material volume processed in the Fuel Ingredients segment increased approximately 6.7%. The increase is primarily due to increased volumes from existing suppliers and a small acquisition.
Sales. Total net sales for the nine months ended September 28, 2024 were consistent with the nine months ended September 30, 2023 in the Fuel Ingredients segment.
Margins. In the Fuel Ingredients segment for the nine months ended September 28, 2024, the gross margin percentage decreased slightly to 19.9% as compared to 20.0% for the comparable period of fiscal 2023.
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 28, 2024 was $157.1 million, a decrease of $(245.5) million or (61.0)% as compared to the same period in fiscal 2023. The decrease in earnings is primarily due to a decrease in RIN values, lower values for LCFS credits, lower diesel fuel prices and the recording of a lower-of cost-or-market reserve by the DGD Joint Venture related to lower market prices that more than offset higher sales volumes at the DGD Joint Venture.
Foreign Currency Exchange
During the first nine months of fiscal 2024, overall the euro strengthened, the Brazilian real weakened and Canadian dollar remained unchanged against the U.S. dollar as compared to the same period in fiscal 2023. Using actual results for the nine months ended September 28, 2024 and using the prior year's average currency rate for the nine months ended September 30, 2023, foreign currency translation would result in a decrease in operating income of approximately $(0.1) million. The average rates for the nine months ended September 28, 2024 were €1.00:$1.09, R$1.00:$0.19 and C$1.00:$0.74 as compared to the average rates for the nine months ended September 30, 2023 of €1.00:$1.08, R$1.00:$0.20 and C$1.00:$0.74, respectively.
Corporate Activities
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $52.1 million during the nine months ended September 28, 2024 compared to approximately $61.7 million during the nine months ended September 30, 2023, a decrease of $(9.6) million. The decrease is due primarily to a decrease in the Company's incentive based compensation.
Acquisition and Integration costs. Acquisition and integration costs were approximately $5.4 million during the nine months ended September 28, 2024 as compared to $12.2 million for the same period in fiscal 2023. These costs primarily related to the Gelnex Acquisition, the Miropasz Acquisition and the FASA Acquisition for the nine months ended September 28, 2024 and the Gelnex Acquisition, the Miropasz Acquisition, the FASA Acquisition and the Valley Proteins acquisition for the nine months ended September 30, 2023.
48
Depreciation and Amortization. Depreciation and amortization charges were approximately $6.5 million for the nine months ended September 28, 2024 as compared to $7.9 million for the nine months ended September 30, 2023. The decrease was due to certain assets becoming fully depreciated.
Interest Expense. Interest expense was $198.9 million during the nine months ended September 28, 2024, compared to $190.8 million during the nine months ended September 30, 2023, an increase of $8.1 million. The increase in interest expense was primarily due to an increase in revolver borrowings, an increase in interest rates and the fact that the term A-3 facility and term A-4 facility debt borrowed to finance the Gelnex Acquisition was outstanding for the entire nine months in fiscal 2024 versus only six months during the same period in fiscal 2023.
Foreign Currency Gain. Foreign currency gains were $0.5 million for the nine months ended September 28, 2024 as compared to foreign currency gains of $8.3 million for the nine months ended September 30, 2023. The decrease in currency gains was due primarily to a decrease in gains on the revaluation of an intercompany note and non-functional currency assets and liabilities as compared to the same period of fiscal 2023.
Other Income, net. Other income was $12.8 million for the nine months ended September 28, 2024, compared to other income of $13.5 million for the nine months ended September 30, 2023. The decrease in other income was primarily due to a decrease in casualty gains as compared to the same period in fiscal 2023.
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 $12.8 million for the nine months ended September 28, 2024, compared to income tax expense of $52.3 million recorded for the nine months ended September 30, 2023, a decrease in tax expense of $65.1 million, which was primarily due to decreased pre-tax earnings of the Company and the relative impact of biofuel tax incentives. The effective tax rates for the nine months ended September 28, 2024 and September 30, 2023 were (7.6)% and 8.4%, respectively. The effective tax rate for the nine months ended September 28, 2024 differed 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), nontaxable change in FASA contingent consideration, certain taxable income inclusion items in the U.S. based on foreign earnings and biofuel tax incentives. The effective tax rate for the nine months ended September 30, 2023 differed 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 impact of the biofuel tax incentives and discrete items was 28.1% for the nine months ended September 28, 2024, compared to 28.4% for the nine months ended September 30, 2023.
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 28, 2024 Compared to the Three Months Ended September 30, 2023 - Non-U.S. GAAP Measures.”
Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA to (Non-GAAP) Pro Forma Adjusted EBITDA to Foreign Currency and to (Non-GAAP) Combined Adjusted EBITDA
First Nine Months of Fiscal 2024 as compared to First Nine Months of Fiscal 2023
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Nine Months Ended
(dollars in thousands)
September 28, 2024
September 30, 2023
Net income attributable to Darling
$
176,972
$
563,210
Depreciation and amortization
375,667
364,086
Interest expense
198,947
190,770
Income tax expense/(benefit)
(12,790)
52,322
Restructuring and asset impairment charges
—
5,420
Acquisition and integration costs
5,402
12,158
Change in fair value of contingent consideration
(42,215)
(13,058)
Foreign currency gain
(515)
(8,339)
Other income, net
(12,823)
(13,485)
Equity in net income of Diamond Green Diesel
(125,046)
(361,690)
Equity in net income of other unconsolidated subsidiaries
(9,109)
(3,503)
Net income attributable to non-controlling interests
5,096
9,923
Adjusted EBITDA (Non-GAAP)
$
559,586
$
797,814
Foreign currency exchange impact (1)
(76)
—
Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP)
$
559,510
$
797,814
DGD Adjusted EBITDA (Darling’s Share) (Non-GAAP)
$
230,787
$
463,171
Combined Adjusted EBITDA (Non-GAAP)
$
790,373
$
1,260,985
(1) The average rates for the nine months ended September 28, 2024 were €1.00:$1.09, R$1.00:$0.19 and C$1.00:$0.74 as compared to the average rates for the nine months ended September 30, 2023 of €1.00:$1.08, R$1.00:$0.20 and C$1.00:$0.74, respectively.
FINANCING, LIQUIDITY AND CAPITAL RESOURCES
Credit Facilities
Indebtedness
Certain Debt Outstanding at September 28, 2024. On September 28, 2024, 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
(5,818)
Carrying value of 6% Notes due 2030
$
994,182
5.25 % Notes due 2027
$
500,000
Less unamortized deferred loan costs
(2,557)
Carrying value of 5.25% Notes due 2027
$
497,443
3.625 % Notes due 2026 - Denominated in euros
$
574,637
Less unamortized deferred loan costs
(1,941)
Carrying value of 3.625% Notes due 2026
$
572,696
Amended Credit Agreement:
Term A-1 facility
$
398,000
Less unamortized deferred loan costs
(411)
Carrying value of Term A-1 facility
$
397,589
Term A-2 facility
$
475,000
Less unamortized deferred loan costs
(574)
Carrying value of Term A-2 facility
$
474,426
Term A-3 facility
$
298,500
Less unamortized deferred loan costs
(629)
Carrying value of Term A-3 facility
$
297,871
Term A-4 facility
$
484,375
Less unamortized deferred loan costs
(749)
Carrying value of Term A-4 facility
$
483,626
Revolving Credit Facility:
Maximum availability
$
1,500,000
Ancillary Facilities
72,955
Borrowings outstanding
418,064
Letters of credit issued
659
Availability
$
1,008,322
Other Debt
$
110,320
During the first nine months of fiscal 2024, the U.S. dollar decreased as compared to the euro at December 30, 2023. Using the euro based debt outstanding at September 28, 2024 and comparing the closing balance sheet rate at September 28, 2024 to the balance sheet rate at December 30, 2023, the U.S. dollar debt balances of euro based debt increased by approximately $6.6 million at September 28, 2024. The closing balance sheet rate assumption used in this calculation was the actual fiscal closing balance sheet rate at September 28, 2024 of €1.00:$1.1158 as compared to the closing balance sheet rate at December 30, 2023 of €1.00:$1.105.
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 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
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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 28, 2024, the Company had availability of $1,008.3 million under the revolving credit facility, taking into account that the Company had $418.1 million in outstanding borrowings, $73.0 million in ancillary facilities and letters of credit issued of $0.7 million.
•As of September 28, 2024, the Company has borrowed all $400.0 million under the terms of the term A-1 facility and has repaid $2.0 million, which when 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 28, 2024, the Company has borrowed all $500.0 million under the terms of the term A-2 facility and has repaid $25.0 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 28, 2024, the Company has borrowed all $300.0 million under the terms of the term A-3 facility and has repaid $1.5 million, which when 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 28, 2024, the Company has borrowed all $500.0 million under the terms of the term A-4 facility and has repaid $15.6 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 28, 2024, the Company has repaid all $525.0 million it had borrowed under the terms of the term B facility, none of which can be reborrowed.
•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 plus 1.75% per annum or base rate or the adjusted term SOFR for U.S. dollar
52
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 0.75% 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 1.875% per annum subject to certain step-ups and step-downs 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 1.75% per annum subject to certain step-ups and step-downs based on the Company’s total leverage ratio.
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 and Chinese overdraft ancillary facilities, U.S., European and Brazilian finance lease obligations and U.S., Brazilian, Chinese and European notes arrangements 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 28, 2024 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 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
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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 30, 2023 as filed with the SEC on February 28, 2024.
As of September 28, 2024, the Company is in compliance with all of the financial covenants under the Amended Credit Agreement, and believes it is in compliance with 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 28, 2024, the Company had working capital of $434.4 million and its working capital ratio was 1.41 to 1 compared to working capital of $857.5 million and a working capital ratio of 1.86 to 1 on December 30, 2023. As of September 28, 2024, the Company had unrestricted cash of $114.8 million and funds available under the revolving credit facility of $1,008.3 million, compared to unrestricted cash of $126.5 million and funds available under the revolving credit facility of $832.5 million at December 30, 2023. The Company diversifies its cash investments by limiting the amounts deposited with any one financial institution.
Net cash provided by operating activities was $684.9 million for the first nine months ended September 28, 2024, as compared to net cash provided by operating activities of $682.3 million for the first nine months ended September 30, 2023, an increase of $2.6 million. Cash used in investing activities was $452.6 million for the first nine months ended September 28, 2024, compared to $1,506.6 million for the first nine months ended September 30, 2023, a decrease in cash used in investing activities of $1,054.0 million, primarily due to a decrease in payments for acquisitions. Net cash provided/(used) in financing activities was $(233.2) million for the first nine months ended September 28, 2024, compared to $902.2 million for the first nine months ended September 30, 2023, a decrease in net cash provided by financing activities of $1,135.4 million, primarily due to a decrease in debt borrowings utilized to finance acquisitions in the first nine months ended September 28, 2024 compared to the first nine months ended September 30, 2023.
Capital expenditures of $259.1 million were made during the first nine months of fiscal 2024, compared to $380.6 million in the first nine months of fiscal 2023. The Company expects to incur additional capital expenditures of approximately $140 million for the remainder of fiscal 2024 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 $43.5 million and $43.4 million during the first nine months ended September 28, 2024 and September 30, 2023, 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 2024, the Company has an accrued balance of approximately $28.0 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 28, 2024. The self insurance reserve is composed of estimated liability for claims arising for workers’ compensation, auto liability, general liability and medical claims liability. The self-insurance reserve liability and medical claims liability are determined annually, based upon third party actuarial estimates. The actuarial estimates 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 $0.8 million to its domestic pension plans in order to meet minimum pension funding requirements during the next twelve months. In addition, the Company expects to make payments of approximately $3.6 million under its foreign pension plans in the next twelve months. The minimum pension funding requirements are determined annually, based upon 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
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September 28, 2024 of approximately $0.4 million. Additionally, the Company has made required and tax deductible discretionary contributions to its foreign pension plans for the first nine months ended September 28, 2024 of approximately $1.4 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 among the contributors 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 respect to the other U.S. 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 PPA. The Company currently has withdrawal liabilities recorded on four U.S. multiemployer plans in which it participated. As of September 28, 2024, the Company has an aggregate accrued liability of approximately $4.5 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 requireadditional funding under the PPA, 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”), with a combined renewable diesel production capacity of approximately 1.2 billion gallons per year. Renewable diesel is a low-carbon transportation fuel that is interchangeable with diesel produced from petroleum and is produced at the DGD Facilities using an advanced hydroprocessing-isomerization process licensed from 62P LLC, known as the Ecofining™ Process, and a pretreatment process developed by the Desmet Ballestra Group, to convert fats (animal fats, used cooking oils, distillers corn oil and vegetable oils) into renewable diesel, renewable naphtha and other light end renewable hydrocarbons. 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. Additionally, in November 2022, the DGD Joint Venture completed the construction of the DGD Port Arthur Plant, with a 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. 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 mechanically complete and commissioning of the unit is underway, with completion expected in the fourth quarter of 2024 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 any unexpected additional 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.
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
55
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 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, which was repaid in fiscal 2023. In January 2024, the DGD Joint Venture borrowed all $200.0 million available under the 2023 DGD Loan Agreement, including the Company’s full $100.0 million commitment, which was repaid in March 2024. The DGD Joint Venture paid interest to the Company for the three months ended September 28, 2024 and September 30, 2023 of approximately zero, respectively, and paid interest to the Company for the nine months ended September 28, 2024 and September 30, 2023 of approximately $1.6 million and $0.6 million, respectively. As of September 28, 2024 and December 30, 2023, zero was owed to Darling Green under the 2023 DGD Loan Agreement and the 2019 DGD Loan Agreement, respectively. 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 28, 2024, the DGD Joint Venture had no borrowings outstanding 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 $618.8 million in additional capital contributions to the DGD Joint Venture. As of September 28, 2024, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $2,260.2 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 2023, 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 2023, DGD was Darling’s largest finished product customer in terms of net sales, with Darling recording sales of approximately $1.3 billion to DGD or 20% 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 Facilities as feedstock. The Darling supply chain has become more efficient and sustainable with transparency for verification to obtain full value to low carbon intensity markets. The development of the low carbon markets in North America and Europe has influenced how Darling operates its core business and has also been a driver for the recent DGD expansions, which are making DGD much more relevant to Darling’s earnings. Since 2011 when construction began on DGD, Darling has invested substantially to increase its U.S. railcar fleet to efficiently manage nationwide transportation of Darling fats to DGD. Additionally, Darling acquired an Iowa location on the Mississippi River that further enhances the ability of the Company’s Midwest network of facilities to collect and deliver feedstocks to DGD via water, rail or truck from a centralized location. In fiscal 2022, Darling acquired both Valley Proteins and FASA, each of which supply additional feedstocks to DGD. Darling has also stepped up collection efforts by providing indoor used cooking oil collection units in exchange for extended collection contracts at eating establishments and has moved to more of a centralized digital marketing effort with restaurant chains and franchise groups and invested in internet search engine key words to improve visibility with restaurants. The Company also includes DGD in marketing efforts to emphasize environmental sustainability that restaurants participate in when their used cooking oil is collected by Darling. From a production standpoint, Darling now isolates used cooking oil from other fats to preserve identification to qualify for a higher carbon intensity value. As a result, the Company includes its equity in net income of the DGD Joint Venture as operating income.
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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 2024 and thereafter. The Company reviews the appropriate use of unrestricted cash periodically. As of the date of this report, no decision has been made as to non-ordinary course material cash usages; 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 or SAF 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% Indenture, the 5.25% Indenture and the 3.625% Indenture, 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, 2026, unless further extended or shortened by the Board of Directors. During the first nine months of fiscal 2024, $29.2 million of Common Stock was repurchased under the share repurchase program. As of September 28, 2024, the Company had approximately $500.0 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 sales prices for agricultural-based alternative ingredients, the prices of which are based on established commodity markets and are subject to volatile changes, and sales prices for the principal products that DGD sells are typically influenced by the demand and pricing of renewable diesel, which is dependent on governmental energy polices and programs and impacted by the value of RIN's and LCFS credits stemming from such governmental energy policies and programs. Any decline in these prices has the potential to adversely impact the Company’s liquidity. Any of a decline in raw material availability, a decline in agricultural-based alternative ingredients prices, increases in energy prices or the impact of U.S. and foreign regulation (including, without limitation, China), changes in foreign exchange rates, imposition of currency controls and currency devaluations has the potential to adversely impact the Company’s liquidity. A decline in commodities prices, 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.
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OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Based upon the underlying purchase agreements, the Company has commitments to purchase $316.3 million of commodity products consisting of approximately $143.5 million of finished products, approximately $145.7 million of natural gas and diesel fuel and approximately $27.1 million of other commitments during the next five years, which are not included in liabilities on the Company’s balance sheet at September 28, 2024. 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 2024 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 28, 2024 (in thousands):
Other commercial commitments:
Standby letters of credit
$
659
Standby letters of credit (ancillary facility)
40,534
Foreign bank guarantees
11,796
Total other commercial commitments:
$
52,989
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 30, 2023, filed with the SEC on February 28, 2024.
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,” “guidance,” “outlook,” “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; reduced demands or prices for biofuels, biogases or renewable electricity; global demands for 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, reduced
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volume due to government regulations affecting animal production 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, used cooking oil, protein or collagen (including, without limitation, collagen peptides and gelatin) finished product prices; changes to government policies around the world relating to renewable fuels and GHG emissions that adversely affect prices, margins or markets (including for the DGD Joint Venture), including programs like renewable fuel standards, low carbon fuel standards, renewable fuel mandates and tax credits for biofuels or loss or diminishment of tax credits due to failure to satisfy any eligibility requirements, including, without limitation, in relation to the blenders tax credit or CFPC; climate related adverse results, including with respect to the Company’s climate goals, targets or commitments; possible product recall resulting from developments relating to the discovery of unauthorized adulterations to food or food additives or products which do not meet specifications, contract requirements or regulatory standards; the occurrence of 2009 H1N1 flu (initially known as Swine Flu), highly pathogenic strains of avian influenza (collectively known as Bird Flu), SARS, BSE, PED or other diseases associated with animal origin in the U.S. or elsewhere, such as the outbreak of ASF 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 (including, without limitation, operational, mechanical, product quality, market based or other such issues); risks and uncertainties relating to international sales and operations, including imposition of tariffs, quotas, trade barriers and other trade protections by foreign countries; tax changes, such as global minimum tax measures, or issues related to administration, guidance and/or regulations associated with biofuel policies, including CFPC; difficulties or a significant disruption (including, without limitation, due to cyber-attack) in the Company’s information systems, networks or the confidentiality, availability or integrity of our data 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 and other associated or emerging conflicts in the Middle East; uncertainty regarding the exit of the U.K. from the European Union; uncertainty regarding any administration changes in the U.S. or elsewhere around the world, including, without limitation, impacts to trade, tariffs and/or policies impacting the Company (such as biofuel policies and mandates); 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, 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. 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
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borrowing costs by reducing the potential impact of increases in interest rates on floating-rate long-term debt. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Soybean meal forwards and options are entered into with the intent of managing the impact of changing prices for poultry meal sales. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of BBP by reducing the impact of changing prices. Foreign currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. The 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 28, 2024, the Company had corn option and forward contracts, foreign exchange forward contracts and interest rate swaps outstanding that qualified and were designated for hedge accounting as well as corn option and forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.
In the first and second quarters 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 28, 2024 and December 30, 2023, the aggregate fair value of these interest rate swaps was approximately $3.4 million and $3.7 million, respectively. These amounts are included in other current assets, accrued expenses and noncurrent liabilities 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 income. At September 28, 2024 and December 30, 2023, the aggregate fair value of these cross currency swaps was approximately $15.5 million and $10.8 million, respectively. These amounts are included in other current assets, accrued expenses and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
In the second and third quarters of fiscal 2024, the Company entered into corn option and forward 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 2025. At September 28, 2024 and December 30, 2023, the aggregate fair value of these corn option contracts was approximately $0.7 million and zero, 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.
In fiscal 2023 and fiscal 2024, the Company entered into foreign exchange forward contracts that are considered cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted sales in currencies other than the functional currency through the fourth quarter of fiscal 2025. As of September 28, 2024 and December 30, 2023, the aggregate fair value of these foreign exchange contracts was approximately $6.9 million and $15.9 million, respectively. As of September 28, 2024, approximately $3.6 million is included in other current assets, approximately $0.4 million is included in noncurrent assets, approximately $8.8 million is included in accrued expenses and approximately $2.1 million is included in other non-current liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss. As of December 30, 2023, approximately $15.9 million is included in other current assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
The Company may enter into soybean meal forward contracts and heating oil swap and option contracts from time to time. There were not any open designated soybean meal forward or heating oil swap and option contracts by the Company at September 28, 2024 and December 30, 2023, respectively.
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As of September 28, 2024, the Company had the following outstanding forward 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
505,977
Euro
81,943
5.54 - 6.81
$
92,968
Brazilian real
2,062,326
U.S. dollar
371,815
5.05 - 6.14
371,815
Euro
58,012
U.S. dollar
64,621
1.09 - 1.12
64,621
Euro
71,038
Polish zloty
303,946
4.27 - 4.28
79,265
Euro
10,979
Japanese yen
1,757,858
158.52 - 165.87
12,251
Euro
29,648
Chinese renminbi
231,820
7.79 - 7.88
33,082
Euro
17,912
Australian dollar
29,450
1.63 - 1.65
19,986
Euro
4,446
British pound
3,721
0.84
4,961
Polish zloty
60,733
Euro
14,187
4.27 - 4.28
15,848
British pound
136
Euro
163
0.84
182
British pound
275
U.S. dollar
367
1.33
367
Japanese yen
106,948
U.S. dollar
743
143.09 - 155.07
743
U.S. dollar
94
Japanese yen
13,476
143.17
94
U.S. dollar
562,340
Euro
519,182
1.08
562,340
Australian dollar
179
Euro
110
1.63
124
$
1,258,647
The above foreign currency contracts that are not designated as hedges had an aggregate fair value of approximately $0.9 million and are included in other current assets and accrued expenses at September 28, 2024.
Additionally, the Company had corn forward contracts that are marked to market because they did not qualify for hedge accounting at September 28, 2024. These contracts have an aggregate fair value of approximately $1.3 million and are included in other current assets and accrued expenses at September 28, 2024.
As of September 28, 2024, the Company had forward purchase agreements in place for purchases of approximately $145.7 million of natural gas and diesel fuel and approximately $27.1 million of other commitments during the next five years. As of September 28, 2024, the Company had forward purchase agreements in place for purchases of approximately $143.5 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 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
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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 Gelnex and Miropasz.
During the first quarter of 2024, the Company acquired Miropasz. 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. The Miropasz Acquisition will be excluded from management's assessment of the Company’s internal control over financial reporting for fiscal 2024, as permitted under SEC regulations.
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DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2024
PART II: Other Information
Item 1. LEGAL PROCEEDINGS
The information required by this Item 1 is contained within Note 18 (Contingencies) on pages 28 through 29 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 30, 2023, 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.
Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 28, 2024 and December 30, 2023; (ii) Consolidated Statements of Operations for the three and nine months ended September 28, 2024 and September 30, 2023; (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and nine months ended September 28, 2024 and September 30, 2023; (iv) Consolidated Statements of Stockholders' Equity for the nine months ended September 28, 2024 and September 30, 2023; (v) Consolidated Statements of Cash Flows for the nine months ended September 28, 2024 and September 30, 2023 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 6, 2024
By:
/s/ Brad Phillips
Brad Phillips
Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)