Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K
2019-03-19
Regulation FD, Exhibits
8-K
2019-02-27
Earnings, Exhibits
8-K
2018-11-07
Other Events, Exhibits
8-K
2018-11-05
Officers, Exhibits
8-K
2018-11-05
Earnings, Other Events, Exhibits
8-K
2018-10-11
Regulation FD, Exhibits
8-K
2018-10-05
Other Events, Exhibits
8-K
2018-08-08
Earnings, Exhibits
8-K
2018-05-21
Other Events, Exhibits
8-K
2018-05-16
Regulation FD, Exhibits
8-K
2018-05-08
Shareholder Vote
8-K
2018-05-02
Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K
2018-04-25
Other Events, Exhibits
8-K
2018-04-23
Other Events, Exhibits
8-K
2018-01-15
Officers, Exhibits
Comparables
UMBF
UMB Financial
3,450
CHCT
Community Healthcare Trust
685
SSTI
Shotspotter
621
TEUM
Pareteum
492
PPIH
Perma-Pipe
71
LVYN
Lvyuan Green Building Material Technology
0
STRI
STR Holdings
0
FZMD
Fuse Medical
0
DTH
Delta Tucker Holdings
0
SGYP
Synergy Pharmaceuticals
0
DAR 2019-03-30
Content
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Item 4. Controls and Procedures
Part Ii: Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
Exhibits
EX-10.1
exhibit101josemployment.htm
EX-31.1
ex311-20190330.htm
EX-31.2
ex312-20190330.htm
EX-32
ex32-20190330.htm
Darling Ingredients Earnings 2019-03-30
DAR 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 dar-20190330x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2019
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)
251 O'Connor Ridge Blvd., Suite 300
Irving, Texas
75038
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (972) 717-0300
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 X 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 X 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
X
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 X
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”)
There were 164,748,806 shares of common stock, $0.01 par value, outstanding at May 1, 2019.
DARLING INGREDIENTS INC. AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2019
Property, plant and equipment, less accumulated depreciation of
$1,281,115 at March 30, 2019 and $1,246,095 at December 29, 2018
1,691,558
1,687,858
Intangible assets, less accumulated amortization of
$427,687 at March 30, 2019 and $423,575 at December 29, 2018
579,313
595,862
Goodwill
1,222,382
1,229,159
Investment in unconsolidated subsidiaries
433,381
410,177
Operating lease right-of-use assets
129,721
—
Other assets
53,487
53,375
Deferred income taxes
14,037
14,981
$
4,995,054
$
4,889,354
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
$
23,693
$
7,492
Accounts payable, principally trade
192,511
219,479
Income taxes payable
8,861
4,043
Current operating lease liabilities
39,776
—
Accrued expenses
281,331
309,484
Total current liabilities
546,172
540,498
Long-term debt, net of current portion
1,663,763
1,666,940
Long-term operating lease liabilities
89,100
—
Other non-current liabilities
113,984
115,032
Deferred income taxes
225,336
231,063
Total liabilities
2,638,355
2,553,533
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 250,000,000 shares authorized;
168,409,679 and 168,098,177 shares issued at March 30, 2019
and at December 29, 2018, respectively
1,684
1,681
Additional paid-in capital
1,548,446
1,536,157
Treasury stock, at cost; 3,660,873 and 3,437,579 shares at
March 30, 2019 and at December 29, 2018, respectively
(52,845
)
(47,756
)
Accumulated other comprehensive loss
(312,263
)
(304,539
)
Retained earnings
1,105,517
1,087,505
Total Darling's stockholders’ equity
2,290,539
2,273,048
Noncontrolling interests
66,160
62,773
Total stockholders' equity
$
2,356,699
$
2,335,821
$
4,995,054
$
4,889,354
The accompanying notes are an integral part of these consolidated financial statements.
3
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 30, 2019 and March 31, 2018
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 30, 2019
March 31, 2018
Net sales
$
835,104
$
875,374
Costs and expenses:
Cost of sales and operating expenses
646,663
678,099
Selling, general and administrative expenses
85,003
86,902
Depreciation and amortization
79,164
78,619
Total costs and expenses
810,830
843,620
Operating income
24,274
31,754
Other expense:
Interest expense
(19,876
)
(23,124
)
Foreign currency loss
(732
)
(1,481
)
Other expense, net
(2,525
)
(2,516
)
Total other expense
(23,133
)
(27,121
)
Equity in net income of unconsolidated subsidiaries
23,773
97,154
Income before income taxes
24,914
101,787
Income tax expense
5,274
3,712
Net income
19,640
98,075
Net income attributable to noncontrolling interests
(1,628
)
(770
)
Net income attributable to Darling
$
18,012
$
97,305
Basic income per share
$
0.11
$
0.59
Diluted income per share
$
0.11
$
0.58
The accompanying notes are an integral part of these consolidated financial statements.
4
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Three months ended March 30, 2019 and March 31, 2018
(in thousands)
(unaudited)
Three Months Ended
March 30, 2019
March 31, 2018
Net income
$
19,640
$
98,075
Other comprehensive income/(loss), net of tax:
Foreign currency translation
(4,886
)
17,295
Pension adjustments
858
667
Natural gas swap derivative adjustments
—
22
Corn option derivative adjustments
—
(1,605
)
Foreign exchange derivative adjustments
(1,937
)
—
Total other comprehensive income/(loss), net of tax
(5,965
)
16,379
Total comprehensive income
$
13,675
$
114,454
Comprehensive income attributable to noncontrolling interests
3,387
1,287
Comprehensive income attributable to Darling
$
10,288
$
113,167
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 March 30, 2019
(in thousands, except share data)
Common Stock
Number of Outstanding Shares
$.01 par Value
Additional Paid-In Capital
Treasury Stock
Accumulated Other Comprehensive Loss
Retained Earnings
Stockholders' equity attributable to Darling
Non-controlling Interest
Total Stockholders' Equity
Balances at December 30, 2017
164,653,437
$
1,679
$
1,515,614
$
(44,063
)
$
(209,524
)
$
981,227
$
2,244,933
$
82,764
$
2,327,697
Adjustment to initially apply FASB ASC No. 2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
—
—
—
—
(4,782
)
4,782
—
—
—
Net income
—
—
—
—
—
97,305
97,305
770
98,075
Deductions to noncontrolling interests
—
—
—
—
—
—
—
(10,173
)
(10,173
)
Pension liability adjustments, net of tax
—
—
—
—
667
—
667
—
667
Natural gas swap derivative adjustment, net of tax
—
—
—
—
22
—
22
—
22
Corn option derivative adjustment, net of tax
—
—
—
—
(1,605
)
—
(1,605
)
—
(1,605
)
Foreign currency translation adjustments
—
—
—
—
16,778
—
16,778
517
17,295
Stock-based compensation
—
—
8,527
—
—
—
8,527
—
8,527
Treasury stock
(159,758
)
—
—
(2,962
)
—
—
(2,962
)
—
(2,962
)
Issuance of common stock
153,983
1
1,695
—
—
—
1,696
—
1,696
Balances at March 31, 2018
164,647,662
$
1,680
$
1,525,836
$
(47,025
)
$
(198,444
)
$
1,083,314
$
2,365,361
$
73,878
$
2,439,239
Common Stock
Number of Outstanding Shares
$.01 par Value
Additional Paid-In Capital
Treasury Stock
Accumulated Other Comprehensive Loss
Retained Earnings
Stockholders' equity attributable to Darling
Non-controlling Interest
Total Stockholders' Equity
Balances at December 29, 2018
164,660,598
$
1,681
$
1,536,157
$
(47,756
)
$
(304,539
)
$
1,087,505
$
2,273,048
$
62,773
$
2,335,821
Net income
—
—
—
—
—
18,012
18,012
1,628
19,640
Pension liability adjustments, net of tax
—
—
—
—
858
—
858
—
858
Foreign exchange derivative adjustment, net of tax
—
—
—
—
(1,937
)
—
(1,937
)
—
(1,937
)
Foreign currency translation adjustments
—
—
—
—
(6,645
)
—
(6,645
)
1,759
(4,886
)
Stock-based compensation
—
—
10,403
—
—
—
10,403
—
10,403
Treasury stock
(223,294
)
—
—
(5,089
)
—
—
(5,089
)
—
(5,089
)
Issuance of common stock
311,502
3
1,886
—
—
—
1,889
—
1,889
Balances at March 30, 2019
164,748,806
$
1,684
$
1,548,446
$
(52,845
)
$
(312,263
)
$
1,105,517
$
2,290,539
$
66,160
$
2,356,699
The accompanying notes are an integral part of these consolidated financial statements.
6
DARLING INGREDIENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 30, 2019 and March 31, 2018
(in thousands)
(unaudited)
March 30, 2019
March 31, 2018
Cash flows from operating activities:
Net Income
$
19,640
$
98,075
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
79,164
78,619
Gain on disposal of property, plant, equipment and other assets
(4,250
)
(462
)
Gain on insurance proceeds from insurance settlements
(845
)
(503
)
Deferred taxes
(2,901
)
(2,649
)
Increase in long-term pension liability
646
159
Stock-based compensation expense
10,327
8,992
Write-off deferred loan costs
27
—
Deferred loan cost amortization
1,574
2,939
Equity in net income of unconsolidated subsidiaries
(23,773
)
(97,154
)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable
11,692
(14,590
)
Income taxes refundable/payable
7,270
(1,384
)
Inventories and prepaid expenses
(5,063
)
(10,182
)
Accounts payable and accrued expenses
(43,016
)
(38,422
)
Other
(1,891
)
3,486
Net cash provided by operating activities
48,601
26,924
Cash flows from investing activities:
Capital expenditures
(84,269
)
(56,587
)
Acquisitions, net of cash acquired
(1,431
)
—
Investment in unconsolidated subsidiary
—
(3,500
)
Proceeds from sale of investment in subsidiaries
—
2,805
Gross proceeds from disposal of property, plant and equipment and other assets
7,868
1,479
Proceeds from insurance settlement
845
503
Payments related to routes and other intangibles
(2,778
)
(15
)
Net cash used by investing activities
(79,765
)
(55,315
)
Cash flows from financing activities:
Proceeds from long-term debt
2,138
3,876
Payments on long-term debt
(10,974
)
(9,622
)
Borrowings from revolving credit facility
156,829
135,184
Payments on revolving credit facility
(138,147
)
(80,019
)
Net cash overdraft financing
14,525
(331
)
Deferred loan costs
—
(1,094
)
Issuance of common stock
12
182
Minimum withholding taxes paid on stock awards
(3,190
)
(2,018
)
Net cash provided by financing activities
21,193
46,158
Effect of exchange rate changes on cash
(1,575
)
(1,672
)
Net increase/(decrease) in cash, cash equivalents and restricted cash
(11,546
)
16,095
Cash, cash equivalents and restricted cash at beginning of period
107,369
106,916
Cash, cash equivalents and restricted cash at end of period
$
95,823
$
123,011
Supplemental disclosure of cash flow information:
Accrued capital expenditures
$
(8,623
)
$
(1,934
)
Cash paid during the period for:
Interest, net of capitalized interest
$
21,602
$
19,142
Income taxes, net of refunds
$
2,894
$
7,120
Non-cash operating activities
Operating lease right of use asset obtained in exchange for new lease liabilities
$
4,794
$
—
Non-cash financing activities
Debt issued for assets
$
—
$
17
The accompanying notes are an integral part of these consolidated financial statements.
7
DARLING INGREDIENTS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 30, 2019
(unaudited)
(1)
General
The accompanying consolidated financial statements for the three month periods ended March 30, 2019 and March 31, 2018, have been prepared by Darling Ingredients Inc., a Delaware corporation (“Darling”, and together with its subsidiaries, the “Company”) in accordance with generally accepted accounting principles in the United States (“GAAP”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information furnished herein reflects all adjustments (consisting only of normal recurring accruals) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Form 10-K for the fiscal year ended December 29, 2018.
(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 significant intercompany balances and transactions have been eliminated in consolidation.
(b)
Fiscal Periods
The Company has a 52/53 week fiscal year ending on the Saturday nearest December 31. Fiscal periods for the consolidated financial statements included herein are as of March 30, 2019, and include the 13 weeks ended March 30, 2019, and the 13 weeks ended March 31, 2018.
(c)
Cash, Cash Equivalents and Restricted Cash
The Company considers all short-term highly liquid instruments, with an original maturity of three months or less, to be cash equivalents. Cash balances are recorded net of book overdrafts when a bank right-of-offset exists. All other book overdrafts are recorded in accounts payable and the change in the related balance is reflected in operating activities on the Consolidated Statement of Cash Flows. In addition, the Company has bank overdrafts, which are considered a form of short-term financing with changes in the related balance reflected in financing activities in the Consolidated Statement of Cash Flows.
Restricted cash represents amounts required to be set aside to cover self-insurance claims and collateral for environmental claims. The following table provides a reconciliation of cash, cash equivalents and restricted cash on the consolidated balance sheet that sum to the total of the same amounts shown in the consolidated statement of cash flows (in thousands):
8
March 30, 2019
December 29, 2018
Cash and cash equivalents
$
95,716
$
107,262
Restricted cash
107
107
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flow
$
95,823
$
107,369
(d)
Accounts Receivable and Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from customers’ non-payment of trade accounts receivable owed to the Company. These trade receivables arise in the ordinary course of business from sales of raw material, finished product or services to the Company’s customers. The estimate of allowance for doubtful accounts is based upon the Company’s bad debt experience, prevailing market conditions, and aging of trade accounts receivable, among other factors. 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 will sell certain selected customers trade receivables to the third party banks without recourse for cash less a nominal fee. For the three months ended March 30, 2019 and March 31, 2018, the Company sold approximately $32.5 million and $18.8 million of its trade receivables and incurred approximately $0.2 million and less than $0.1 million in fees, which are recorded as interest expense, respectively.
(e)
Revenue Recognition
The Company recognizes revenue on sales when control of the promised finished product is transferred to the Company's customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for the finished product. Service revenues are recognized when the service occurs. Certain customers may be required to prepay prior to shipment in order to maintain payment protection related to certain foreign and domestic sales. These amounts are recorded as unearned revenue and recognized when control of the promised finished product is transferred to the Company's customer. See Note 19 to the consolidated financial statements.
(f)
Foreign Currency Translation and Remeasurement
Foreign currency translation is included as a component of accumulated other comprehensive loss and reflects the adjustments resulting from translating the foreign currency denominated financial statements of foreign subsidiaries into U.S. dollars. The functional currency of the Company's foreign subsidiaries is the currency of the primary economic environment in which the entity operates, which is generally the local currency of the country. Accordingly, assets and liabilities of the foreign subsidiaries are translated into U.S. dollars at fiscal period end exchange rates, including intercompany foreign currency transactions that are of long-term investment nature. Income and expense items are translated at average exchange rates occurring during the period. Changes in exchange rates that affect cash flows and the related receivables or payables are recognized as transaction gains and losses in determining net income. The Company incurred net foreign currency translation losses of approximately $6.6 million for the three months ended March 30, 2019 and net foreign currency translation gains of approximately $16.8 million for the three months ended March 31, 2018, 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 c
9
omparable market yield curve consistent with the Company's credit quality is determined. The lease term for all of the Company's leases include the noncancellable period of the lease plus any additional periods covered by either a Company option to extend the lease that the Company is reasonably certain to exercise or when a triggering event occurs. The Company has elected to not recognize a ROU asset and lease liability with an initial term of 12 months or less at lease commencement. Current operating leases are included on the Company's balance sheet as a ROU asset, current operating lease liabilities and long-term operating lease liabilities. For finance leases, the lease liability is initially measured in the same manner and date as for the operating leases, and is subsequently measured at amortized cost using the effective interest method. Finance leases are included in property, plant and equipment, current portion of long-term debt and long-term debt, net of current portion, but are not significant to the Company.
The ROU asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any direct costs incurred less any lease incentives received. For operating leases, the ROU asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of the lease incentives received. Some leases payments contain rent escalation clauses (including index-based escalations), initially measured using the index at the lease commencement date. The Company recognizes minimum rental expense on a straight-line basis based on the fixed components of the lease arrangement.
The Company uses the long-lived assets impairment guidance in ASC subtopic 360-10, Property, Plant and Equipment - Overall, to determine whether the ROU asset is impaired, and if so, the amount of the impairment loss to recognize. The Company monitors for events or changes in circumstances that require a reassessment of one of its leases. When a reassessment results in the remeasurement of a lease liability, a corresponding adjustment is made to the carrying amount of the corresponding ROU asset unless doing so would reduce the carrying amount of the ROU asset to an amount less than zero. In that case, the amount of the adjustment that would result in a negative ROU asset balance is recorded in the consolidated statement of operations.
As a result, of adopting the new lease standard, the Company recognized additional operating liabilities of approximately $134.4 million with a corresponding ROU asset of approximately $135.7 million as of December 30, 2018.
(h)
Earnings Per Share
Basic income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares including non-vested and restricted shares outstanding during the period. Diluted income per common share is computed by dividing net income attributable to Darling by the weighted average number of common shares outstanding during the period increased by dilutive common equivalent shares determined using the treasury stock method.
Net Income per Common Share (in thousands, except per share data)
Three Months Ended
March 30, 2019
March 31, 2018
Income
Shares
Per Share
Income
Shares
Per Share
Basic:
Net Income attributable to Darling
$
18,012
164,855
$
0.11
$
97,305
164,772
$
0.59
Diluted:
Effect of dilutive securities:
Add: Option shares in the money and dilutive effect of non-vested stock awards
6,127
5,071
Less: Pro forma treasury shares
(2,322
)
(2,101
)
Diluted:
Net income attributable to Darling
$
18,012
168,660
$
0.11
$
97,305
167,742
$
0.58
For the three months ended March 30, 2019 and March 31, 2018, respectively, 466,841 and 749,550 outstanding stock options were excluded from diluted income per common share as the effect was antidilutive. For the three months ended March 30, 2019 and March 31, 2018, respectively, 391,800 and 385,216 shares of non-vested stock and stock equivalents were excluded from diluted income per common share as the effect was antidilutive.
10
(3)
Investment in Unconsolidated Subsidiaries
On January 21, 2011, a wholly-owned subsidiary of Darling entered into a limited liability company agreement with a wholly-owned subsidiary of Valero Energy Corporation (“Valero”) to form Diamond Green Diesel Holdings LLC (the “DGD Joint Venture”). The DGD Joint Venture is owned 50% / 50% with Valero and was formed to design, engineer, construct and operate a renewable diesel plant (the “DGD Facility”), which as a result of the recent expanded capacity is now capable of processing approximately 20,000 barrels per day of input feedstock to produce renewable diesel fuel and certain other co-products, and is located adjacent to Valero's refinery in Norco, Louisiana. The DGD Joint Venture reached mechanical completion and began the production of renewable diesel in late June 2013. Effective May 1, 2019, the limited liability company agreement was amended and restated for the purpose of updating the agreement in certain respects, including to remove certain provisions that were no longer relevant and to add new provisions relating to the DGD Joint Venture’s recently approved expansion project to construct a new, parallel facility located next to the existing facility.
Selected financial information for the Company's DGD Joint Venture is as follows (in thousands):
(in thousands)
March 31, 2019
December 31, 2018
Assets:
Total current assets
$
225,948
$
186,258
Property, plant and equipment, net
591,927
576,384
Other assets
26,427
24,601
Total assets
$
844,302
$
787,243
Liabilities and members' equity:
Total current portion of long term debt
$
276
$
189
Total other current liabilities
44,440
40,619
Total long term debt
9,010
8,485
Total other long term liabilities
4,612
539
Total members' equity
785,964
737,411
Total liabilities and members' equity
$
844,302
$
787,243
Three Months Ended
(in thousands)
March 31, 2019
March 31, 2018
Revenues:
Operating revenues
$
302,718
$
150,321
Expenses:
Total costs and expenses less depreciation, amortization and accretion expense
243,063
(49,821
)
Depreciation, amortization and accretion expense
11,418
6,120
Total costs and expenses
254,481
(43,701
)
Operating income
48,237
194,022
Other income
641
377
Interest and debt expense, net
(324
)
—
Net income
$
48,554
$
194,399
As of March 30, 2019 under the equity method of accounting, the Company has an investment in the DGD Joint Venture of approximately $393.0 million on the consolidated balance sheet. The Company has recorded an equity net gain of approximately $24.3 million and $97.2 million for the three months ended March 30, 2019 and March 31, 2018. In February 2018, the blender tax credits for calendar year 2017 were retroactively reinstated by the U.S. Congress. Fiscal 2019 results do not include any blenders tax credits, while in the first three months of fiscal 2018, the DGD Joint Venture recorded approximately $160.4 million for the 2017 reinstated blenders tax credits. The DGD Joint Venture recorded the blenders tax credits in the first quarter of fiscal 2018 as a reduction of total costs and expenses in the above table. The biodiesel blenders tax credit have not been reinstated for fiscal 2018 or fiscal 2019. In addition, in April 2019, the Company received a dividend distribution of approximately $17.7 million 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.
11
(4)
Acquisitions and Dispositions
In October 2018, the Company acquired substantially all of the assets of Triple - T Foods - Arkansas, Inc. including a wet pet food ingredient operation in Springdale, Arkansas and a cold storage operation in Rogers, Arkansas. The Company finalized the working capital amount in the first quarter of 2019, which resulted in insignificant adjustments to previously disclosed amounts.
(5)
Inventories
A summary of inventories follows (in thousands):
March 30, 2019
December 29, 2018
Finished product
$
176,451
$
176,184
Work in process
81,242
78,501
Raw material
27,723
32,502
Supplies and other
54,466
53,841
$
339,882
$
341,028
(6)
Intangible Assets
The gross carrying amount of intangible assets not subject to amortization and intangible assets subject to amortization
is as follows (in thousands):
March 30, 2019
December 29, 2018
Indefinite Lived Intangible Assets
Trade names
$
52,926
$
53,472
52,926
53,472
Finite Lived Intangible Assets:
Routes
380,442
386,724
Permits
485,119
486,359
Non-compete agreements
3,778
3,784
Trade names
65,670
72,570
Royalty, consulting, land use rights and leasehold
19,065
16,528
954,074
965,965
Accumulated Amortization:
Routes
(146,415
)
(145,702
)
Permits
(246,460
)
(238,123
)
Non-compete agreements
(2,635
)
(2,501
)
Trade names
(27,979
)
(33,242
)
Royalty, consulting, land use rights and leasehold
(4,198
)
(4,007
)
(427,687
)
(423,575
)
Total Intangible assets, less accumulated amortization
$
579,313
$
595,862
Gross intangible routes, permits, trade names, non-compete agreements and other intangibles partially decreased in fiscal 2018 as a result of approximately $13.4 million of fully amortized asset retirements. Amortization expense for the three ended March 30, 2019 and March 31, 2018, was approximately $18.4 million, $19.5 million, respectively.
(7)
Goodwill
Changes in the carrying amount of goodwill (in thousands):
12
Feed Ingredients
Food Ingredients
Fuel Ingredients
Total
Balance at December 29, 2018
Goodwill
$
791,966
$
335,701
$
117,867
$
1,245,534
Accumulated impairment losses
(15,914
)
(461
)
—
(16,375
)
776,052
335,240
117,867
1,229,159
Goodwill acquired during year
396
91
—
487
Foreign currency translation
(1,306
)
(4,548
)
(1,410
)
(7,264
)
Balance at March 30, 2019
Goodwill
791,056
331,244
116,457
1,238,757
Accumulated impairment losses
(15,914
)
(461
)
—
(16,375
)
$
775,142
$
330,783
$
116,457
$
1,222,382
(8)
Accrued Expenses
Accrued expenses consist of the following (in thousands):
March 30, 2019
December 29, 2018
Compensation and benefits
$
75,568
$
91,851
Accrued income, ad valorem, and franchise taxes
24,463
31,366
Accrued operating expenses
59,763
62,247
Customer deposits
31,563
30,741
Other accrued expense
89,974
93,279
$
281,331
$
309,484
(9)
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The Company adopted the new standard on December 30, 2018 and is using the effective date as the Company's date of initial application and consequently, financial information will not be updated and the disclosures required under the this ASU will not be provided for dates and periods before December 30, 2018. The Company has elected the package of expedients, which permits the Company not to reassess under the new standard the Company's prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.
The Company leases certain real and personal property under non-cancelable operating leases. In addition, the Company leases a large portion of the Company's fleet of tractors, all of its rail cars, some IT equipment and other transportation equipment. The Company's office leases include certain lease and non-lease components, where the Company has elected to exclude the non-lease components from the calculation of the lease liability and ROU asset. The Company has finance leases, which are not significant to the Company and not separately disclosed in detail.
The components of operating lease expense included in cost of sales and operating expenses and selling, general and administrative expenses were as follows (in thousands):
Three months Ended
March 30, 2019
Operating lease expense
$
12,317
Short-term lease costs
3,053
Total lease cost
$
15,370
13
Other information (in thousands, except lease terms and discount rates):
Cash paid for amounts included in the measurement lease liabilities
Operating cash flows from operating leases
$
12,029
As of March 30, 2019
Operating right-of-use assets, net
$
129,721
Operating lease liability, current
$
39,776
Operating lease liability, non-current
89,100
Total operating lease liabilities
$
128,876
Weighted average remaining lease term - operating leases
6.3 years
Weighted average discount rate - operating leases
5.26
%
Future annual minimum lease payments and capital lease commitments as of March 30, 2019 were as follows (in thousands):
Period Ending Fiscal
Operating Leases
Capital Leases
2019 (excluding the three months ended March 30, 2019)
$
34,356
$
217
2020
35,776
153
2021
23,580
6
2022
14,338
6
2023
9,734
—
Thereafter
36,564
—
$
154,348
$
382
Less amounts representing interest
$
(25,472
)
(16
)
Lease obligations included in current and long-term liabilities
$
128,876
$
366
The Company adopted ASU 2016-02 on December 30, 2018 as noted above. The following disclosure is provided for periods prior to adoption. Future annual minimum lease payments and capital lease commitments as of December 29, 2018 were as follows (in thousands):
Period Ending Fiscal
Operating Leases
Capital Leases
2019
$
46,316
$
271
2020
34,403
152
2021
22,252
6
2022
13,091
6
2023
8,478
—
Thereafter
28,219
—
$
152,759
$
435
Less amounts representing interest
(20
)
Capital lease obligation included in current and long-term debt
$
415
(10)
Debt
Debt consists of the following (in thousands):
14
March 30, 2019
December 29, 2018
Amended Credit Agreement:
Revolving Credit Facility ($37.1 million and $32.1 million denominated in euro at March 30, 2019 and December 29, 2018, respectively)
$
50,061
$
32,105
Term Loan A ($22.8 million and $29.8 million denominated in CAD at March 30, 2019 and December 29, 2018, respectively)
61,030
68,080
Less unamortized deferred loan costs
(316
)
(381
)
Carrying value Term Loan A
60,714
67,699
Term Loan B
495,000
495,000
Less unamortized deferred loan costs
(8,741
)
(9,024
)
Carrying value Term Loan B
486,259
485,976
5.375% Senior Notes due 2022 with effective interest of 5.72%
500,000
500,000
Less unamortized deferred loan costs
(4,503
)
(4,876
)
Carrying value 5.375% Senior Notes due 2022
495,497
495,124
3.625% Senior Notes due 2026 - Denominated in euro with effective interest of 3.83%
578,371
590,499
Less unamortized deferred loan costs - Denominated in euro
(7,753
)
(8,160
)
Carrying value 3.625% Senior Notes due 2026
570,618
582,339
Other Notes and Obligations
24,307
11,189
1,687,456
1,674,432
Less Current Maturities
23,693
7,492
$
1,663,763
$
1,666,940
As of March 30, 2019, the Company had outstanding debt under a term loan facility denominated in Canadian dollars of CAD$30.6 million. See below for discussion relating to the Company's debt agreements. In addition, as of March 30, 2019, the Company had capital lease obligations denominated in Canadian dollars included in debt. The total Canadian dollar finance lease obligation was approximately CAD$0.4 million.
As of March 30, 2019, the Company had outstanding debt under the revolving credit facility and the Company's 3.625% Senior Notes due 2026 denominated in euros of €33.0 million and €515.0 million, respectively. See below for discussion relating to the Company's debt agreements. In addition, at March 30, 2019, the Company had capital lease obligations denominated in euros included in debt. The total euro finance lease obligations was approximately €0.1 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 December 18, 2017, the Company, and certain of its subsidiaries entered into an amendment (the “Fifth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Fifth Amendment (i) refinanced the term B loans under the Amended Credit Agreement with new term B loans in an aggregate principal amount of $525.0 million with a maturity date of December 18, 2024; (ii) adjusted the applicable margin pricing on borrowings under the term B loan; (iii) modified certain of the negative covenants to increase the allowances for certain actions, including debt and investments; and (iv) made other updates and changes.
Effective December 16, 2016, the Company, and certain of its subsidiaries entered into an amendment (the “Fourth Amendment”) with its lenders to the Amended Credit Agreement. Among other things, the Fourth Amendment (i) extended the maturity date of the term A loans and revolving credit facility loans under the Amended Credit Agreement from September 27, 2018 to December 16, 2021, subject to a 91-day “springing” adjustment if the term B loans are outstanding 91 days prior to the maturity date of the term B loans; (ii) reset the amortization schedule of the term A loans to their original schedule; (iii) adjusted the applicable margin pricing grid on borrowings under the term A Loan and revolving credit facility which adjusts based on the Company's total leverage ratio as set forth in the Amended Credit Agreement;
15
(iv) eliminated the secured leverage ratio financial maintenance covenant so that from and after the effective date of the Fourth Amendment the Company’s financial covenants consist of maintaining of total leverage ratio not to exceed 5.50 to 1.00 and maintaining an interest coverage ratio of not less than 3.00 to 1.00; (v) modified certain of the negative covenants to include a senior leverage ratio incurrence-based test and to increase the allowances for certain actions, including debt, investments and restricted payments; and (vi) made other updates and changes.
The Company's Amended Credit Agreement provides for senior secured credit facilities in the aggregate principal amount of $1.88 billion comprised of (i) the Company's $350.0 million term loan A facility, (ii) the Company's $525.0 million term loan B facility and (iii) the Company's $1.0 billion five-year revolving loan facility (approximately $150.0 million of which is available for a letter of credit sub-facility and $50.0 million of which is available for a swingline sub-facility) (collectively, the “Senior Secured Credit Facilities”). The Amended Credit Agreement also permits Darling and the other borrowers thereunder to incur ancillary facilities provided by any revolving lender party to the Senior Secured Credit Facilities (with certain restrictions). Up to $948.3 million of the revolving loan facility is available to be borrowed by (x) Darling in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender, (y) Darling Canada in Canadian dollars and (z) Darling NL, Darling Ingredients International Holding B.V. (“Darling BV”) and Darling Ingredients Germany Holding GmbH in U.S. dollars, Canadian dollars, euros and other currencies to be agreed and available to each applicable lender. The revolving loan facility and term loan A facility will mature on December 16, 2021. The revolving loan facility will be used for working capital needs, general corporate purposes and other purposes not prohibited by the Amended Credit Agreement.
The interest rate applicable to any borrowings under the term loan A facility and the revolving loan facility will equal either LIBOR/euro interbank offered rate/CDOR plus 2.00% per annum or base rate/Canadian prime rate plus 1.00% per annum, subject to certain step-ups or step-downs based on the Company's total leverage ratio. The interest rate applicable to any borrowings under the term loan B facility will equal the base rate plus 1.00% or LIBOR plus 2.00%.
As of March 30, 2019, the Company had $38.3 million outstanding under the term loan A facility at LIBOR plus a margin of 2.00% per annum for a total of 4.50% per annum and $13.0 million outstanding under the revolver at base rate plus a margin of 1.00% per annum for a total of 6.50% per annum. The Company had $485.0 million outstanding under the term loan B facility at LIBOR plus a margin of 2.00% per annum for a total of 4.50% per annum and $10.0 million at base rate plus a margin of 1.00% per annum for a total of 6.50%. The Company had CAD$30.6 million outstanding under the term loan A facility at CDOR plus a margin of 2.00% per annum for a total of 4.0572%. The Company had €33.0 million under the revolver at LIBOR plus a margin of 2.00% for a total of 2.00% per annum. As of March 30, 2019, the Company had availability of $901.5 million under the Amended Credit Agreement taking into account amounts borrowed, ancillary facilities and letters of credit issued of $23.5 million. The Company also has foreign bank guarantees that are not part of the Company's Amended Credit Agreement in the amount of approximately $17.8 million at March 30, 2019.
5.375 % Senior Notes due 2022. On January 2, 2014, Darling Escrow Corporation, a wholly-owned subsidiary of Darling, issued and sold $500.0 million aggregate principal amount of its 5.375% Notes due 2022 (the “5.375% Notes”). The 5.375% Notes, which were offered in a private offering in connection with the Company's acquisition in January 2014 of its Darling Ingredients International business from VION Holding, N.V., were issued pursuant to a 5.375% Notes Indenture, dated as of January 2, 2014 (the “Original 5.375% Indenture”) (as supplemented, the “5.375% Indenture”), among Darling Escrow Corporation, the subsidiary guarantors party thereto from time to time, and U.S. Bank National Association, as trustee.
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.
As of March 30, 2019, 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 5.375% Indenture and the 3.625% Indenture.
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
16
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 gross proceeds from the sale of the Notes, together with cash on hand, were used to refinance all of the Company's 5.375% Notes, by cash tender offer for and redemption of those notes, to pay the discount of the initial purchasers and to pay the other fees and expenses related to the offering of the 5.25% Notes.
(11)
Income Taxes
The Company has provided income taxes for the three month periods ended March 30, 2019 and March 31, 2018, based on its estimate of the effective tax rate for the entire 2019 and 2018 fiscal years. The Company’s estimated annual effective tax rate is based on forecasts of income by jurisdiction, permanent differences between book and tax income, the relative proportion of income and losses by jurisdiction, and statutory income tax rates. Discrete events such as the assessment of the ultimate outcome of tax audits, audit settlements, recognizing previously unrecognized tax benefits due to the lapsing of statutes of limitation, recognizing or derecognizing deferred tax assets due to projections of income or loss and changes in tax laws are recognized in the period in which they occur.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company expects to have access to its offshore earnings with no material U.S. tax impact. Therefore, the Company does not consider earnings from its foreign subsidiaries to be permanently reinvested offshore.
The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets. In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions. The Company considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends and its outlook for future years.
Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. As of March 30, 2019, the Company had $4.3 million of gross unrecognized tax benefits and $0.7 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 $0.3 million, excluding interest and penalties, primarily due to potential settlements and expiration of certain statutes of limitations.
The Company’s major taxing jurisdictions include the United States (federal and state), Canada, the Netherlands, Belgium, Brazil, Germany, France and China. The Company is subject to regular examination by various tax authorities and although the final outcome of these examinations is not yet determinable, the Company does not anticipate that any of the examinations will have a significant impact on the Company's results of operations or financial position. The statute of limitations for the Company’s major tax jurisdictions is open for varying periods, but is generally closed through the 2010 tax year.
(12)
Other Comprehensive Income/(Loss)
The Company follows FASB authoritative guidance for reporting and presentation of comprehensive income/(loss) and its components. Other comprehensive income/(loss) is derived from adjustments that reflect pension adjustments, natural gas swap adjustments, corn option adjustments, foreign exchange forward adjustments and foreign currency translation adjustments.
The components of other comprehensive income (loss) and the related tax impacts for the three months ended March 30, 2019 and March 31, 2018 are as follows (in thousands):
17
Three Months Ended
Before-Tax
Tax (Expense)
Net-of-Tax
Amount
or Benefit
Amount
March 30, 2019
March 31, 2018
March 30, 2019
March 31, 2018
March 30, 2019
March 31, 2018
Defined benefit pension plans
Amortization of prior service cost/(benefit)
$
9
$
9
$
(3
)
$
(3
)
$
6
$
6
Amortization of actuarial loss
1,146
888
(294
)
(227
)
852
661
Total defined benefit pension plans
1,155
897
(297
)
(230
)
858
667
Natural gas swap derivatives
Loss/(gain) reclassified to net income
—
14
—
(4
)
—
10
Gain/(loss) activity recognized in other comprehensive income/(loss)
—
16
—
(4
)
—
12
Total natural gas swap derivatives
—
30
—
(8
)
—
22
Corn option derivatives
Loss/(gain) reclassified to net income
—
(668
)
—
173
—
(495
)
Gain/(loss) activity recognized in other comprehensive income/(loss)
—
(1,497
)
—
387
—
(1,110
)
Total corn option derivatives
—
(2,165
)
—
560
—
(1,605
)
Foreign exchange derivatives
Gain/(loss) activity recognized in other comprehensive income/(loss)
(2,934
)
—
997
—
(1,937
)
—
Total foreign exchange derivatives
(2,934
)
—
997
—
(1,937
)
—
Foreign currency translation
(5,393
)
17,295
507
—
(4,886
)
17,295
Other comprehensive income/(loss)
$
(7,172
)
$
16,057
$
1,207
$
322
$
(5,965
)
$
16,379
The following table presents the amounts reclassified out of each component of other comprehensive income (loss), net of tax for the three months ended March 30, 2019 and March 31, 2018 as follows (in thousands):
Three Months Ended
March 30, 2019
March 31, 2018
Statement of Operations Classification
Derivative instruments
Natural gas swap derivatives
$
—
$
(14
)
Cost of sales and operating expenses
Corn option derivatives
—
668
Cost of sales and operating expenses
—
654
Total before tax
—
(169
)
Income taxes
—
485
Net of tax
Defined benefit pension plans
Amortization of prior service cost
$
(9
)
$
(9
)
(a)
Amortization of actuarial loss
(1,146
)
(888
)
(a)
(1,155
)
(897
)
Total before tax
297
230
Income taxes
(858
)
(667
)
Net of tax
Total reclassifications
$
(858
)
$
(182
)
Net of tax
(a)
These items are included in the computation of net periodic pension cost. See Note 14 Employee Benefit Plans for additional information.
The following table presents changes in each component of accumulated other comprehensive income/(loss) as of March 30, 2019 as follows (in thousands):
18
Three Months Ended March 30, 2019
Foreign Currency
Derivative
Defined Benefit
Translation
Instruments
Pension Plans
Total
Accumulated Other Comprehensive Income/(loss) December 29, 2018, attributable to Darling, net of tax
$
(270,081
)
$
1,081
$
(35,539
)
$
(304,539
)
Other comprehensive gain/(loss) before reclassifications
(4,886
)
(1,937
)
—
(6,823
)
Amounts reclassified from accumulated other comprehensive income/(loss)
—
—
858
858
Net current-period other comprehensive income/(loss)
(4,886
)
(1,937
)
858
(5,965
)
Noncontrolling interest
1,759
—
—
1,759
Accumulated Other Comprehensive Income/(loss) March 30, 2019, attributable to Darling, net of tax
(276,726
)
$
(856
)
$
(34,681
)
$
(312,263
)
(13) Stockholders' Equity
Fiscal 2019 Long-Term Incentive Opportunity Awards (2019 LTIP). On January 25, 2019, the Compensation Committee (the “Committee”) of the Company's Board of Directors adopted the 2019 LTIP pursuant to which they awarded certain of the Company's key employees, 610,953 stock options and 305,195 performance share units (the “PSUs”) under the Company's 2017 Omnibus Incentive Plan. The stock options vest 33.33% on the first, second and third anniversaries of the grant date. The PSUs are tied to a three-year forward-looking performance period and will be earned based on the Company's average return on capital employed (“ROCE”), as calculated in accordance with the terms of the award agreement, relative to the average ROCE of the Company's performance peer group companies, with the earned award to be determined in the first quarter of fiscal 2022, 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.
As of March 30, 2019, the Company has approximately $200.0 million remaining under the share repurchase program initially approved in August 2017 and subsequently extended to August 13, 2020.
(14) Employee Benefit Plans
The Company has retirement and pension plans covering a substantial number of its domestic and foreign employees. Most retirement benefits are provided by the Company under separate final-pay noncontributory and contributory defined benefit and defined contribution plans for all salaried and hourly employees (excluding those covered by union-sponsored plans) who meet service and age requirements. Although various defined benefit formulas exist for employees, generally these are based on length of service and earnings patterns during employment. Effective January 1, 2012, the Company's Board of Directors authorized the Company to proceed with the restructuring of its domestic retirement benefit program to include the closing of Darling's salaried and hourly defined benefit plans to new participants as well as the freezing of service and wage accruals thereunder effective December 31, 2011 (a curtailment of these plans for financial reporting purposes) and the enhancing of benefits under the Company's domestic defined contribution plans. The Company-sponsored domestic hourly union plan has not been curtailed; however, several locations of the Company-sponsored domestic hourly union plan have been curtailed as a result of collective bargaining renewals for those sites.
Net pension cost for the three ended March 30, 2019 and March 31, 2018 includes the following components (in thousands):
19
Pension Benefits
Three Months Ended
March 30, 2019
March 31, 2018
Service cost
$
678
$
799
Interest cost
1,710
1,625
Expected return on plan assets
(1,819
)
(2,064
)
Amortization of prior service cost
9
9
Amortization of net loss
1,146
888
Net pension cost
$
1,724
$
1,257
The Company's funding policy for employee benefit pension plans is to contribute annually not less than the minimum amount required nor more than the maximum amount that can be deducted for federal and foreign income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Based on actuarial estimates at March 30, 2019, the Company expects to contribute approximately $4.2 million to its pension plans to meet funding requirements during the next twelve months. Additionally, the Company has made tax deductible discretionary and required contributions to its pension plans for the three months ended March 30, 2019 and March 31, 2018 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 such plan. Based on the most currently available information, the Company has determined that, if a withdrawal were to occur, withdrawal liabilities on two of the plans in which the Company currently participates could be material to the Company, with one of these material plans certified as critical or red zone. With respect to the other multiemployer pension plans in which the Company participates and which are not individually significant, five plans have certified as critical or red zone, two plans have certified as endangered or yellow zone as defined by the Pension Protection Act of 2006.
The Company has received notices of withdrawal liability from two U.S. multiemployer plans in which it participated. As of March 30, 2019, the Company has an aggregate accrued liability of approximately $1.6 million representing the present value of scheduled withdrawal liability payments under these multiemployer plans. While the Company has no ability to calculate a possible current liability for under-funded multiemployer plans that could terminate or could require additional funding under the Pension Protection Act of 2006, the amounts could be material.
(15)
Derivatives
The Company’s operations are exposed to market risks relating to commodity prices that affect the Company’s cost of raw materials, finished product prices and energy costs and the risk of changes in interest rates and foreign currency exchange rates.
The Company makes limited use of derivative instruments to manage cash flow risks related to natural gas usage, diesel fuel usage, inventory, forecasted sales and foreign currency exchange rates. The Company does not use derivative instruments for trading purposes. Natural gas swaps and options are entered into with the intent of managing the overall cost of natural gas usage by reducing the potential impact of seasonal weather demands on natural gas that increases natural gas prices. Heating oil swaps and options are entered into with the intent of managing the overall cost of diesel fuel usage by reducing the potential impact of seasonal weather demands on diesel fuel that increases diesel fuel prices. Soybean meal options are entered into with the intent of managing the impact of changing prices for poultry meal sales. Corn options and future contracts are entered into with the intent of managing U.S. forecasted sales of bakery by-products (“BBP”) by reducing the impact of changing prices. Foreign currency forward contracts are entered into to mitigate the foreign exchange rate risk for transactions designated in a currency other than the local functional currency. At March 30, 2019, the Company had foreign exchange forward and option contracts outstanding that qualified and were designated for hedge accounting as well as corn forward contracts and foreign currency forward contracts that did not qualify and were not designated for hedge accounting.
Entities are required to report all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions
20
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 2018 and the first three months of fiscal 2019, the Company entered into foreign exchange forward and option contracts that are considered cash flow hedges. Under the terms of the foreign exchange contracts, the Company hedged a portion of its forecasted peptan sales in currencies other than the functional currency through the fourth quarter of fiscal 2022. At March 30, 2019 and December 29, 2018, the aggregate fair value of these foreign exchange contracts was approximately $4.0 million and $1.6 million, respectively. The March 30, 2019 amounts are included in other current assets, accrued expense, other assets and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss. The December 29, 2018 amounts are included in other current assets, accrued expense and noncurrent liabilities on the balance sheet, with an offset recorded in accumulated other comprehensive loss.
As of March 30, 2019, the Company had the following outstanding forward and option contract amounts that were entered into to hedge foreign currency transactions in currencies other than the functional currency and forecasted transactions in currencies other than the functional currency (in thousands):
Functional Currency
Contract Currency
Type
Amount
Type
Amount
Brazilian real
49,321
Euro
10,988
Brazilian real
1,171,313
U.S. dollar
330,455
Euro
44,675
U.S. dollar
51,207
Euro
22,121
Polish zloty
95,280
Euro
6,098
Japanese yen
768,000
Euro
38,245
Chinese renminbi
294,273
Euro
13,632
Australian dollar
21,850
Euro
4,573
British pound
3,961
Polish zloty
22,168
Euro
5,156
British pound
276
Euro
322
Japanese yen
296,912
U.S. dollar
2,710
U.S. dollar
821
Japanese yen
90,000
The Company estimates the amount that will be reclassified from accumulated other comprehensive loss at March 30, 2019 into earnings over the next 12 months will be approximately $2.1 million. As of March 30, 2019, 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 ended March 30, 2019 and March 31, 2018 (in thousands):
21
Loss or (Gain) Recognized in Income on Derivatives Not Designated as Hedges
Three Months Ended
Derivatives not designated as hedging instruments
Location
March 30, 2019
March 31, 2018
Foreign exchange
Foreign currency loss
$
1,871
$
1,654
Foreign exchange
Net sales
296
—
Foreign exchange
Cost of sales and operating expenses
(245
)
—
Foreign exchange
Selling, general and administrative expense
873
489
Corn options and futures
Net sales
350
(309
)
Corn options and futures
Cost of sales and operating expenses
(873
)
512
Heating Oil swaps and options
Cost of sales and operating expenses
(506
)
—
Total
$
1,766
$
2,346
At March 30, 2019, the Company had forward purchase agreements in place for purchases of approximately $16.6 million of natural gas and diesel fuel. These forward purchase agreements have no net settlement provisions and the Company intends to take physical delivery of the underlying product. Accordingly, the forward purchase agreements are not subject to the requirements of fair value accounting because they qualify and the Company has elected to account for these as normal purchases as defined in the FASB authoritative guidance.
(16) Fair Value Measurements
FASB authoritative guidance defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The following table presents the Company’s financial instruments that are measured at fair value on a recurring and nonrecurring basis as of March 30, 2019 and are categorized using the fair value hierarchy under FASB authoritative guidance. The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value.
Fair Value Measurements at March 30, 2019 Using
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
(In thousands of dollars)
Total
(Level 1)
(Level 2)
(Level 3)
Assets:
Derivative instruments
$
5,922
$
—
$
5,922
$
—
Total Assets
$
5,922
$
—
$
5,922
$
—
Liabilities:
Derivative instruments
$
2,987
$
—
$
2,987
$
—
5.375% Senior notes
507,500
—
507,500
—
3.625% Senior notes
599,886
—
599,886
—
Term loan A
60,725
—
60,725
—
Term loan B
494,381
—
494,381
—
Revolver debt
49,310
—
49,310
—
Total Liabilities
$
1,714,789
$
—
$
1,714,789
$
—
22
Fair Value Measurements at December 29, 2018 Using
Quoted Prices in
Active Markets for
Identical Assets
Significant Other
Observable
Inputs
Significant
Unobservable
Inputs
(In thousands of dollars)
Total
(Level 1)
(Level 2)
(Level 3)
Assets:
Derivative instruments
$
4,307
$
—
$
4,307
$
—
Total Assets
$
4,307
$
—
$
4,307
$
—
Liabilities:
Derivative instruments
$
3,235
$
—
$
3,235
$
—
5.375% Senior notes
495,000
—
495,000
—
3.625% Senior notes
585,303
—
585,303
—
Term loan A
67,739
—
67,739
—
Term loan B
492,525
—
492,525
—
Revolver debt
31,623
—
31,623
—
Total Liabilities
$
1,675,425
$
—
$
1,675,425
$
—
Derivative assets and liabilities consist of the Company’s corn future contracts and foreign currency contracts, which represents the difference between observable market rates of commonly quoted intervals for similar assets and liabilities in active markets and the fixed swap rate considering the instruments term, notional amount and credit risk. See Note 15 (Derivatives) for discussion on the Company's derivatives.
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value due to the short maturity of these instruments and as such have been excluded from the table above. The carrying amount of the Company's other debt is not deemed to be significantly different from the fair value and all other instruments have been recorded at fair value.
The fair value of the senior notes, term loan A, term loan B and revolver debt is based on market quotation from third-party banks.
(17)
Contingencies
The Company is a party to various lawsuits, claims and loss contingencies arising in the ordinary course of its business, including insured worker's compensation, auto, and general liability claims, assertions by certain regulatory and governmental agencies related to permitting requirements and/or air, wastewater and storm water discharges from the Company’s processing facilities, litigation involving tort, contract, statutory, labor, employment, and other claims, and tax matters.
The Company’s workers compensation, auto and general liability policies contain significant deductibles or self-insured retentions. The Company estimates and accrues its expected ultimate claim costs related to accidents occurring during each fiscal year under these insurance policies and carries this accrual as a reserve until these claims are paid by the Company.
As a result of the matters discussed above, the Company has established loss reserves for insurance, environmental, litigation and tax contingencies. At March 30, 2019 and December 29, 2018, the reserves for insurance, environmental, litigation and tax contingencies reflected on the balance sheet in accrued expenses and other non-current liabilities were approximately $66.8 million and $66.6 million, respectively. The Company has insurance recovery receivables of approximately $26.1 million as of March 30, 2019 and December 29, 2018, related to the insurance contingencies. The Company's management believes these reserves for contingencies are reasonable and sufficient based upon present governmental regulations and information currently available to management; however, there can be no assurance that final costs related to these contingencies will not exceed current estimates. The Company believes that the likelihood is remote that any additional liability from the lawsuits and claims that may not be covered by insurance would have a material effect on the Company's financial position, results of operations or cash flows.
Lower Passaic River Area. In December 2009, the Company, along with numerous other entities, received notice from the United States Environmental Protection Agency (“EPA”) that the Company (as alleged successor-in-interest to The Standard Tallow Corporation) is considered a potentially responsible party (a “PRP”) with respect to alleged contamination
23
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 has begun a settlement analysis using a third-party allocator. The Company is participating 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. 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. 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.
Fresno Facility Permit Issue. The Company has been named as a defendant and a real party in interest in a lawsuit filed on April 9, 2012 in the Superior Court of the State of California, Fresno County, styled Concerned Citizens of West Fresno vs. Darling International Inc. The complaint, as subsequently amended, alleges that the Company's Fresno facility is operating without a proper use permit and seeks, among other things, injunctive relief. The complaint had at one time also alleged that the Company's Fresno facility constitutes a continuing private and public nuisance, but the plaintiff has since amended the complaint to drop these allegations. The City of Fresno was also named as a defendant in the original complaint but has since had a judgment entered in its favor and is no longer a defendant in the lawsuit; however, in December 2013 the City of Fresno filed a motion to intervene as a plaintiff in this matter. The Superior Court heard the motion on February 4, 2014, and entered an order on February 18, 2014 denying the motion. Rendering operations have been conducted on the site since 1955, and the Company believes that it possesses all of the required federal, state and local permits to continue to operate the facility in the manner currently conducted and that its operations do not constitute a private or public nuisance. Accordingly, the Company intends to defend itself vigorously in this matter. Discovery has begun and this matter was scheduled for trial in July 2014; however, the parties have agreed to stay the litigation while they participate in a mediation process, which remains ongoing. In January 2017, the Company entered into a non-binding letter of intent with the City of Fresno pursuant to which the City and the Company will work toward the execution of a definitive agreement to relocate the facility to a different location in Fresno. Whether an agreement to relocate the facility ultimately gets executed is subject to the Company’s receipt of certain incentives and an agreement by the Concerned Citizens of West Fresno to settle and dismiss the aforementioned litigation. While management cannot predict the ultimate outcome of this matter, management does not believe the outcome will have a material effect on the Company's financial condition, results of operations or cash flows.
24
(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.
Feed Ingredients
Feed Ingredients consists principally of (i) the Company's U.S. ingredients business, including the Company's fats and proteins, used cooking oil, trap grease and food residuals collection businesses, the Rothsay ingredients business, the ingredients and specialty products businesses conducted by Darling Ingredients International under the Sonac name (proteins, fats, and plasma products) and (ii) the Company's bakery residuals business. Feed Ingredients operations process animal by-products and used cooking oil into fats, proteins and hides.
Food Ingredients
Food Ingredients consists principally of (i) the collagen business conducted by Darling Ingredients International under the Rousselot name, (ii) the natural casings and meat-by-products business conducted by Darling Ingredients International under the CTH name and (iii) certain specialty products businesses conducted by Darling Ingredients International under the Sonac name.
Fuel Ingredients
The Company's Fuel Ingredients segment consists of (i) the Company's investment in the DGD Joint Venture (ii) the Company's biofuel business conducted under the Dar Pro® and Rothsay names and (iii) the bioenergy business conducted by Darling Ingredients International under the Ecoson and Rendac names.
Business Segments (in thousands):
Feed Ingredients
Food Ingredients
Fuel Ingredients
Corporate
Total
Three Months Ended March 30, 2019
Net Sales
$
495,819
$
279,164
$
60,121
$
—
$
835,104
Cost of sales and operating expenses
382,468
214,118
50,077
—
646,663
Gross Margin
113,351
65,046
10,044
—
188,441
Selling, general and administrative expenses
48,831
21,887
(754
)
15,039
85,003
Depreciation and amortization
49,369
19,511
7,798
2,486
79,164
Segment operating income/(loss)
15,151
23,648
3,000
(17,525
)
24,274
Equity in net income/(loss) of unconsolidated subsidiaries