DARLING INGREDIENTS INC. [DAR] Filings

10-Q 1 dar-20230701.htm 10-Q dar-20230701

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	July 1, 2023
	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 159,491,100 shares of common stock, $0.01 par value, outstanding at August 3, 2023.

DARLING INGREDIENTS INC. AND SUBSIDIARIES

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 1, 2023

TABLE OF CONTENTS


		Page No.
	PART I: FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS
	Consolidated Balance Sheets	3
	July 1, 2023 (unaudited) and December 31, 2022

	Consolidated Statements of Operations (unaudited)	4
	Three and Six Months Ended July 1, 2023 and July 2, 2022

	Consolidated Statements of Comprehensive Income/(Loss) (unaudited)	5
	Three and Six Months Ended July 1, 2023 and July 2, 2022

	Consolidated Statements of Stockholders' Equity (unaudited)	6
	Six Months Ended July 1, 2023 and July 2, 2022

	Consolidated Statements of Cash Flows (unaudited)	8
	Six Months Ended July 1, 2023 and July 2, 2022

	Notes to Consolidated Financial Statements (unaudited)	9

Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	60

Item 4.	CONTROLS AND PROCEDURES	62


	PART II: OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	64

Item 1A.	RISK FACTORS	64

Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	64

Item 5.	OTHER INFORMATION	65

Item 6.	EXHIBITS	65

	Signatures	66

DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

July 1, 2023 and December 31, 2022

(in thousands, except share data)


	July 1, 2023		December 31, 2022
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	111,541	$	127,016
Restricted cash	299		315
Accounts receivable, less allowance for bad debts of $12,912 at July 1, 2023 and $11,889 at December 31, 2022	746,638		676,573
Inventories	825,130		673,621
Prepaid expenses	116,540		85,665
Income taxes refundable	22,621		18,583
Other current assets	53,188		56,324
Total current assets	1,875,957		1,638,097
Property, plant and equipment, less accumulated depreciation of $2,219,926 at July 1, 2023 and $2,054,928 at December 31, 2022	2,774,526		2,462,082
Intangible assets, less accumulated amortization of $685,911 at July 1, 2023 and $623,101 at December 31, 2022	1,074,604		865,122
Goodwill	2,566,169		1,970,377
Investment in unconsolidated subsidiaries	2,214,312		1,926,395
Operating lease right-of-use assets	196,554		186,141
Other assets	246,032		136,268
Deferred income taxes	25,085		17,888
	$	10,973,239	$	9,202,370
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	88,085	$	69,846
Accounts payable, principally trade	427,066		472,491
Income taxes payable	29,821		44,851
Current operating lease liabilities	48,381		49,232
Accrued expenses	420,196		432,023
Total current liabilities	1,013,549		1,068,443
Long-term debt, net of current portion	4,458,797		3,314,969
Long-term operating lease liabilities	149,165		141,703
Other non-current liabilities	339,270		298,933
Deferred income taxes	561,895		481,832
Total liabilities	6,522,676		5,305,880
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 250,000,000 shares authorized; 174,317,233 and 173,593,099 shares issued at July 1, 2023 and December 31, 2022, respectively	1,743		1,736
Additional paid-in capital	1,680,188		1,660,084
Treasury stock, at cost; 14,827,327 and 13,623,503 shares at July 1, 2023 and December 31, 2022, respectively	(624,852)		(554,451)
Accumulated other comprehensive loss	(212,561)		(383,874)
Retained earnings	3,523,712		3,085,528
Total Darling's stockholders’ equity	4,368,230		3,809,023
Noncontrolling interests	82,333		87,467
Total stockholders' equity	4,450,563		3,896,490
	$	10,973,239	$	9,202,370

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

DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Three and six months ended July 1, 2023 and July 2, 2022

(in thousands, except per share data)

(unaudited)


	Three Months Ended				Six Months Ended
	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022
Net sales	$	1,757,621	$	1,650,188	$	3,548,793	$	3,016,522
Costs and expenses:
Cost of sales and operating expenses	1,359,702		1,231,507		2,726,675		2,252,084
Loss/(gain) on sale of assets	259		(1,055)		(68)		(1,444)
Selling, general and administrative expenses	136,751		107,776		272,217		209,808
Restructuring and asset impairment charges	896		8,557		5,420		8,557
Acquisition and integration costs	1,706		5,358		8,728		9,131
Change in fair value of contingent consideration	(7,499)		—		(7,499)		—
Depreciation and amortization	122,086		93,113		238,092		172,359
Total costs and expenses	1,613,901		1,445,256		3,243,565		2,650,495
Equity in net income of Diamond Green Diesel	212,964		73,680		307,301		145,484
Operating income	356,684		278,612		612,529		511,511

Other expense:
Interest expense	(70,193)		(24,008)		(120,492)		(39,611)

Foreign currency gain/(loss)	2,490		(4,412)		7,494		(5,512)

Other income/(expense), net	5,079		(302)		11,238		(1,044)
Total other expense	(62,624)		(28,722)		(101,760)		(46,167)

Equity in net income of other unconsolidated subsidiaries	1,849		2,272		1,969		3,632
Income before income taxes	295,909		252,162		512,738		468,976

Income tax expense	40,712		47,333		67,686		73,416

Net income	255,197		204,829		445,052		395,560

Net income attributable to noncontrolling interests	(2,814)		(2,833)		(6,868)		(5,511)

Net income attributable to Darling	$	252,383	$	201,996	$	438,184	$	390,049

Basic income per share	$	1.58	$	1.25	$	2.74	$	2.41
Diluted income per share	$	1.55	$	1.23	$	2.69	$	2.37

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

DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

Three and six months ended July 1, 2023 and July 2, 2022

(in thousands)

(unaudited)


	Three Months Ended				Six Months Ended
	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022
Net income	$	255,197	$	204,829	$	445,052	$	395,560
Other comprehensive income/(loss), net of tax:
Foreign currency translation adjustments	82,592		(93,855)		138,809		(90,473)
Pension adjustments	327		428		654		857
Commodities derivative adjustments	(17,662)		24,462		3,462		2,404
Interest rate swap adjustments	9,606		—		10,326		—
Foreign exchange derivative adjustments	9,271		(20,719)		14,891		8,716
Total other comprehensive income/(loss), net of tax	84,134		(89,684)		168,142		(78,496)
Total comprehensive income	$	339,331	$	115,145	$	613,194	$	317,064
Comprehensive income attributable to noncontrolling interests	301		2,687		3,697		6,232
Comprehensive income attributable to Darling	$	339,030	$	112,458	$	609,497	$	310,832

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

DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six months ended July 1, 2023 and July 2, 2022

(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 December 31, 2022	159,969,596	$	1,736	$	1,660,084	$	(554,451)	$	(383,874)	$	3,085,528	$	3,809,023	$	87,467	$	3,896,490
Net income	—	—		—		—		—		185,801		185,801		4,054		189,855

Deductions to noncontrolling interests	—	—		—		—		—		—		—		(3,441)		(3,441)
Addition to noncontrolling interests	—	—		—		—		—		—		—		1,643		1,643
Pension adjustments, net of tax	—	—		—		—		327		—		327		—		327
Commodities derivative adjustments, net of tax	—	—		—		—		21,124		—		21,124		—		21,124
Interest rate swap adjustments, net of tax	—	—		—		—		720		—		720		—		720
Foreign exchange derivative adjustments, net of tax	—	—		—		—		5,620		—		5,620		—		5,620
Foreign currency translation adjustments	—	—		—		—		56,875		—		56,875		(658)		56,217
Issuance of non-vested stock	—	—		47		—		—		—		47		—		47
Stock-based compensation	—	—		11,806		—		—		—		11,806		—		11,806
Treasury stock	(1,039,462)	—		—		(60,510)		—		—		(60,510)		—		(60,510)
Issuance of common stock	633,972	6		1,695		—		—		—		1,701		—		1,701
Balances at April 1, 2023	159,564,106	$	1,742	$	1,673,632	$	(614,961)	$	(299,208)	$	3,271,329	$	4,032,534	$	89,065	$	4,121,599
Net income	—	—		—		—		—		252,383		252,383		2,814		255,197
Distribution of noncontrolling interest earnings	—	—		—		—		—		—		—		(9,036)		(9,036)

Addition to noncontrolling interests	—	—		—		—		—		—		—		2,003		2,003
Pension adjustments, net of tax	—	—		—		—		327		—		327		—		327
Commodities derivative adjustments, net of tax	—	—		—		—		(17,662)		—		(17,662)		—		(17,662)
Interest rate swap adjustments, net of tax	—	—		—		—		9,606		—		9,606		—		9,606
Foreign exchange derivative adjustments, net of tax	—	—		—		—		9,271		—		9,271		—		9,271
Foreign currency translation adjustments	—	—		—		—		85,105		—		85,105		(2,513)		82,592
Issuance of non-vested stock	—	—		46		—		—		—		46		—		46
Stock-based compensation	—	—		6,186		—		—		—		6,186		—		6,186
Treasury stock	(164,362)	—		—		(9,891)		—		—		(9,891)		—		(9,891)
Issuance of common stock	90,162	1		324		—		—		—		325		—		325
Balances at July 1, 2023	159,489,906	$	1,743	$	1,680,188	$	(624,852)	$	(212,561)	$	3,523,712	$	4,368,230	$	82,333	$	4,450,563

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

DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Six months ended July 1, 2023 and July 2, 2022

(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 1, 2022	160,792,004	$	1,717	$	1,627,816	$	(374,721)	$	(321,690)	$	2,347,838	$	3,280,960	$	66,825	$	3,347,785

Net income	—	—		—		—		—		188,053		188,053		2,678		190,731


Pension adjustments, net of tax	—	—		—		—		429		—		429		—		429
Commodities derivative adjustments, net of tax	—	—		—		—		(22,058)		—		(22,058)		—		(22,058)
Foreign exchange derivative adjustments, net of tax	—	—		—		—		29,435		—		29,435		—		29,435
Foreign currency translation adjustments	—	—		—		—		2,515		—		2,515		867		3,382
Issuance of non-vested stock	5,000	—		18		—		—		—		18		—		18
Stock-based compensation	—	—		6,305		—		—		—		6,305		—		6,305
Treasury stock	(938,113)	—		—		(64,185)		—		—		(64,185)		—		(64,185)
Issuance of common stock	1,644,866	17		3,791		—		—		—		3,808		—		3,808
Balances at April 2, 2022	161,503,757	$	1,734	$	1,637,930	$	(438,906)	$	(311,369)	$	2,535,891	$	3,425,280	$	70,370	$	3,495,650
Net income	—	—		—		—		—		201,996		201,996		2,833		204,829

Pension adjustments, net of tax	—	—		—		—		428		—		428		—		428
Commodities derivative adjustments, net of tax	—	—		—		—		24,462		—		24,462		—		24,462
Foreign exchange derivative adjustments, net of tax	—	—		—		—		(20,719)		—		(20,719)		—		(20,719)
Foreign currency translation adjustments	—	—		—		—		(93,709)		—		(93,709)		(146)		(93,855)
Issuance of non-vested stock	—	—		30		—		—		—		30		—		30
Stock-based compensation	—	—		7,016		—		—		—		7,016		—		7,016
Treasury stock	(751,432)	—		—		(52,811)		—		—		(52,811)		—		(52,811)
Issuance of common stock	108,586	1		1,492		—		—		—		1,493		—		1,493
Balances at July 2, 2022	160,860,911	$	1,735	$	1,646,468	$	(491,717)	$	(400,907)	$	2,737,887	$	3,493,466	$	73,057	$	3,566,523

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

DARLING INGREDIENTS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six months ended July 1, 2023 and July 2, 2022

(in thousands)

(unaudited)


	July 1, 2023		July 2, 2022
Cash flows from operating activities:
Net Income	$	445,052	$	395,560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	238,092		172,359
Gain on sale of assets	(68)		(1,444)

Asset impairment	—		8,557
Change in fair value of contingent consideration	(7,499)		—
Gain on insurance proceeds from insurance settlements	(13,836)		—
Deferred taxes	34,202		35,674
Increase/(decrease) in long-term pension liability	480		(547)
Stock-based compensation expense	18,085		13,369


Deferred loan cost amortization	3,138		2,207
Equity in net income of Diamond Green Diesel and other unconsolidated subsidiaries	(309,270)		(149,116)
Distributions of earnings from Diamond Green Diesel and other unconsolidated subsidiaries	103,794		1,631
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable	24,397		(47,046)
Income taxes refundable/payable	(24,551)		(28,834)
Inventories and prepaid expenses	(22,301)		(95,199)
Accounts payable and accrued expenses	(94,080)		72,351
Other	10,065		(18,487)
Net cash provided by operating activities	405,700		361,035
Cash flows from investing activities:
Capital expenditures	(234,307)		(151,478)
Acquisitions, net of cash acquired	(1,079,083)		(1,235,537)
Investment in Diamond Green Diesel	(75,000)		(239,750)
Investment in other unconsolidated subsidiaries	(27)		—

Loan repayment from Diamond Green Diesel	25,000		—

Gross proceeds from disposal of property, plant and equipment and other assets	2,733		2,161
Proceeds from insurance settlement	13,836		—
Payments related to routes and other intangibles	(1,517)		(179)
Net cash used in investing activities	(1,348,365)		(1,624,783)
Cash flows from financing activities:
Proceeds from long-term debt	807,956		1,663,612
Payments on long-term debt	(83,616)		(23,600)
Borrowings from revolving credit facility	1,415,916		777,902
Payments on revolving credit facility	(1,063,516)		(937,921)
Net cash overdraft financing	16,673		12
Deferred loan costs	(9)		(10,707)

Repurchase of common stock	(52,941)		(65,887)
Minimum withholding taxes paid on stock awards	(15,558)		(45,836)

Distributions to noncontrolling interests	(4,824)		—
Net cash provided by financing activities	1,020,081		1,357,575
Effect of exchange rate changes on cash	16,535		(16,059)
Net increase in cash, cash equivalents and restricted cash	93,951		77,768
Cash, cash equivalents and restricted cash at beginning of period	150,168		69,072
Cash, cash equivalents and restricted cash at end of period	$	244,119	$	146,840

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

DARLING INGREDIENTS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

July 1, 2023

(unaudited)

(1)General

The accompanying consolidated financial statements for the three and six month periods ended July 1, 2023 and July 2, 2022, 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 December 31, 2022.

(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's consolidated subsidiaries' net assets held by parties other than the Company. These ownership interests are presented separately as “Noncontrolling interests” within “Stockholders' Equity.” All intercompany balances and transactions have been eliminated in consolidation.

(b)Fiscal Periods

The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31. Fiscal periods for the consolidated financial statements included herein are as of July 1, 2023, and include the 13 and 26 weeks ended July 1, 2023, and the 13 and 26 weeks ended July 2, 2022.

The Company considers all short-term highly liquid instruments, with an original maturity of three months or less, to be cash equivalents. Cash balances are recorded net of book overdrafts when a bank right-of-offset exists. All other book overdrafts are recorded in accounts payable and the change in the related balance is reflected in operating activities on the Consolidated Statement of Cash Flows. In addition, the Company has bank overdrafts, which are considered a form of short-term financing with changes in the related balance reflected in financing activities in the Consolidated Statement of Cash Flows. Restricted cash shown on the Consolidated Balance Sheet as of July 1, 2023 and December 31, 2022, primarily represented amounts set aside as collateral for foreign construction projects and U.S. environmental claims and were insignificant to the Company. Restricted cash included in other long term assets on the Consolidated Balance Sheet as of July 1, 2023 and December 31, 2022, primarily represents acquisition consideration hold-back amounts that are part of the purchase price set aside in escrow in the Company's name for possible indemnification claims by the Company, which amounts will be paid to the sellers in the future if no claims arise. A reconciliation of cash, cash equivalents, and restricted cash reported within the Consolidated Balance Sheets that sum to the total of same such amounts shown in the Consolidated Statement of Cash flows is as follows (in thousands):


	July 1, 2023		December 31, 2022
Cash and cash equivalents	$	111,541	$	127,016
Restricted cash	299		315
Restricted cash included in other long-term assets	132,279		22,837
Total cash, cash equivalents and restricted cash shown in the statement of cash flows	$	244,119	$	150,168

(d) Accounts Receivable Factoring

The Company has entered into agreements with third party banks to factor certain of the Company's trade receivables in order to enhance working capital by turning trade receivables into cash faster. Under these agreements, the Company sells certain selected customers’ trade receivables to third party banks without recourse for cash less a nominal fee. For the three months ended July 1, 2023 and July 2, 2022, the Company sold approximately $130.6 million and $145.0 million of its trade receivables and incurred approximately $1.7 million and $0.7 million in fees, respectively, which are recorded as interest expense. For the six months ended July 1, 2023 and July 2, 2022, the Company sold approximately $292.0 million and $271.3 million of its trade receivables and incurred approximately $3.7 million and $1.1 million in fees, which are recorded as interest expense.

(e) Revenue Recognition

The Company recognizes revenue on sales when control of the promised finished product is transferred to the Company's customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for the finished product. Service revenues are recognized when the service occurs. Certain customers may be required to prepay prior to shipment in order to maintain payment protection related to certain foreign and domestic sales. These amounts are recorded as unearned revenue in accrued expenses and recognized when control of the promised finished product is transferred to the Company's customer. See Note 20 (Revenue) to the Company's Consolidated Financial Statements included herein.

(f) Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

If it is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that exist at the date of the financial statements will change in the near term due to one or more future confirming events, and the effect of the change would be material to the financial statements, the Company will disclose the nature of the uncertainty and include an indication that it is at least reasonably possible that a change in the estimate will occur in the near term. If the estimate involves certain loss contingencies, the disclosure will also include an estimate of the probable loss or range of loss or state that an estimate cannot be made.

As a result of the Russia-Ukraine war and the current inflationary environment, we have evaluated the potential impact to the Company's operations and for any indicators of potential triggering events that could indicate certain of the Company's assets may be impaired. Through the six months ended July 1, 2023, the Company has not observed any impairments of the Company's assets or a significant change in their fair value due to the Russia-Ukraine war or inflation.

(g) Out-of-Period Correction

During the quarter ended July 1, 2023, the Company determined the fair value of the contingent consideration liability recorded related to the FASA Group of approximately R$867.5 million (approximately $168.1 million USD at the exchange rate in effect on the closing date of the acquisition) was overstated in the initial

purchase price allocation. The error was the result of the use of an incorrect fair value model under the income approach to determine fair value of the contingent consideration liability upon acquisition. Utilizing assistance from external valuation experts and the use of a monte-carlo simulation, the Company determined during the quarter ended July 1, 2023 the acquisition date fair value of the contingent payment was R$428.2 million (approximately $83.0 million USD at the exchange rate in effect on the closing date of the acquisition) representing the probability weighted present value of the expected payment to be made under the agreement using the income approach. This resulted in an overstatement of the fair value of the contingent consideration liability of approximately $85.1 million on the acquisition date.

The Company assessed the impact of this error and concluded that it was not material to the financial statements previously issued for any interim or annual period and the correction of the error during the quarter ended July 1, 2023 is not material to the second quarter 2023 financial statements and is not expected to be material to the annual financial statements for fiscal 2023. The correction of the fair value of the contingent consideration liability at the acquisition date was recorded as an immaterial out-of-period correction during the quarter ended July 1, 2023 with the offset to the balance sheet recorded as a reduction to goodwill of approximately $85.1 million, which is included in the Feed Ingredients segment.

(h) Reclassifications

Certain immaterial prior year amounts have been reclassified to conform to current year presentation.

(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.


	Net Income per Common Share (in thousands, except per share data)
	Three Months Ended
			July 1, 2023					July 2, 2022
	Income		Shares	Per Share		Income		Shares	Per Share
Basic:
Net Income attributable to Darling	$	252,383	159,810	$	1.58	$	201,996	161,632	$	1.25
Diluted:
Effect of dilutive securities:
Add: Option shares in the money and dilutive effect of non-vested stock awards			3,308					3,781
Less: Pro forma treasury shares			(748)					(668)
Diluted:
Net income attributable to Darling	$	252,383	162,370	$	1.55	$	201,996	164,745	$	1.23


	Net Income per Common Share (in thousands, except per share data)
	Six Months Ended
			July 1, 2023					July 2, 2022
	Income		Shares	Per Share		Income		Shares	Per Share
Basic:
Net Income attributable to Darling	$	438,184	159,978	$	2.74	$	390,049	161,514	$	2.41
Diluted: