DARLING INGREDIENTS INC. - Quarter Report: 2021 April (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 | April 3, 2021 | |||||||
| 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 163,172,181 shares of common stock, $0.01 par value, outstanding at May 6, 2021.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 3, 2021
TABLE OF CONTENTS
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DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 3, 2021 and January 2, 2021
(in thousands, except share data)
| April 3, 2021 | January 2, 2021 | ||||||||||
| ASSETS | (unaudited) | ||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 71,199 | $ | 81,617 | |||||||
| Restricted cash | 177 | 103 | |||||||||
Accounts receivable, less allowance for bad debts of $9,111 at April 3, 2021 and $10,815 at January 2, 2021 | 385,663 | 405,387 | |||||||||
| Inventories | 420,659 | 405,922 | |||||||||
| Prepaid expenses | 50,251 | 47,793 | |||||||||
| Income taxes refundable | 3,274 | 3,883 | |||||||||
| Other current assets | 9,544 | 42,289 | |||||||||
| Total current assets | 940,767 | 986,994 | |||||||||
Property, plant and equipment, less accumulated depreciation of $1,731,400 at April 3, 2021 and $1,702,123 at January 2, 2021 | 1,822,075 | 1,863,814 | |||||||||
Intangible assets, less accumulated amortization of $569,477 at April 3, 2021 and $568,086 at January 2, 2021 | 452,539 | 473,680 | |||||||||
| Goodwill | 1,241,242 | 1,260,240 | |||||||||
| Investment in unconsolidated subsidiaries | 915,085 | 804,682 | |||||||||
| Operating lease right-of-use assets | 145,238 | 146,563 | |||||||||
| Other assets | 59,099 | 60,682 | |||||||||
| Deferred income taxes | 15,402 | 16,676 | |||||||||
| $ | 5,591,447 | $ | 5,613,331 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | 26,997 | $ | 27,538 | |||||||
| Accounts payable, principally trade | 245,648 | 255,340 | |||||||||
| Income taxes payable | 15,627 | 17,497 | |||||||||
| Current operating lease liabilities | 38,064 | 39,459 | |||||||||
| Accrued expenses | 311,371 | 335,471 | |||||||||
| Total current liabilities | 637,707 | 675,305 | |||||||||
| Long-term debt, net of current portion | 1,417,534 | 1,480,531 | |||||||||
| Long-term operating lease liabilities | 108,777 | 109,707 | |||||||||
| Other non-current liabilities | 115,799 | 117,371 | |||||||||
| Deferred income taxes | 281,684 | 276,208 | |||||||||
| Total liabilities | 2,561,501 | 2,659,122 | |||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $0.01 par value; 250,000,000 shares authorized; 171,519,389 and 169,880,238 shares issued at April 3, 2021 and January 2, 2021, respectively | 1,715 | 1,699 | |||||||||
| Additional paid-in capital | 1,611,845 | 1,597,429 | |||||||||
Treasury stock, at cost; 8,364,523 and 7,679,849 shares at April 3, 2021 and January 2, 2021, respectively | (199,851) | (151,710) | |||||||||
| Accumulated other comprehensive loss | (295,796) | (252,433) | |||||||||
| Retained earnings | 1,848,690 | 1,696,924 | |||||||||
| Total Darling's stockholders’ equity | 2,966,603 | 2,891,909 | |||||||||
| Noncontrolling interests | 63,343 | 62,300 | |||||||||
| Total stockholders' equity | $ | 3,029,946 | $ | 2,954,209 | |||||||
| $ | 5,591,447 | $ | 5,613,331 | ||||||||
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 April 3, 2021 and March 28, 2020
(in thousands, except per share data)
(unaudited)
| Three Months Ended | |||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||
| Net sales | $ | 1,046,716 | $ | 852,842 | |||||||
| Costs and expenses: | |||||||||||
| Cost of sales and operating expenses | 772,784 | 646,908 | |||||||||
| Loss/(gain) on sale of assets | (64) | 61 | |||||||||
| Selling, general and administrative expenses | 97,398 | 96,193 | |||||||||
| Restructuring and asset impairment charges | 778 | — | |||||||||
| Depreciation and amortization | 78,534 | 84,671 | |||||||||
| Total costs and expenses | 949,430 | 827,833 | |||||||||
Equity in net income of Diamond Green Diesel | 102,225 | 97,820 | |||||||||
| Operating income | 199,511 | 122,829 | |||||||||
| Other expense: | |||||||||||
| Interest expense | (16,428) | (19,090) | |||||||||
| Foreign currency gain/(loss) | (410) | 1,664 | |||||||||
| Other expense, net | (1,159) | (1,881) | |||||||||
| Total other expense | (17,997) | (19,307) | |||||||||
| Equity in net income of other unconsolidated subsidiaries | 612 | 869 | |||||||||
| Income before income taxes | 182,126 | 104,391 | |||||||||
| Income tax expense | 28,708 | 18,300 | |||||||||
| Net income | 153,418 | 86,091 | |||||||||
| Net income attributable to noncontrolling interests | (1,652) | (581) | |||||||||
| Net income attributable to Darling | $ | 151,766 | $ | 85,510 | |||||||
| Basic income per share | $ | 0.93 | $ | 0.52 | |||||||
| Diluted income per share | $ | 0.90 | $ | 0.51 | |||||||
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 April 3, 2021 and March 28, 2020
(in thousands)
(unaudited)
| Three Months Ended | |||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||
| Net income | $ | 153,418 | $ | 86,091 | |||||||
| Other comprehensive income/(loss), net of tax: | |||||||||||
| Foreign currency translation | (38,222) | (65,236) | |||||||||
| Pension adjustments | 792 | 648 | |||||||||
| Soybean meal derivative adjustments | (257) | — | |||||||||
| Corn option derivative adjustments | (800) | 136 | |||||||||
| Heating oil derivative adjustments | 3,464 | 10,870 | |||||||||
| Foreign exchange derivative adjustments | (6,806) | (9,151) | |||||||||
| Total other comprehensive loss, net of tax | (41,829) | (62,733) | |||||||||
| Total comprehensive income | $ | 111,589 | $ | 23,358 | |||||||
Comprehensive income attributable to noncontrolling interests | 3,186 | 492 | |||||||||
| Comprehensive income attributable to Darling | $ | 108,403 | $ | 22,866 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three months ended April 3, 2021 and March 28, 2020
(in thousands, except share data)
(unaudited)
| Common Stock | |||||||||||||||||||||||||||||
| Number of Outstanding Shares | $0.01 par Value | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Stockholders' equity attributable to Darling | Non-controlling Interests | Total Stockholders' Equity | |||||||||||||||||||||
| Balances at January 2, 2021 | 162,200,389 | $ | 1,699 | $ | 1,597,429 | $ | (151,710) | $ | (252,433) | $ | 1,696,924 | $ | 2,891,909 | $ | 62,300 | $ | 2,954,209 | ||||||||||||
| Net income | — | — | — | — | — | 151,766 | 151,766 | 1,652 | 153,418 | ||||||||||||||||||||
Distribution of noncontrolling interest earnings | — | — | — | — | — | — | — | (2,143) | (2,143) | ||||||||||||||||||||
Pension liability adjustments, net of tax | — | — | — | — | 792 | — | 792 | — | 792 | ||||||||||||||||||||
| Heating oil derivative adjustments, net of tax | — | — | — | — | 3,464 | — | 3,464 | — | 3,464 | ||||||||||||||||||||
| Corn option derivative adjustments, net of tax | — | — | — | — | (800) | — | (800) | — | (800) | ||||||||||||||||||||
| Soybean meal derivative adjustments, net of tax | — | — | — | — | (257) | — | (257) | — | (257) | ||||||||||||||||||||
| Foreign exchange derivative adjustments, net of tax | — | — | — | — | (6,806) | — | (6,806) | — | (6,806) | ||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | — | (39,756) | — | (39,756) | 1,534 | (38,222) | ||||||||||||||||||||
| Issuance of non-vested stock | — | — | 58 | — | — | — | 58 | — | 58 | ||||||||||||||||||||
| Stock-based compensation | — | — | 8,357 | — | — | — | 8,357 | — | 8,357 | ||||||||||||||||||||
| Treasury stock | (684,674) | — | — | (48,141) | — | — | (48,141) | — | (48,141) | ||||||||||||||||||||
| Issuance of common stock | 1,639,151 | 16 | 6,001 | — | — | — | 6,017 | — | 6,017 | ||||||||||||||||||||
| Balances at April 3, 2021 | 163,154,866 | $ | 1,715 | $ | 1,611,845 | $ | (199,851) | $ | (295,796) | $ | 1,848,690 | $ | 2,966,603 | $ | 63,343 | $ | 3,029,946 | ||||||||||||
| Common Stock | |||||||||||||||||||||||||||||
| Number of Outstanding Shares | $0.01 par Value | Additional Paid-In Capital | Treasury Stock | Accumulated Other Comprehensive Loss | Retained Earnings | Stockholders' equity attributable to Darling | Non-controlling Interests | Total Stockholders' Equity | |||||||||||||||||||||
| Balances at December 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 adjustments, net of tax | — | — | — | — | 10,870 | — | 10,870 | 10,870 | |||||||||||||||||||||
| Corn option derivative adjustments, net of tax | — | — | — | — | 136 | — | 136 | — | 136 | ||||||||||||||||||||
| Foreign exchange derivative adjustments, 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 | ||||||||||||
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 April 3, 2021 and March 28, 2020
(in thousands)
(unaudited)
| April 3, 2021 | March 28, 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net Income | $ | 153,418 | $ | 86,091 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 78,534 | 84,671 | |||||||||
| Loss (gain) on disposal of property, plant, equipment and other assets | (64) | 61 | |||||||||
| Asset impairment | 138 | — | |||||||||
| Deferred taxes | 11,809 | 6,377 | |||||||||
| Decrease in long-term pension liability | (448) | (264) | |||||||||
| Stock-based compensation expense | 8,415 | 10,818 | |||||||||
Write-off deferred loan costs | 598 | — | |||||||||
Deferred loan cost amortization | 1,040 | 1,416 | |||||||||
Equity in net income of Diamond Green Diesel and other unconsolidated subsidiaries | (102,837) | (98,689) | |||||||||
| Distributions of earnings from other unconsolidated subsidiaries | 57 | — | |||||||||
Changes in operating assets and liabilities, net of effects from acquisitions: | |||||||||||
| Accounts receivable | 10,721 | 487 | |||||||||
| Income taxes refundable/payable | (760) | 348 | |||||||||
| Inventories and prepaid expenses | (27,188) | (24,999) | |||||||||
| Accounts payable and accrued expenses | (13,462) | (16,790) | |||||||||
| Other | 18,834 | (14,981) | |||||||||
| Net cash provided by operating activities | 138,805 | 34,546 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (60,751) | (61,599) | |||||||||
| Acquisitions, net of cash acquired | (340) | — | |||||||||
| Investment in unconsolidated subsidiary | (4,449) | — | |||||||||
Gross proceeds from disposal of property, plant and equipment and other assets | 1,629 | 379 | |||||||||
| Payments related to routes and other intangibles | (347) | (3,416) | |||||||||
| Net cash used by investing activities | (64,258) | (64,636) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from long-term debt | 9,262 | 8,264 | |||||||||
| Payments on long-term debt | (60,444) | (8,638) | |||||||||
| Borrowings from revolving credit facility | 111,000 | 219,933 | |||||||||
| Payments on revolving credit facility | (97,000) | (100,782) | |||||||||
| Net cash overdraft financing | 499 | (9,594) | |||||||||
| Issuance of common stock | 50 | 67 | |||||||||
| Repurchase of common stock | — | (55,044) | |||||||||
| Minimum withholding taxes paid on stock awards | (42,268) | (4,328) | |||||||||
| Acquisition of noncontrolling interest | — | (8,784) | |||||||||
| Distributions to noncontrolling interests | (2,143) | (688) | |||||||||
| Net cash provided (used) by financing activities | (81,044) | 40,406 | |||||||||
| Effect of exchange rate changes on cash | (3,847) | (6,916) | |||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | (10,344) | 3,400 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 81,720 | 73,045 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 71,376 | $ | 76,445 | |||||||
| Supplemental disclosure of cash flow information: | |||||||||||
| Accrued capital expenditures | $ | (9,678) | $ | (1,630) | |||||||
| Cash paid during the period for: | |||||||||||
| Interest, net of capitalized interest | $ | 2,774 | $ | 5,863 | |||||||
| Income taxes, net of refunds | $ | 15,578 | $ | 11,453 | |||||||
| Non-cash operating activities | |||||||||||
| Operating lease right of use asset obtained in exchange for new lease liabilities | $ | 12,404 | $ | 9,121 | |||||||
| 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
April 3, 2021
(unaudited)
(1)General
The accompanying consolidated financial statements for the three month periods ended April 3, 2021 and March 28, 2020, have been prepared by Darling Ingredients Inc., a Delaware corporation (“Darling”, and together with its subsidiaries, the “Company” or “we”, “us” or “our”) in accordance with generally accepted accounting principles in the United States (“GAAP”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended January 2, 2021.
(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 April 3, 2021, and include the 13 weeks ended April 3, 2021, and the 13 weeks ended March 28, 2020.
(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 as collateral for environmental claims and are insignificant to the Company.
(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 finished product or services to the Company’s customers. The estimate of
8
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 third party banks without recourse for cash less a nominal fee. For the three months ended April 3, 2021 and March 28, 2020, the Company sold approximately $106.9 million and $84.5 million of its trade receivables and incurred approximately $0.3 million and $0.4 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 (Revenue) to the Company's Consolidated Financial Statements included herein.
(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/(losses) in determining net income. The Company incurred net foreign currency translation losses of approximately $39.8 million and $65.1 million for the three months ended April 3, 2021 and March 28, 2020, 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 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. 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
9
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.
As a result of the current global COVID-19 pandemic, and related government imposed movement restrictions and initiatives implemented to reduce the global transmission of COVID-19, we have evaluated the potential impact to the Company's operations and for any indicators of potential triggering events that could indicate certain of the Company's assets may be impaired. Through the three months ended April 3, 2021, the Company has not observed any impairments of the Company's assets or a significant change in their fair value due to the COVID-19 pandemic.
(i) Earnings Per Share
Basic income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares including non-vested and restricted shares outstanding during the period. Diluted income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares outstanding during the period increased by dilutive common equivalent shares determined using the treasury stock method.
10
| Net Income per Common Share (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| April 3, 2021 | March 28, 2020 | ||||||||||||||||||||||||||||||||||
| Income | Shares | Per Share | Income | Shares | Per Share | ||||||||||||||||||||||||||||||
| Basic: | |||||||||||||||||||||||||||||||||||
| Net Income attributable to Darling | $ | 151,766 | 162,925 | $ | 0.93 | $ | 85,510 | 163,474 | $ | 0.52 | |||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||||||||||||||
| Add: Option shares in the money and dilutive effect of non-vested stock awards | 5,733 | 6,749 | |||||||||||||||||||||||||||||||||
| Less: Pro forma treasury shares | (909) | (2,296) | |||||||||||||||||||||||||||||||||
| Diluted: | |||||||||||||||||||||||||||||||||||
| Net income attributable to Darling | $ | 151,766 | 167,749 | $ | 0.90 | $ | 85,510 | 167,927 | $ | 0.51 | |||||||||||||||||||||||||
For the three months ended April 3, 2021 and March 28, 2020, respectively, zero and 551,877 outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the three months ended April 3, 2021 and March 28, 2020, respectively, 162,896 and 406,502 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.
(3) Investment in Unconsolidated Subsidiaries
On January 21, 2011, a wholly-owned subsidiary of Darling entered into a limited liability company agreement with a wholly-owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (“DGD” or the “DGD Joint Venture”). The DGD Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant 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 ongoing expansion project to construct a new, parallel facility located next to the existing facility.
Selected financial information for the Company's DGD Joint Venture is as follows (in thousands):
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Assets: | |||||||||||
| Total current assets | $ | 477,840 | $ | 383,557 | |||||||
| Property, plant and equipment, net | 1,437,905 | 1,238,726 | |||||||||
| Other assets | 39,171 | 36,082 | |||||||||
| Total assets | $ | 1,954,916 | $ | 1,658,365 | |||||||
| Liabilities and members' equity: | |||||||||||
| Total current portion of long term debt | $ | 562 | $ | 517 | |||||||
| Total other current liabilities | 177,594 | 99,787 | |||||||||
| Total long term debt | 8,702 | 8,705 | |||||||||
| Total other long term liabilities | 8,722 | 3,758 | |||||||||
| Total members' equity | 1,759,336 | 1,545,598 | |||||||||
| Total liabilities and members' equity | $ | 1,954,916 | $ | 1,658,365 | |||||||
11
| Three Months Ended | |||||||||||
| (in thousands) | March 31, 2021 | March 31, 2020 | |||||||||
| Revenues: | |||||||||||
| Operating revenues | $ | 431,633 | $ | 358,615 | |||||||
| Expenses: | |||||||||||
Total costs and expenses less depreciation, amortization and accretion expense | 215,234 | 151,347 | |||||||||
Depreciation, amortization and accretion expense | 11,687 | 11,774 | |||||||||
| Total costs and expenses | 226,921 | 163,121 | |||||||||
| Operating income | 204,712 | 195,494 | |||||||||
| Other income | 58 | 461 | |||||||||
| Interest and debt expense, net | (320) | (315) | |||||||||
| Net income | $ | 204,450 | $ | 195,640 | |||||||
As of April 3, 2021, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $879.7 million on the consolidated balance sheet. The Company has recorded equity in net income from the DGD Joint Venture of approximately $102.2 million and $97.8 million for the three months ended April 3, 2021 and March 28, 2020, respectively. In December 2019, the blender tax credits for calendar year 2018 and 2019 were retroactively reinstated 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, 2021 and March 31, 2020, the DGD Joint Venture recorded approximately $79.0 million and $80.0 million of blenders tax credits, respectively. In the three months ended April 3, 2021, the Company did not receive any dividend distributions from the DGD Joint Venture.
In addition to the DGD Joint Venture, the Company has investments in other unconsolidated subsidiaries that are insignificant to the Company.
(4) Inventories
A summary of inventories follows (in thousands):
| April 3, 2021 | January 2, 2021 | ||||||||||
| Finished product | $ | 250,237 | $ | 233,044 | |||||||
| Work in process | 87,219 | 87,223 | |||||||||
| Raw material | 35,229 | 36,746 | |||||||||
| Supplies and other | 47,974 | 48,909 | |||||||||
| $ | 420,659 | $ | 405,922 | ||||||||
(5) Intangible Assets
The gross carrying amount of intangible assets not subject to amortization and intangible assets subject to amortization
is as follows (in thousands):
12
| April 3, 2021 | January 2, 2021 | ||||||||||
| Indefinite Lived Intangible Assets | |||||||||||
| Trade names | $ | 54,184 | $ | 55,349 | |||||||
| 54,184 | 55,349 | ||||||||||
| Finite Lived Intangible Assets: | |||||||||||
| Routes | 393,937 | 397,342 | |||||||||
| Permits | 481,959 | 494,191 | |||||||||
| Non-compete agreements | 645 | 3,300 | |||||||||
| Trade names | 65,675 | 65,675 | |||||||||
| Royalty, consulting, land use rights and leasehold | 25,616 | 25,909 | |||||||||
| 967,832 | 986,417 | ||||||||||
| Accumulated Amortization: | |||||||||||
| Routes | (206,137) | (203,392) | |||||||||
| Permits | (314,741) | (315,246) | |||||||||
| Non-compete agreements | (355) | (2,981) | |||||||||
| Trade names | (41,125) | (39,491) | |||||||||
| Royalty, consulting, land use rights and leasehold | (7,119) | (6,976) | |||||||||
| (569,477) | (568,086) | ||||||||||
| Total Intangible assets, less accumulated amortization | $ | 452,539 | $ | 473,680 | |||||||
Gross intangible routes, permits, trade names, non-compete agreements and other intangibles decreased in fiscal 2021 as a result of approximately $9.5 million of fully amortized asset retirements and a decrease from foreign currency translation. Amortization expense for the three months ended April 3, 2021 and March 28, 2020, was approximately $17.0 million and $18.2 million, respectively.
(6) Goodwill
Changes in the carrying amount of goodwill (in thousands):
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Balance at January 2, 2021 | ||||||||||||||
| Goodwill | $ | 830,321 | $ | 351,296 | $ | 126,578 | $ | 1,308,195 | ||||||
| Accumulated impairment losses | (15,914) | (461) | (31,580) | (47,955) | ||||||||||
| 814,407 | 350,835 | 94,998 | 1,260,240 | |||||||||||
| Goodwill acquired during year | 40 | — | 161 | 201 | ||||||||||
| Foreign currency translation | (5,631) | (9,685) | (3,883) | (19,199) | ||||||||||
| Balance at April 3, 2021 | ||||||||||||||
| Goodwill | 824,730 | 341,611 | 122,856 | 1,289,197 | ||||||||||
| Accumulated impairment losses | (15,914) | (461) | (31,580) | (47,955) | ||||||||||
| $ | 808,816 | $ | 341,150 | $ | 91,276 | $ | 1,241,242 | |||||||
(7) Accrued Expenses
Accrued expenses consist of the following (in thousands):
| April 3, 2021 | January 2, 2021 | ||||||||||
Compensation and benefits | $ | 99,108 | $ | 121,497 | |||||||
Accrued ad valorem, and franchise taxes | 15,779 | 39,167 | |||||||||
Accrued operating expenses | 67,132 | 62,601 | |||||||||
Other accrued expense | 129,352 | 112,206 | |||||||||
| $ | 311,371 | $ | 335,471 | ||||||||
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(8) Leases
The Company leases certain real and personal property, a large portion of the Company's fleet of tractors, all of its rail cars, some IT equipment and other transportation equipment under non-cancelable operating leases. 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 | ||||||||
| April 3, 2021 | March 28, 2020 | |||||||
| Operating lease expense | $ | 11,661 | $ | 11,509 | ||||
| Short-term lease costs | 6,408 | 6,245 | ||||||
| Total lease cost | $ | 18,069 | $ | 17,754 | ||||
Other information (in thousands, except lease terms and discount rates):
| Three Months Ended | ||||||||
| April 3, 2021 | March 28, 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||
| Operating cash flows from operating leases | $ | 14,265 | $ | 12,456 | ||||
| April 3, 2021 | January 2, 2021 | |||||||
| Operating right-of-use assets, net | $ | 145,238 | $ | 146,563 | ||||
| Operating lease liability, current | $ | 38,064 | $ | 39,459 | ||||
| Operating lease liability, non-current | 108,777 | 109,707 | ||||||
| Total operating lease liabilities | $ | 146,841 | $ | 149,166 | ||||
| Weighted average remaining lease term - operating leases | 6.43 years | 6.30 years | ||||||
| Weighted average discount rate - operating leases | 4.01 | % | 4.22 | % | ||||
Future annual minimum lease payments and capital lease commitments as of April 3, 2021 are as follows (in thousands):
| Period Ending Fiscal | Operating Leases | Capital Leases | ||||||
| 2021 (excluding the three months ended April 3, 2021) | $ | 32,297 | $ | 650 | ||||
| 2022 | 34,591 | 824 | ||||||
| 2023 | 29,567 | 611 | ||||||
| 2024 | 22,759 | 467 | ||||||
| 2025 | 14,118 | 331 | ||||||
| Thereafter | 27,721 | 574 | ||||||
| $ | 161,053 | $ | 3,457 | |||||
| Less amounts representing interest | $ | (14,212) | (134) | |||||
| Lease obligations included in current and long-term liabilities | $ | 146,841 | $ | 3,323 | ||||
As of April 3, 2021, the Company also has additional operating leases that have not yet commenced, primarily for rail car and tractors, with fixed payments over their noncancellable terms of $3.2 million. These operating leases will commence in 2021 with noncancellable terms of 5 years.
14
(9) Debt
Debt consists of the following (in thousands):
| April 3, 2021 | January 2, 2021 | ||||||||||
| Amended Credit Agreement: | |||||||||||
Revolving Credit Facility | $ | 69,000 | $ | 55,000 | |||||||
Term Loan B | 250,000 | 300,000 | |||||||||
| Less unamortized deferred loan costs | (2,979) | (3,798) | |||||||||
| Carrying value Term Loan B | 247,021 | 296,202 | |||||||||
5.25% Senior Notes due 2027 with effective interest of 5.47% | 500,000 | 500,000 | |||||||||
| Less unamortized deferred loan costs | (5,553) | (5,747) | |||||||||
Carrying value 5.25% Senior Notes due 2027 | 494,447 | 494,253 | |||||||||
3.625% Senior Notes due 2026 - Denominated in euro with effective interest of 3.83% | 606,310 | 632,163 | |||||||||
| Less unamortized deferred loan costs - Denominated in euro | (6,046) | (6,586) | |||||||||
Carrying value 3.625% Senior Notes due 2026 | 600,264 | 625,577 | |||||||||
| Other Notes and Obligations | 33,799 | 37,037 | |||||||||
| 1,444,531 | 1,508,069 | ||||||||||
| Less Current Maturities | 26,997 | 27,538 | |||||||||
| $ | 1,417,534 | $ | 1,480,531 | ||||||||
As of April 3, 2021, the Company had 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 April 3, 2021, the Company had finance lease obligations denominated in euros of approximately €2.8 million.
As of April 3, 2021, the Company had other notes and obligations of $33.8 million that consist of various overdraft facilities of approximately $4.7 million, a China working capital line of credit of approximately $16.2 million and other debt of approximately $12.9 million.
Senior Secured Credit Facilities. On January 6, 2014, Darling, Darling International Canada Inc. (“Darling Canada”) and Darling International NL Holdings B.V. (“Darling NL”) entered into a Second Amended and Restated Credit Agreement (as subsequently amended, the “Amended Credit Agreement”), restating its then existing Amended and Restated Credit Agreement dated September 27, 2013 (the “Former Credit Agreement”), with the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents from time to time party thereto.
Effective September 18, 2020, the Company, and certain of its subsidiaries entered into an amendment (the “Sixth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Sixth Amendment (i) extended the maturity date of the revolving credit facility under the Amended Credit Agreement from December 16, 2021 to September 18, 2025, (ii) increased the leverage ratio applicable to achieving the lowest applicable margin on borrowing under the revolving credit facility from 1.0 to 1.5, (iii) eliminated or modified certain of the negative covenants to increase the allowances for certain actions, including the incurrence of debt and investments, (iv) limited guarantees from, and security with respect to, entities organized outside of the United States and Canada to a limited group of foreign subsidiary holding companies, (v) included a collateral release mechanism, subject to the consent of the term loan B lenders, upon the Company achieving certain investment grade credit ratings, and (vi) made other market updates and changes.
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.
15
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) adjusted the applicable margin pricing grid on borrowings under the revolving credit facility which adjusts based on the Company's total leverage ratio as set forth in the Amended Credit Agreement; (ii) 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 a 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; (iii) 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 (iv) made other updates and changes.
The Company's Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of $1.525 billion comprised of (i) the Company's $525.0 million term loan B facility and (ii) the Company's $1.0 billion five-year revolving credit facility (up to $150.0 million of which is available for a letter of credit sub-facility and up to $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 $970.0 million of the revolving loan facility is available to be borrowed by (x) Darling in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender, (y) Darling Canada in Canadian dollars and (z) Darling NL and Darling Ingredients International Holding B.V. (“Darling BV”), in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender. The remaining $30.0 million is only available in U.S. dollars to Darling. The revolving credit facility will mature on September 18, 2025. The revolving credit facility will be used for working capital needs, general corporate purposes and other purposes not prohibited by the Amended Credit Agreement.
The interest rate applicable to any borrowings under the revolving credit facility will equal either LIBOR/euro interbank offered rate/CDOR plus 1.50% per annum or base rate/Canadian prime rate plus 0.50% 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 April 3, 2021, the Company had $27.0 million outstanding under the revolver at base rate plus a margin of 0.50% per annum for a total of 3.75% per annum and $42.0 million outstanding under the revolver at LIBOR plus a margin of 1.50% per annum for a total of 1.616% per annum. The Company had $250.0 million outstanding under the term loan B facility at LIBOR plus a margin of 2.00% per annum for a total of 2.12% per annum. As of April 3, 2021, the Company had availability of $879.9 million under the Amended Credit Agreement taking into account amounts borrowed, ancillary facilities and letters of credit issued of $3.8 million. The Company also has foreign bank guarantees that are not part of the Company's Amended Credit Agreement in the amount of approximately $11.7 million at April 3, 2021.
3.625% Senior Notes due 2026. On May 2, 2018, Darling Global Finance B.V. issued and sold €515.0 million aggregate principal amount of 3.625% Senior Notes due 2026 (the “3.625% Notes”). The 3.625% Notes, which were offered in a private offering, were issued pursuant to a Senior Notes Indenture, dated as of May 2, 2018 (the “3.625% Indenture”), among Darling Global Finance B.V., Darling, the subsidiary guarantors party thereto from time to time, Citibank, N.A., London Branch, as trustee and principal paying agent, and Citigroup Global Markets Deutschland AG, as principal registrar. The 3.625% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than any foreign subsidiary or any receivable entity) that guarantee the Senior Secured Credit Facilities.
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 April 3, 2021, 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.
16
(10) Income Taxes
The Company has provided income taxes for the three month periods ended April 3, 2021 and March 28, 2020, based on its estimate of the effective tax rate for the entire 2021 and 2020 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 April 3, 2021, the Company had $5.6 million of gross unrecognized tax benefits and $0.4 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 $0.2 million, excluding interest and penalties. The possible change in unrecognized tax benefits relates to the expiration of certain statutes of limitation.
The Company’s major taxing jurisdictions include the United States (federal and state), Canada, the Netherlands, Belgium, Brazil, Germany, France and China. The Company is subject to regular examination by various tax authorities and although the final outcome of these examinations is not yet determinable, the Company does not anticipate that any of the examinations will have a significant impact on the Company's results of operations or financial position. The statute of limitations for the Company’s major tax jurisdictions is open for varying periods, but is generally closed through the 2013 tax year.
(11) Other Comprehensive Income/(Loss)
The Company follows Financial Accounting Standards Board (“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, soybean meal adjustments, corn option adjustments, foreign exchange forward adjustments, heating oil swap adjustments and foreign currency translation adjustments.
In the first three months of fiscal 2021 and 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 April 3, 2021 and March 28, 2020 are as follows (in thousands):
17
| Three Months Ended | ||||||||||||||||||||
| Before-Tax | Tax (Expense) | Net-of-Tax | ||||||||||||||||||
| Amount | or Benefit | Amount | ||||||||||||||||||
| April 3, 2021 | March 28, 2020 | April 3, 2021 | March 28, 2020 | April 3, 2021 | March 28, 2020 | |||||||||||||||
| Defined benefit pension plans | ||||||||||||||||||||
Amortization of prior service (cost)/benefit | $ | 5 | $ | 8 | $ | (1) | $ | (2) | $ | 4 | $ | 6 | ||||||||
| Amortization of actuarial loss | 1,052 | 854 | (264) | (212) | 788 | 642 | ||||||||||||||
| Total defined benefit pension plans | 1,057 | 862 | (265) | (214) | 792 | 648 | ||||||||||||||
| Soybean meal option derivatives | ||||||||||||||||||||
| Reclassified to earnings | (280) | — | 71 | — | (209) | — | ||||||||||||||
| Activity recognized in other comprehensive income/(loss) | (64) | — | 16 | — | (48) | — | ||||||||||||||
| Total soybean meal option derivatives | (344) | — | 87 | — | (257) | — | ||||||||||||||
| Corn option derivatives | ||||||||||||||||||||
| Reclassified to earnings | 3,920 | 300 | (996) | (75) | 2,924 | 225 | ||||||||||||||
| Activity recognized in other comprehensive income/(loss) | (4,993) | (119) | 1,269 | 30 | (3,724) | (89) | ||||||||||||||
| Total corn option derivatives | (1,073) | 181 | 273 | (45) | (800) | 136 | ||||||||||||||
| Heating oil derivatives | ||||||||||||||||||||
| Activity recognized in other comprehensive income/(loss) | 4,644 | 14,494 | (1,180) | (3,624) | 3,464 | 10,870 | ||||||||||||||
| Total heating oil derivatives | 4,644 | 14,494 | (1,180) | (3,624) | 3,464 | 10,870 | ||||||||||||||
| Foreign exchange derivatives | ||||||||||||||||||||
| Reclassified to earnings | 224 | (412) | (75) | 129 | 149 | (283) | ||||||||||||||
| Activity recognized in other comprehensive income/(loss) | (10,457) | (12,920) | 3,502 | 4,052 | (6,955) | (8,868) | ||||||||||||||
| Total foreign exchange derivatives | (10,233) | (13,332) | 3,427 | 4,181 | (6,806) | (9,151) | ||||||||||||||
| Foreign currency translation | (39,737) | (65,887) | 1,515 | 651 | (38,222) | (65,236) | ||||||||||||||
| Other comprehensive income/(loss) | $ | (45,686) | $ | (63,682) | $ | 3,857 | $ | 949 | $ | (41,829) | $ | (62,733) | ||||||||
The following table presents the amounts reclassified out of each component of other comprehensive income/(loss), net of tax for the three months ended April 3, 2021 and March 28, 2020 as follows (in thousands):
| Three Months Ended | |||||||||||
| April 3, 2021 | March 28, 2020 | Statement of Operations Classification | |||||||||
| Derivative instruments | |||||||||||
| Soybean meal derivatives | $ | 280 | $ | — | Net sales | ||||||
| Foreign exchange contracts | (224) | 412 | Net sales | ||||||||
| Corn option derivatives | (3,920) | (300) | Cost of sales and operating expenses | ||||||||
| (3,864) | 112 | Total before tax | |||||||||
| 1,000 | (54) | Income taxes | |||||||||
| (2,864) | 58 | Net of tax | |||||||||
| Defined benefit pension plans | |||||||||||
Amortization of prior service cost | $ | (5) | $ | (8) | (a) | ||||||
Amortization of actuarial loss | (1,052) | (854) | (a) | ||||||||
| (1,057) | (862) | Total before tax | |||||||||
| 265 | 214 | Income taxes | |||||||||
| (792) | (648) | Net of tax | |||||||||
| Total reclassifications | $ | (3,656) | $ | (590) | Net of tax | ||||||
(a)These items are included in the computation of net periodic pension cost. See Note 13 (Employee Benefit Plans) to the Company's Consolidated Financial Statement included herein for additional information.
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The following table presents changes in each component of accumulated other comprehensive income/(loss) as of April 3, 2021 as follows (in thousands):
| Three Months Ended April 3, 2021 | |||||||||||||||||
| Foreign Currency | Derivative | Defined Benefit | |||||||||||||||
| Translation | Instruments | Pension Plans | Total | ||||||||||||||
| Accumulated Other Comprehensive loss January 2, 2021, attributable to Darling, net of tax | $ | (210,902) | $ | (3,214) | $ | (38,317) | $ | (252,433) | |||||||||
| Other comprehensive loss before reclassifications | (38,222) | (7,263) | — | (45,485) | |||||||||||||
Amounts reclassified from accumulated other comprehensive loss | — | 2,864 | 792 | 3,656 | |||||||||||||
| Net current-period other comprehensive income/(loss) | (38,222) | (4,399) | 792 | (41,829) | |||||||||||||
Noncontrolling interest | 1,534 | — | — | 1,534 | |||||||||||||
| Accumulated Other Comprehensive loss April 3, 2021, attributable to Darling, net of tax | (250,658) | $ | (7,613) | $ | (37,525) | $ | (295,796) | ||||||||||
(12) Stockholders' Equity
Fiscal 2021 Long-Term Incentive Opportunity Awards (2021 LTIP). On January 4, 2021, the Compensation Committee (the “Committee”) of the Company's Board of Directors adopted the 2021 LTIP pursuant to which they awarded certain of the Company's key employees, 90,689 restricted stock units and 126,711 performance share units (the “PSUs”) under the Company's 2017 Omnibus Incentive Plan. The restricted stock units vest 33.33% on the first, second and third anniversaries of the grant date. The PSUs are tied to a three-year forward-looking performance period and will be earned based on the Company's average return on 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 2024, 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.
On August 3, 2020, the Company’s Board of Directors approved the extension for an additional two years of its previously announced share repurchase program and refreshed the amount of the program back up to its original amount of an aggregate of $200.0 million of the Company's Common Stock depending on market conditions. As of April 3, 2021, the Company had approximately $200.0 million remaining under the share repurchase program initially approved in August 2017 and subsequently extended to August 13, 2022. During the first quarter of fiscal 2021, no common stock was repurchased under the repurchase program.
(13) 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 April 3, 2021 and March 28, 2020 includes the following components (in thousands):
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| Pension Benefits | ||||||||
| Three Months Ended | ||||||||
| April 3, 2021 | March 28, 2020 | |||||||
| Service cost | $ | 785 | $ | 755 | ||||
| Interest cost | 1,204 | 1,428 | ||||||
| Expected return on plan assets | (2,321) | (2,039) | ||||||
| Amortization of prior service cost | 5 | 8 | ||||||
| Amortization of actuarial loss | 1,052 | 854 | ||||||
| Net pension cost | $ | 725 | $ | 1,006 | ||||
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 April 3, 2021, the Company expects to contribute approximately $3.8 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 April 3, 2021 and March 28, 2020 of approximately $0.9 million and $0.8 million, respectively.
The Company participates in various multiemployer pension plans which provide defined benefits to certain employees covered by labor contracts. These plans are not administered by the Company and contributions are determined in accordance with provisions of negotiated labor contracts to meet their pension benefit obligations to their participants. The Company's contributions to each multiemployer plan represent less than 5% of the total contributions to each plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities on two of the plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone. With respect to the other multiemployer pension plans in which the Company participates and which are not individually significant, five plans have certified as critical or red zone and two plans have certified as endangered or yellow zone as defined by the Pension Protection Act of 2006.
The Company currently has withdrawal liabilities recorded on four U.S. multiemployer plans in which it participated. During the first quarter of fiscal 2021, the Company was notified by one of these multiemployer plans that the Company's withdrawal liability has increased and as a result the Company recorded an additional liability of approximately $1.3 million. As of April 3, 2021, the Company has an aggregate accrued liability of approximately $4.0 million representing the present value of scheduled withdrawal liability payments on the multiemployer plans that have given notice of withdrawal. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require additional funding under the Pension Protection Act of 2006, the amounts could be material.
(14) 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 April 3, 2021, the Company had corn option contracts, soybean meal forward contracts and foreign exchange forward and option contracts outstanding that qualified and were
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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 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 2020 and fiscal 2021, 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 April 3, 2021 and January 2, 2021, the aggregate fair value of these corn option contracts was approximately $8.0 million and $6.8 million, respectively. These amounts are included in accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss. The Company may enter into corn option contracts in the future from time to time.
In fiscal 2020 and fiscal 2021, the Company entered into foreign exchange forward and option contracts that are designated as cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2022. At April 3, 2021 and January 2, 2021, the aggregate fair value of these foreign exchange contracts was approximately $0.4 million and $11.6 million, respectively. These amounts are included in other current assets, accrued expense and noncurrent assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
In fiscal 2020 and fiscal 2021, the Company entered into soybean meal forward contracts to hedge a portion of its forecasted poultry meal sales into the second quarter of fiscal 2021. As of April 3, 2021 and January 2, 2021, the aggregate fair value of the soybean meal contracts was $0.1 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 loss.
As of April 3, 2021, the Company had the following designated and non-designated outstanding forward and option contract amounts that were entered into to hedge foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency (in thousands):
| Functional Currency | Contract Currency | |||||||||||||
| Type | Amount | Type | Amount | |||||||||||
| Brazilian real | 49,335 | Euro | 7,305 | |||||||||||
| Brazilian real | 1,103,561 | U.S. dollar | 241,320 | |||||||||||
| Euro | 35,967 | U.S. dollar | 42,810 | |||||||||||
| Euro | 43,119 | Polish zloty | 198,500 | |||||||||||
| Euro | 6,293 | Japanese yen | 808,776 | |||||||||||
| Euro | 16,176 | Chinese renminbi | 126,124 | |||||||||||
| Euro | 42,340 | Australian dollar | 65,550 | |||||||||||
| Euro | 3,048 | British pound | 2,600 | |||||||||||
| Euro | 32 | Canadian dollar | 50 | |||||||||||
| Polish zloty | 1,031 | U.S. dollar | 262 | |||||||||||
| Polish zloty | 24,116 | Euro | 5,195 | |||||||||||
| British pound | 176 | Euro | 207 | |||||||||||
| Japanese yen | 231,803 | U.S. dollar | 2,159 | |||||||||||
| U.S. dollar | 100 | Japanese yen | 11,000 | |||||||||||
| U.S. dollar | 165,311 | Euro | 140,000 | |||||||||||
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The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at April 3, 2021 into earnings over the next 12 months will be approximately $10.0 million. As of April 3, 2021, 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 April 3, 2021 and March 28, 2020 (in thousands):
| Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges | |||||||||||||||||
| Three Months Ended | |||||||||||||||||
| Derivatives not designated as hedging instruments | Location | April 3, 2021 | March 28, 2020 | ||||||||||||||
| Foreign exchange | Foreign currency loss | $ | 5,389 | $ | (1,295) | ||||||||||||
| Foreign exchange | Net sales | 729 | 730 | ||||||||||||||
| Foreign exchange | Cost of sales and operating expenses | (444) | (887) | ||||||||||||||
| Foreign exchange | Selling, general and administrative expense | 2,531 | 5,724 | ||||||||||||||
| Corn options and futures | Net sales | (998) | 855 | ||||||||||||||
| Corn options and futures | Cost of sales and operating expenses | 1,469 | (1,841) | ||||||||||||||
| Total | $ | 8,676 | $ | 3,286 | |||||||||||||
At April 3, 2021, the Company had forward purchase agreements in place for purchases of approximately $71.9 million of natural gas and diesel fuel. The Company intends to take physical delivery of the commodities under the forward purchase agreements and accordingly, these contracts are not subject to the requirements of fair value accounting because they qualify as normal purchases.
(15) 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 April 3, 2021 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 April 3, 2021 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 | $ | 2,211 | $ | — | $ | 2,211 | $ | — | ||||||
| Total Assets | $ | 2,211 | $ | — | $ | 2,211 | $ | — | ||||||
| Liabilities: | ||||||||||||||
| Derivative instruments | $ | 10,483 | $ | — | $ | 10,483 | $ | — | ||||||
| 5.25% Senior notes | 526,650 | — | 526,650 | — | ||||||||||
| 3.625% Senior notes | 617,284 | — | 617,284 | — | ||||||||||
| Term loan B | 249,375 | — | 249,375 | — | ||||||||||
| Revolver debt | 68,655 | — | 68,655 | — | ||||||||||
| Total Liabilities | $ | 1,472,447 | $ | — | $ | 1,472,447 | $ | — | ||||||
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| Fair Value Measurements at January 2, 2021 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 | $ | 17,358 | $ | — | $ | 17,358 | $ | — | ||||||
| Total Assets | $ | 17,358 | $ | — | $ | 17,358 | $ | — | ||||||
| Liabilities: | ||||||||||||||
| Derivative instruments | $ | 9,778 | $ | — | $ | 9,778 | $ | — | ||||||
| 5.25% Senior notes | 531,300 | — | 531,300 | — | ||||||||||
| 3.625% Senior notes | 646,323 | — | 646,323 | — | ||||||||||
| Term loan B | 298,500 | — | 298,500 | — | ||||||||||
| Revolver debt | 54,175 | — | 54,175 | — | ||||||||||
| Total Liabilities | $ | 1,540,076 | $ | — | $ | 1,540,076 | $ | — | ||||||
Derivative assets and liabilities consist of the Company’s corn option and future contracts, foreign currency forward and option contracts and soybean meal forward contracts which represent the difference between observable market rates of commonly quoted intervals for similar assets and liabilities in active markets and the fixed swap rate considering the instruments term, notional amount and credit risk. See Note 14 (Derivatives) to the Company's Consolidated Financial Statements included herein for discussion on the Company's derivatives.
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments and as such have been excluded from the table above. The 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.
(16) Restructuring and Asset Impairment Charges
In December 2020, due to unfavorable economics in the biodiesel industry, the Company made the decision to shut down processing operations at its biodiesel facilities located in the United States and Canada, and there are no current plans to resume biodiesel production at these facilities in the future. In addition to charges incurred in fiscal 2020, the Company has incurred additional restructuring and asset impairment charges related to the biodiesel facilities of approximately $0.8 million, with approximately $0.4 million of this amount being employee termination costs in Canada and the remainder representing charges to long-lived assets and other charges.
(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 April 3, 2021 and January 2, 2021, the reserves for insurance, environmental, litigation and tax contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities were approximately $67.8 million and $66.2 million, respectively. The Company has insurance recovery receivables of approximately $27.0 million as of April 3, 2021 and January 2, 2021, related to the insurance contingencies. The Company's management believes these reserves for contingencies are reasonable and sufficient based upon present
23
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 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 accepted this settlement offer, and the settlement became effective on April 16, 2021 following the completion of the EPA's administrative approval process. 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, the Company's settlement with the EPA described above could preclude certain of the claims alleged by OCC against the Company. The Company's ultimate liability, if any, for investigatory costs, remedial costs and/or natural resource damages in connection with the lower Passaic River area cannot be determined at this time; however, as of the date of this report, the Company has found no definitive evidence that the former Standard Tallow Corporation plant sites contributed any of the COCs to the Passaic River and, therefore, there is nothing that leads the Company to believe that this matter will have a material effect on the Company's financial position, results of operations or cash flows.
(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.
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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, the Rothsay ingredients business, and the ingredients and specialty products businesses conducted by Darling Ingredients International under the Sonac name (proteins, fats, and blood products) and (ii) the Company's bakery residuals business. Feed Ingredients operations process animal by-products and used cooking oil into fats, proteins and hides.
Food Ingredients
Food Ingredients consists principally of (i) the collagen business conducted by Darling Ingredients International under the Rousselot 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.
Fuel Ingredients
The Company's Fuel Ingredients segment consists of (i) the Company's investment in the DGD Joint Venture and (ii) the bioenergy business conducted by Darling Ingredients International under the Ecoson and Rendac names.
Business Segments (in thousands):
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | |||||||||||||
| Three Months Ended April 3, 2021 | |||||||||||||||||
| Net Sales | $ | 651,444 | $ | 298,065 | $ | 97,207 | $ | — | $ | 1,046,716 | |||||||
| Cost of sales and operating expenses | 474,581 | 226,413 | 71,790 | — | 772,784 | ||||||||||||
| Gross Margin | 176,863 | 71,652 | 25,417 | — | 273,932 | ||||||||||||
| Loss/(gain) on sale of assets | (139) | 55 | 20 | — | (64) | ||||||||||||
| Selling, general and administrative expense | 52,620 | 25,191 | 4,867 | 14,720 | 97,398 | ||||||||||||
| Restructuring and asset impairment charges | — | — | 778 | — | 778 | ||||||||||||
| Depreciation and amortization | 54,609 | 14,883 | 6,155 | 2,887 | 78,534 | ||||||||||||
Equity in net income of Diamond Green Diesel | — | — | 102,225 | — | 102,225 | ||||||||||||
| Segment operating income/(loss) | 69,773 | 31,523 | 115,822 | (17,607) | 199,511 | ||||||||||||
Equity in net income of other unconsolidated subsidiaries | 612 | — | — | — | 612 | ||||||||||||
| Segment income/(loss) | 70,385 | 31,523 | 115,822 | (17,607) | 200,123 | ||||||||||||
| Total other expense | (17,997) | ||||||||||||||||
| Income before income taxes | $ | 182,126 | |||||||||||||||
| Segment assets at April 3, 2021 | $ | 2,708,035 | $ | 1,235,547 | $ | 1,229,461 | $ | 418,404 | $ | 5,591,447 | |||||||
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| 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 January 2, 2021 | $ | 2,708,922 | $ | 1,335,769 | $ | 1,160,132 | $ | 408,508 | $ | 5,613,331 | |||||||
(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 an executed agreement or purchase order.
Most of the Company's products are shipped based on the customer specifications. Customer returns are infrequent and not material to the Company. Adjustments to net sales for sales deductions are generally recognized in the same period as the sale or when known. Customers in certain industries or countries may be required to prepay prior to shipment in order to maintain payment protection. These represent short-term prepayment from customers and are not material to the Company. The Company elected to treat shipping and handling as fulfilment costs, which will result in billed freight recorded in cost of sales and netted against freight costs. Sales, value-add, and other taxes collected concurrently with revenue-producing activities are excluded from revenue and booked on a net basis.
The following tables present the Company revenues disaggregated by geographic area and major product types by reportable segment for the three months ended April 3, 2021 and March 28, 2020 (in thousands):
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| Three Months Ended April 3, 2021 | ||||||||||||||
| Feed Ingredients | Food Ingredients | Fuel Ingredients | Total | |||||||||||
| Geographic Area | ||||||||||||||
| North America | $ | 549,015 | $ | 60,940 | $ | 3,350 | $ | 613,305 | ||||||
| Europe | 97,645 | 155,363 | 93,857 | 346,865 | ||||||||||
| China | 1,938 | 57,932 | — | 59,870 | ||||||||||
| South America | — | 10,454 | — | 10,454 | ||||||||||
| Other | 2,846 | 13,376 | — | 16,222 | ||||||||||
| Net sales | $ | 651,444 | $ | 298,065 | $ | 97,207 | $ | 1,046,716 | ||||||
| Major product types | ||||||||||||||
| Fats | $ | 229,006 | $ | 41,433 | $ | — | $ | 270,439 | ||||||
| Used cooking oil | 51,029 | — | — | 51,029 | ||||||||||
| Proteins | 255,507 | — | — | 255,507 | ||||||||||
| Bakery | 63,105 | — | — | 63,105 | ||||||||||
| Other rendering | 42,957 | — | — | 42,957 | ||||||||||
| Food ingredients | — | 229,542 | — | 229,542 | ||||||||||
| Bioenergy | — | — | 93,857 | 93,857 | ||||||||||
| Biofuels | — | — | 3,350 | 3,350 | ||||||||||
| Other | 9,840 | 27,090 | — | 36,930 | ||||||||||
| Net sales | $ | 651,444 | $ | 298,065 | $ | 97,207 | $ | 1,046,716 | ||||||
| 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 | ||||||
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 in net sales 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.
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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 in net sales when the service has occurred.
Food Ingredients. Food ingredients includes collection and processing of pigskin, hide, bone and fish into finished product. It 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.
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 and control has been transferred. Service revenues are recognized in net sales 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 2021 under these long-term supply contracts was approximately $15.0 million, with the remaining performance obligations to be recognized in future periods (generally 2 years) of approximately $154.7 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, 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 April 3, 2021 and March 28, 2020, the Company has recorded sales to the DGD Joint Venture of approximately $89.0 million and $62.1 million, respectively. At April 3, 2021 and January 2, 2021, the Company has $12.6 million and $14.2 million in outstanding receivables due from the DGD Joint Venture, respectively. In addition, the Company has eliminated approximately $14.6 million and $5.7 million of additional sales for the three months ended April 3, 2021 and March 28, 2020, respectively to defer the Company's portion of profit of approximately $4.1 million and $1.0 million on those sales relating to inventory assets remaining on the DGD Joint Venture's balance sheet at April 3, 2021 and March 28, 2020, 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
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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, 2022, unless extended by agreement of the parties. As of April 3, 2021, no amounts are owed to Darling Green under the DGD Loan Agreement.
Guarantee Agreements
In February 2020, in connection with the DGD Joint Venture’s expansion project at its Norco, LA facility, it entered into two agreements (the “IMTT Terminaling Agreements”) with International-Matex Tank Terminals (“IMTT”), pursuant to which the DGD Joint Venture will move raw material and finished product to and from the IMTT terminal facility by pipeline, thereby providing better logistical capabilities. As a condition to entering into the IMTT Terminaling Agreements, IMTT required that the Company and Valero guarantee their proportionate share, up to $50 million each, of the DGD Joint Venture’s obligations under the IMTT Terminaling Agreements (the “IMTT Guarantee”), subject to the conditions provided for in the IMTT Terminaling Agreements. The Company has not recorded any liability as a result of the IMTT Guarantee, as the Company believes the likelihood of having to make any payments under the IMTT Guarantee is remote.
In April 2021, in connection with the DGD Joint Venture’s expansion project at its Port Arthur, TX facility, it entered into two agreements (the “GTL Terminaling Agreements”) with GT Logistics, LLC (“GTL”), pursuant to which the DGD Joint Venture will move raw material and finished product to and from the GTL terminal facility by pipeline, thereby providing better logistical capabilities. As a condition to entering into the GTL Terminaling Agreements, GLT required that the Company and Valero guarantee their proportionate share, up to a maximum of approximately $160.0 million each, of the DGD Joint Venture’s obligations under the GTL Terminaling Agreements (the “GTL Guarantee”), subject to the conditions provided for in the GTL Terminaling Agreements. The maximum amount of the GTL Guarantee is reduced over the 20-year initial term of the GTL Terminaling Agreements as the termination fee under such agreements declines. The Company has not recorded any liability as a result of the GTL Guarantee, as the Company believes the likelihood of having to make any payments under the GTL Guarantee is remote.
(21) New Accounting Pronouncements
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 adoption of this ASU in the first quarter of fiscal 2021 did not have a material impact on the Company's consolidated financial statements.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below under the heading “Forward Looking Statements” and elsewhere in this report, and under the heading “Risk Factors” in Part I, Item 1A in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021, filed with the SEC on March 2, 2021 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 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, (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 (the “DGD Joint Venture”) as described in Note 3 (Investment in Unconsolidated Subsidiaries) to the Company's Consolidated Financial Statements for the period ended April 3, 2021 included herein, (ii) the conversion of organic sludge and food waste into biogas in Europe,
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(iii) the collection and conversion of fallen stock and certain animal by-products pursuant to applicable E.U. regulations into low-grade energy sources to be used in industrial applications, and (iv) the processing of manure into natural bio-phosphate in Europe.
Corporate Activities principally include unallocated corporate overhead expenses, acquisition-related expenses, interest expense net of interest income, and other non-operating income and expenses.
Observations on the Effects of COVID-19
In January 2020, the World Health Organization (“WHO”) declared the coronavirus disease (“COVID-19”) 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. Since then, various federal, state and local government-imposed movement restrictions and initiatives have been implemented worldwide to reduce the global transmission of COVID-19, including reduced or eliminated food services, the promotion of social distancing and the adoption of remote working policies.
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; however, the Company did incur approximately $7.5 million of COVID-19 related charges globally in fiscal year 2020. 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. In December 2020, several vaccines were first authorized for use against COVID-19 in the United States and internationally. As a result of the distribution of these vaccines, various of the government imposed movement restrictions and initiatives have begun to be relaxed in certain areas of the United States and abroad. Notwithstanding, the Company believes the severity and duration of the COVID-19 pandemic is uncertain and such uncertainty will likely continue. 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.
DGD has also 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, cannot be predicted and may vary by jurisdiction and market, including the duration and scope of the pandemic, the emergence of new variants of the virus, the likelihood of a resurgence of positive cases, the development and availability of effective treatments and vaccines, the speed at which such vaccines are administered, global economic conditions during and after the pandemic and governmental actions that have been taken or may be taken in the future in response to the pandemic, among others. For additional information regarding the risks associated with COVID-19, see the important information in Item 1A. Risk Factors, 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” in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2021, as filed with the SEC on March 2, 2021.
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
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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 January 2, 2021.
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 and Polish zloty. To prepare the Company's consolidated financial statements, assets, liabilities, revenues, and expenses must be translated into U.S. dollars at the applicable exchange rate. As a result, increases or decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items recorded in the Company's consolidated financial statements, even if their value has not changed in the functional currency. This could have a significant impact on the Company's results, if such increase or decrease in the value of the U.S. dollar relative to these other currencies is substantial.
Results of Operations
Three Months Ended April 3, 2021 Compared to Three Months Ended March 28, 2020
Operating Performance Metrics
Operating performance metrics which management routinely monitors as an indicator of operating performance include:
•Finished product commodity prices
•Segment results
•Foreign currency exchange
•Corporate activities
•Non-U.S. GAAP measures
These indicators and their importance are discussed below.
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Finished Product Commodity Prices
Prices for finished product commodities that the Company produces in the Feed Ingredients segment are reported each business day on the Jacobsen Index (the “Jacobsen”), an established North American trading exchange price publisher. The Jacobsen reports industry sales from the prior day's activity by product. Included on the Jacobsen are reported prices for finished products such as protein (primarily meat and bone meal (“MBM”), poultry meal (“PM”) and feather meal (“FM”)), hides, fats (primarily bleachable fancy tallow (“BFT”) and yellow grease (“YG”)) and corn, which is a substitute commodity for the Company's bakery by-product (“BBP”) as well as a range of other branded and value-added products, which are products of the Company's Feed Ingredients segment. In the United States, 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 2021, 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 2021, compared to average Jacobsen and Reuters prices for the first quarter of fiscal 2020 are as follows:
| Avg. Price 1st Quarter 2021 | Avg. Price 1st Quarter 2020 | Increase/(Decrease) | % Increase/(Decrease) | |||||||||||
| Jacobsen: | ||||||||||||||
| MBM (Illinois) | $ 386.97/ton | $ 237.10/ton | $ 149.87/ton | 63.2 | % | |||||||||
| Feed Grade PM (Mid-South) | $ 357.79/ton | $ 225.73/ton | $ 132.06/ton | 58.5 | % | |||||||||
| Pet Food PM (Mid-South) | $ 845.08/ton | $ 540.44/ton | $ 304.64/ton | 56.4 | % | |||||||||
| Feather meal (Mid-South) | $ 539.02/ton | $ 282.50/ton | $ 256.52/ton | 90.8 | % | |||||||||
| BFT (Chicago) | $ 46.42/cwt | $ 32.69/cwt | $ 13.73/cwt | 42.0 | % | |||||||||
| YG (Illinois) | $ 34.45/cwt | $ 22.92/cwt | $ 11.53/cwt | 50.3 | % | |||||||||
| Corn (Illinois) | $ 5.56/bushel | $ 3.90/bushel | $ 1.66/bushel | 42.6 | % | |||||||||
| Reuters: | ||||||||||||||
| Palm Oil (CIF Rotterdam) | $ 1,084.00/MT | $ 724.00/MT | $ 360.00/MT | 49.7 | % | |||||||||
| Soy meal (CIF Rotterdam) | $ 535.00/MT | $ 360.00/MT | $ 175.00/MT | 48.6 | % | |||||||||
The following table shows the average Jacobsen and Reuters prices for the first quarter of fiscal 2021, compared to average Jacobsen and Reuters prices for the fourth quarter of fiscal 2020.
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| Avg. Price 1st Quarter 2021 | Avg. Price 4th Quarter 2020 | Increase/(Decrease) | % Increase/(Decrease) | |||||||||||
| Jacobsen: | ||||||||||||||
| MBM (Illinois) | $ 386.97/ton | $ 305.29/ton | $ 81.68/ton | 26.8 | % | |||||||||
| Feed Grade PM (Mid-South) | $ 357.79/ton | $ 283.65/ton | $ 74.14/ton | 26.1 | % | |||||||||
| Pet Food PM (Mid-South) | $ 845.08/ton | $ 733.12/ton | $ 111.96/ton | 15.3 | % | |||||||||
| Feather meal (Mid-South) | $ 539.02/ton | $ 405.49/ton | $ 133.53/ton | 32.9 | % | |||||||||
| BFT (Chicago) | $ 46.42/cwt | $ 34.24/cwt | $ 12.18/cwt | 35.6 | % | |||||||||
| YG (Illinois) | $ 34.45/cwt | $ 25.22/cwt | $ 9.23/cwt | 36.6 | % | |||||||||
| Corn (Illinois) | $ 5.56/bushel | $ 4.29/bushel | $ 1.27/bushel | 29.6 | % | |||||||||
| Reuters: | ||||||||||||||
| Palm Oil (CIF Rotterdam) | $ 1,084.00/MT | $ 850.00/MT | $ 234.00/MT | 27.5 | % | |||||||||
| Soy meal (CIF Rotterdam) | $ 535.00/MT | $ 485.00/MT | $ 50.00/MT | 10.3 | % | |||||||||
Segment Results
Segment operating income for the three months ended April 3, 2021 was $199.5 million, which reflects an increase of $76.7 million or 62.5% as compared to the three months ended March 28, 2020.
| (in thousands, except percentages) | Feed Ingredients | Food Ingredients | Fuel Ingredients | Corporate | Total | ||||||||||||
| Three Months Ended April 3, 2021 | |||||||||||||||||
| Net Sales | $ | 651,444 | $ | 298,065 | $ | 97,207 | $ | — | $ | 1,046,716 | |||||||
| Cost of sales and operating expenses | 474,581 | 226,413 | 71,790 | — | 772,784 | ||||||||||||
| Gross Margin | 176,863 | 71,652 | 25,417 | — | 273,932 | ||||||||||||
| Gross Margin % | 27.1 | % | 24.0 | % | 26.1 | % | — | % | 26.2 | % | |||||||
| Loss/(gain) on sale of assets | (139) | 55 | 20 | — | (64) | ||||||||||||
| Selling, general and administrative expenses | 52,620 | 25,191 | 4,867 | 14,720 | 97,398 | ||||||||||||
| Restructuring and asset impairment charges | — | — | 778 | — | 778 | ||||||||||||
| Depreciation and amortization | 54,609 | 14,883 | 6,155 | 2,887 | 78,534 | ||||||||||||
Equity in net income of Diamond Green Diesel | — | — | 102,225 | — | 102,225 | ||||||||||||
| Segment operating income/(loss) | 69,773 | 31,523 | 115,822 | (17,607) | 199,511 | ||||||||||||
Equity in net income of other unconsolidated subsidiaries | 612 | — | — | — | 612 | ||||||||||||
| Segment income/(loss) | 70,385 | 31,523 | 115,822 | (17,607) | 200,123 | ||||||||||||
| (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 | ||||||||||||
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Feed Ingredients Segment
Raw material volume. In the three months ended April 3, 2021, the raw material processed by the Company's Feed Ingredients segment totaled approximately 2.23 million metric tons. Compared to the three months ended March 28, 2020, overall raw material volume processed in the Feed Ingredients segment decreased approximately 0.5%.
Sales. During the three months ended April 3, 2021, net sales for the Feed Ingredients segment were $651.4 million as compared to $512.6 million during the three months ended March 28, 2020, an increase of approximately $138.8 million or 27.1%. Net sales for fats were approximately $229.0 million and $163.3 million for the three months ended April 3, 2021 and March 28, 2020, respectively. Protein net sales were approximately $255.5 million and $196.0 million for the three months ended April 3, 2021 and March 28, 2020, respectively. Other rendering net sales, which include hides, pet food and service charges, were approximately $43.0 million and $47.1 million for the three months ended April 3, 2021 and March 28, 2020, respectively. Total rendering net sales were approximately $527.5 million and $406.4 million for the three months ended April 3, 2021 and March 28, 2020, respectively. Used cooking oil net sales were approximately $51.0 million and $47.6 million for the three months ended April 3, 2021 and March 28, 2020, respectively. Bakery net sales were approximately $63.1 million and $47.1 million for the three months ended April 3, 2021 and March 28, 2020, respectively, and other net sales, which includes trap services, were approximately $9.8 million and $11.5 million for the three months ended April 3, 2021 and March 28, 2020, 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 28, 2020 | 163.3 | 196.0 | 47.1 | $ | 406.4 | 47.6 | 47.1 | 11.5 | $ | 512.6 | ||||||||||||||||
Increase/(decrease) in sales volumes | 4.9 | 0.8 | — | 5.7 | (6.1) | (0.9) | — | (1.3) | ||||||||||||||||||
| Increase in finished product prices | 58.2 | 52.3 | — | 110.5 | 9.5 | 16.9 | — | 136.9 | ||||||||||||||||||
| Increase due to currency exchange rates | 2.6 | 6.4 | 0.1 | 9.1 | — | — | — | 9.1 | ||||||||||||||||||
| Other change | — | — | (4.2) | (4.2) | — | — | (1.7) | (5.9) | ||||||||||||||||||
| Total change | 65.7 | 59.5 | (4.1) | 121.1 | 3.4 | 16.0 | (1.7) | 138.8 | ||||||||||||||||||
| Net sales three months ended April 3, 2021 | $ | 229.0 | $ | 255.5 | $ | 43.0 | $ | 527.5 | $ | 51.0 | $ | 63.1 | $ | 9.8 | $ | 651.4 | ||||||||||
Margins. In the Feed Ingredients segment for the three months ended April 3, 2021, the gross margin percentage increased to 27.1% as compared to 24.2% for the comparable period of fiscal 2020. The increase is primarily due to higher overall finished product prices as compared to fiscal 2020.
Segment operating income. Feed Ingredients operating income for the three months ended April 3, 2021 was $69.8 million, an increase of $53.1 million or 318.0% as compared to the three months ended March 28, 2020. The increase is due to higher overall finished product prices as compared to the same period in fiscal 2020.
Food Ingredients Segment
Raw material volume. In the three months ended April 3, 2021, the raw material processed by the Company's Food Ingredients segment totaled approximately 274,000 metric tons. Compared to the three months ended March 28, 2020, overall raw material volume processed in the Food Ingredients segment increased approximately 5.0%.
Sales. Overall sales increased in the Food Ingredients segment primarily due to higher sales volumes in the collagen markets and higher edible fat prices.
Margins. In the Food Ingredients segment for the three months ended April 3, 2021 and March 28, 2020, the gross margin percentage remained constant at 24.0%.
Segment operating income. Food Ingredients operating income was $31.5 million for the three months ended April 3, 2021, an increase of $12.4 million or 64.9% as compared to the three months ended March 28, 2020. The increase
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is primarily due to higher sales volumes in North America and China collagen markets and higher fat prices in the edible fat market. This was offset by the impact of lower volumes in Europe and a weaker Brazilian real and lower volumes in Brazil as a result of the COVID-19 outbreak in South America.
Fuel Ingredients Segment
Raw material volume. In the three months ended April 3, 2021, the raw material processed by the Company's Fuel Ingredients segment totaled approximately 328,000 metric tons. Compared to the three months ended March 28, 2020, overall raw material volume processed in the Fuel Ingredients segment increased approximately 0.1%.
Sales. Overall sales increased in the Fuel Ingredients segment primarily due to higher sales volumes and prices in Europe.
Margins. In the Fuel Ingredients segment (exclusive of the equity contribution from the DGD Joint Venture) for the three months ended April 3, 2021, the gross margin percentage increased to 26.1% as compared to 24.2% for the comparable period of fiscal 2020. The increase is primarily due to higher finished product prices and demand in Europe in fiscal 2021 as compared to fiscal 2020.
Segment operating income. The Company's Fuel Ingredients segment operating income (inclusive of the equity contribution from the DGD Joint Venture) for the three months ended April 3, 2021 was $115.8 million, an increase of $10.8 million or 10.3% as compared to the same period in fiscal 2020. The increase is due to higher sale volumes and higher finished product prices from increased demand in Europe as well as an increase in renewable identification number (RIN) prices and diesel fuel prices at the DGD Joint Venture.
Foreign Currency Exchange
During the first quarter of fiscal 2021, the euro and Canadian dollar strengthened against the U.S. dollar as compared to the same period in fiscal 2020. Using actual results for the three months ended April 3, 2021 and using the prior year's average currency rate for the three months ended March 28, 2020, foreign currency translation would result in a decrease in operating income of approximately $8.0 million. The average rates assumptions used in this calculation were the actual fiscal average rates for the three months ended April 3, 2021 of €1.00:USD$1.20 and CAD$1.00:USD$0.79 as compared to the average rates for the three months ended March 28, 2020 of €1.00:USD$1.10 and CAD$1.00:USD$0.75, respectively.
Corporate Activities
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $14.7 million during the three months ended April 3, 2021, compared to $15.1 million during the three months ended March 28, 2020, a decrease of $0.4 million. The decrease is primarily due to lower corporate related benefits, lower travel related costs, lower legal costs and lower overall other costs that more than offset an increase in insurance costs and tax and license costs.
Depreciation and Amortization. Depreciation and amortization charges increased slightly by $0.1 million to $2.9 million during the three months ended April 3, 2021, as compared to $2.8 million during the three months ended March 28, 2020.
Interest Expense. Interest expense was $16.4 million during the three months ended April 3, 2021, compared to $19.1 million during the three months ended March 28, 2020, a decrease of $2.7 million. The decrease is primarily due to lower Term loan B debt outstanding from partial pay-downs and lower interest on the Term loan B and revolver borrowings as a result of lower interest rates that more than offset an increase in deferred loan cost expense and higher interest expense from foreign currency translation on the Company's 3.625% Senior Notes.
Foreign Currency Gain/(Loss). Foreign currency losses were $0.4 million for the three months ended April 3, 2021 as compared to foreign currency gains of $1.7 million for the three months ended March 28, 2020. The loss in foreign currency is due primarily to an increase in losses on the revaluation of non-functional currency assets and liabilities as compared to the same period in fiscal 2020.
Other Expense, net. Other expense was $1.2 million in the three months ended April 3, 2021, compared to other expense of $1.9 million for the three months ended March 28, 2020. The decrease in other expense was primarily due to a decrease in the non-service component of pension expense and casualty losses as compared to the same period in fiscal 2020.
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Equity in Net Income in Investment of Other Unconsolidated Subsidiaries. The change in this line item is not significant and primarily represents the Company's pro rata share of the net income from foreign unconsolidated subsidiaries.
Income Taxes. The Company recorded income tax expense of $28.7 million for the three months ended April 3, 2021, compared to $18.3 million of income tax expense recorded in the three months ended March 28, 2020, an increase of $10.4 million, which is primarily due to increased pre-tax earnings of the Company for the first three months of fiscal 2021. The effective tax rate for the first three months of fiscal 2021 and 2020 is 15.8% and 17.5%, respectively. The effective tax rate for the first three months of fiscal 2021 and 2020 differs from the federal statutory rate of 21% due primarily to the relative mix of earnings among jurisdictions with different tax rates (including foreign withholding taxes and state income taxes), biofuel tax incentives, and discrete items, including excess tax benefits from stock-based compensation. The Company's effective tax rate excluding discrete items is 20.0% for the three months ended April 3, 2021, compared to 18.8% for the three months ended March 28, 2020.
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 April 3, 2021. 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 2021 As Compared to First Quarter 2020
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| Three Months Ended | ||||||||
| (dollars in thousands) | April 3, 2021 | March 28, 2020 | ||||||
| Net income attributable to Darling | $ | 151,766 | $ | 85,510 | ||||
| Depreciation and amortization | 78,534 | 84,671 | ||||||
| Interest expense | 16,428 | 19,090 | ||||||
| Income tax expense | 28,708 | 18,300 | ||||||
| Restructuring and asset impairment charges | 778 | — | ||||||
| Foreign currency loss/(gain) | 410 | (1,664) | ||||||
| Other expense, net | 1,159 | 1,881 | ||||||
| Equity in net income of Diamond Green Diesel | (102,225) | (97,820) | ||||||
| Equity in net income of unconsolidated subsidiaries | (612) | (869) | ||||||
| Net income attributable to non-controlling interests | 1,652 | 581 | ||||||
| Darling's Adjusted EBITDA | $ | 176,598 | $ | 109,680 | ||||
| Foreign currency exchange impact (1) | (8,050) | — | ||||||
| Pro forma Adjusted EBITDA to Foreign Currency (Non-GAAP) | $ | 168,548 | $ | 109,680 | ||||
| DGD Joint Venture Adjusted EBITDA (Darling's Share) | $ | 108,200 | $ | 103,634 | ||||
| Darling plus Darling's share of DGD Joint Venture Adjusted EBITDA | $ | 284,798 | $ | 213,314 | ||||
(1) The average rates assumption used in this calculation was the actual fiscal average rate for the three months ended April 3, 2021 of €1.00:USD$1.20 and CAD$1.00:USD$0.79 as compared to the average rate for the three months ended March 28, 2020 of €1.00:USD$1.10 and CAD$1.00:USD$0.75, respectively.
FINANCING, LIQUIDITY AND CAPITAL RESOURCES
Credit Facilities
Indebtedness
Certain Debt Outstanding at April 3, 2021. On April 3, 2021, 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 | (5,553) | ||||
| Carrying value of 5.25% Notes due 2027 | $ | 494,447 | |||
| 3.625 % Notes due 2026 - Denominated in euros | $ | 606,310 | |||
| Less unamortized deferred loan costs | (6,046) | ||||
| Carrying value of 3.625% Notes due 2026 | $ | 600,264 | |||
| Amended Credit Agreement: | |||||
| Term Loan B | $ | 250,000 | |||
| Less unamortized deferred loan costs | (2,979) | ||||
| Carrying value of Term Loan B | $ | 247,021 | |||
| Revolving Credit Facility: | |||||
| Maximum availability | $ | 1,000,000 | |||
| Ancillary Facilities | 47,295 | ||||
| Borrowings outstanding | 69,000 | ||||
| Letters of credit issued | 3,845 | ||||
| Availability | $ | 879,860 | |||
Other Debt | $ | 33,799 | |||
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During the first three months of fiscal 2021, the U.S. dollar strengthened as compared to the euro at January 2, 2021. Using the euro based debt outstanding at April 3, 2021 and comparing the closing balance sheet rate at April 3, 2021 to the balance sheet rate at January 2, 2021, the U.S. dollar debt balances of euro based debt decreased by approximately $25.7 million at April 3, 2021. The closing balance sheet rate assumption used in this calculation was the actual fiscal closing balance sheet rate at April 3, 2021 of €1.00:USD$1.17730 as compared to the closing balance sheet rate at January 2, 2021 of €1.00:USD$1.22750.
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 September 18, 2020, the Company, and certain of its subsidiaries entered into an amendment (the “Sixth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Sixth Amendment (i) extended the maturity date of the revolving credit facility under the Credit Agreement from December 16, 2021 to September 18, 2025, (ii) increased the leverage ratio applicable to achieving the lowest applicable margin on borrowings under the revolving credit facility from 1.0 to 1.5, (iii) eliminated or modified certain of the negative covenants to increase the allowances for certain actions, including the incurrence of debt and investments, (iv) limited guarantees from, and security with respect to, entities organized outside of the United States and Canada to a limited group of foreign subsidiary holding companies, (v) included a collateral release mechanism, subject to the consent of the term loan B lenders, upon the Company achieving certain investment grade credit ratings, and (vi) made other market updates and changes. For more information regarding the Amended Credit Agreement see Note 9 (Debt) to the Company's Consolidated Financial Statements included herein.
•As of April 3, 2021, the Company had availability of $879.9 million under the revolving credit facility, taking into account that the Company had $69.0 million in outstanding borrowings, $47.3 million in ancillary facilities and letters of credit issued of $3.8 million.
•As of April 3, 2021, the Company has borrowed all $525.0 million under the terms of the term loan B facility and repaid approximately $275.0 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 credit facility will equal either LIBOR/euro interbank offered rate/CDOR plus 1.50% per annum or base rate/Canadian prime rate plus 0.50% 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 (the “3.625% Indenture”), among Darling Global Finance B.V., Darling, the subsidiary guarantors party thereto from time to time, Citibank, N.A., London Branch, as trustee and principal paying agent, and Citigroup Global Markets Deutschland AG, as principal registrar. The 3.625% Notes are guaranteed on a senior unsecured basis by Darling and all of Darling's restricted subsidiaries (other than any foreign subsidiary or any receivable entity) that guarantee the Senior Secured Credit Facilities.
Other debt consists of U.S and European finance 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.
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The classification of long-term debt in the Company’s April 3, 2021 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 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 January 2, 2021 as filed with the SEC on March 2, 2021.
As of April 3, 2021, 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 April 3, 2021, the Company had working capital of $303.1 million and its working capital ratio was 1.48 to 1 compared to working capital of $311.7 million and a working capital ratio of 1.46 to 1 on January 2, 2021. As of April 3, 2021, the Company had unrestricted cash of $71.2 million and funds available under the revolving credit facility of $879.9 million, compared to unrestricted cash of $81.6 million and funds available under the revolving credit facility of $893.9 million at January 2, 2021. The Company diversifies its cash investments by limiting the amounts deposited with any one financial institution.
Net cash provided by operating activities was $138.8 million for the first three months ended April 3, 2021, as compared to net cash provided by operating activities of $34.5 million for the first three months ended March 28, 2020, an increase of $104.3 million due primarily to an increase in net income of approximately $67.3 million and changes in operating assets and liabilities that includes approximately $10.2 million of an increase in cash provided by accounts receivable and approximately $33.8 million of an increase in cash provided by other primarily from a reduction of foreign governmental sales taxes and hedging activities. Cash used by investing activities was $64.3 million for the first three months ended April 3, 2021, compared to $64.6 million for the first three months ended March 28, 2020, a decrease in cash used by investing activities of $0.3 million, primarily due to a decrease in capital asset spending. Net cash used by financing activities was $81.0 million for the first three months ended April 3, 2021, compared to net cash provided by financing activities of $40.4 million for the first three months ended March 28, 2020, an increase in net cash used by financing activities of $121.4 million, primarily due to payment of outstanding debt in the first three months ended April 3, 2021 compared to increased revolver borrowings in the first three months ended March 28, 2020.
Capital expenditures of $60.8 million were made during the first three months of fiscal 2021, compared to $61.6 million in the first three months of fiscal 2020, for a net decrease of $0.8 million or 1.3%. The Company expects to incur additional capital expenditures of approximately $250 million for the remainder of fiscal 2021 including compliance and expansion projects. The Company intends to finance these costs using cash flows from operations. Capital expenditures related to compliance with environmental regulations were $5.5 million and $6.9 million during the first three months ended April 3, 2021 and March 28, 2020, respectively.
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Accrued Insurance and Pension Plan Obligations
Based upon the annual actuarial estimate, current accruals and claims paid during the first three months of fiscal 2021, the Company has accrued approximately $11.0 million it expects will become due during the next twelve months in order to meet obligations related to the Company’s self insurance reserves and accrued insurance obligations, which are included in current accrued expenses at April 3, 2021. The self insurance reserve is composed of estimated liability for claims arising for workers’ compensation, auto liability and general liability claims. The self insurance reserve liability is determined annually, based upon a third party actuarial estimate. The actuarial estimate may vary from year to year due to changes in cost of health care, the pending number of claims or other factors beyond the control of management of the Company.
Based upon current actuarial estimates, the Company expects to contribute approximately $0.3 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 $3.5 million under its foreign pension plans in the next twelve months. The minimum pension funding requirements are determined annually, based upon a third party actuarial estimate. The actuarial estimate may vary from year to year due to fluctuations in return on investments or other factors beyond the control of management of the Company or the administrator of the Company’s pension funds. No assurance can be given that the minimum pension funding requirements will not increase in the future. The Company has not made any tax deductible discretionary and required contributions to its domestic pension plans for the first three months ended April 3, 2021. Additionally, the Company has made required and tax deductible discretionary contributions to its foreign pension plans for the first three months ended April 3, 2021 of approximately $0.9 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 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 currently has withdrawal liabilities recorded on four U.S. multiemployer plans in which it participated. During the first quarter of fiscal 2021, the Company was notified by one of these multiemployer plans that the Company's withdrawal liability has increased and as a result the Company recorded an additional liability of approximately $1.3 million. As of April 3, 2021, the Company has an aggregate accrued liability of approximately $4.0 million representing the present value of scheduled withdrawal liability payments on the multiemployer plans that have given notice of withdrawal. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require additional funding under the PPA, the amounts could be material.
DGD Joint Venture
In January 2011, Darling, through a wholly-owned subsidiary, 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 a renewable diesel plant located adjacent to Valero's refinery in Norco, Louisiana (the “DGD Norco Facility”). The DGD Norco Facility reached mechanical completion and began the production of renewable diesel in late June 2013 and is currently capable of producing 290 million gallons of renewable diesel per year and certain other co-products. 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 ongoing 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
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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, 2022, unless extended by agreement of the parties. As of April 3, 2021, no amounts are owed to the DGD Lenders under the DGD Loan Agreement.
On March 30, 2021, the DGD Joint Venture entered into a $400.0 million senior, unsecured revolving credit facility, with CoBank ACB acting as lead arranger and the administrative agent for the lending group, which is comprised of Farm Credit System institutions. The new revolving credit facility matures March 30, 2024 and is non-recourse to the joint venture partners.
Based on the sponsor support agreements executed in connection with the initial construction of the DGD Norco Facility, the Company contributed a total of approximately $111.7 million for completion of the DGD Norco Facility including the Company's portion of cost overruns and working capital funding. As of April 3, 2021, under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $879.7 million included on the consolidated balance sheet.
The DGD Joint Venture began work on an expansion of the DGD Norco Facility in 2019, which is expected to increase its renewable diesel production by 400 million gallons per year and provide the capability to separate renewable naphtha (approximately 30 million gallons) and other light end renewable hydrocarbons for sale into low carbon fuel markets. In addition, the expansion project includes expanded inbound and outbound logistics, thereby improving feedstock sourcing flexibility as well as finished product marketing flexibility. The DGD Joint Venture estimates completion and startup of the expanded portion of the 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 expansion of the DGD Norco 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 and in accordance with the DGD LLC Agreement, fall below $50 million. Additionally, in January 2021, the joint venture partners approved the construction of a new facility to be located next to Valero’s Port Arthur Refinery in Port Arthur, Texas, capable of producing 470 million gallons per year of renewable diesel and 20 million gallons per year of renewable naphtha and having similar logistics flexibilities as those of the DGD Norco Facility. The new plant is anticipated to commence operations in the second half of 2023 and the total cost of the expansion project is estimated to be approximately $1.45 billion. Once operational, the new plant is expected to increase the DGD Joint Venture’s total renewable diesel production capacity to almost 1.2 billion gallons per year. Based on forecasted margins as of the date of this report, the Port Arthur expansion project is expected to be substantially funded by DGD Joint Venture cash flow; however, if the DGD Joint Venture cash flow is not sufficient to fully fund the project, the DGD Joint Venture may need to borrow funds or the joint venture partners may be required to contribute additional funds to complete the project.
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 DGD Norco 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 April 3, 2021, the DGD Joint Venture has not made any distributions to the partners.
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 2020, a large portion of Darling’s total U.S. finished fats products were sold to the DGD Norco Facility as feedstock for renewable diesel. In 2020, DGD was Darling’s largest finished product customer in terms of sales, with Darling recording sales of approximately $264.1 million to DGD.
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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 Norco 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 ability of the Company's Midwest network of facilities to collect and deliver feedstocks to DGD via water, rail or truck from a centralized location. Darling has also stepped up collection efforts by providing indoor used cooking oil collection units in exchange for extended collection contracts at eating establishments and has moved to more of a centralized digital marketing effort with restaurant chains and franchise groups and invested in internet search engine key words to improve visibility with restaurants. The Company also includes DGD in marketing efforts to emphasize environmental sustainability that restaurants participate in when their used cooking oil is collected by Darling. From a production standpoint, Darling now isolates used cooking oil from other fats to preserve identification to qualify for a higher carbon intensity value. As a result, the Company includes its equity in net income of the DGD Joint Venture as operating income.
Financial Impact of Significant Debt Outstanding
The Company has a substantial amount of indebtedness, which could make it more difficult for the Company to satisfy its obligations to its financial lenders and its contractual and commercial commitments, limit the Company's ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements on commercially reasonable terms or at all, require the Company to use a substantial portion of its cash flows from operations to pay principal and interest on its indebtedness instead of other purposes, thereby reducing the amount of the Company's cash flows from operations available for working capital, capital expenditures, acquisitions and other general corporate purposes, increase the Company's vulnerability to adverse economic, industry and business conditions, expose the Company to the risk of increased interest rates as certain of the Company's borrowings are at variable rates of interest, limit the Company's flexibility in planning for, or reacting to, changes in the Company's business and the industry in which the Company operates, place the Company at a competitive disadvantage compared to other, less leveraged competitors, and/or increase the Company's cost of borrowing.
Cash Flows and Liquidity Risks
Management believes that the Company’s cash flows from operating activities, 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 year 2021 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 projects 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. The Company's Board of Directors has approved a share repurchase program of up to an aggregate of $200.0 million of the Company's Common Stock depending on market conditions. The repurchases may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. The program runs through August 13, 2022, unless further extended or shortened by the Board of Directors. During the first three months of fiscal 2021, the Company has not repurchased any of its common stock in the open market. As of April 3, 2021, the Company had approximately $200.0 million remaining in its share repurchase program.
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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.
Supplemental Guarantor Financial Information
The following is a description of the terms and conditions of the guarantees with respect to senior notes for which Darling is an issuer or provides full and unconditional guarantee.
Note Guarantees
The Company's 5.25% Notes and 3.625% Notes (see Note 9 (Debt) to the Company's Consolidated Financial Statements included herein) 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 collectively 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 LLC, Griffin Industries LLC and its subsidiary Craig Protein Division, Inc., DarPro Storage Solutions LLC, Darling Global Holdings Inc., Rousselot Inc., Rousselot Dubuque Inc., Sonac USA LLC and Rousselot Peabody Inc (collectively, the “Notes Guarantors”). 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 tables present summarized financial information 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 summarized financial information, which include summarized condensed consolidated balance sheets as of April 3, 2021 and January 2, 2021, and the summarized condensed consolidating statements of operations for the three months ended April 3, 2021 and March 28, 2020. 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.
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Summarized Financial Information
Condensed Balance Sheet Information
(in thousands)
| April 3, 2021 | Parent | Notes Guarantors | Non-guarantors | Eliminations | Consolidated | ||||||||||||
| Current assets | $ | 109,043 | $ | 947,490 | $ | 1,105,855 | $ | (1,221,621) | $ | 940,767 | |||||||
| Noncurrent assets | 6,644,267 | 2,450,113 | 3,848,471 | (8,292,171) | 4,650,680 | ||||||||||||
| Current liabilities | 1,376,700 | 87,313 | 395,316 | (1,221,622) | 637,707 | ||||||||||||
| Noncurrent liabilities | 1,276,606 | 19,897 | 792,113 | (164,822) | 1,923,794 | ||||||||||||
| Stockholders' equity | 4,100,004 | 3,290,393 | 3,766,897 | (8,127,348) | 3,029,946 | ||||||||||||
| January 2, 2021 | |||||||||||||||||
| Current assets | $ | 103,728 | $ | 881,669 | $ | 1,177,869 | $ | (1,176,272) | $ | 986,994 | |||||||
| Noncurrent assets | 6,476,886 | 2,465,785 | 3,753,644 | (8,069,978) | 4,626,337 | ||||||||||||
| Current liabilities | 1,345,233 | 77,573 | 428,771 | (1,176,272) | 675,305 | ||||||||||||
| Noncurrent liabilities | 1,254,518 | 19,755 | 826,157 | (116,613) | 1,983,817 | ||||||||||||
| Stockholders' equity | 3,980,863 | 3,250,126 | 3,676,585 | (7,953,365) | 2,954,209 | ||||||||||||
Condensed Statements of Operations Information
(in thousands)
| For the three months ended April 3, 2021 | Parent | Notes Guarantors | Non-guarantors | Eliminations | Consolidated | ||||||||||||
| Net sales | $ | 237,941 | $ | 403,746 | $ | 485,135 | $ | (80,106) | $ | 1,046,716 | |||||||
| Total costs and expenses | 246,942 | 355,525 | 427,069 | (80,106) | 949,430 | ||||||||||||
| Equity in net income of Diamond Green Diesel | — | — | 102,225 | — | 102,225 | ||||||||||||
| Operating income (loss) | (9,001) | 48,221 | 160,291 | — | 199,511 | ||||||||||||
| Net income allocable to Darling | 151,766 | 40,267 | 128,717 | (168,984) | 151,766 | ||||||||||||
| For the three months ended March 28, 2020 | |||||||||||||||||
| Net sales | $ | 180,919 | $ | 310,301 | $ | 405,025 | $ | (43,403) | $ | 852,842 | |||||||
| 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 | ||||||||||||
| Net income allocable to Darling | 85,510 | 20,112 | 101,827 | (121,939) | 85,510 | ||||||||||||
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Based upon the underlying purchase agreements, the Company has commitments to purchase $191.9 million of commodity products consisting of approximately $91.8 million of finished products, approximately $71.9 million of natural gas and diesel fuel and approximately $28.2 million of other commitments during the next two years, which are not included in liabilities on the Company’s balance sheet at April 3, 2021. 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 or products occurs and ownership passes to the Company during the remainder of fiscal 2021 and fiscal 2022, in accordance with accounting principles generally accepted in the United States.
The following table summarizes the Company’s other commercial commitments, including both on- and off-balance sheet arrangements that are part of the Company's Amended Credit Agreement and other foreign bank guarantees that are not a part of the Company's Amended Credit Agreement at April 3, 2021 (in thousands):
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| Other commercial commitments: | |||||
| Standby letters of credit | $ | 3,845 | |||
| Standby letters of credit (ancillary facility) | 24,334 | ||||
| Foreign bank guarantees | 11,655 | ||||
| Total other commercial commitments: | $ | 39,834 | |||
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 January 2, 2021, filed with the SEC on March 2, 2021.
NEW ACCOUNTING PRONOUNCEMENTS
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 adoption of this ASU in the first quarter of fiscal 2021 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) 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 projects; risks and uncertainties relating
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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 January 2, 2021. 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 April 3, 2021, the Company had corn option contracts, soybean meal forward 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 2021, 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 April 3, 2021 and January 2, 2021 the aggregate fair value of these corn option contracts was approximately $8.0 million and $6.8 million, respectively. These amounts are included in accrued expenses on the balance sheet, with an offset recorded in accumulated other comprehensive loss. The Company may enter into corn option contracts in the future from time to time.
In fiscal 2020 and fiscal 2021, 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
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forecasted collagen sales in currencies other than the functional currency through the fourth quarter of fiscal 2022. As of April 3, 2021 and January 2, 2021, the aggregate fair value of these foreign exchange contracts was approximately $0.4 million and $11.6 million, respectively and are included in other current assets, accrued expenses and noncurrent assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
In fiscal 2020 and fiscal 2021, the Company entered into soybean meal forward contracts to hedge a portion of its forecasted poultry meal sales into the second quarter of fiscal 2021. As of April 3, 2021 and January 2, 2021, the aggregate fair value of the soybean meal contracts was $0.1 million and $0.4 million, respectively. The amounts are included in other current assets on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
As of April 3, 2021, 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 | 49,335 | Euro | 7,305 | 6.39 - 6.98 | $ | 8,681 | |||||||||||||||||
| Brazilian real | 1,103,561 | U.S. dollar | 241,320 | 3.35 - 6.25 | 241,320 | ||||||||||||||||||
| Euro | 35,967 | U.S. dollar | 42,810 | 1.17 - 1.24 | 42,810 | ||||||||||||||||||
| Euro | 43,119 | Polish zloty | 198,500 | 4.55 - 4.67 | 50,764 | ||||||||||||||||||
| Euro | 6,293 | Japanese yen | 808,776 | 125.65 - 130.11 | 7,409 | ||||||||||||||||||
| Euro | 16,176 | Chinese renminbi | 126,124 | 7.75 - 7.99 | 19,043 | ||||||||||||||||||
| Euro | 42,340 | Australian dollar | 65,550 | 1.55 | 49,847 | ||||||||||||||||||
| Euro | 3,048 | British pound | 2,600 | 0.85 | 3,588 | ||||||||||||||||||
| Euro | 32 | Canadian dollar | 50 | 1.56 | 38 | ||||||||||||||||||
| Polish zloty | 1,031 | U.S. dollar | 262 | 3.94 | 262 | ||||||||||||||||||
| Polish zloty | 24,116 | Euro | 5,195 | 4.64 - 4.67 | 6,181 | ||||||||||||||||||
| British pound | 176 | Euro | 207 | 0.85 | 244 | ||||||||||||||||||
| Japanese yen | 231,803 | U.S. dollar | 2,159 | 102.77 - 109.62 | 2,159 | ||||||||||||||||||
| U.S. dollar | 100 | Japanese yen | 11,000 | 109.64 | 100 | ||||||||||||||||||
| U.S. dollar | 165,311 | Euro | 140,000 | 1.18 | 165,311 | ||||||||||||||||||
| $ | 597,757 | ||||||||||||||||||||||
The above foreign currency contracts that are not designated as hedges had an aggregate fair value of approximately $0.5 million and are included in other current assets and accrued expenses at April 3, 2021.
Additionally, the Company had corn forward contracts that are marked to market because they did not qualify for hedge accounting at April 3, 2021. These contracts have an aggregate fair value of approximately $0.2 million and are included in other current assets and accrued expenses at April 3, 2021.
As of April 3, 2021, the Company had forward purchase agreements in place for purchases of approximately $71.9 million of natural gas and diesel fuel and approximately $28.2 million of other commitments during the next two years. As of April 3, 2021, the Company had forward purchase agreements in place for purchases of approximately $91.8 million of finished product in fiscal 2021.
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, Polish zloty, and Japanese yen.
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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 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 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 APRIL 3, 2021
PART II: Other Information
Item 1. LEGAL PROCEEDINGS
The information required by this Item 1 is contained within Note 17 (Contingencies) 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 factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties that are not currently known or that are currently deemed to be immaterial may also materially and adversely affect our business operations and financial condition or the market price of our common stock.
Item 6. EXHIBITS
The following exhibits are filed herewith:
| 10.1 | ||||||||||||||
| 10.2 | ||||||||||||||
| 31.1 | ||||||||||||||
| 31.2 | ||||||||||||||
| 32 | ||||||||||||||
| 101 | Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of April 3, 2021 and January 2, 2021; (ii) Consolidated Statements of Operations for the three months ended April 3, 2021 and March 28, 2020; (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three months ended April 3, 2021 and March 28, 2020; (iv) Consolidated Statements of Stockholders' Equity for the three months ended April 3, 2021 and March 28, 2020; (v) Consolidated Statements of Cash Flows for the three months ended April 3, 2021 and March 28, 2020; (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 11, 2021 | By: | /s/ Brad Phillips | ||||||||
| Brad Phillips | |||||||||||
| Chief Financial Officer | |||||||||||
(Principal Financial Officer and Duly Authorized Officer) | |||||||||||
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