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DARLING INGREDIENTS INC. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
 
 (Mark One)      
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended
March 28, 2020
 
OR
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
  For the transition period from _______ to _______
 
Commission File Number   001-13323

DARLING INGREDIENTS INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
 
36-2495346
 (State or other jurisdiction     
 
 
(I.R.S. Employer
of incorporation or organization)   
 
Identification Number)
 5601 N MacArthur Blvd., Irving, Texas     75038
(Address of principal executive offices)     (Zip Code)

Registrant's telephone number, including area code:  (972) 717-0300

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock $0.01 par value per share
DAR
New York Stock Exchange
(“NYSE”)
 
    Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes      No
 
    Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).        Yes      No 

 Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
 
 
 
 
 
 
Accelerated filer    
 
 
 
 
 
 
 
 
 
 
 
Non-accelerated filer 
 
 
 
Smaller reporting company       
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of Exchange Act.
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No 
 
There were 161,857,964 shares of common stock, $0.01 par value, outstanding at April 30, 2020.




DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2020
 
 
TABLE OF CONTENTS   

 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  51
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2






DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
March 28, 2020 and December 28, 2019
(in thousands, except share data)
 
March 28,
2020
 
December 28,
2019
ASSETS
(unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
76,339

 
$
72,935

Restricted cash
106

 
110

Accounts receivable, less allowance for bad debts of $9,606
    at March 28, 2020 and $8,802 at December 28, 2019
397,700

 
406,338

Inventories
381,432

 
362,957

Prepaid expenses
45,107

 
46,599

Income taxes refundable
3,106

 
3,317

Other current assets
26,270

 
25,032

Total current assets
930,060

 
917,288

Property, plant and equipment, less accumulated depreciation of
   $1,480,244 at March 28, 2020 and $1,438,388 at December 28, 2019
1,764,120

 
1,802,411

Intangible assets, less accumulated amortization of
   $485,655 at March 28, 2020 and $482,442 at December 28, 2019
497,779

 
526,394

Goodwill
1,202,592

 
1,223,291

Investment in unconsolidated subsidiaries
802,184

 
689,354

Operating lease right-of-use assets
123,859

 
124,726

Other assets
42,653

 
47,400

Deferred income taxes
14,532

 
14,394

 
$
5,377,779

 
$
5,345,258

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities:
 

 
 

Current portion of long-term debt
$
86,397

 
$
90,996

Accounts payable, principally trade
211,596

 
239,252

Income taxes payable
8,593

 
8,895

Current operating lease liabilities
37,472

 
37,805

Accrued expenses
307,688

 
311,391

Total current liabilities
651,746

 
688,339

Long-term debt, net of current portion
1,664,858

 
1,558,429

Long-term operating lease liabilities
91,250

 
91,424

Other non-current liabilities
111,145

 
115,785

Deferred income taxes
250,338

 
247,931

Total liabilities
2,769,337

 
2,701,908

Commitments and contingencies


 


Stockholders’ equity:
 

 
 

     Common stock, $0.01 par value; 250,000,000 shares authorized;
        169,076,043 and 168,620,314 shares issued at March 28, 2020
        and at December 28, 2019, respectively
1,691

 
1,686

Additional paid-in capital
1,575,854

 
1,560,897

     Treasury stock, at cost; 7,218,079 and 4,845,203 shares at
       March 28, 2020 and at December 28, 2019, respectively
(135,104
)
 
(75,022
)
Accumulated other comprehensive loss
(384,491
)
 
(321,847
)
Retained earnings
1,485,615

 
1,400,105

Total Darling's stockholders’ equity
2,543,565

 
2,565,819

Noncontrolling interests
64,877

 
77,531

 Total stockholders' equity
$
2,608,442

 
$
2,643,350

 
$
5,377,779

 
$
5,345,258

 The accompanying notes are an integral part of these consolidated financial statements.

3



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 28, 2020 and March 30, 2019
(in thousands, except per share data)
(unaudited)


 
 
Three Months Ended
 
March 28,
2020
 
March 30,
2019
Net sales
$
852,842

 
$
835,104

Costs and expenses:
 

 
 

Cost of sales and operating expenses
646,908

 
650,913

Loss/(gain) on sale of assets
61

 
(4,250
)
Selling, general and administrative expenses
96,193

 
85,003

Depreciation and amortization
84,671

 
79,164

Total costs and expenses
827,833

 
810,830

 Equity in net income of Diamond Green Diesel
97,820

 
24,277

Operating income
122,829

 
48,551

 
 
 
 
Other expense:
 

 
 

Interest expense
(19,090
)
 
(19,876
)
Foreign currency gain/(loss)
1,664

 
(732
)
Other expense, net
(1,881
)
 
(2,525
)
Total other expense
(19,307
)
 
(23,133
)
 
 
 
 
Equity in net income/(loss) of other unconsolidated subsidiaries
869

 
(504
)
Income before income taxes
104,391

 
24,914

 
 
 
 
Income tax expense
18,300

 
5,274

 
 
 
 
Net income
86,091

 
19,640

 
 
 
 
Net income attributable to noncontrolling interests
(581
)
 
(1,628
)
 
 
 
 
Net income attributable to Darling
$
85,510

 
$
18,012

 
 
 
 
Basic income per share
$
0.52

 
$
0.11

Diluted income per share
$
0.51

 
$
0.11



 



The accompanying notes are an integral part of these consolidated financial statements.

4



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Three months ended March 28, 2020 and March 30, 2019
(in thousands)
(unaudited)


 
Three Months Ended
 
March 28, 2020
 
March 30, 2019
Net income
$
86,091

 
$
19,640

Other comprehensive income/(loss), net of tax:
 
 
 
Foreign currency translation
(65,236
)
 
(4,886
)
Pension adjustments
648

 
858

Corn option derivative adjustments
136

 

Heating oil derivative adjustments
10,870

 

Foreign exchange derivative adjustments
(9,151
)
 
(1,937
)
Total other comprehensive loss, net of tax
(62,733
)
 
(5,965
)
Total comprehensive income
$
23,358

 
$
13,675

Comprehensive income attributable to noncontrolling interests
492

 
3,387

Comprehensive income attributable to Darling
$
22,866

 
$
10,288







The accompanying notes are an integral part of these consolidated financial statements.


5




DARLING INGREDIENTS INC. AND SUBSIDIARIES
  
Consolidated Statements of Stockholders’ Equity (Unaudited)
Three months ended March 28, 2020 and March 30, 2019
(in thousands, except share data)

 
Common Stock
 
 
 
 
 
 
 
 
Number of Outstanding Shares
$.01 par Value
Additional Paid-In Capital
Treasury Stock
Accumulated Other Comprehensive Loss
Retained Earnings
Stockholders' equity attributable to Darling
Non-controlling Interest
Total Stockholders' Equity
Balances at December 28, 2019
163,775,111

$
1,686

$
1,560,897

$
(75,022
)
$
(321,847
)
$
1,400,105

$
2,565,819

$
77,531

$
2,643,350

Net income





85,510

85,510

581

86,091

Deductions to noncontrolling interests


3,271




3,271

(13,146
)
(9,875
)
Pension liability adjustments, net of tax




648


648


648

Heating oil derivative adjustment, net of tax




10,870


10,870


10,870

Corn option derivative adjustment, net of tax




136


136


136

Foreign exchange derivative adjustment, net of tax




(9,151
)

(9,151
)

(9,151
)
Foreign currency translation adjustments




(65,147
)

(65,147
)
(89
)
(65,236
)
Issuance of non-vested stock
8,000


40




40


40

Stock-based compensation


10,778




10,778


10,778

Treasury stock
(2,372,876
)


(60,082
)


(60,082
)

(60,082
)
Issuance of common stock
447,729

5

868




873


873

Balances at March 28, 2020
161,857,964

$
1,691

$
1,575,854

$
(135,104
)
$
(384,491
)
$
1,485,615

$
2,543,565

$
64,877

$
2,608,442




 
Common Stock
 
 
 
 
 
 
 
 
Number of Outstanding Shares
$.01 par Value
Additional Paid-In Capital
Treasury Stock
Accumulated Other Comprehensive Loss
Retained Earnings
Stockholders' equity attributable to Darling
Non-controlling Interest
Total Stockholders' Equity
Balances at December 29, 2018
164,660,598

$
1,681

$
1,536,157

$
(47,756
)
$
(304,539
)
$
1,087,505

$
2,273,048

$
62,773

$
2,335,821

Net income





18,012

18,012

1,628

19,640

Pension liability adjustments, net of tax




858


858


858

Foreign exchange derivative adjustment, net of tax




(1,937
)

(1,937
)

(1,937
)
Foreign currency translation adjustments




(6,645
)

(6,645
)
1,759

(4,886
)
Stock-based compensation


10,403




10,403


10,403

Treasury stock
(223,294
)


(5,089
)


(5,089
)

(5,089
)
Issuance of common stock
311,502

3

1,886




1,889


1,889

Balances at March 30, 2019
164,748,806

$
1,684

$
1,548,446

$
(52,845
)
$
(312,263
)
$
1,105,517

$
2,290,539

$
66,160

$
2,356,699




The accompanying notes are an integral part of these consolidated financial statements.


6



DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 28, 2020 and March 30, 2019
(in thousands)
(unaudited)
 
March 28,
2020
 
March 30,
2019
Cash flows from operating activities:
 
 
 
Net Income
$
86,091

 
$
19,640

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
84,671

 
79,164

Loss (gain) on disposal of property, plant, equipment and other assets
61

 
(4,250
)
Gain on insurance proceeds from insurance settlements

 
(845
)
Deferred taxes
6,377

 
(2,901
)
Increase (decrease) in long-term pension liability
(264
)
 
646

Stock-based compensation expense
10,818

 
10,327

Write-off deferred loan costs

 
27

Deferred loan cost amortization
1,416

 
1,574

Equity in net income of Diamond Green Diesel and other unconsolidated subsidiaries
(98,689
)
 
(23,773
)
Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
Accounts receivable
487

 
11,692

Income taxes refundable/payable
348

 
7,270

Inventories and prepaid expenses
(24,999
)
 
(5,063
)
Accounts payable and accrued expenses
(16,790
)
 
(43,016
)
Other
(14,981
)
 
(1,891
)
Net cash provided by operating activities
34,546

 
48,601

Cash flows from investing activities:
 
 
 
Capital expenditures
(61,599
)
 
(84,269
)
       Acquisitions, net of cash acquired

 
(1,431
)
Gross proceeds from disposal of property, plant and equipment and other assets
379

 
7,868

Proceeds from insurance settlement

 
845

Payments related to routes and other intangibles
(3,416
)
 
(2,778
)
Net cash used by investing activities
(64,636
)
 
(79,765
)
Cash flows from financing activities:
 
 
 
Proceeds from long-term debt
8,264

 
2,138

Payments on long-term debt
(8,638
)
 
(10,974
)
Borrowings from revolving credit facility
219,933

 
156,829

Payments on revolving credit facility
(100,782
)
 
(138,147
)
Net cash overdraft financing
(9,594
)
 
14,525

Issuance of common stock
67

 
12

Repurchase of common stock
(55,044
)
 

Minimum withholding taxes paid on stock awards
(4,328
)
 
(3,190
)
Acquisition of noncontrolling interest
(8,784
)
 

Distributions to noncontrolling interests
(688
)
 

Net cash provided by financing activities
40,406

 
21,193

Effect of exchange rate changes on cash
(6,916
)
 
(1,575
)
Net increase (decrease) in cash, cash equivalents and restricted cash
3,400

 
(11,546
)
Cash, cash equivalents and restricted cash at beginning of period
73,045

 
107,369

Cash, cash equivalents and restricted cash at end of period
$
76,445

 
$
95,823

Supplemental disclosure of cash flow information:
 
 
 
Accrued capital expenditures
$
(1,630
)
 
$
(8,623
)
Cash paid during the period for:
 
 
 
Interest, net of capitalized interest
$
5,863

 
$
21,602

Income taxes, net of refunds
$
11,453

 
$
2,894

Non-cash operating activities
 
 
 
 Operating lease right of use asset obtained in exchange for new lease liabilities
$
9,121

 
$
4,794

Non-cash financing activities
 
 
 
Debt issued for assets
$
21

 
$



The accompanying notes are an integral part of these consolidated financial statements.

7



DARLING INGREDIENTS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
March 28, 2020
(unaudited)

(1)
General

The accompanying consolidated financial statements for the three month periods ended March 28, 2020 and March 30, 2019, have been prepared by Darling Ingredients Inc., a Delaware corporation (“Darling”, and together with its subsidiaries, the “Company”) in accordance with generally accepted accounting principles in the United States (“GAAP”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations.  However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading.  The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended December 28, 2019

(2)
Summary of Significant Accounting Policies

(a)
Basis of Presentation

The consolidated financial statements include the accounts of Darling and its consolidated subsidiaries. Noncontrolling interests represent the outstanding ownership interest in the Company's consolidated subsidiaries that are not owned by the Company. In the accompanying Consolidated Statements of Operations, the noncontrolling interest in net income of the consolidated subsidiaries is shown as an allocation of the Company's net income and is presented separately as “Net income attributable to noncontrolling interests.” In the Company's Consolidated Balance Sheets, noncontrolling interests represent the ownership interests in the Company 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 March 28, 2020, and include the 13 weeks ended March 28, 2020, and the 13 weeks ended March 30, 2019.

(c)
Cash, Cash Equivalents and Restricted Cash

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 represents amounts required to be set aside to cover self-insurance claims and collateral for environmental claims. The following table provides a reconciliation of cash, cash equivalents and restricted cash on the consolidated balance sheet that sum to the total of the same amounts shown in the Consolidated Statement of Cash Flows (in thousands):


8



 
 
March 28, 2020
December 29, 2018
Cash and cash equivalents
 
$
76,339

$
72,935

Restricted cash
 
106

110

Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flow
 
$
76,445

$
73,045



(d)
Accounts Receivable and Allowance for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from customers’ non-payment of trade accounts receivable owed to the Company.  These trade receivables arise in the ordinary course of business from sales of raw material, finished product or services to the Company’s customers.  The estimate of allowance for doubtful accounts is based upon the Company’s bad debt experience adjusted for differences in asset-specific risk characteristic, current economic conditions, and forecasts of future economic conditions.  If the financial condition of the Company’s customers deteriorates, resulting in the customers’ inability to pay the Company’s receivables as they come due, additional allowances for doubtful accounts may be required.

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 the third party banks without recourse for cash less a nominal fee. For the three months ended March 28, 2020 and March 30, 2019, the Company sold approximately $84.5 million and $32.5 million of its trade receivables and incurred approximately $0.4 million and $0.2 million in fees, which are recorded as interest expense, respectively.

(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 and recognized when control of the promised finished product is transferred to the Company's customer.  See Note 19 to the consolidated financial statements.

(f)
Foreign Currency Translation and Remeasurement

Foreign currency translation is included as a component of accumulated other comprehensive loss and reflects the adjustments resulting from translating the foreign currency denominated financial statements of foreign subsidiaries into U.S. dollars. The functional currency of the Company's foreign subsidiaries is the currency of the primary economic environment in which the entity operates, which is generally the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at fiscal period end exchange rates, including intercompany foreign currency transactions that are of long-term investment nature. Income and expense items are translated at average exchange rates occurring during the period. Changes in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses in determining net income. The Company incurred net foreign currency translation losses of approximately $65.1 million and $6.6 million for the three months ended March 28, 2020 and March 30, 2019, respectively.

(g)
Leases

The Company accounts for leases in accordance with Accounting Standard Codification (“ASC”) Topic 842, leases. The Company determines if an arrangement is a lease at inception for which the Company recognizes the right-of-use (“ROU”) asset and a lease liability at the lease commencement date. For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments at the lease commencement date. In determining the lease liability, the Company applies a discount rate to the minimum lease payments within each lease. ASC 842 requires the Company to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a

9



similar economic environment. To estimate the Company's incremental borrowing rate over various terms, a comparable market yield curve consistent with the Company's credit quality is determined. The lease term for all of the Company's leases include the noncancellable period of the lease plus any additional periods covered by either a Company option to extend the lease that the Company is reasonably certain to exercise or when a triggering event occurs. The Company has elected to not recognize a ROU asset and lease liability with an initial term of 12 months or less at lease commencement. Current operating leases are included on the Company's balance sheet as a ROU asset, current operating lease liabilities and long-term operating lease liabilities. For finance leases, the lease liability is initially measured in the same manner and date as for the operating leases, and is subsequently measured at amortized cost using the effective interest method. Finance leases are included in property, plant and equipment, current portion of long-term debt and long-term debt, net of current portion, but are not significant to the Company.

The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of the lease incentives received. Some leases payments contain rent escalation clauses (including index-based escalations), initially measured using the index at the lease commencement date. The Company recognizes minimum rental expense on a straight-line basis based on the fixed components of the lease arrangement.

The Company uses the long-lived assets impairment guidance in ASC subtopic 360-10, Property, Plant and Equipment - Overall, to determine whether the ROU asset is impaired, and if so, the amount of the impairment loss to recognize. The Company monitors for events or changes in circumstances that require a reassessment of one of its leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in the consolidated statement of operations.

(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.

Many of the initial economic effects of the early stages of the global coronavirus disease (“COVID-19”) outbreak and the government-imposed movement and work restrictions designed to slow the pace of the outbreak occurred in the last month of the first quarter. The Company has not observed any impairments of the Company's assets or a significant change in the fair value of assets in the first quarter due to the COVID-19 pandemic.

(i)
Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation including reclassification of the Company's investment equity in net income of Diamond Green Diesel to operating income. See Note 3 for further discussion.


10



(j)
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
 
 
 
March 28, 2020
 
 
 
 
 
March 30, 2019
 
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic:
 
 
 
 
 
 
 
 
 
 
 
Net Income attributable to Darling
$
85,510

 
163,474

 
$
0.52

 
$
18,012

 
164,855

 
$
0.11

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Effect of dilutive securities:
 

 
 

 
 

 
 

 
 

 
 

Add: Option shares in the money and dilutive effect of non-vested stock awards
 

 
6,749

 
 

 
 

 
6,127

 
 

Less: Pro forma treasury shares
 

 
(2,296
)
 
 

 
 

 
(2,322
)
 
 

Diluted:
 

 
 

 
 

 
 

 
 

 
 

Net income attributable to Darling
$
85,510

 
167,927

 
$
0.51

 
$
18,012

 
168,660

 
$
0.11

 
 
 
 
 
 
 
 
 
 
 
 


For the three months ended March 28, 2020 and March 30, 2019, respectively, 551,877 and 466,841 outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the three months ended March 28, 2020 and March 30, 2019, respectively, 406,502 and 391,800 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.

(3)
Investment in Unconsolidated Subsidiaries

On January 21, 2011, a wholly-owned subsidiary of Darling entered into a limited liability company agreement with a wholly-owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (the “DGD Joint Venture”). The DGD Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant (the “DGD Facility”), which as a result of the recent expanded capacity is now capable of processing approximately 20,000 barrels per day of input feedstock to produce renewable diesel fuel and certain other co-products, and is located adjacent to Valero's refinery in Norco, Louisiana. The DGD Joint Venture reached mechanical completion and began the production of renewable diesel in late June 2013. Effective May 1, 2019, the limited liability company agreement was amended and restated for the purpose of updating the agreement in certain respects, including to remove certain provisions that were no longer relevant and to add new provisions relating to the DGD Joint Venture’s recently approved expansion project to construct a new, parallel facility located next to the existing facility.

In 2019, the Company continued to evaluate operational developments and the impact of anticipated significant expansion of the DGD Joint Venture. This evaluation was impactful to the consideration of how the Company most appropriately reflects its share of equity income from the DGD Joint Venture. Based on the Company's analysis, it was determined that the DGD Joint Venture has evolved into an integral and integrated part of the Company's ongoing operations. The Company determined this justifies a more meaningful and transparent presentation of equity in net income of the DGD Joint Venture as a component of the Company's operating income. As a result, the Company has reclassified its equity in net income of the DGD Joint Venture to operating income for all periods presented.

Selected financial information for the Company's DGD Joint Venture is as follows (in thousands):
(in thousands)
 
March 31, 2020
December 31, 2019
Assets:
 
 
 
Total current assets
 
$
821,602

$
668,026

Property, plant and equipment, net
 
779,961

713,489

Other assets
 
30,446

30,710

Total assets
 
$
1,632,009

$
1,412,225

Liabilities and members' equity:
 
 
 
Total current portion of long term debt
 
$
496

$
341

Total other current liabilities
 
70,758

75,802

Total long term debt
 
8,936

8,742

Total other long term liabilities
 
4,273

4,422

Total members' equity
 
1,547,546

1,322,918

Total liabilities and members' equity
 
$
1,632,009

$
1,412,225



 
 
Three Months Ended
(in thousands)
 
March 31, 2020
March 31, 2019
Revenues:
 
 
 
Operating revenues
 
$
358,615

$
302,718

Expenses:
 
 
 
Total costs and expenses less depreciation, amortization and accretion expense
 
151,347

243,063

Depreciation, amortization and accretion expense
 
11,774

11,418

Total costs and expenses
 
163,121

254,481

Operating income
 
195,494

48,237

Other income
 
461

641

Interest and debt expense, net
 
(315
)
(324
)
Net income
 
$
195,640

$
48,554



As of March 28, 2020 under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $773.8 million on the consolidated balance sheet. The Company has recorded an equity in net income of approximately $97.8 million and $24.3 million for the three months ended March 28, 2020 and March 30, 2019, respectively. In December 2019, the blender tax credits for calendar year 2018 and 2019 were retrospectively approved by the U.S. Congress. In addition, blenders tax credits were extended for calendar years 2020, 2021 and 2022. For the three months ended March 31, 2019, the DGD Joint Venture results do not include any blenders tax credits, while in the three months of fiscal 2020, the DGD Joint Venture recorded approximately $80.0 million of blenders tax credits. In the three months ended March 28, 2020, the Company received no dividend distributions from the DGD Joint Venture. In April 2020, the DGD Joint Venture made dividend distributions to each partner in the amount of approximately $125.0 million.

In addition to the DGD Joint Venture, the Company has investments in other unconsolidated subsidiaries that are insignificant to the Company.

(4)
Acquisitions and Dispositions

In December 2019, the Company began to consolidate EnviroFlight, LLC due to a loan issued by the Company, which    resulted in more control by the Company based on variable interest entity literature. In January 2020, the Company acquired the other 50% minority interest in EnviroFlight, LLC from the other joint venture partner for approximately $8.8 million, along with the purchase of intellectual property of approximately $3.4 million for a total of approximately $12.2 million, thereby increasing the Company's ownership interest in EnviroFlight, LLC to 100%.
 

11



(5)
Inventories

A summary of inventories follows (in thousands):

        
 
March 28, 2020
 
December 28, 2019
Finished product
$
215,422

 
$
199,799

Work in process
87,291

 
81,841

Raw material
38,416

 
41,964

Supplies and other
40,303

 
39,353

 
$
381,432

 
$
362,957



(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):    

 
March 28, 2020
 
December 28, 2019
Indefinite Lived Intangible Assets
 
 
 
Trade names
$
52,407

 
$
52,733

 
52,407

 
52,733

Finite Lived Intangible Assets:
 

 
 

Routes
363,150

 
382,263

Permits
475,266

 
483,593

Non-compete agreements
3,036

 
3,840

Trade names
65,670

 
65,670

Royalty, consulting, land use rights and leasehold
23,905

 
20,737

 
931,027

 
956,103

Accumulated Amortization:
 
 
 
Routes
(166,126
)
 
(169,050
)
Permits
(277,136
)
 
(272,213
)
Non-compete agreements
(2,441
)
 
(3,111
)
Trade names
(34,528
)
 
(32,890
)
Royalty, consulting, land use rights and leasehold
(5,424
)
 
(5,178
)
 
(485,655
)
 
(482,442
)
Total Intangible assets, less accumulated amortization
$
497,779

 
$
526,394



Gross intangible routes, permits, trade names, non-compete agreements and other intangibles partially decreased in fiscal 2020 as a result of approximately $5.5 million of fully amortized asset retirements with the remainder of the decrease as a result of foreign currency translation. Amortization expense for the three months ended March 28, 2020 and March 30, 2019, was approximately $18.2 million and $18.4 million, respectively.

(7)
Goodwill

Changes in the carrying amount of goodwill (in thousands):
 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Total
Balance at December 28, 2019
 
 
 
 
Goodwill
$
793,457

$
329,654

$
116,555

$
1,239,666

Accumulated impairment losses
(15,914
)
(461
)

(16,375
)
 
777,543

329,193

116,555

1,223,291

Foreign currency translation
(14,675
)
(2,811
)
(3,213
)
(20,699
)
Balance at March 28, 2020
 

 

 
 

Goodwill
778,782

326,843

113,342

1,218,967

Accumulated impairment losses
(15,914
)
(461
)

(16,375
)
 
$
762,868

$
326,382

$
113,342

$
1,202,592



12




(8)
Accrued Expenses
 
Accrued expenses consist of the following (in thousands):

 
 
March 28, 2020
 
December 28, 2019
Compensation and benefits
$
84,112

 
$
107,324

Accrued ad valorem, and franchise taxes
25,614

 
30,231

Accrued operating expenses
62,678

 
67,194

Other accrued expense
135,284

 
106,642

 
$
307,688

 
$
311,391



(9)
Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The Company adopted the new standard on December 30, 2018 and is using the effective date as the Company's date of initial application and consequently, financial information will not be updated and the disclosures required under the this ASU will not be provided for dates and periods before December 30, 2018. The Company has elected the package of expedients, which permits the Company not to reassess under the new standard the Company's prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.

The Company leases certain real and personal property under non-cancelable operating leases. In addition, the Company leases a large portion of the Company's fleet of tractors, all of its rail cars, some IT equipment and other transportation equipment. The Company's office leases include certain lease and non-lease components, where the Company has elected to exclude the non-lease components from the calculation of the lease liability and ROU asset. The Company has finance leases, which are not significant to the Company and not separately disclosed in detail.

The components of operating lease expense included in cost of sales and operating expenses and selling, general and administrative expenses were as follows (in thousands):
 
Three Months Ended
 
March 28, 2020
March 30, 2019
Operating lease expense
$
11,509

$
12,317

Short-term lease costs
6,245

3,053

Total lease cost
$
17,754

$
15,370


Other information (in thousands, except lease terms and discount rates):
 
Three Months Ended
 
March 28, 2020
March 30, 2019
Cash paid for amounts included in the measurement lease liabilities
 
 
Operating cash flows from operating leases
$
12,456

$
12,029

 
 
 
 
March 28, 2020
December 28, 2019
Operating right-of-use assets, net
$
123,859

$
124,726

 
 
 
Operating lease liability, current
$
37,472

$
37,805

Operating lease liability, non-current
91,250

91,424

Total operating lease liabilities
$
128,722

$
129,229

 
 
 
Weighted average remaining lease term - operating leases
6.61 years

6.46 years

Weighted average discount rate - operating leases
4.53
%
4.55
%



13



Future annual minimum lease payments and capital lease commitments as of March 28, 2020 are as follows (in thousands):

Period Ending Fiscal
Operating Leases
Capital Leases
2020 (excluding the three months ended March 28, 2020)
$
37,556

$
86

2021
34,526

16

2022
24,218

16

2023
19,628

10

2024
13,552

8

Thereafter
26,298

1

 
$
155,778

$
137

Less amounts representing interest
$
(27,056
)
(7
)
Lease obligations included in current and long-term liabilities
$
128,722

$
130



(10)
Debt

Debt consists of the following (in thousands): 
 
March 28,
2020
 
December 28,
2019
Amended Credit Agreement:
 
 
 
Revolving Credit Facility ($2.8 million denominated in CAD at March 28, 2020 and $11.0 million denominated in euro at March 28, 2020)
$
157,848

 
$
39,000

Term Loan B
495,000

 
495,000

Less unamortized deferred loan costs
(7,341
)
 
(7,696
)
Carrying value Term Loan B
487,659

 
487,304

 
 
 
 
5.25% Senior Notes due 2027 with effective interest of 5.47%
500,000

 
500,000

Less unamortized deferred loan costs
(6,310
)
 
(6,494
)
Carrying value 5.25% Senior Notes due 2027
493,690

 
493,506

 
 
 
 
3.625% Senior Notes due 2026 - Denominated in euro with effective interest of 3.83%
566,861

 
574,096

Less unamortized deferred loan costs - Denominated in euro
(6,653
)
 
(6,982
)
Carrying value 3.625% Senior Notes due 2026
560,208

 
567,114

 
 
 
 
Other Notes and Obligations
51,850

 
62,501

 
1,751,255

 
1,649,425

Less Current Maturities
86,397

 
90,996

 
$
1,664,858

 
$
1,558,429



As of March 28, 2020, the Company had outstanding debt under a revolving credit facility denominated in Canadian dollars of CAD$4.0 million. See below for discussion relating to the Company's debt agreements. In addition, as of March 28, 2020, the Company had capital lease obligations denominated in Canadian dollars included in debt. The total Canadian dollar finance lease obligation was approximately CAD$0.1 million.

As of March 28, 2020, the Company had outstanding debt under a revolving credit facility denominated in euros of €10.0 million and outstanding debt under the Company's 3.625% Senior Notes due 2026 denominated in euros of €515.0 million. See below for discussion relating to the Company's debt agreements. In addition, at March 28, 2020, the Company had capital lease obligations denominated in euros included in debt. The total euro finance lease obligations was less than approximately €0.1 million.

As of March 28, 2020, the Company had other notes and obligations that consist of various overdraft facilities of approximately $32.2 million, a China working capital line of credit of approximately $19.1 million and other debt of approximately $0.6 million.


14



Senior Secured Credit Facilities. On January 6, 2014, Darling, Darling International Canada Inc. (“Darling Canada”) and Darling International NL Holdings B.V. (“Darling NL”) entered into a Second Amended and Restated Credit Agreement (as subsequently amended, the “Amended Credit Agreement”), restating its then existing Amended and Restated Credit Agreement dated September 27, 2013 (the “Former Credit Agreement”), with the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents from time to time party thereto.

Effective December 18, 2017, the Company, and certain of its subsidiaries entered into an amendment (the “Fifth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Fifth Amendment (i) refinanced the term B loans under the Amended Credit Agreement with new term B loans in an aggregate principal amount of $525.0 million with a maturity date of December 18, 2024; (ii) adjusted the applicable margin pricing on borrowings under the term B loan; (iii) modified certain of the negative covenants to increase the allowances for certain actions, including debt and investments; and (iv) made other updates and changes.

Effective December 16, 2016, the Company, and certain of its subsidiaries entered into an amendment (the “Fourth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Fourth Amendment (i) extended the maturity date of the term A loans and revolving credit facility loans under the Amended Credit Agreement from September 27, 2018 to December 16, 2021, subject to a 91-day “springing” adjustment if the term B loans are outstanding 91 days prior to the maturity date of the term B loans; (ii) reset the amortization schedule of the term A loans to their original schedule; (iii) adjusted the applicable margin pricing grid on borrowings under the term A Loan and revolving credit facility which adjusts based on the Company's total leverage ratio as set forth in the Amended Credit Agreement; (iv) eliminated the secured leverage ratio financial maintenance covenant so that from and after the effective date of the Fourth Amendment the Company’s financial covenants consist of maintaining of total leverage ratio not to exceed 5.50 to 1.00 and maintaining an interest coverage ratio of not less than 3.00 to 1.00; (v) modified certain of the negative covenants to include a senior leverage ratio incurrence-based test and to increase the allowances for certain actions, including debt, investments and restricted payments; and (vi) made other updates and changes.

The Company's Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of $1.88 billion comprised of (i) the Company's $350.0 million term loan A facility, (ii) the Company's $525.0 million term loan B facility and (iii) the Company's $1.0 billion five-year revolving loan facility (approximately $150.0 million of which is available for a letter of credit sub-facility and $50.0 million of which is available for a swingline sub-facility) (collectively, the “Senior Secured Credit Facilities”). The Amended Credit Agreement also permits Darling and the other borrowers thereunder to incur ancillary facilities provided by any revolving lender party to the Senior Secured Credit Facilities (with certain restrictions). Up to $948.3 million of the revolving loan facility is available to be borrowed by (x) Darling in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender, (y) Darling Canada in Canadian dollars and (z) Darling NL, Darling Ingredients International Holding B.V. (“Darling BV”) and Darling Ingredients Germany Holding GmbH in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender. The revolving loan facility and term loan A facility will mature on December 16, 2021. The revolving loan facility will be used for working capital needs, general corporate purposes and other purposes not prohibited by the Amended Credit Agreement.

The interest rate applicable to any borrowings under the term loan A facility and the revolving loan facility will equal either LIBOR/euro interbank offered rate/CDOR plus 2.00% per annum or base rate/Canadian prime rate plus 1.00% per annum, subject to certain step-ups or step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal the base rate plus 1.00% or LIBOR plus 2.00%.

As of March 28, 2020, the Company had $35.0 million outstanding under the revolver at base rate plus a margin of 1.00% per annum for a total of 4.25% per annum and $109.0 million outstanding under the revolver at LIBOR plus a margin of 2.00% per annum for a total of 3.3616% per annum. The Company had $495.0 million outstanding under the term loan B facility at LIBOR plus a margin of 2.00% per annum for a total of 3.61% per annum. The Company had CAD$4.0 million outstanding under the revolver at CDOR plus a margin of 2.00% per annum for a total of 3.4891%. The Company had €10.0 million at LIBOR plus a margin of 2.00% per annum for a total of 2.00% per annum. As of March 28, 2020, the Company had availability of $795.9 million under the Amended Credit Agreement taking into account amounts borrowed, ancillary facilities and letters of credit issued of $3.6 million. The Company also has foreign bank guarantees that are not part of the Company's Amended Credit Agreement in the amount of approximately $10.1 million at March 28, 2020.

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”),

15



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.

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).

As of March 28, 2020, the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 5.25% Indenture and the 3.625% Indenture.

(11)
Income Taxes
 
The Company has provided income taxes for the three month periods ended March 28, 2020 and March 30, 2019, based on its estimate of the effective tax rate for the entire 2020 and 2019 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.
 
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company expects to have access to its offshore earnings with no material U.S. tax impact. Therefore, the Company does not consider earnings from its foreign subsidiaries to be permanently reinvested offshore.

The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets.  In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions.  The Company considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends and its outlook for future years.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. As of March 28, 2020, the Company had $8.1 million of gross unrecognized tax benefits and $0.6 million of related accrued interest and penalties. It is reasonably possible within the next twelve months that the Company’s gross unrecognized tax benefits may decrease by up to $3.9 million, excluding interest and penalties. The possible change in unrecognized tax benefits relates to the resolution of an uncertain tax position upon the restructuring of certain subsidiaries.

On March 27, 2020, the CARES Act (the “Act”) was enacted in response to the COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief measures in response to the economic conditions in the wake of COVID-19. The Company is evaluating the impact of the Act and changes to income tax laws and regulations in other jurisdictions and currently does not expect they will materially impact the Company.

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 2010 tax year.

(12)  
Other Comprehensive Income/(Loss)

The Company follows FASB authoritative guidance for reporting and presentation of comprehensive income/(loss) and its components.  Other comprehensive income/(loss) is derived from adjustments that reflect pension adjustments, natural

16



gas swap adjustments, corn option adjustments, soybean meal adjustments, foreign exchange forward adjustments and foreign currency translation adjustments.

In the first three months of fiscal 2020, 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.

The components of other comprehensive income/(loss) and the related tax impacts for the three months ended March 28, 2020 and March 30, 2019 are as follows (in thousands):

 
Three Months Ended
 
Before-Tax
Tax (Expense)
Net-of-Tax
 
Amount
or Benefit
Amount
 
March 28, 2020
March 30, 2019
March 28, 2020
March 30, 2019
March 28, 2020
March 30, 2019
Defined benefit pension plans
 
 
 
 
 
 
Amortization of prior service cost/(benefit)
$
8

$
9

$
(2
)
$
(3
)
$
6

$
6

Amortization of actuarial loss
854

1,146

(212
)
(294
)
642

852

Total defined benefit pension plans
862

1,155

(214
)
(297
)
648

858

Corn option derivatives
 
 
 
 
 
 
Loss/(gain) reclassified to net income
300


(75
)

225


Gain/(loss) activity recognized in other comprehensive income/(loss)
(119
)

30


(89
)

Total corn option derivatives
181


(45
)

136


Heating oil derivatives
 
 
 
 
 
 
Gain/(loss) activity recognized in other comprehensive income/(loss)
14,494


(3,624
)

10,870


Total heating oil derivatives
14,494


(3,624
)

10,870


Foreign exchange derivatives
 
 
 
 
 
 
Loss/(gain) reclassified to net income
(412
)

129


(283
)

Gain/(loss) activity recognized in other comprehensive income/(loss)
(12,920
)
(2,934
)
4,052

997

(8,868
)
(1,937
)
Total foreign exchange derivatives
(13,332
)
(2,934
)
4,181

997

(9,151
)
(1,937
)
 
 
 
 
 
 
 
Foreign currency translation
(65,887
)
(5,393
)
651

507

(65,236
)
(4,886
)
 
 
 
 
 
 
 
Other comprehensive income/(loss)
$
(63,682
)
$
(7,172
)
$
949

$
1,207

$
(62,733
)
$
(5,965
)
 
 
 
 
 
 
 

The following table presents the amounts reclassified out of each component of other comprehensive income/(loss), net of tax for the three months ended March 28, 2020 and March 30, 2019 as follows (in thousands):
 
Three Months Ended
 
 
March 28, 2020
March 30, 2019
Statement of Operations Classification
Derivative instruments
 
 
 
Foreign exchange contracts
$
412

$

Net sales
Corn option derivatives
(300
)

Cost of sales and operating expenses
 
112


Total before tax
 
(54
)

Income taxes
 
58


Net of tax
Defined benefit pension plans
 
 
 
Amortization of prior service cost
$
(8
)
$
(9
)
(a)
Amortization of actuarial loss
(854
)
(1,146
)
(a)
 
(862
)
(1,155
)
Total before tax
 
214

297

Income taxes
 
(648
)
(858
)
Net of tax
Total reclassifications
$
(590
)
$
(858
)
Net of tax


17



(a)
These items are included in the computation of net periodic pension cost. See Note 14 Employee Benefit Plans for additional information.

The following table presents changes in each component of accumulated other comprehensive income/(loss) as of March 28, 2020 as follows (in thousands):
 
 
Three Months Ended March 28, 2020
 
 
Foreign Currency
Derivative
Defined Benefit
 
 
 
Translation
Instruments
Pension Plans
Total
Accumulated Other Comprehensive Income/(loss) December 28, 2019, attributable to Darling, net of tax
 
$
(282,338
)
$
(5,505
)
$
(34,004
)
$
(321,847
)
Other comprehensive loss before reclassifications
 
(65,236
)
1,913


(63,323
)
Amounts reclassified from accumulated other comprehensive loss
 

(58
)
648

590

Net current-period other comprehensive income/(loss)
 
(65,236
)
1,855

648

(62,733
)
Noncontrolling interest
 
(89
)


(89
)
Accumulated Other Comprehensive loss March 28, 2020, attributable to Darling, net of tax
 
(347,485
)
$
(3,650
)
$
(33,356
)
$
(384,491
)


(13)    Stockholders' Equity

Fiscal 2020 Long-Term Incentive Opportunity Awards (2020 LTIP). On January 6, 2020, the Compensation Committee (the “Committee”) of the Company's Board of Directors adopted the 2020 LTIP pursuant to which they awarded certain of the Company's key employees, 550,934 stock options and 224,481 performance share units (the “PSUs”) under the Company's 2017 Omnibus Incentive Plan. The stock options vest 33.33% on the first, second and third anniversaries of the grant date. The PSUs are tied to a three-year forward-looking performance period and will be earned based on the Company's average return on capital employed (“ROCE”), as calculated in accordance with the terms of the award agreement, relative to the average ROCE of the Company's performance peer group companies, with the earned award to be determined in the first quarter of fiscal 2023, 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 depending on the Company's ROCE relative to that of the performance peer group companies and is also subject to the application of a total shareholder return (“TSR”) cap/collar modifier depending on the Company's TSR during the performance period relative to that of the performance peer group companies.

During the first quarter of fiscal 2020, the Company repurchased approximately $55.0 million of its common stock in the open market. As of March 28, 2020, the Company has approximately $125.8 million remaining under the share repurchase program initially approved in August 2017 and subsequently extended to August 13, 2020.

(14)    Employee Benefit Plans

The Company has retirement and pension plans covering a substantial number of its domestic and foreign employees.  Most retirement benefits are provided by the Company under separate final-pay noncontributory and contributory defined benefit and defined contribution plans for all salaried and hourly employees (excluding those covered by union-sponsored plans) who meet service and age requirements. Although various defined benefit formulas exist for employees, generally these are based on length of service and earnings patterns during employment. Effective January 1, 2012, the Company's Board of Directors authorized the Company to proceed with the restructuring of its domestic retirement benefit program to include the closing of Darling's salaried and hourly defined benefit plans to new participants as well as the freezing of service and wage accruals thereunder effective December 31, 2011 (a curtailment of these plans for financial reporting purposes) and the enhancing of benefits under the Company's domestic defined contribution plans. The Company-sponsored domestic hourly union plan has not been curtailed; however, several locations of the Company-sponsored domestic hourly union plan have been curtailed as a result of collective bargaining renewals for those sites.

Net pension cost for the three months ended March 28, 2020 and March 30, 2019 includes the following components (in thousands):

18



 
Pension Benefits
 
Three Months Ended
 
March 28,
2020
March 30,
2019
Service cost
$
755

$
678

Interest cost
1,428

1,710

Expected return on plan assets
(2,039
)
(1,819
)
Amortization of prior service cost
8

9

Amortization of net loss
854

1,146

Net pension cost
$
1,006

$
1,724



The Company's funding policy for employee benefit pension plans is to contribute annually not less than the minimum amount required nor more than the maximum amount that can be deducted for federal and foreign income tax purposes.  Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Based on actuarial estimates at March 28, 2020, the Company expects to contribute approximately $4.7 million to its pension plans to meet funding requirements during the next twelve months. Additionally, the Company has made tax deductible discretionary and required contributions to its pension plans for the three months ended March 28, 2020 and March 30, 2019 of approximately $0.8 million and $0.9 million, respectively.  

The Company participates in various multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts.  These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants.   The Company's contributions to each multiemployer plan represent less than 5% of the total contributions to each such plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities on two of the plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone. With respect to the other multiemployer pension plans in which the Company participates and which are not individually significant, five plans have certified as critical or red zone, two plans have certified as endangered or yellow zone as defined by the Pension Protection Act of 2006.

The Company has received notices of withdrawal liability from five U.S. multiemployer plans in which it participated. As of March 28, 2020, the Company has an aggregate accrued liability of approximately $5.5 million representing the present value of scheduled withdrawal liability payments under these multiemployer plans. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require additional funding under the Pension Protection Act of 2006, the amounts could be material.

(15)
Derivatives

The Company’s operations are exposed to market risks relating to commodity prices that affect the Company’s cost of raw materials, finished product prices and energy costs and the risk of changes in interest rates and foreign currency exchange rates.

The Company makes limited use of derivative instruments to manage cash flow risks related to natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes.  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 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 March 28, 2020, the Company had corn option contracts and foreign exchange forward and option contracts outstanding that qualified and were designated for hedge accounting as well as corn forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.

Entities are required to report all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions

19



are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair value, cash flows or foreign currencies. If the hedged exposure is a cash flow exposure, the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside of earnings) and is subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.

Cash Flow Hedges

In fiscal 2019 and fiscal 2020, the Company entered into corn option contracts on the Chicago Board of Trade that are designated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the fourth quarter of fiscal 2021. At March 28, 2020 and December 28, 2019, the aggregate fair value of these corn option contracts was approximately $0.8 million and $0.4 million, respectively. These amounts are included in other current assets on the balance sheet, with an offset recorded in accumulated other comprehensive income. The Company may enter into corn option contracts in the future from time to time.

In fiscal 2019 and fiscal 2020, the Company entered into foreign exchange forward and option contracts that are considered cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2022. At March 28, 2020 and December 28, 2019, the aggregate fair value of these foreign exchange contracts was approximately $10.4 million and $1.3 million, respectively. The March 28, 2020 amounts are included in other current assets, accrued expense and other assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss. The December 28, 2019 amounts are included in other current assets, accrued expense and noncurrent assets on the balance sheet, with an offset recorded in accumulated other comprehensive gain.

As of March 28, 2020, the Company had the following outstanding forward and option contract amounts that were entered into to hedge foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency (in thousands):

Functional Currency
 
Contract Currency
Type
Amount
 
Type
Amount
Brazilian real
38,179

 
Euro
8,100

Brazilian real
1,055,921

 
U.S. dollar
292,149

Euro
59,386

 
U.S. dollar
65,693

Euro
18,314

 
Polish zloty
80,500

Euro
8,992

 
Japanese yen
1,076,265

Euro
10,967

 
Chinese renminbi
84,048

Euro
16,514

 
Australian dollar
27,850

Euro
5,977

 
British pound
5,248

Polish zloty
24,133

 
Euro
5,264

British pound
37

 
Euro
40

British pound
108

 
U.S. dollar
126

Japanese yen
137,644

 
U.S. dollar
1,271

U.S. dollar
932

 
Japanese yen
103,000

U.S. dollar
49,766

 
Euro
45,000



The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at March 28, 2020 into earnings over the next 12 months will be approximately $6.6 million. As of March 28, 2020, 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 months ended March 28, 2020 and March 30, 2019 (in thousands):


20



 
 
 
 
Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
 
 
 
 
Three Months Ended
Derivatives not designated as hedging instruments
 
Location
 
March 28, 2020
March 30, 2019
 
 
 
 
 
 
Foreign exchange
 
Foreign currency loss
 
$
(1,295
)
$
1,871

Foreign exchange
 
Net sales
 
730

296

Foreign exchange
 
Cost of sales and operating expenses
 
(887
)
(245
)
Foreign exchange
 
Selling, general and administrative expense
 
5,724

873

Corn options and futures
 
Net sales
 
855

350

Corn options and futures
 
Cost of sales and operating expenses
 
(1,841
)
(873
)
Heating Oil swaps and options
 
Cost of sales and operating expenses
 

(506
)
Total
 
 
 
$
3,286

$
1,766



At March 28, 2020, the Company had forward purchase agreements in place for purchases of approximately $36.2 million of natural gas and diesel fuel.  These forward purchase agreements have no net settlement provisions and the Company intends to take physical delivery of the underlying product.  Accordingly, the forward purchase agreements are not subject to the requirements of fair value accounting because they qualify and the Company has elected to account for these as normal purchases as defined in the FASB authoritative guidance.

(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 March 28, 2020 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 March 28, 2020 Using
 
 
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
(In thousands of dollars)
Total
(Level 1)
(Level 2)
(Level 3)
Assets:
 
 
 
 
Derivative instruments
$
5,712

$

$
5,712

$

Total Assets
$
5,712

$

$
5,712

$

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative instruments
$
14,612

$

$
14,612

$

5.25% Senior notes
470,000


470,000


3.625% Senior notes
513,122


513,122


Term loan B
482,625


482,625


Revolver debt
146,799


146,799


Total Liabilities
$
1,627,158

$

$
1,627,158

$




21



 
 
Fair Value Measurements at December 28, 2019 Using
 
 
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
(In thousands of dollars)
Total
(Level 1)
(Level 2)
(Level 3)
Assets:
 
 
 
 
Derivative instruments
$
4,140

$

$
4,140

$

Total Assets
$
4,140

$

$
4,140

$

 
 
 
 
 
Liabilities:
 
 
 
 
Derivative instruments
$
1,593

$

$
1,593

$

5.25% Senior notes
531,850


531,850


3.625% Senior notes
605,327


605,327


Term loan B
497,475


497,475


Revolver debt
38,805


38,805


Total Liabilities
$
1,675,050

$

$
1,675,050

$



Derivative assets and liabilities consist of the Company’s corn future contracts and foreign currency contracts, which represents 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) for discussion on the Company's derivatives.

The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments and as such have been excluded from the table above. The carrying amount of the Company's other debt is not deemed to be significantly different from the fair value and all other instruments have been recorded at fair value. 

The fair value of the senior notes, term loan B and revolver debt is based on market quotation from third-party banks.

(17)
Contingencies 

The Company is a party to various lawsuits, claims and loss contingencies arising in the ordinary course of its business, including insured worker's compensation, auto, and general liability claims, assertions by certain regulatory and governmental agencies related to permitting requirements and environmental matters, including air, wastewater and storm water discharges from the Company’s processing facilities, litigation involving tort, contract, statutory, labor, employment, and other claims, and tax matters.

The Company’s workers compensation, auto and general liability policies contain significant deductibles or self-insured retentions.  The Company estimates and accrues its expected ultimate claim costs related to accidents occurring during each fiscal year under these insurance policies and carries this accrual as a reserve until these claims are paid by the Company.

As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental, litigation and tax contingencies. At March 28, 2020 and December 28, 2019, the reserves for insurance, environmental, litigation and tax contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities were approximately $69.7 million and $70.5 million, respectively.  The Company has insurance recovery receivables of approximately $26.2 million as of March 28, 2020 and December 28, 2019, related to the insurance contingencies. The Company's management believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these contingencies will not exceed current estimates. The Company believes that the likelihood is remote that any additional liability from the lawsuits and claims that may not be covered by insurance would have a material effect on the Company's financial position, results of operations or cash flows.

Lower Passaic River Area. In December 2009, the Company, along with numerous other entities, received notice from the United States Environmental Protection Agency (“EPA”) that the Company (as alleged successor-in-interest to The Standard Tallow Corporation) is considered a potentially responsible party (a “PRP”) with respect to alleged contamination in the lower 17-mile area of the 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

22



and Kearny, New Jersey by The Standard Tallow Corporation, an entity that the Company acquired in 1996. In the letter, EPA requested that the Company join a group of other parties in funding a remedial investigation and feasibility study at the site. As of the date of this report, the Company has not agreed to participate in the funding group. In March 2016, the Company received another letter from 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 makes no demand on the Company and lays out a framework for remedial design/remedial action implementation in which the EPA will first seek funding from major PRPs. The letter indicates that the EPA has 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 EPA has already offered early cash out settlements to 20 of the other PRPs and has stated that other parties who did not discharge any of the eight contaminants of concern identified in the ROD (the “COCs”) may also be eligible for cash out settlements and conducted a settlement analysis using a third-party allocator. The Company participated in this allocation process as it 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 COCs. In November 2019, the Company 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 has accepted this settlement offer, which is now subject to the EPA's administrative approval process, which includes publication and a public comment period. On September 30, 2016, Occidental Chemical Corporation (“OCC”) entered into an agreement with the EPA to perform the remedial design for the cleanup plan for the lower 8.3 miles of the 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 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 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 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 Passaic River. Furthermore, in the event the settlement with the EPA described above is consummated, it 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.

Environmental Enforcement Matter. In February 2020, the Company entered into a Joint Consent Order with the Office of the Attorney General of the State of New Jersey (the “New Jersey AG”) resolving all but the penalty portion of a suit filed by the New Jersey AG in the Superior Court of New Jersey, Essex County, Chancery Division, Docket No. C-188-19, in which the New Jersey AG sought injunctive relief and penalties related to various alleged violations relating to emissions from the Company’s Newark, New Jersey facility. We are currently working with the New Jersey AG to resolve the penalty portion of the claim, which may exceed $100,000. Even though we expect this matter will have no material effect on our financial position, results of operations or liquidity, we are reporting this proceeding to comply with SEC regulations, which require us to disclose certain information about proceedings arising under federal, state, or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings may result in monetary sanctions of $100,000 or more.

(18)
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.


23



Feed Ingredients
Feed Ingredients consists principally of (i) the Company's U.S. ingredients business, including the Company's fats and proteins, used cooking oil, trap grease and food residuals collection businesses, the Rothsay ingredients business, the ingredients and specialty products businesses conducted by Darling Ingredients International under the Sonac name (proteins, fats, and plasma 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 name, (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, which primarily consists of an edible fat business.

Fuel Ingredients
The Company's Fuel Ingredients segment consists of (i) the portion of the Company's biofuel business related to its investment in the DGD Joint Venture (ii) the Company's biofuel business conducted under the Dar Pro® and Rothsay names and (iii) the bioenergy business conducted by Darling Ingredients International under the Ecoson and Rendac names.

Business Segments (in thousands):
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended March 28, 2020
 
 
 
 
 
Net Sales
$
512,625

$
270,294

$
69,923

$

$
852,842

Cost of sales and operating expenses
388,453

205,430

53,025


646,908

Gross Margin
124,172

64,864

16,898


205,934

 
 
 
 
 
 
Loss on sale of assets
50

2

9


61

Selling, general and administrative expense
53,947

25,476

1,654

15,116

96,193

Depreciation and amortization
53,521

20,305

8,092

2,753

84,671

Equity in net income of Diamond Green Diesel


97,820


97,820

Segment operating income/(loss)
16,654

19,081

104,963

(17,869
)
122,829

 
 
 
 
 
 
Equity in net income of other unconsolidated subsidiaries
869




869

Segment income/(loss)
17,523

19,081

104,963

(17,869
)
123,698

 
 
 
 
 
 
Total other expense
 
 
 
 
(19,307
)
Income before income taxes
 
 
 
 
$
104,391

 
 
 
 
 
 
Segment assets at March 28, 2020
$
2,613,292

$
1,314,436

$
1,181,241

$
268,810

$
5,377,779



24



 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended March 30, 2019
 
 
 
 
 
Net Sales
$
495,819

$
279,164

$
60,121

$

$
835,104

Cost of sales and operating expenses
386,859

214,004

50,050


650,913

Gross Margin
108,960

65,160

10,071


184,191

 
 
 
 
 
 
Loss/(gain) on sale of assets
(4,391
)
114

27


(4,250
)
Selling, general and administrative expense
48,831

21,887

(754
)
15,039

85,003

Depreciation and amortization
49,369

19,511

7,798

2,486

79,164

Equity in net income of Diamond Green Diesel


24,277


24,277

Segment operating income/(loss)
15,151

23,648

27,277

(17,525
)
48,551

 
 
 
 
 
 
Equity in net loss of other unconsolidated subsidiaries
(504
)



(504
)
Segment income/(loss)
14,647

23,648

27,277

(17,525
)
48,047

 
 
 
 
 
 
Total other expense
 
 
 
 
(23,133
)
Income before income taxes
 
 
 
 
$
24,914

 
 
 
 
 
 
Segment assets at December 28, 2019
$
2,653,363

$
1,345,526

$
1,087,701

$
258,668

$
5,345,258



(19)
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 executed agreement or purchase order.

Most of the Company's products are shipped based on the customer specifications. Customer returns are infrequent and not material to the Company. Adjustments to net sales for sales deductions are generally recognized in the same period as the sale or when known. Customers in certain industries or countries may be required to prepay prior to shipment in order to maintain payment protection. These represent short-term prepayment from customers and are not material to the Company.

The following tables presents the Company revenues disaggregated by geographic area and major product types by reportable segment for the three months ended March 28, 2020 and March 30, 2019 (in thousands):

 
Three Months Ended March 28, 2020
 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Total
Geographic Area
 
 
 
 
North America
$
427,463

$
46,415

$
5,400

$
479,278

Europe
80,443

158,587

64,523

303,553

China
2,423

39,956


42,379

South America

10,586


10,586

Other
2,296

14,750


17,046

Net sales
$
512,625

$
270,294

$
69,923

$
852,842

 
 
 
 
 
Major product types
 
 
 
 
Fats
$
163,284

$
33,476

$

$
196,760

Used cooking oil
47,608



47,608

Proteins
195,980



195,980

Bakery
47,101



47,101

Other rendering
47,164



47,164

Food ingredients

214,793


214,793

Bioenergy


64,523

64,523

Biofuels


5,400

5,400

Other
11,488

22,025


33,513

Net sales
$
512,625

$
270,294

$
69,923

$
852,842


25



 
 
 
 
 
 
Three Months Ended March 30, 2019
 
Feed Ingredients
Food Ingredients
Fuel Ingredients
Total
Geographic Area Revenues
 
 
 
 
North America
$
410,237

$
48,813

$
5,710

$
464,760

Europe
79,998

151,652

54,411

286,061

China
2,952

46,937


49,889

South America

12,669


12,669

Other
2,632

19,093


21,725

Net sales
$
495,819

$
279,164

$
60,121

$
835,104

 
 
 
 
 
Major product types
 
 
 
 
Fats
$
144,876

$
35,138

$

$
180,014

Used cooking oil
45,406



45,406

Proteins
205,813



205,813

Bakery
45,656



45,656

Other rendering
41,254



41,254

Food ingredients

221,908


221,908

Bioenergy


54,411

54,411

Biofuels


5,710

5,710

Other
12,814

22,118


34,932

Net sales
$
495,819

$
279,164

$
60,121

$
835,104


 
 
 
 
 

Revenue from Contracts with Customers

The Company has two primary revenue streams. Finished product revenues are recognized 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.

Fats and Proteins. Fats and Proteins include the Company's global activities related to the collection and processing of beef, poultry and pork animal by-products into finished products of non-food grade oils, food grade fats and protein meal. Fats and proteins net sales are recognized when the Company ships the finished product to the customer and control has been transferred.

Used Cooking Oil. Used cooking oil includes collection and processing of used cooking oil into finished products of non-food grade fats. Used cooking oil net sales are recognized when the Company ships the finished product to the customer and control has been transferred.

Bakery. Bakery includes collection and processing of bakery residuals into finished product including Cookie Meal®, an animal feed ingredient primarily used in poultry and swine rations. Bakery net sales are recognized when the Company ships the finished product to the customer and control has been transferred.

Other Rendering. Other rendering include hides, pet food products, and service charges. Hides and pet food net sales are recognized when the Company ships the finished product to the customer and control has been transferred. Service revenues are recognized when the service has occurred.

Food Ingredients. Food ingredients includes collection and processing of pigskin, hide, bone and fish into finished product. Also includes harvesting, sorting and selling of hog and sheep casings as well as harvesting, purchasing and processing of hog, sheep and beef meat for pet food industry. Collagen and CTH meat and casings net sales are recognized when the Company ships the finished product to the customer and control has been transferred.

Bioenergy. Bioenergy includes Ecoson, which converts organic sludge and food waste into biogas and Rendac, which collects fallen stock and animal waste for a fee and processes these materials into fats and meals that can only be used as low grade energy or fuel for boilers and cement kilns. Net sales are recognized when the finished product is shipped to the customer and control has been transferred. Service revenues are recognized in net sales when the service has occurred.


26



Biofuels. Biofuels includes the North American processing of rendered animal fats, recycled cooking oils and third party additives to produce diesel fuel. Biofuel net sales are recognized when the finished product is shipped to the customer and control has been transferred.

Other. Other includes grease trap collection and environmental services to food processors in the Feed Ingredients segment and Sonac Bone and Sonac Heparin in the Food Ingredients segment. Net sales are recognized when the Company ships the finished product to the customer. Service revenues are recognized when the service has occurred.

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 2020 under these long-term supply contracts was approximately $7.5 million, with the remaining performance obligations to be recognized in future periods (generally 4 years) of approximately $273.2 million.

(20)
Related Party Transactions

Raw Material Agreement

The Company entered into a Raw Material Agreement with the DGD Joint Venture in May 2011 pursuant to which the Company will offer to supply certain animal fats and used cooking oil at market prices, up to the DGD Joint Venture's full operational requirement of feedstock, but the DGD Joint Venture is not obligated to purchase the raw material offered by the Company. Additionally, the Company may offer other feedstocks to the DGD Joint Venture, such as inedible corn oil, purchased on a resale basis. For the three months ended March 28, 2020 and March 30, 2019, the Company has recorded sales to the DGD Joint Venture of approximately $62.1 million and $51.2 million, respectively. At March 28, 2020 and December 28, 2019, the Company has $12.9 million and $17.8 million in outstanding receivables due from the DGD Joint Venture, respectively. In addition, the Company has eliminated approximately $5.7 million and $5.9 million of additional sales for the three months ended March 28, 2020 and March 30, 2019, respectively to defer the Company's portion of profit of approximately $1.0 million on those sales relating to inventory assets remaining on the DGD Joint Venture's balance sheet at March 28, 2020 and March 30, 2019, 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 “DGD Loan Agreement”) with the DGD Joint Venture. The DGD Lenders have 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 DGD Loan Agreement are 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%. The DGD Loan Agreement matures on April 29, 2021, unless extended by agreement of the parties. As of March 28, 2020, no amounts are owed to Darling Green under the DGD Loan Agreement.

Guarantee Agreement

In February 2020, in connection with the DGD Joint Venture’s expansion project at its Norco, LA facility, it has 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 $50 million each, of the DGD Joint Venture’s obligations under the IMTT Terminaling Agreements (the “Guarantee”), subject to the conditions provided for in the IMTT Terminaling Agreements. The Company has not recorded any liability as a result of the Guarantee, as the Company believes the likelihood of having to make any payments under the Guarantee is remote.

(21)    New Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform Topic 848, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or reorganizing the effects of) contract modifications on financial reporting, caused by reference rate reform. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

27




In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This ASU amends Topic 740 Income Taxes, which eliminates certain exceptions in accounting for income taxes, improves consistency in application and clarifies existing guidance. The standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard.

In August 2018, the FASB issued ASU No. 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU amends Subtopic 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The standard is effective for fiscal years ending after December 15, 2020, with early adoption permitted. While the adoption of this standard will impact the Company's disclosure, the Company does not expect it will materially impact the Company's consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurements. This ASU amends Topic 820, Fair Value Measurement, which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. The standard is effective for fiscal years beginning after December 15, 2019 and for interim periods therein, with early adoption permitted. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04 Simplifying the Test for Goodwill Impairment. This ASU amends Topic 350, Intangibles-Goodwill and Other, which will simplify the goodwill impairment calculation by eliminating Step 2 from the current goodwill impairment test. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of the assets and liabilities as if that reporting unit had been acquired in a business combination. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under ASU 2016-13, existing guidance on reporting credit losses for trade and other receivables and available for sale debt securities will be replaced with a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods therein. The initial adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

(22)     Guarantor Financial Information

The Company's 5.25% Notes and 3.625% Notes (see Note 10) are guaranteed on a senior unsecured basis by the following Notes Guarantors, each of which is a 100% directly or indirectly owned subsidiary of Darling and which constitute all of Darling's existing restricted subsidiaries that are Credit Agreement Guarantors (other than Darling's foreign subsidiaries, Darling Global Finance B.V., which issued the 3.625% Notes and is discussed further below, or any receivables entity): Darling National, Griffin and its subsidiary Craig Protein, Darling AWS LLC, Darling Global Holdings Inc., Darling Northstar LLC, EV Acquisition, LLC, Rousselot Inc., Rousselot Dubuque Inc., Sonac USA LLC and Rousselot Peabody Inc. In addition, the 3.625% Notes, which were issued by Darling Global Finance B.V., a wholly-owned indirect subsidiary of Darling, are guaranteed on a senior unsecured basis by Darling. The Notes Guarantors, and Darling in the case of the 3.625% Notes, fully and unconditionally guaranteed the 5.25% Notes and 3.625% Notes on a joint and several basis. The following financial statements present condensed consolidated financial data for (i) Darling, (ii) the combined Notes Guarantors, (iii) the combined other subsidiaries of the Company that did not guarantee the 5.25% Notes or the 3.625% Notes (the “Non-guarantors”), and (iv) eliminations necessary to arrive at the Company's consolidated financial statements, which include condensed consolidated balance sheets as of March 28, 2020 and December 28, 2019, and the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive income/(loss) and the condensed consolidated statements of cash flows for the three months ended March 28, 2020 and March 30, 2019. Separate financial information is not presented for Darling Global Finance B.V. since it was formed as a special purpose finance subsidiary for the purpose of issuing euro-denominated notes such as the 3.625% Notes and therefore does not have any substantial operations or assets.


28



Condensed Consolidated Balance Sheet
As of March 28, 2020
(in thousands)

 
Parent
Guarantors
Non-guarantors
Eliminations
Consolidated
ASSETS
 
 
 
 
 
Cash and cash equivalents
$
903

$
25

$
75,411

$

$
76,339

Restricted cash
103


3


106

Accounts receivable
47,852

663,967

545,669

(859,788
)
397,700

Inventories
24,028

97,781

259,623


381,432

Income taxes refundable
1,378


1,728


3,106

Prepaid expenses
17,927

2,281

24,899


45,107

Other current assets
4,950

(3,346
)
44,906

(20,240
)
26,270

Total current assets
97,141

760,708

952,239

(880,028
)
930,060

Investment in subsidiaries
5,509,606

1,283,699

844,042

(7,637,347
)

Property, plant and equipment, net
432,561

521,784

809,775


1,764,120

Intangible assets, net
42,993

163,064

291,722


497,779

Goodwill
49,902

490,748

661,942


1,202,592

Investment in unconsolidated subsidiaries


802,184


802,184

Operating lease right-of-use asset
72,161

30,475

21,223


123,859

Other assets
34,715

134

57,336

(49,532
)
42,653

Deferred taxes


14,532


14,532

 
$
6,239,079

$
3,250,612

$
4,454,995

$
(8,566,907
)
$
5,377,779

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 

 
 
 

Current portion of long-term debt
$
50,004

$
11

$
56,622

$
(20,240
)
$
86,397

Accounts payable
887,354

23,026

160,990

(859,774
)
211,596

Income taxes payable
919


7,674


8,593

Current operating lease liability
19,774

10,592

7,106


37,472

Accrued expenses
97,602

26,190

183,910

(14
)
307,688

Total current liabilities
1,055,653

59,819

416,302

(880,028
)
651,746

Long-term debt, net of current portion
1,139,898

27

574,465

(49,532
)
1,664,858

Long-term operating lease liability
57,796

19,462

13,992


91,250

Other noncurrent liabilities
76,714


34,431


111,145

Deferred income taxes
131,000


119,338


250,338

 Total liabilities
2,461,061

79,308

1,158,528

(929,560
)
2,769,337

Total stockholders’ equity
3,778,018

3,171,304

3,296,467

(7,637,347
)
2,608,442

 
$
6,239,079

$
3,250,612

$
4,454,995

$
(8,566,907
)
$
5,377,779



29



Condensed Consolidated Balance Sheet
As of December 28, 2019
(in thousands)

 
Parent
Guarantors
Non-guarantors
Eliminations
Consolidated
ASSETS
 
 
 
 
 
Cash and cash equivalents
$
551

$
26

$
72,358

$

$
72,935

Restricted cash
103


7


110

Accounts receivable
51,097

702,945

518,614

(866,318
)
406,338

Inventories
26,893

86,609

249,455


362,957

Income taxes refundable
1,106


2,211


3,317

Prepaid expenses
20,888

2,241

23,470


46,599

Other current assets
5,399

(2,326
)
40,872

(18,913
)
25,032

Total current assets
106,037

789,495

906,987

(885,231
)
917,288

Investment in subsidiaries
5,365,956

1,366,635

844,043

(7,576,634
)

Property, plant and equipment, net
434,237

524,577

843,597


1,802,411

Intangible assets, net
44,404

170,581

311,409


526,394

Goodwill
49,902

490,748

682,641


1,223,291

Investment in unconsolidated subsidiary


689,354


689,354

Operating lease right-of-use asset
74,005

31,243

19,478


124,726

Other assets
35,456

134

61,974

(50,164
)
47,400

Deferred income taxes


14,394


14,394

 
$
6,109,997

$
3,373,413

$
4,373,877

$
(8,512,029
)
$
5,345,258

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 

 
 
 

Current portion of long-term debt
$
40,916

$
10

$
68,983

$
(18,913
)
$
90,996

Accounts payable
893,490

29,535

182,484

(866,257
)
239,252

Income taxes payable
(10
)

8,905


8,895

Current operating lease liability
20,454

10,510

6,841


37,805

Accrued expenses
116,758

32,861

161,833

(61
)
311,391

Total current liabilities
1,071,608

72,916

429,046

(885,231
)
688,339

Long-term debt, net of current portion
1,040,974

30

567,589

(50,164
)
1,558,429

Long-term operating lease liability
58,970

20,281

12,173


91,424

Other noncurrent liabilities
80,409


35,376


115,785

Deferred income taxes
122,109


125,822


247,931

 Total liabilities
2,374,070

93,227

1,170,006

(935,395
)
2,701,908

 Total stockholders’ equity
3,735,927

3,280,186

3,203,871

(7,576,634
)
2,643,350

 
$
6,109,997

$
3,373,413

$
4,373,877

$
(8,512,029
)
$
5,345,258







30



Condensed Consolidated Statements of Operations
For the three months ended March 28, 2020
(in thousands)
 
Parent
Guarantors
Non-guarantors
Eliminations
Consolidated
Net sales
$
180,919

$
310,301

$
405,025

$
(43,403
)
$
852,842

Cost and expenses:
 
 
 
 
 
Cost of sales and operating expenses
144,142

246,320

299,849

(43,403
)
646,908

Loss/(gain) on sale of assets
(38
)
63

36


61

Selling, general and administrative expenses
48,074

12,517

35,602


96,193

Depreciation and amortization
17,272

26,593

40,806


84,671

Total costs and expenses
209,450

285,493

376,293

(43,403
)
827,833

Equity in net income of Diamond Green Diesel


97,820


97,820

Operating income/(loss)
(28,531
)
24,808

126,552


122,829

 
 

 

 
 
 

Interest expense
(13,775
)
(58
)
(5,257
)

(19,090
)
Foreign currency gains/(losses)
(326
)
(24
)
2,014


1,664

Other expense, net
(1,540
)
(339
)
(2
)

(1,881
)
Equity in net income of other unconsolidated subsidiaries


869


869

Earnings in investments in subsidiaries
121,939



(121,939
)

Income/(loss) before taxes
77,767

24,387

124,176

(121,939
)
104,391

Income tax expense/(benefit)
(7,743
)
4,275

21,768


18,300

Net income attributable to noncontrolling interests


(581
)

(581
)
Net income/(loss) attributable to Darling
$
85,510

$
20,112

$
101,827

$
(121,939
)
$
85,510

 
 
 
 
 
 

Condensed Consolidated Statements of Operations
For the three months ended March 30, 2019
(in thousands)

 
Parent
Guarantors
Non-guarantors
Eliminations
Consolidated
Net sales
$
160,230

$
329,991

$
403,911

$
(59,028
)
$
835,104

Cost and expenses:
 
 
 
 
 
Cost of sales and operating expenses
128,324

271,671

309,946

(59,028
)
650,913

Loss (gain) on sale of assets
68

(4,477
)
159


(4,250
)
Selling, general and administrative expenses
47,423

11,947

25,633


85,003

Depreciation and amortization
14,373

26,112

38,679


79,164

Total costs and expenses
190,188

305,253

374,417

(59,028
)
810,830

Equity in net income of Diamond Green Diesel


24,277


24,277

Operating income/(loss)
(29,958
)
24,738

53,771


48,551

 
 

 

 
 
 

Interest expense
(14,027
)
(32
)
(5,817
)

(19,876
)
Foreign currency losses
(4
)

(728
)

(732
)
Other income/(expense), net
(1,567
)
(1,212
)
254


(2,525
)
Equity in net income/(loss) of other unconsolidated subsidiaries
(891
)

387


(504
)
Earnings in investments in subsidiaries
54,627



(54,627
)

Income/(loss) before taxes
8,180

23,494

47,867

(54,627
)
24,914

Income tax expense/(benefit)
(9,832
)
4,973

10,133


5,274

Net income attributable to noncontrolling interests


(1,628
)

(1,628
)
Net income/(loss) attributable to Darling
$
18,012

$
18,521

$
36,106

$
(54,627
)
$
18,012


 
 
 
 
 
 



31



Condensed Consolidated Statements of Comprehensive Income/(Loss)
For the three months ended March 28, 2020
(in thousands)

 
Parent
Guarantors
Non-guarantors
Eliminations
Consolidated
Net income/(loss)
$
86,091

$
20,112

$
101,827

$
(121,939
)
$
86,091

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
Foreign currency translation
651

(128,994
)
63,107


(65,236
)
Pension adjustments
518


130


648

Corn option derivative adjustments
136




136

Heating oil derivative adjustments


10,870


10,870

Foreign exchange derivative adjustments


(9,151
)

(9,151
)
Total other comprehensive income/(loss), net of tax
1,305

(128,994
)
64,956


(62,733
)
Total comprehensive income/(loss)
87,396

(108,882
)
166,783

(121,939
)
23,358

Total comprehensive loss attributable to noncontrolling interest


492


492

Total comprehensive income/(loss) attributable to Darling
$
87,396

$
(108,882
)
$
166,291

$
(121,939
)
$
22,866

 
 
 
 
 
 


Condensed Consolidated Statements of Comprehensive Income/(Loss)
For the three months ended March 30, 2019
(in thousands)

 
Parent
Guarantors
Non-guarantors
Eliminations
Consolidated
Net income/(loss)
$
19,640

$
18,521

$
36,106

$
(54,627
)
$
19,640

Other comprehensive income/(loss), net of tax:
 
 
 
 
 
Foreign currency translation
507


(5,393
)

(4,886
)
Pension adjustments
767


91


858

Foreign exchange derivative adjustment


(1,937
)

(1,937
)
Total other comprehensive income/(loss), net of tax
1,274


(7,239
)

(5,965
)
Total comprehensive income/(loss)
20,914

18,521

28,867

(54,627
)
13,675

Total comprehensive income attributable to noncontrolling interest


3,387


3,387

Total comprehensive income/(loss) attributable to Darling
$
20,914

$
18,521

$
25,480

$
(54,627
)
$
10,288

 
 
 
 
 
 



32




Condensed Consolidated Statements of Cash Flows
For the three months ended March 28, 2020
(in thousands)

 
Parent
Guarantors
Non-guarantors
Eliminations
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net income/(loss)
$
86,091

$
20,112

$
101,827

$
(121,939
)
$
86,091

Earnings in investments in subsidiaries
(121,939
)


121,939


Other operating cash flows
19,102

(3,545
)
(67,102
)

(51,545
)
Net cash provided/(used) by operating activities
(16,746
)
16,567

34,725


34,546

 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(14,829
)
(16,695
)
(30,075
)

(61,599
)
Investment in subsidiaries and affiliates
(13,534
)


13,534


Gross proceeds from sale of property, plant and equipment and other assets
87

129

163


379

Payments related to routes and other intangibles
(3,416
)



(3,416
)
Net cash provided/(used) in investing activities
(31,692
)
(16,566
)
(29,912
)
13,534

(64,636
)
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Proceeds for long-term debt


8,264


8,264

Payments on long-term debt
(1
)
(2
)
(8,635
)

(8,638
)
Borrowings from revolving facilities
176,000


43,933


219,933

Payments on revolving facilities
(71,000
)

(29,782
)

(100,782
)
Net cash overdraft financing
3,084


(12,678
)

(9,594
)
Issuances of common stock
67




67

Repurchase of treasury stock
(55,044
)



(55,044
)
Contributions from parent


13,534

(13,534
)

Minimum withholding taxes paid on stock awards
(4,316
)

(12
)

(4,328
)
    Acquisition of noncontrolling interest


(8,784
)

(8,784
)
    Distributions to noncontrolling interests


(688
)

(688
)
Net cash provided/(used) in financing activities
48,790

(2
)
5,152

(13,534
)
40,406

 
 
 
 
 
 
Effect of exchange rate changes on cash


(6,916
)

(6,916
)
 
 
 
 
 
 
Net increase/(decrease) in cash, cash equivalents and restricted cash
352

(1
)
3,049


3,400

Cash, cash equivalents and restricted cash at beginning of period
654

26

72,365


73,045

Cash, cash equivalents and restricted cash at end of period
$
1,006

$
25

$
75,414

$

$
76,445



33




Condensed Consolidated Statements of Cash Flows
For the three months ended March 30, 2019
(in thousands)

 
Parent
Guarantors
Non-guarantors
Eliminations
Consolidated
Cash flows from operating activities:
 
 
 
 
 
Net income/(loss)
$
19,640

$
18,521

$
36,106

$
(54,627
)
$
19,640

Earnings in investments in subsidiaries
(54,627
)


54,627


Other operating cash flows
52,135

(2,881
)
(20,293
)

28,961

Net cash provided by operating activities
17,148

15,640

15,813


48,601

 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(34,303
)
(23,498
)
(26,468
)

(84,269
)
Acquisitions
(1,157
)

(274
)

(1,431
)
Gross proceeds from sale of property, plant and equipment and other assets
132

7,016

720


7,868

Proceeds from insurance settlements

845



845

Payments related to routes and other intangibles


(2,778
)

(2,778
)
Net cash used in investing activities
(35,328
)
(15,637
)
(28,800
)

(79,765
)
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Proceeds for long-term debt


2,138


2,138

Payments on long-term debt

(2
)
(10,972
)

(10,974
)
Borrowings from revolving credit facility
50,000


106,829


156,829

Payments on revolving credit facility
(37,000
)

(101,147
)

(138,147
)
Net cash overdraft financing
8,350


6,175


14,525

Issuances of common stock
12




12

Minimum withholding taxes paid on stock awards
(3,190
)



(3,190
)
Net cash provided/(used) by financing activities
18,172

(2
)
3,023


21,193

 
 
 
 
 
 
Effect of exchange rate changes on cash


(1,575
)

(1,575
)
 
 
 
 
 
 
Net increase/(decrease) in cash, cash equivalents and restricted cash
(8
)
1

(11,539
)

(11,546
)
Cash, cash equivalents and restricted cash at beginning of period
1,098

32

106,239


107,369

Cash, cash equivalents and restricted cash at end of period
$
1,090

$
33

$
94,700

$

$
95,823




34



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,” in Item 1A of this report under the heading “Risk Factors” 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 28, 2019, filed with the SEC on February 25, 2020 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 fuel ingredients, 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 and Europe 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 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 and North 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; and (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 biodiesel and renewable diesel, 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 to the Company's Consolidated Financial Statement for the period ended March 28, 2020 included herein, (ii) the conversion of animal fats and recycled greases into biodiesel in North America, (iii) the conversion of organic sludge and

35



food waste into biogas in Europe, (iv) 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 (v) 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.

Observations on the Effects of COVID-19

In December 2019, a novel coronavirus disease (“COVID-19”) was reported and in January 2020, the World Health Organization (“WHO”) declared it a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic.

Many of the initial economic effects of the early stages of the global COVID-19 outbreak and the government-imposed movement and work restrictions designed to slow the pace of the outbreak occurred in the last month of our first quarter. To date, these restrictions have not had a material impact on the Company’s operations, as the Company operates in industries that are deemed “critical” and “essential” under the rules imposing these restrictions. In addition, the Company has implemented operational guidelines throughout the Company's organization consistent with the applicable governmental and regulatory policies in the geographies the Company operates intended to protect the Company's employees and prevent the spread of the virus in the Company's workplace, and to date, all of the Company's facilities are operational. The Company believes the severity and duration of the COVID-19 pandemic is uncertain and such uncertainty will likely continue throughout the remainder of the Company's fiscal year. Among the items that could have a significant impact on the Company's future results is a reduction in the Company's raw material supply due to disruptions in the operations of the Company's third-party suppliers. Accordingly, while to date the Company has experienced no material negative effects on the Company's business and results of operations as a result of the current COVID-19 outbreak, the situation remains dynamic and subject to rapid and possibly material change, including but not limited to changes that may materially affect the operations of the Company's supply chain partners and finished product customers, which ultimately could result in material negative effects on the Company's business and results of operations. For example, during the second quarter, the Company has begun to experience a decline in raw material volumes from slaughterhouses and food service establishments due to the temporary closures and disruptions in operating procedures at these establishments, which is something we would expect to continue until such time as they can return to normal operation.

Similarly, DGD has implemented operational guidelines in its organization, and to date, COVID-19 has not had a material impact on DGD’s operations. We expect that biofuel regulations and mandates will continue supporting renewable diesel demand; however, a prolonged or significant decline in overall fuel demand could negatively impact the sales and profitability of DGD’s business.

The extent to which COVID-19 impacts the Company’s and DGD's results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain the virus or treat its impact, among others. For additional information regarding the risks associated with COVID-19, see the important information in Item 1A. Risk Factors below, under the caption “Pandemics, epidemics or disease outbreaks, such as the novel coronavirus (“COVID-19”), may disrupt our business, including, among other things, our supply chain and production processes, each of which could materially affect our operations, liquidity, financial condition and results of operations.”

Operating Performance Indicators

The Company monitors the performance of its business segments using key financial metrics such as results of operations, non-GAAP measurements (Adjusted EBITDA), segment operating income, raw material processed, gross margin percentage, foreign currency translation, and corporate activities. The Company’s operating results can vary significantly due to changes in factors such as the fluctuation in 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 28, 2019.


36



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, natural gas 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, Japanese yen and Polish zloty. To prepare the Company's consolidated financial statements, assets, liabilities, revenues, and expenses must be translated into U.S. dollars at the applicable exchange rate. As a result, increases or decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items recorded in the Company's consolidated financial statements, even if their value has not changed in the functional currency. This could have a significant impact on the Company's results, if such increase or decrease in the value of the U.S. dollar relative to these other currencies is substantial.

In 2019, the Company continued to evaluate operational developments and the impact of anticipated significant expansion of the DGD Joint Venture. This evaluation was impactful to the consideration of how the Company most appropriately reflects its share of equity income from the DGD Joint Venture. Based on the Company's analysis, it was determined that the DGD Joint Venture has evolved into an integral and integrated part of the Company's ongoing operations. The Company determined this justifies a more meaningful and transparent presentation of equity in net income of the DGD Joint Venture as a component of the Company's operating income. As a result, the Company has reclassified its equity in net income of the DGD Joint Venture to operating income for all periods presented. Prior to the third quarter ended September 28, 2019, the equity in Diamond Green Diesel was presented below the operating income line in the Company’s published results.  Commencing with the third quarter of 2019, the Company is including its equity in earnings of Diamond Green Diesel in operating income for all periods presented.

Results of Operations

Three Months Ended March 28, 2020 Compared to Three Months Ended March 30, 2019

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

37




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 U.S., 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. revenue performance against business plan benchmarks. In Europe, 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 first quarter of fiscal 2020, 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 quarter of fiscal 2020, compared to average Jacobsen and Reuters prices for the first quarter of fiscal 2019 are as follows:
 
Avg. Price
1st Quarter
2020
Avg. Price
1st Quarter
2019
 
Increase/(Decrease)
%
Increase/(Decrease)
Jacobsen:
 
 
 
 
MBM (Illinois)
$ 237.10/ton
$ 250.00/ton
$ (12.90)/ton
(5.2
)%
Feed Grade PM (Mid-South)
$ 225.73/ton
$ 269.26/ton
$ (43.53)/ton
(16.2
)%
Pet Food PM (Mid-South)
$ 540.44/ton
$ 684.51/ton
$ (144.07)/ton
(21.0
)%
Feather meal (Mid-South)
$ 282.50/ton
$ 447.83/ton
$ (165.33)/ton
(36.9
)%
BFT (Chicago)
$ 32.69/cwt
$   27.00/cwt
$ 5.69/cwt
21.1
 %
YG (Illinois)
$ 22.92/cwt
$   20.72/cwt
$  2.20/cwt
10.6
 %
Corn (Illinois)
$ 3.90/bushel
$ 3.69/bushel
$ 0.21/bushel
5.7
 %
Reuters:
 
 
 
 
Palm Oil (CIF Rotterdam)
$ 724.00/MT
$ 550.00/MT
$ 174.00/MT
31.6
 %
Soy meal (CIF Rotterdam)
$ 360.00/MT
$ 353.00/MT
$ 7.00/MT
2.0
 %

The following table shows the average Jacobsen and Reuters prices for the first quarter of fiscal 2020, compared to the average Jacobsen and Reuters prices for the fourth quarter of fiscal 2019.

38



 
Avg. Price
1st Quarter
2020
Avg. Price
4th Quarter
2019
 
Increase/(Decrease)
%
Increase/(Decrease)
Jacobsen:
 
 
 
 
MBM (Illinois)
$ 237.10/ton
$ 230.01/ton
$ 7.09/ton
3.1
 %
Feed Grade PM (Mid-South)
$ 225.73/ton
$ 223.46/ton
$ 2.27/ton
1.0
 %
Pet Food PM (Mid-South)
$ 540.44/ton
$ 408.75/ton
$ 131.69/ton
32.2
 %
Feather meal (Mid-South)
$ 282.50/ton
$ 283.81/ton
$ (1.31)/ton
(0.5
)%
BFT (Chicago)
$ 32.69/cwt
$   25.62/cwt
$     7.07/cwt
27.6
 %
YG (Illinois)
$ 22.92/cwt
$   20.39/cwt
$   2.53/cwt
12.4
 %
Corn (Illinois)
$ 3.90/bushel
$ 3.98/bushel
$ (0.08)/bushel
(2.0
)%
Reuters:
 
 
 
 
Palm Oil (CIF Rotterdam)
$ 724.00/MT
$ 675.00/MT
$ 49.00/MT
7.3
 %
Soy meal (CIF Rotterdam)
$ 360.00/MT
$ 347.00/MT
$ 13.00/MT
3.7
 %

Segment Results

Segment operating income for the three months ended March 28, 2020 was $122.8 million, which reflects an increase of $74.2 million or 152.7% as compared to the three months ended March 30, 2019.

 
(in thousands, except percentages)
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended March 28, 2020
 
 
 
 
 
Net Sales
$
512,625

$
270,294

$
69,923

$

$
852,842

Cost of sales and operating expenses
388,453

205,430

53,025


646,908

Gross Margin
124,172

64,864

16,898


205,934

 
 
 
 
 
 
Gross Margin %
24.2
%
24.0
%
24.2
%
%
24.1
%
 
 
 
 
 
 
Loss on sale of assets
50

2

9


61

Selling, general and administrative expenses
53,947

25,476

1,654

15,116

96,193

Depreciation and amortization
53,521

20,305

8,092

2,753

84,671

Equity in net income of Diamond Green Diesel


97,820


97,820

Segment operating income/(loss)
16,654

19,081

104,963

(17,869
)
122,829

 
 
 
 
 
 
Equity in net income of other unconsolidated subsidiaries
869




869

Segment income/(loss)
17,523

19,081

104,963

(17,869
)
123,698


(in thousands, except percentages)
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended March 30, 2019
 
 
 
 
 
Net Sales
$
495,819

$
279,164

$
60,121

$

$
835,104

Cost of sales and operating expenses
386,859

214,004

50,050


650,913

Gross Margin
108,960

65,160

10,071


184,191

 
 
 
 
 
 
Gross Margin %
22.0
%
23.3
%
16.8
%
%
22.1
%
 
 
 
 
 
 
Loss/(gain) on sale of assets
(4,391
)
114

27


(4,250
)
Selling, general and administrative expenses
48,831

21,887

(754
)
15,039

85,003

Depreciation and amortization
49,369

19,511

7,798

2,486

79,164

Equity in net income of Diamond Green Diesel


24,277


24,277

Segment operating income/(loss)
15,151

23,648

27,277

(17,525
)
48,551

 
 
 
 
 
 
Equity in net loss of other unconsolidated subsidiaries
(504
)



(504
)
Segment income/(loss)
14,647

23,648

27,277

(17,525
)
48,047



39



Feed Ingredients Segment

Raw material volume. Overall, in the three months ended March 28, 2020, the raw material processed by the Company's Feed Ingredients segment totaled 2.24 million metric tons, an increase of approximately 2.9% as compared to the three months ended March 30, 2019.

Sales. During the three months ended March 28, 2020, net sales for the Feed Ingredients segment were $512.6 million as compared to $495.8 million during the three months ended March 30, 2019, an increase of approximately $16.8 million or 3.4%. Net sales for fats were approximately $163.3 million and $144.9 million for the three months ended March 28, 2020 and March 30, 2019, respectively. Protein net sales were approximately $196.0 million and $205.8 million for the three months ended March 28, 2020 and March 30, 2019, respectively. Other rendering net sales, which include hides, pet food and service charges, were approximately $47.1 million and $41.2 million for the three months ended March 28, 2020 and March 30, 2019, respectively. Total rendering net sales were approximately $406.4 million and $391.9 million for the three months ended March 28, 2020 and March 30, 2019, respectively. Used cooking oil net sales were approximately $47.6 million and $45.4 million for the three months ended March 28, 2020 and March 30, 2019, respectively. Bakery net sales were approximately $47.1 million and $45.7 million for the three months ended March 28, 2020 and March 30, 2019, respectively, and other sales, which includes trap services, net sales were approximately $11.5 million and $12.8 million for the three months ended March 28, 2020 and March 30, 2019, respectively.

The increase in net sales for the Feed Ingredients segment was primarily due to the following (in millions of dollars):
 
Fats
Proteins
Other Rendering
Total Rendering
Used Cooking Oil
Bakery
Other
Total
Net sales three months ended March 30, 2019
$
144.9

$
205.8

$
41.2

$
391.9

$
45.4

$
45.7

$
12.8

$
495.8

Increase/(decrease) in sales volumes
5.8

3.0


8.8

2.3

(1.0
)

10.1

Increase/(decrease) in finished product prices
13.5

(10.8
)

2.7

(0.1
)
2.4


5.0

Increase/(decrease) due to currency exchange rates
(0.9
)
(2.0
)
(0.1
)
(3.0
)



(3.0
)
Other change


6.0

6.0



(1.3
)
4.7

Total change
18.4

(9.8
)
5.9

14.5

2.2

1.4

(1.3
)
16.8

Net sales three months ended March 28, 2020
$
163.3

$
196.0

$
47.1

$
406.4

$
47.6

$
47.1

$
11.5

$
512.6


Margins. In the Feed Ingredients segment for the three months ended March 28, 2020, the gross margin percentage increased to 24.2% as compared to 22.0% for the same period of fiscal 2019. The increase is primarily due to an increase in fat prices that more than offset lower protein prices as compared to fiscal 2019.

Segment operating income. Feed Ingredients operating income for the three months ended March 28, 2020 was $16.7 million, an increase of $1.5 million or 9.9% as compared to the three months ended March 30, 2019. This was due to higher fat prices that more than offset higher selling, general and administrative costs and gains on sale of assets in prior year.

Food Ingredients Segment

Raw material volume. Overall, for the three months ended March 28, 2020, the raw material processed by the Company's Food Ingredients segment totaled 261,000 metric tons, a decrease of approximately 5.8% as compared to the three months ended March 30, 2019.

Sales. Overall sales decreased in the Food Ingredients segment primarily due to lower sales volumes in the collagen and edible fat and bone markets.

Margins. In the Food Ingredients segment for the three months ended March 28, 2020, the gross margin percentage increased to 24.0% as compared to 23.3% during the comparable period of fiscal 2019. The increase is primarily due to higher fat prices and improved sales mix in the collagen business.

Segment operating income. Food Ingredients operating income was $19.1 million for the three months ended March 28, 2020, a decrease of $4.5 million or 19.1% as compared to the three months ended March 30, 2019. The decrease is primarily due to lower sales volumes in the China collagen markets due to the timing of sales, especially as a result of the COVID-19 outbreak. Despite increased fat sales prices, the Company suffered lower volumes processed and sold resulting

40



from export of raw materials to Asian food markets due to African Swine Fever (“ASF”) as compared to the same period in fiscal 2019.

Fuel Ingredients Segment

Raw material volume. Overall, in the three months ended March 28, 2020, the raw material processed by the Company's Fuel Ingredients segment totaled 328,000 metric tons, an increase of approximately 5.0%, as compared to the three months ended March 30, 2019.

Sales. Overall sales increased in the Fuel Ingredients segment primarily due to higher sales volumes in Europe.

Margins. In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the three months ended March 28, 2020, the gross margin percentage increased to 24.2% as compared to 16.8% for the comparable period of fiscal 2019. The increase is primarily related to improved fat prices and demand in Europe in fiscal 2020 as compared to fiscal 2019.

Segment operating income. The Company's Fuel Ingredients segment operating income (inclusive of the equity contribution from DGD Joint Venture) for the three months ended March 28, 2020 was $105.0 million, an increase of $77.7 million or 284.6% as compared to the same period in fiscal 2019. The increase is primarily due to current year net income at the DGD Joint Venture from the inclusion of blenders tax credits as compared to no blenders tax credits in the prior year.

Foreign Currency Exchange

During the first quarter of fiscal 2020, the euro weakened against the U.S. dollar as compared to the same period in fiscal 2019. Using actual results for the three months ended March 28, 2020 and using the prior year's average currency rate for the three months ended March 30, 2019, foreign currency translation would result in an increase in operating income of approximately $2.2 million. The average rates assumptions used in this calculation were the actual fiscal average rate for the three months ended March 28, 2020 of €1.00:USD$1.10 and CAD$1.00:USD$0.75 as compared to the average rate for the three months ended March 30, 2019 of €1.00:USD$1.14 and CAD$1.00:USD$0.75, respectively.

Corporate Activities

Selling, General and Administrative Expenses.  Selling, general and administrative expenses were $15.1 million during the three months ended March 28, 2020, compared to $15.0 million during the three months ended March 30, 2019, an increase of $0.1 million

Depreciation and Amortization.  Depreciation and amortization charges increased slightly by $0.3 million to $2.8 million during the three months ended March 28, 2020, as compared to $2.5 million during the three months ended March 30, 2019. The increase is related to increased leasehold improvements and office equipment depreciation at the corporate office.

Interest Expense. Interest expense was $19.1 million during the three months ended March 28, 2020, compared to $19.9 million during the three months ended March 30, 2019, a decrease of $0.8 million. The decrease is primarily due to lower interest from the Term loan A and Term loan B notes as a result of Term Loan A being paid off in 2019 and lower interest rates that more than offset increased interest expense from higher revolver borrowings.

Foreign Currency Gain/(Loss).  Foreign currency gains were $1.7 million for the three months ended March 28, 2020 as compared to foreign currency losses of $0.7 million for the three months ended March 30, 2019. The gain in foreign currency is due primarily to gains on the revaluation of non-functional currency liabilities as compared to losses in the same period in fiscal 2019.

Other Expense, net. Other expense was $1.9 million in the three months ended March 28, 2020, compared to other expense of $2.5 million for the three months ended March 30, 2019. The decrease in other expense was primarily due to a decrease in the non-service component of pension expense as compared to the same period in fiscal 2019.

Equity in Net Income/(Loss) in Investment of Other Unconsolidated Subsidiaries. This represents the Company's pro rata share of the net income from foreign unconsolidated subsidiaries.
 
Income Taxes. The Company recorded income tax expense of $18.3 million for the three months ended March 28, 2020, compared to $5.3 million of income tax expense recorded in the three months ended March 30, 2019, an increase of $13.0 million. The effective tax rate for the three months ended March 28, 2020 was 17.5%. The effective tax rate for the three months ended March 28, 2020 differed from the statutory rate of 21% due to the relative mix of earnings among

41



jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, and compensation related expenses not deductible for tax purposes. The effective tax rate for the three months ended March 30, 2019 was 21.2%. The effective tax rate for the three months ended March 30, 2019 differed slightly from the statutory rate of 21% due to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes) and discrete items, including the favorable settlement of an audit. The Company's effective tax rate excluding discrete items is 18.8% for the three months ended March 28, 2020, compared to 29.0% for the three months ended March 30, 2019.

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, goodwill and long-lived asset impairment, interest expense, (income)/loss from discontinued operations, net of tax, income tax provision, other income/(expense) and equity in net (income)/loss of unconsolidated subsidiary. Management believes that Adjusted EBITDA is useful in evaluating the Company's operating performance compared to that of other companies in its industry because the calculation of Adjusted EBITDA generally eliminates the effects of financing, income taxes and certain non-cash and other items that may vary for different companies for reasons unrelated to overall operating performance.  

As a result, the Company’s management uses Adjusted EBITDA as a measure to evaluate performance and for other discretionary purposes.  In addition to the foregoing, management also uses or will use Adjusted EBITDA to measure compliance with certain financial covenants under the Company’s Senior Secured Credit Facilities, 5.25% Notes and 3.625% Notes that were outstanding at March 28, 2020.  However, the amounts shown below for Adjusted EBITDA differ from the amounts calculated under similarly titled definitions in the Company’s Senior Secured Credit Facilities, 5.25% Notes and 3.625% Notes, as those definitions permit further adjustments to reflect certain other non-recurring costs, non-cash charges and cash dividends from the DGD Joint Venture. Additionally, the Company evaluates the impact of foreign exchange on operating cash flow, which is defined as segment operating income (loss) plus depreciation and amortization.

Reconciliation of Net Income to (Non-GAAP) Adjusted EBITDA and (Non-GAAP) Pro Forma Adjusted EBITDA
First Quarter 2020 As Compared to First Quarter 2019
 
Three Months Ended
(dollars in thousands)
March 28,
2020
March 30,
2019
Net income attributable to Darling
$
85,510

$
18,012

Depreciation and amortization
84,671

79,164

Interest expense
19,090

19,876

Income tax expense
18,300

5,274

Foreign currency loss/(gain)
(1,664
)
732

Other expense, net
1,881

2,525

Equity in net income of Diamond Green Diesel
(97,820
)
(24,277
)
Equity in net (income)/loss of unconsolidated subsidiaries
(869
)
504

Net income attributable to non-controlling interests
581

1,628

Darling's Adjusted EBITDA
$
109,680

$
103,438

 
 
 
Foreign currency exchange impact (1)
2,158


Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP)
$
111,838

$
103,438

 
 
 
DGD Joint Venture Adjusted EBITDA (Darling's Share)
$
103,634

$
29,828

 
 
 
Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA
$
213,314

$
133,266


(1) The average rates assumption used in this calculation was the actual fiscal average rate for the three months ended March 28, 2020 of €1.00:USD$1.10 and CAD$1.00:USD$0.75 as compared to the average rate for the three months ended March 30, 2019 of €1.00:USD$1.14 and CAD$1.00:USD$0.75, respectively.


42



For the three months ended March 28, 2020, the Company generated Adjusted EBITDA of $109.7 million, as compared to $103.4 million in the same period in fiscal 2019.

On a Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) basis, the Company generated $111.8 million in the three months ended March 28, 2020, as compared to a Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) of $103.4 million in the same period in fiscal 2019.

DGD Joint Venture Adjusted EBITDA (Darling's share) is not reflected in the Adjusted EBITDA or the Pro forma Adjusted EBITDA to Foreign Currency. See Note 3 to the Company's Consolidated Financial Statements included herein for financial information regarding the DGD Joint Venture.

FINANCING, LIQUIDITY AND CAPITAL RESOURCES

Credit Facilities

Indebtedness

Certain Debt Outstanding at March 28, 2020. On March 28, 2020, debt outstanding under the Company's Amended Credit Agreement, the Company's 5.25% Notes and the Company's 3.625% Notes consists of the following (in thousands):

        
Senior Notes:
 
5.25 % Notes due 2027
$
500,000

Less unamortized deferred loan costs
(6,310
)
Carrying value of 5.25% Notes due 2027
$
493,690

 
 
3.625 % Notes due 2026 - Denominated in euros
$
566,861

Less unamortized deferred loan costs
(6,653
)
 Carrying value of 3.625% Notes due 2026
$
560,208

 
 
Amended Credit Agreement:
 
Term Loan B
$
495,000

Less unamortized deferred loan costs
(7,341
)
Carrying value of Term Loan B
$
487,659

 
 
Revolving Credit Facility:
 
Maximum availability
$
1,000,000

Ancillary Facilities
42,593

Borrowings outstanding
157,848

Letters of credit issued
3,636

Availability
$
795,923

 
 
Other Debt
$
51,850


During the first three months of fiscal 2020, the U.S. dollar strengthened as compared to the euro and Canadian dollar. Using the euro and Canadian dollar based debt outstanding at March 28, 2020 and comparing the closing balance sheet rates at March 28, 2020 to those at December 28, 2019, the U.S. dollar debt balances of euro based debt decreased by approximately $7.3 million and Canadian based debt decreased by approximately $0.3 million, respectively, at March 28, 2020. The closing balance sheet rate assumptions used in this calculation were the actual fiscal closing balance sheet rate at March 28, 2020 of €1.00:USD$1.100700 and CAD$1.00:USD$0.710335 as compared to the closing balance sheet rate at December 28, 2019 of €1.00:USD$1.114750 and CAD$1.00:USD$0.763789, respectively.

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. Effective December 18, 2017, the Company, and certain of its subsidiaries entered into an amendment (the “Fifth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Fifth Amendment (i) refinanced the term B loans under the Amended Credit Agreement with new term B loans in an aggregate principal amount of $525.0 million with a maturity date of December 18, 2024; (ii)

43



adjusted the applicable margin pricing on borrowings under the term B loan; (iii) modified certain of the negative covenants to increase the allowances for certain actions, including debt and investments; and (iv) made other updates and changes. Effective December 16, 2016, the Company, and certain of its subsidiaries entered into an amendment (the “Fourth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Fourth Amendment extended the maturity date of the term A loans and revolving credit facility loans under the Amended Credit Agreement from September 27, 2018 to December 16, 2021. For more information regarding the Amended Credit Agreement see Note 10 to the Company's Consolidated Financial Statements included herein.

As of March 28, 2020, the Company had availability of $795.9 million under the revolving loan facility, taking into account that the Company had $157.8 million in outstanding borrowings, $45.5 million in ancillary facilities and letters of credit issued of $3.6 million.

As of March 28, 2020, the Company has borrowed all $525.0 million under the terms of the term loan B facility and repaid approximately $30.0 million, which when repaid, cannot be reborrowed. The term loan B facility is repayable in quarterly installments of 0.25% of the aggregate principal amount of the relevant term loan B facility on the last day of each March, June, September and December of each year commencing on the last day of each month falling on or after the last day of the first full quarter following December 18, 2017, and continuing until the last day of each quarter period ending immediately prior to December 18, 2024; and one final installment in the amount of the relevant term loan B facility then outstanding, due on December 18, 2024. The term loan B facility will mature on December 18, 2024.

The interest rate applicable to any borrowings under the revolving loan facility will equal either LIBOR/euro interbank offered rate/CDOR plus 2.00% per annum or base rate/Canadian prime rate plus 1.00% per annum, subject to certain step-downs or step-ups based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal the base rate plus 1.00% or LIBOR plus 2.00%.

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).

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, 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, Canadian and European capital lease obligations, note arrangements in Brazil, China and European notes that are not part of the Company's Amended Credit Agreement, 5.25% Notes or 3.625% Notes.

The classification of long-term debt in the Company’s March 28, 2020 consolidated balance sheet is based on the contractual repayment terms of 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 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 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 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

44



controls or currency devaluations that may limit the Company's access to profits from the Company's subsidiaries or otherwise negatively impact the Company's financial condition and therefore reduce the Company's ability to make required payments under the Amended Credit Agreement, the 5.25% 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 28, 2019 as filed with the SEC on February 25, 2020.
 
As of March 28, 2020, the Company believes it is in compliance with all of the financial covenants under the Amended Credit Agreement, as well as all of the other covenants contained in the Amended Credit Agreement, the 5.25% Indenture and the 3.625% Indenture.

Working Capital and Capital Expenditures

On March 28, 2020, the Company had working capital of $278.3 million and its working capital ratio was 1.43 to 1 compared to working capital of $228.9 million and a working capital ratio of 1.33 to 1 on December 28, 2019.  As of March 28, 2020, the Company had unrestricted cash of $76.3 million and funds available under the revolving credit facility of $795.9 million, compared to unrestricted cash of $72.9 million and funds available under the revolving credit facility of $911.9 million at December 28, 2019. The Company diversifies its cash investments by limiting the amounts deposited with any one financial institution.

Net cash provided by operating activities was $34.5 million for the first three months ended March 28, 2020, as compared to net cash provided by operating activities of $48.6 million for the first three months ended March 30, 2019, a decrease of $14.1 million due primarily to changes in operating assets and liabilities that includes a decrease in accounts receivable of approximately $11.2 million, a decrease in income taxes refundable/payable of approximately $7.0 million, a decrease in inventories and prepaid expenses of approximately $19.9 million and an increase in accounts payable and accrued expenses of approximately $26.2 million.  Cash used by investing activities was $64.6 million for the first three months ended March 28, 2020, compared to $79.8 million for the first three months ended March 30, 2019, a decrease in cash used by investing activities of $15.2 million, primarily due to a decrease in capital asset spending.  Net cash provided by financing activities was $40.4 million for the first three months ended March 28, 2020, compared to net cash provided by financing activities of $21.2 million for the first three months ended March 30, 2019, an increase in net cash provided by financing activities of $19.2 million, primarily due to higher revolver borrowings in the first three months ended March 28, 2020 as compared to the first three months ended March 30, 2019 offset by common stock repurchases of $55.0 million during the three months ended March 28, 2020.

Capital expenditures of $61.6 million were made during the first three months of fiscal 2020, compared to $84.3 million in the first three months of fiscal 2019, for a net decrease of $22.7 million or 26.9%.  The Company had previously expected to spend approximately $306.0 million in capital expenditures in fiscal 2020; however, due to the COVID-19 outbreak and the government-imposed movement and work restrictions, the Company has initiated a temporary reduction in non-essential capital expenditures until the uncertainty surrounding the COVID-19 outbreak improves. The Company intends to finance these costs using cash flows from operations. Capital expenditures related to compliance with environmental regulations were $6.9 million and $8.2 million during the first three months ended March 28, 2020 and March 30, 2019, respectively.

Accrued Insurance and Pension Plan Obligations

Based upon the annual actuarial estimate, current accruals and claims paid during the first three months of fiscal 2020, the Company has accrued approximately $10.5 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 March 28, 2020.  The self insurance reserve is composed of estimated liability for claims arising for workers’ compensation, and for auto liability and general liability claims.  The self insurance reserve liability is determined annually, based upon a third party actuarial estimate.  The actuarial estimate may vary from year to year due to changes in cost of health care, the pending number of claims or other factors beyond the control of management of the Company. 

Based upon current actuarial estimates, the Company expects to contribute approximately $1.3 million to its domestic pension plans in order to meet minimum pension funding requirements during the next twelve months.  In addition, the Company expects to make payments of approximately $3.4 million under its foreign pension plans in the next twelve months.  The minimum pension funding requirements are determined annually, based upon a third party actuarial estimate.  The

45



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 three months ended March 28, 2020 of approximately $0.2 million. Additionally, the Company has made required and tax deductible discretionary contributions to its foreign pension plans for the first three months ended March 28, 2020 of approximately $0.6 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 current COVID-19 outbreak, could have a material negative impact on U.S. pension plan assets and the status of required funding under the PPA.  The Company participates in various U.S. multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts.  These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants. The Company's contributions to each individual U.S. multiemployer plan represent less than 5% of the total contributions to each such plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities for two of the U.S. plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone under PPA guidelines. With respect to the 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 and two have certified as endangered or yellow zone as defined by the PPA. The Company has received notices of withdrawal liability from five U.S. multiemployer pension plans in which it participated. As a result, the Company has an accrued aggregate liability of approximately $5.5 million representing the present value of scheduled withdrawal liability payments under these multiemployer plans. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require additional funding under the PPA, the amounts could be material.

DGD Joint Venture

The Company announced on January 21, 2011 that a wholly-owned subsidiary of Darling entered into a limited liability company agreement (as subsequently amended, the “DGD LLC Agreement”) with Valero to form the DGD Joint Venture. The DGD Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate the DGD Facility, which as a result of its recently expanded capacity is now capable of processing approximately 20,000 barrels per day of input feedstock to produce renewable diesel fuel and certain other co-products, and is located adjacent to Valero's refinery in Norco, Louisiana. The DGD Joint Venture reached mechanical completion and began the production of renewable diesel in late June 2013. Effective May 1, 2019, the DGD LLC Agreement was amended and restated for the purpose of updating the agreement in certain respects, including to remove certain provisions that were no longer relevant and to add new provisions relating to the DGD Joint Venture’s recently approved expansion project to construct a new, parallel facility located next to the current facility, as further described below.

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 “DGD Loan Agreement”) with the DGD Joint Venture. The DGD Lenders have committed to make 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 DGD Loan Agreement are 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%. The DGD Loan Agreement matures on April 29, 2021, unless extended by agreement of the parties. As of March 28, 2020, no amounts are owed to the DGD Lenders under the DGD Loan Agreement.

Based on the sponsor support agreements executed in connection with the initial construction of the DGD Facility, the Company contributed a total of approximately $111.7 million for completion of the DGD Facility including the Company's portion of cost overruns and working capital funding. As of March 28, 2020, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $773.8 million included on the consolidated balance sheet.

In August 2018, the DGD Joint Venture completed an expansion project that increased the DGD Facility's annual production capacity from 160 million gallons of renewable diesel to 275 million gallons and expanded outbound logistics for servicing the many developing low carbon fuel markets around North America and worldwide. In November 2018, the joint venture partners approved the DGD Joint Venture moving forward with another expansion project to construct a new, parallel

46



facility (the “New Facility”) located next to the current facility. The New Facility is expected to grow the DGD Joint Venture’s annual production capacity by an additional 400 million gallons from the current capacity of 275 million gallons of renewable diesel to 675 million gallons of renewable diesel and provide the capability to separate naphtha for sale into low carbon fuel markets. In addition, the expansion project includes expanded inbound and outbound logistics for servicing the many developing low carbon fuel markets around North America and worldwide. The DGD Joint Venture estimates completion and startup of the New Facility in the fourth quarter of 2021, and the total cost of the expansion project, including the naphtha production and improved logistics capability, is estimated to be approximately $1.1 billion. Based on forecasted margins as of the date of this report, the expansion project is expected to be substantially funded by DGD Joint Venture cash flow; however, the DGD LLC Agreement provides that until such time as the New Facility is complete and operational, the joint venture partners shall be required to make capital contributions or, if they agree, loans, to the DGD Joint Venture should the excess available cash in the DGD Joint Venture, as determined on specified dates and in accordance with the provisions contained in the DGD LLC Agreement, fall below $50 million.

In April 2019, the joint venture partners adopted a distribution policy that, unless earlier terminated by the partners, will remain in place through the construction and completion of the New Facility. Pursuant to the distribution policy, the DGD Joint Venture will make quarterly distributions to the partners to the extent that distributable cash (as determined in accordance with the policy) exceeds $50 million and the DGD Joint Venture’s forward looking cash forecast. During the three months ended March 28, 2020, the DGD Joint Venture made no distributions to the partners. In April 2020, the DGD Joint Venture made special dividend distributions to each partner in the amount of approximately $125.0 million. This special dividend was a result of the DGD Joint Venture's receipt of the fiscal 2019 and 2018 blenders tax credits of approximately $430.6 million in early April 2020.

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 2019, a large portion of Darling’s total U.S. finished fats products were sold to the DGD Facility as feedstock for renewable diesel. In 2019, DGD was Darling’s largest finished product customer in terms of sales, with Darling recording sales of $208.7 million to DGD.

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 nationwide to transporting the refined fats to the DGD facility 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 Company's Midwest network of facilities the ability to collect and deliver feedstocks to DGD via water, rail or truck from a centralized location. 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 has reclassified its equity in net income of the DGD Joint Venture to operating income for all periods presented.

In September 2019, the Company announced that the DGD Joint Venture was initiating an advanced engineering and development cost review for construction of a new renewable diesel plant to be located in Port Arthur, Texas. The proposed facility under review would be designed to produce 400 million gallons of renewable diesel annually as well as 40 million gallons of renewable naphtha. The final investment decision on the project is expected in 2021, subject to further engineering, obtaining necessary permits, and approval by the boards of the Company and Valero. If the decision is made to move forward, new plant construction could begin in 2021, with expected operations commencing in 2024.


47



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 current COVID-19 outbreak 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 2020 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 at this time; however, potential usages could include:  opportunistic capital expenditures and/or acquisitions and joint ventures;  investments relating to the Company’s renewable energy strategy, including, without limitation, potential required funding obligations with respect to the DGD Joint Venture expansion project or potential investments in additional renewable diesel and/or biodiesel projects;  investments in response to governmental regulations relating to human and animal food safety or other regulations;  unexpected funding required by the legislation, regulation or mass termination of multiemployer plans; and paying dividends or repurchasing stock, subject to limitations under the Amended Credit Agreement, the 5.25% Notes and the 3.625% Notes, as well as suitable cash conservation to withstand adverse commodity cycles. In August 2015, the Company's Board of Directors approved a share repurchase program of up to an aggregate of $100.0 million of the Company's Common Stock depending on market conditions. The repurchases may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. The program initially approved by the Board of Directors was for a 24 month period; however, the Board has subsequently extended the program for an additional 36 month period and increased the amount of the program to $200.0 million. Accordingly, repurchases may occur through August 13, 2020, unless further extended or shortened by the Board of Directors. During the first quarter of fiscal 2020, the Company repurchased approximately $55.0 million of its common stock in the open market. As of March 28, 2020, the Company has approximately $125.8 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. Any decline in these prices has the potential to adversely impact the Company's liquidity. Any of a decline in raw material availability, a decline in agricultural-based alternative ingredients prices, increases in energy prices or the impact of U.S. and foreign regulation (including, without limitation, China), changes in foreign exchange rates, imposition of currency controls and currency devaluations has the potential to adversely impact the Company's liquidity. A decline in commodities prices, a rise in energy prices, a slowdown in the U.S. or international economy or other factors could cause the Company to fail to meet management's expectations or could cause liquidity concerns.

OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

Based upon the underlying purchase agreements, the Company has commitments to purchase $100.2 million of commodity products consisting of approximately $64.0 million of finished products, approximately $36.2 million of natural

48



gas and diesel fuel during the next two years, which are not included in liabilities on the Company’s balance sheet at March 28, 2020.  These purchase agreements are entered into in the normal course of the Company’s business and are not subject to derivative accounting. The commitments will be recorded on the balance sheet of the Company when delivery of these commodities occurs and ownership passes to the Company during the remainder of fiscal 2020, in accordance with accounting principles generally accepted in the U.S.

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 bank guarantees that are not a part of the Company's Amended Credit Agreement at March 28, 2020 (in thousands):
            
Other commercial commitments:
 
Standby letters of credit
$
3,636

Standby letters of credit (ancillary facility)
20,490

Foreign bank guarantees
10,100

Total other commercial commitments:
$
34,226


CRITICAL ACCOUNTING POLICIES

The Company follows certain significant accounting policies when preparing its consolidated financial statements. A complete summary of these policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019, filed with the SEC on February 25, 2020.

Based on the Company’s annual impairment testing at October 26, 2019, the fair values of the Company’s reporting units containing goodwill exceeded the related carrying value.  However, based on the Company's annual impairment testing at October 26, 2019, the fair value of four of the Company's eight reporting units was less than 30% in excess of its carrying value and one reporting unit (Canada Feed) was less than 10% of the estimated fair value with goodwill of approximately $166.1 million as of March 28, 2020, which was substantially less than the percentage by which the other reporting units with goodwill exceeded their carrying values. The Company determined the fair value of reporting units with the assistance of a valuation expert who assisted the Company primarily using the Income Approach to determine the fair value of the Company's reporting units. Key assumptions that impacted the discounted cash flow model were raw material volumes, gross margins, terminal growth rates and discount rates. It is possible, depending upon a number of factors that are not determinable at this time or within the control of the Company, that the fair value of these four reporting units could decrease in the future and result in an impairment to goodwill.  The amount of goodwill allocated to these four reporting units was approximately $486.4 million as of March 28, 2020.  The Company's management believes the biggest risk to these reporting units is decreasing finished product prices impacting gross margins and an economic slowdown that would impact raw material suppliers. While to date the Company has experienced no material negative effects on its business and results of operation as a result of the current COVID-19 pandemic, and therefore no impairment triggering events were identified, the valuation of the Company’s reporting units could be negatively impacted in future periods by the COVID-19 pandemic, the severity and duration of which is uncertain.
 
NEW ACCOUNTING PRONOUNCEMENTS

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform Topic 848, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The update provides optional guidance for a limited period of time to ease the potential burden in accounting for (or reorganizing the effects of) contract modifications on financial reporting, caused by reference rate reform. This ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. This ASU amends Topic 740 Income Taxes, which eliminates certain exceptions in accounting for income taxes, improves consistency in application and clarifies existing guidance. The standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard.

In August 2018, the FASB issued ASU No. 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU amends Subtopic 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing and adding certain disclosures for these plans. The standard is effective for fiscal years ending after December 15, 2020, with early adoption permitted. While the adoption of this standard will impact the Company's disclosure, the Company does not expect it will materially impact the Company's consolidated financial statements.


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In August 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirements for Fair Value Measurements. This ASU amends Topic 820, Fair Value Measurement, which changes the disclosure requirements for fair value measurements by removing, adding and modifying certain disclosures. The standard is effective for fiscal years beginning after December 15, 2019 and for interim periods therein, with early adoption permitted. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04 Simplifying the Test for Goodwill Impairment. This ASU amends Topic 350, Intangibles-Goodwill and Other, which will simplify the goodwill impairment calculation by eliminating Step 2 from the current goodwill impairment test. Under the new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of the assets and liabilities as if that reporting unit had been acquired in a business combination. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under ASU 2016-13, existing guidance on reporting credit losses for trade and other receivables and available for sale debt securities will be replaced with a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods therein. The initial adoption of this ASU did not have a material impact on the Company's consolidated financial statements.

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking” statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the statements.   Statements that are not statements of historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “planned,” “contemplate,” “potential,” “possible,” “proposed,” “intend,” “believe,” “anticipate,” “expect,” “may,” “will,” “would,” “should,” “could,” and similar expressions are intended to identify forward-looking statements.  All statements other than statements of historical facts included in this report are forward looking statements, including, without limitation, the statements under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and located elsewhere herein regarding industry prospects, the Company’s financial position and the Company's use of cash.  Forward-looking statements are based on the Company's current expectations and assumptions regarding its business, the economy and other future conditions. The Company cautions readers that any such forward-looking statements it makes are not guarantees of future performance and that actual results may differ materially from anticipated results or expectations expressed in its forward-looking statements as a result of a variety of factors, including many that are beyond the Company's control.
 
In addition to those factors discussed elsewhere in this report and in the Company's other public filings with the SEC, important factors that could cause actual results to differ materially from the Company’s expectations include: existing and unknown future limitations on the ability of the Company's direct and indirect subsidiaries to make their cash flow available to the Company for payments on the Company's indebtedness or other purposes; global demands for bio-fuels and grain and oilseed commodities, which have exhibited volatility, and can impact the cost of feed for cattle, hogs and poultry, thus affecting available rendering feedstock and selling prices for the Company’s products; reductions in raw material volumes available to the Company due to weak margins in the meat production industry as a result of higher feed costs, reduced consumer demand or other factors, reduced volume from food service establishments, or otherwise; reduced demand for animal feed; reduced finished product prices, including a decline in fat and used cooking oil finished product prices;  changes to worldwide government policies relating to renewable fuels and greenhouse gas (“GHG”) emissions that adversely affect programs like the U.S. government's renewable fuel standard, low carbon fuel standards (“LCFS”) and tax credits for biofuels both in the United States and abroad; possible product recall resulting from developments relating to the discovery of unauthorized adulterations to food or food additives; the occurrence of 2009 H1N1 flu (initially known as “Swine Flu”), highly pathogenic strains of avian influenza (collectively known as “Bird Flu”), severe acute respiratory syndrome (“SARS”), bovine spongiform encephalopathy (or “BSE”), porcine epidemic diarrhea (“PED”) or other diseases associated with animal origin in the United States or elsewhere, such as the outbreak of ASF in China and elsewhere; the occurrence of pandemics, epidemics or disease outbreaks, such as the current 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)

50



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 and issues relating to the announced expansion project; risks and uncertainties relating to international sales and operations, including imposition of tariffs, quotas, trade barriers and other trade protections imposed by foreign countries; difficulties or a significant disruption in the Company's information systems or failure to implement new systems and software successfully; risks relating to possible third party claims of intellectual property infringement; increased contributions to the Company’s pension and benefit plans, including multiemployer and employer-sponsored defined benefit pension plans as required by legislation, regulation or other applicable U.S. or foreign law or resulting from a U.S. mass withdrawal event; bad debt write-offs; loss of or failure to obtain necessary permits and registrations; continued or escalated conflict in the Middle East, North Korea, Ukraine or elsewhere; uncertainty regarding the exit of the U.K. from the European Union; and/or unfavorable export or import markets.  These factors, coupled with volatile prices for natural gas and diesel fuel, 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. For more detailed discussion of these factors see the Risk Factors discussion in Item 1A of Part I of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019. 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 natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. 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 options are entered into with the intent of managing the impact of changing prices for poultry meal sales. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of BBP by reducing the impact of changing prices. Foreign currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. The interest rate swaps and the natural gas swaps are subject to the requirements of FASB authoritative guidance. Some of the Company's natural gas and diesel fuel instruments are not subject to the requirements of FASB authoritative guidance because some of the natural gas and diesel fuel instruments qualify as normal purchases as defined in FASB authoritative guidance. At March 28, 2020, the Company had corn option contracts and foreign exchange forward and option contracts outstanding that qualified and were designated for hedge accounting as well as corn forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.

In fiscal 2020 and fiscal 2019, the Company entered into corn option contracts on the Chicago Board of Trade that are designated as cash flow hedges. Under the terms of the corn option contracts, the Company hedged a portion of its U.S. forecasted sales of BBP into the fourth quarter of fiscal 2021. As of March 28, 2020, the aggregate fair value of these corn option contracts was approximately $0.8 million. These amounts are included in other current assets on the balance sheet, with an offset recorded in accumulated other comprehensive income. The Company may enter into corn option contracts in the future from time to time.

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In fiscal 2020 and fiscal 2019, the Company entered into foreign exchange forward and option contracts that are considered cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2022. As of March 28, 2020, the aggregate fair value of these foreign exchange contracts was approximately $10.4 million and is included in other current assets, other assets and other current liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.

As of March 28, 2020, the Company had the following outstanding forward and option contract amounts that were entered into to hedge foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency (in thousands):

Functional Currency
 
Contract Currency
 
Range of
U.S.
Type
Amount
 
Type
Amount
 
Hedge rates
Equivalent
Brazilian real
38,179

 
Euro
8,100

 
4.64 - 4.85
$
7,517

Brazilian real
1,055,921

 
U.S. dollar
292,149

 
3.35 - 5.10
292,149

Euro
59,386

 
U.S. dollar
65,693

 
1.07 - 1.15
65,693

Euro
18,314

 
Polish zloty
80,500

 
4.30 - 4.62
20,158

Euro
8,992

 
Japanese yen
1,076,265

 
117.80 - 122.61
9,898

Euro
10,967

 
Chinese renminbi
84,048

 
7.65 - 7.78
12,071

Euro
16,514

 
Australian dollar
27,850

 
1.68 - 1.69
18,177

Euro
5,977

 
British pound
5,248

 
0.84 - 0.94
6,579

Polish zloty
24,133

 
Euro
5,264

 
4.58 - 4.60
5,871

British pound
37

 
Euro
40

 
0.93
45

British pound
108

 
U.S. dollar
126

 
1.16
126

Japanese yen
137,644

 
U.S. dollar
1,271

 
106.92 - 110.36
1,271

U.S. dollar
932

 
Japanese yen
103,000

 
110.57
932

U.S. dollar
49,766

 
Euro
45,000

 
1.11
49,766

 
 
 
 
 
 
 
$
490,253


The above foreign currency contracts that are not designated as hedges had an aggregate fair value of approximately $0.4 million and are included in other current assets and accrued expenses at March 28, 2020.

Additionally, the Company had corn forward contracts that are marked to market because they did not qualify for hedge accounting at March 28, 2020. These contracts have an aggregate fair value of approximately $1.1 million and are included in other current assets, other assets and accrued expenses at March 28, 2020.

As of March 28, 2020, the Company had forward purchase agreements in place for purchases of approximately $36.2 million of natural gas and diesel fuel during the next two years. As of March 28, 2020, the Company had forward purchase agreements in place for purchases of approximately $64.0 million of finished product in fiscal 2020.

Foreign Exchange

The Company now has significant international operations and is subject to certain opportunities and risks, including currency fluctuations. As a result, the Company is affected by changes in foreign currency exchange rates, particularly with respect to the euro, British pound, Canadian dollar, Australian dollar, Chinese renminbi, Brazilian real, 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.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that

52



controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on management’s evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting.  As required by Exchange Act Rule 13a-15(d), the Company’s management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s internal control over financial reporting to determine whether any change occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.  Based on that evaluation, there has been no change in the Company’s internal control over financial reporting during the last fiscal quarter of the period covered by this report other than SOX control changes related to the upgrade of accounting software at its international operations that has materially affected, or is reasonably likely to materially affect the Company's internal control over financial reporting.

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DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2020

PART II:  Other Information
 

Item 1.  LEGAL PROCEEDINGS

The information required by this Item 1 is contained within Note 17 on pages 23 through 24 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 risk set forth below and the risk factors described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2019, which could materially affect our business, financial condition or future results. The risks and uncertainties described below 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.

Pandemics, epidemics or disease outbreaks, such as the novel coronavirus (“COVID-19”), may disrupt our business, including, among other things, our supply chain and production processes, each of which could materially affect our operations, liquidity, financial condition and results of operations.

The actual or perceived effects of a disease outbreak, epidemic, pandemic or similar widespread public health concern, such as COVID-19, could negatively affect our operations, liquidity, financial condition and results of operations. While to date we have experienced no material negative effects on our business and results of operations as a result of the current COVID-19 outbreak, the situation remains dynamic and subject to rapid and possibly material change, including but not limited to changes that may materially affect the operations of our supply chain partners and finished product customers, which ultimately could result in material negative effects on our business and results of operations.

The spread of pandemics, epidemics or disease outbreaks such as COVID-19 may disrupt our third-party business partners’ ability to meet their obligations to us, which may negatively affect our operations. These third parties include those who supply our raw materials and other necessary operating materials and logistics and transportation services providers. Ports and other channels of entry may be closed or operate at only a portion of capacity, as workers may be prohibited or otherwise unable to report to work, and means of transporting products within regions or countries may be limited for the same reason. As a result of the current COVID-19 outbreak, transport restrictions related to quarantines or travel bans have been put in place and global supply may become constrained, each of which may cause the price of certain raw materials used in our products to increase and/or we may experience disruptions to our operations. In addition, COVID-19 and similar outbreaks may affect the prices and demand for our finished products.

Workforce limitations and travel restrictions resulting from pandemics, epidemics or disease outbreaks such as COVID-19 and related government actions may affect many aspects of our business. If a significant percentage of our workforce is unable to work, including because of illness or travel or government restrictions in connection with pandemics or disease outbreaks, our operations and financial reporting capabilities may be negatively affected. In addition, pandemics or disease outbreaks could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect our raw material supply and our customers’ demand for our finished products.

Our efforts to manage and mitigate these factors may be unsuccessful, and the effectiveness of these efforts depends on factors beyond our control, including the duration and severity of any pandemic, epidemic or disease outbreak, as well as third party actions taken to contain its spread and mitigate public health effects.

The risks described above also apply to DGD and its business and operations.


Item 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On August 7, 2017, the Company's Board of Directors approved the extension for an additional two years of its previously announced share repurchase program of up to an aggregate of $100.0 million of the Company's Common Stock depending on

54



market conditions. On November 6, 2018, the Board approved an increase in the share repurchase program from $100.0 million to $200.0 million and extended the term of the program for an additional year to August 13, 2020. Repurchases may occur through August 13, 2020, unless extended or shortened by the Board of Directors. During the first quarter of fiscal 2020, the Company repurchased approximately $55.0 million worth of its common stock in the open market.

The following table is a summary of equity securities purchased by the Company during the first quarter of fiscal 2020.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
Total Number of Shares Purchased (1)
 
Average Price Paid per Share (2)
 
Total Number of Shares Purchased as part of Publicly Announced Plans or Programs (4)
 
Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased Under the Plan or Programs at End of Period.
January 2020:
 
 
 
 
 
 
 
 
December 29, 2019 through January 25, 2020
 
4,893

 
29.27

 
 
$
180,760,509

February 2020:
 
 
 
 
 
 
 
 
January 26, 2020 through February 22, 2020
 
78,052

 
28.10

 
 
180,760,509

March 2020:
 
 
 
 
 
 
 
 
February 23, 2020 through March 28, 2020
 
2,289,931

(3)
25.40

 
2,187,685

 
125,760,525

Total
 
2,372,876

 
26.24

 
2,187,685

 
$
125,760,525


(1)
All shares purchased during the first quarter were acquired by the Company pursuant to the announced share repurchase program (other than shares withheld for taxes on restricted stock and exercised options and the strike price on exercised options).
(2)
The average price paid per share is calculated on a trade date basis and excludes commissions.
(3)
Includes 102,246 shares withheld for taxes on restricted stock and options.
(4)
Represents purchases made during the quarter under the authorization from the Company's Board of Directors, as announced, to repurchase up to an aggregate of $200.0 million of the Company's common stock over the period ending August 13, 2020, unless extended or shortened by the Board of Directors.


Item 6.  EXHIBITS

 The following exhibits are filed herewith:
 
31.1
 
31.2
 
32
 
101
Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 28, 2020 and December 28, 2019; (ii) Consolidated Statements of Operations for the three months ended March 28, 2020 and March 30, 2019; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 28, 2020 and March 30, 2019; (iv) Consolidated Statements of Stockholders' Equity for the three months ended March 28, 2020 and March 30, 2019; (v) Consolidated Statements of Cash Flows for the three months ended March 28, 2020 and March 30, 2019; (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:   
May 6, 2020
By: 
/s/  Brad Phillips
 
 
 
Brad Phillips
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer and Duly Authorized Officer)
 
 





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