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) | |
Large
accelerated filer
|
X
|
Accelerated
filer
|
Non-accelerated
filer
|
Smaller
reporting company
|
||||||
(Do
not check if a smaller
reporting company) |
Page
No.
|
||
PART
I: FINANCIAL INFORMATION
|
||
Item
1.
|
FINANCIAL
STATEMENTS
|
|
Consolidated
Balance Sheets
|
3
|
|
September
27, 2008 (unaudited) and December 29, 2007
|
||
Consolidated
Statements of Operations (unaudited)
|
4
|
|
Three
and Nine Months Ended September 27, 2008 and
September 29, 2007
|
||
Consolidated
Statements of Cash Flows (unaudited)
|
5
|
|
Nine
Months Ended September 27, 2008 and
September 29, 2007
|
||
Notes
to Consolidated Financial Statements (unaudited)
|
6
|
|
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
18
|
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
|
33
|
Item
4.
|
CONTROLS
AND PROCEDURES
|
34
|
PART
II: OTHER INFORMATION
|
||
Item 1A.
|
RISK FACTORS | 35 |
Item
6.
|
EXHIBITS
|
35
|
Signatures
|
36
|
September
27,
2008
|
December
29,
2007
|
||||||
|
(unaudited)
|
||||||
ASSETS
|
|||||||
Current
assets:
|
|||||||
Cash
and cash equivalents
|
$
|
43,214
|
$
|
16,335
|
|||
Restricted
cash
|
322
|
433
|
|||||
Accounts
receivable, net
|
72,142
|
59,401
|
|||||
Inventories
|
29,623
|
22,481
|
|||||
Other
current assets
|
6,796
|
8,417
|
|||||
Deferred
income taxes
|
5,098
|
8,026
|
|||||
Total
current assets
|
157,195
|
115,093
|
|||||
Property,
plant and equipment, less accumulated depreciation
of
$207,865 at September 27, 2008 and $199,157 at December 29,
2007
|
138,993
|
128,685
|
|||||
Intangible
assets, less accumulated amortization of
$46,175
at September 27, 2008 and $42,481 at December 29, 2007
|
30,846
|
29,037
|
|||||
Goodwill
|
80,063
|
71,856
|
|||||
Other
assets
|
6,177
|
6,667
|
|||||
$
|
413,274
|
$
|
351,338
|
||||
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Current
portion of long-term debt
|
$
|
5,000
|
$
|
6,250
|
|||
Accounts
payable, principally trade
|
31,735
|
24,879
|
|||||
Accrued
expenses
|
45,221
|
49,579
|
|||||
Total
current liabilities
|
81,956
|
80,708
|
|||||
Long-term
debt, net
|
35,000
|
37,500
|
|||||
Other
non-current liabilities
|
19,390
|
27,225
|
|||||
Deferred
income taxes
|
4,372
|
4,921
|
|||||
Total
liabilities
|
140,718
|
150,354
|
|||||
Commitments
and contingencies
|
|||||||
Stockholders’
equity:
|
|||||||
Common
stock, $0.01 par value; 100,000,000 shares authorized;
82,169,076 and
81,544,466 shares issued and outstanding
at September 27, 2008 and at December 29, 2007,
respectively
|
822
|
815
|
|||||
Additional
paid-in capital
|
156,973
|
152,264
|
|||||
Treasury
stock, at cost; 309,969 and 182,366 shares at
September
27, 2008 and December 29, 2007, respectively
|
(3,520
|
)
|
(1,547
|
)
|
|||
Accumulated
other comprehensive loss
|
(8,303
|
)
|
(8,598
|
)
|
|||
Retained
earnings
|
126,584
|
58,050
|
|||||
Total
stockholders’ equity
|
272,556
|
200,984
|
|||||
$
|
413,274
|
$
|
351,338
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
2008
|
September
29,
2007
|
September
27,
2008
|
September
29,
2007
|
|||||||||||||
Net
sales
|
$
|
236,227
|
$
|
171,831
|
$
|
659,041
|
$
|
469,868
|
||||||||
Costs
and expenses:
|
||||||||||||||||
Cost
of sales and operating expenses
|
177,745
|
130,889
|
485,339
|
356,058
|
||||||||||||
Selling,
general and administrative
expenses
|
15,371
|
14,285
|
44,052
|
41,161
|
||||||||||||
Depreciation
and amortization
|
5,799
|
5,647
|
17,436
|
17,186
|
||||||||||||
Total
costs and expenses
|
198,915
|
150,821
|
546,827
|
414,405
|
||||||||||||
Operating
income
|
37,312
|
21,010
|
112,214
|
55,463
|
||||||||||||
Other
income/(expense):
|
||||||||||||||||
Interest
expense
|
(714
|
)
|
(1,166
|
)
|
(2,334
|
)
|
(4,125
|
)
|
||||||||
Other,
net
|
97
|
(105
|
)
|
397
|
(636
|
)
|
||||||||||
Total
other income/(expense)
|
(617
|
)
|
(1,271
|
)
|
(1,937
|
)
|
(4,761
|
)
|
||||||||
Income
from operations before income
taxes
|
36,695
|
19,739
|
110,277
|
50,702
|
||||||||||||
Income
taxes expense
|
13,701
|
7,639
|
41,743
|
19,540
|
||||||||||||
Net
income
|
$
|
22,994
|
$
|
12,100
|
$
|
68,534
|
$
|
31,162
|
||||||||
Basic
income per share:
|
$
|
0.28
|
$
|
0.15
|
$
|
0.84
|
$
|
0.39
|
||||||||
Diluted
income per share:
|
$
|
0.28
|
$
|
0.15
|
$
|
0.83
|
$
|
0.38
|
September
27,
2008
|
September
29,
2007
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
income
|
$
|
68,534
|
$
|
31,162
|
|||
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
|||||||
Depreciation
and amortization
|
17,436
|
17,186
|
|||||
Loss
(gain) on disposal of property, plant, equipment and other
assets
|
(74
|
)
|
46
|
||||
Deferred
taxes
|
2,379
|
2,018
|
|||||
Stock-based
compensation expense
|
672
|
1,115
|
|||||
Changes
in operating assets and liabilities, net of effect of
acquisition:
|
|||||||
Restricted
cash
|
111
|
40
|
|||||
Accounts
receivable
|
(12,741
|
)
|
(12,201
|
)
|
|||
Inventories
and prepaid expenses
|
(8,683
|
)
|
(9,195
|
)
|
|||
Accounts
payable and accrued expenses
|
4,863
|
11,618
|
|||||
Other
|
(5,883
|
)
|
(2,355
|
)
|
|||
Net
cash provided by operating activities
|
66,614
|
39,434
|
|||||
Cash
flows from investing activities:
|
|||||||
Capital
expenditures
|
(21,032
|
)
|
(10,208
|
)
|
|||
Acquisition
|
(17,440
|
)
|
–
|
||||
Gross
proceeds from disposal of property, plant and equipment
and other assets
|
881
|
131
|
|||||
Payments
related to routes and other intangibles
|
–
|
(239
|
)
|
||||
Net
cash used by investing activities
|
(37,591
|
)
|
(10,316
|
)
|
|||
Cash
flows from financing activities:
|
|||||||
Proceeds
from debt
|
–
|
40,000
|
|||||
Payments
on debt
|
(3,750
|
)
|
(68,254
|
)
|
|||
Deferred
loan costs
|
–
|
(20
|
)
|
||||
Contract
payments
|
(134
|
)
|
(121
|
)
|
|||
Issuance
of common stock
|
303
|
495
|
|||||
Minimum
withholding taxes paid on stock awards
|
(871
|
)
|
(1,375
|
)
|
|||
Excess
tax benefits from stock-based compensation
|
2,308
|
749
|
|||||
Net
cash used by financing activities
|
(2,144
|
)
|
(28,526
|
)
|
|||
Net
increase in cash and cash equivalents
|
26,879
|
592
|
|||||
Cash
and cash equivalents at beginning of period
|
16,335
|
5,281
|
|||||
Cash
and cash equivalents at end of period
|
$
|
43,214
|
$
|
5,873
|
|||
Supplemental
disclosure of cash flow information:
|
|||||||
Cash
paid during the period for:
|
|||||||
Interest
|
$
|
1,657
|
$
|
4,153
|
|||
Income
taxes, net of refunds
|
$
|
38,901
|
$
|
22,332
|
(1)
|
General
|
|
The
accompanying consolidated financial statements for the three and nine
month periods ended September 27, 2008 and September 29, 2007 have been
prepared in accordance with generally accepted accounting principles in
the United States by Darling International Inc. (“Darling”) and its
subsidiaries (Darling and its subsidiaries are collectively referred to
herein as the “Company”) 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 generally accepted accounting
principles have been omitted pursuant to such rules and
regulations. However, management of the Company believes, to
the best of its 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,
2007.
|
(2)
|
Summary of Significant
Accounting Policies
|
|
(a) Basis of
Presentation
|
|
(b) Fiscal
Periods
|
|
The
Company has a 52/53 week fiscal year ending on the Saturday nearest
December 31. Fiscal periods for the consolidated financial statements
included herein are as of September 27, 2008, and include the 13 weeks and
39 weeks ended September 27, 2008, and the 13 weeks and 39 weeks ended
September 29, 2007.
|
|
(c) Earnings per Share
|
|
Basic
income per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the
period. Diluted income per common share is computed by dividing
net income by the weighted average number of common shares outstanding
during the period increased by dilutive common equivalent shares
determined using the treasury stock
method.
|
Net
Income per Common Share (in thousands, except per share data)
|
|||||||||||
Three
Months Ended
|
|||||||||||
September
27,
|
September
29,
|
||||||||||
2008
|
2007
|
||||||||||
Income
|
Shares
|
Per
Share
|
Income
|
Shares
|
Per
Share
|
||||||
Basic:
|
|||||||||||
Net
Income
|
$
22,994
|
81,516
|
$ 0.28
|
$
12,100
|
80,983
|
$
0.15
|
|||||
Diluted:
|
|||||||||||
Effect
of dilutive securities:
|
|||||||||||
Add:
Option shares in the money
|
995
|
1,599
|
|||||||||
Less:
Pro forma treasury shares
|
(326
|
)
|
(606
|
)
|
|||||||
Diluted:
|
|||||||||||
Net
income
|
$
22,994
|
82,185
|
$ 0.28
|
$
12,100
|
81,976
|
$
0.15
|
Nine
Months Ended
|
|||||||||||
September
27,
|
September
29,
|
||||||||||
2008
|
2007
|
||||||||||
Income
|
Shares
|
Per
Share
|
Income
|
Shares
|
Per
Share
|
||||||
Basic:
|
|||||||||||
Net
Income
|
$
68,534
|
81,313
|
$ 0.84
|
$
31,162
|
80,675
|
$ 0.39
|
|||||
Diluted:
|
|||||||||||
Effect
of dilutive securities:
|
|||||||||||
Add:
Option shares in the money
|
1,261
|
1,865
|
|||||||||
Less:
Pro forma treasury shares
|
(405
|
)
|
(690
|
)
|
|||||||
Diluted:
|
|||||||||||
Net
income
|
$
68,534
|
82,169
|
$ 0.83
|
$
31,162
|
81,850
|
$ 0.38
|
(3)
|
Acquisition
|
(4)
|
Contingencies
|
(5)
|
Business
Segments
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||
September
27,
2008
|
September
29,
2007
|
September
27,
2008
|
September
29,
2007
|
||||||||
Rendering:
|
|||||||||||
Trade
|
$
168,233
|
$
122,229
|
$
472,883
|
$
335,829
|
|||||||
Intersegment
|
14,939
|
12,728
|
45,471
|
31,106
|
|||||||
183,172
|
134,957
|
518,354
|
366,935
|
||||||||
Restaurant
Services:
|
|||||||||||
Trade
|
67,994
|
49,602
|
186,158
|
134,039
|
|||||||
Intersegment
|
3,696
|
1,351
|
7,822
|
3,631
|
|||||||
71,690
|
50,953
|
193,980
|
137,670
|
||||||||
Eliminations
|
(18,635
|
)
|
(14,079
|
)
|
(53,293
|
)
|
(34,737
|
)
|
|||
Total
|
$
236,227
|
$
171,831
|
$
659,041
|
$
469,868
|
Three
Months Ended
|
Nine
Months Ended
|
||||||||||
September
27,
2008
|
September
29,
2007
|
September
27,
2008
|
September
29,
2007
|
||||||||
Rendering
|
$ 35,667
|
$ 21,072
|
$ 106,181
|
$ 56,435
|
|||||||
Restaurant
Services
|
10,678
|
9,395
|
34,217
|
26,810
|
|||||||
Corporate
|
(22,637
|
)
|
(17,201
|
)
|
(69,530
|
)
|
(47,958
|
)
|
|||
Interest
expense
|
(714
|
)
|
(1,166
|
)
|
(2,334
|
)
|
(4,125
|
)
|
|||
Income
from
continuing
operations
|
$ 22,994
|
$ 12,100
|
$ 68,534
|
$ 31,162
|
September
27,
2008
|
December
29,
2007
|
||
Rendering
|
$
178,477
|
$
162,091
|
|
Restaurant
Services
|
55,114
|
40,518
|
|
Combined
Rendering/Restaurant Services
|
114,249
|
106,958
|
|
Corporate
|
65,434
|
41,771
|
|
Total
|
$
413,274
|
$
351,338
|
(6)
|
Income
Taxes
|
|
The
Company has provided income taxes for the three-month and nine-month
period ended September 27, 2008 and September 29, 2007, based on its
estimate of the effective tax rate for the entire 2008 and 2007 fiscal
years.
|
|
In
determining whether its deferred tax assets are more likely than not to be
recoverable, the Company considers all positive and negative evidence
currently available to support projections of future taxable
income. The Company is unable to carry back any of its net
operating losses and recent favorable operating results do provide
sufficient historical evidence at this time of sustained future
profitability sufficient to result in taxable income against which certain
net operating losses can be carried forward and
utilized.
|
|
In
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN
48”), which prescribes accounting for and disclosure of uncertainty in tax
positions. This interpretation defines the criteria that must be met for
the benefits of a tax position to be recognized in the financial
statements and the measurement of tax benefits
recognized. Effective December 31, 2006 the Company adopted the
provisions of FIN 48 resulting in a reduction in the Company’s existing
reserves for uncertain state and federal income tax positions of
approximately $0.1 million. This reduction was recorded as a
cumulative effect adjustment to retained earnings. The Company recognizes
interest and penalties related to uncertain tax positions in income tax
expense.
|
|
The
Company’s major taxing jurisdiction is the U.S. (federal and
state). The Company is no longer subject to federal
examinations on years prior to fiscal 2005. The number of years
open for state tax audits varies, depending on the tax jurisdiction, but
is generally from three to five years. Currently, several state
examinations are in progress. The Company does not anticipate
that any state or federal audits will have a significant impact on the
Company’s results of operations or financial position. In
addition, the Company does not reasonably expect any significant changes
to the estimated amount of liability associated with the Company’s
unrecognized tax positions in the next twelve
months.
|
(7)
|
Financing
|
September
27,
2008
|
December
29,
2007
|
|||||
Term
Loan
|
$
|
40,000
|
$
|
43,750
|
||
Revolving
Credit Facility:
|
||||||
Maximum
availability
|
$
|
125,000
|
$
|
125,000
|
||
Borrowings
outstanding
|
–
|
–
|
||||
Letters
of credit issued
|
16,424
|
18,881
|
||||
Availability
|
$
|
108,576
|
$
|
106,119
|
(8)
|
Derivative
Instruments
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
27,
|
September
29,
|
September
27,
|
September
29,
|
|||||||||||||
2008
|
2007
|
2008
|
2007
|
|||||||||||||
Derivative
adjustment included in
accumulated
other comprehensive
loss
at beginning of period
|
$ | 1,051 | $ | 66 | $ | 1,143 | $ | 408 | ||||||||
Net
change arising from current period
hedging
transactions
|
281 | 547 | 536 | 219 | ||||||||||||
Reclassifications
into earnings
|
(267 | ) | (7 | ) | (614 | ) | (21 | ) | ||||||||
Accumulated
other comprehensive loss (a)
|
$ | 1,065 | $ | 606 | $ | 1,065 | $ | 606 |
(a)
|
Reported
as other comprehensive loss of approximately $1.7 million and $1.0 million
recorded net of taxes of approximately $0.6 million and $0.4 million for
the three and nine months ended September 27, 2008 and September 29,
2007, respectively.
|
(9)
|
Comprehensive
Income
|
(10)
|
Revenue
Recognition
|
(11)
|
Employee Benefit
Plans
|
Three
Months Ended
|
Nine
Months Ended
|
|||||||||
September
27,
2008
|
September
29,
2007 |
September
27,
2008
|
September
29,
2007 |
|||||||
Service
cost
|
$ 266
|
$ 582
|
$ 800
|
$ 1,746
|
||||||
Interest
cost
|
1,361
|
1,252
|
4,081
|
3,758
|
||||||
Expected
return on plan assets
|
(1,650
|
)
|
(1,409
|
)
|
(4,951
|
)
|
(4,227
|
)
|
||
Amortization
of prior service cost
|
30
|
30
|
92
|
88
|
||||||
Amortization
of net loss
|
87
|
288
|
261
|
864
|
||||||
Net
pension cost
|
$ 94
|
$ 743
|
$
283
|
$ 2,229
|
(12)
|
Fair Value
Measurement
|
Fair
Value Measurements at September 27, 2008 Using
|
|||||||
Quoted
Prices in
|
Significant
Other
|
Significant
|
|||||
Active
Markets for
|
Observable
|
Unobservable
|
|||||
Identical
Assets
|
Inputs
|
Inputs
|
|||||
(In
thousands of dollars)
|
Total
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|||
Derivative
liabilities
|
$
(1,739)
|
$ —
|
$ (1,739)
|
$ —
|
|||
Total
|
$
(1,739)
|
$ —
|
$ (1,739)
|
$ —
|
(13)
|
New Accounting
Pronouncements
|
Item
2.
|
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
|
·
|
Higher
finished product prices during the third quarter of fiscal 2008 were
indicative of tightening grain and oilseed supplies driven by a
combination of new demand for bio-fuels, growing consumption in China and
India and back-to-back droughts in various grain and oilseed producing
regions of the world. Higher finished product prices for BFT
and YG were favorable to the Company’s sales revenue, but this favorable
result was partially offset by the negative impact on raw material cost,
due to the Company’s formula pricing arrangements with raw material
suppliers, which index raw material cost to the prices of finished product
derived from the raw material. The financial impact of finished
goods prices on sales revenue and raw material cost is summarized below in
Results of Operations. Comparative sales price information from
the Jacobsen index, an established trading exchange publisher used by
management, is listed below in Summary of Key
Indicators.
|
·
|
The
Company has the ability to burn alternative fuels, including its fats and
greases, at a majority of its plants as a way to help manage the Company’s
exposure to high natural gas prices. Beginning October 1, 2006,
the federal government effected a program which provides federal tax
credits under certain circumstances for commercial use of alternative
fuels in lieu of fossil-based fuels. Beginning in the fourth
quarter of 2006, the Company filed documentation with the Internal Revenue
Service (“IRS”) to recover these Alternative Fuel Mixture Credits as a
result of its use of fats and greases to fuel boilers at its
plants. The Company has received approval from the IRS to apply
for these credits. However, the federal regulations relating to
the Alternative Fuel Mixture Credits are complex and further clarification
is needed by the Company prior to recognition of certain tax credits
received. As of September 27, 2008, the Company has $0.7
million of received credits included in current liabilities on the balance
sheet as deferred income while the Company pursues further
clarification. The Company will continue to evaluate the option
of burning alternative fuels at its plants in future periods depending on
the price relationship between alternative fuels and natural
gas.
|
·
|
On
April 25, 2008, the Food and Drug Administration (“FDA”) published
“Substances Prohibited From Use in Animal Food or Feed,” a Final Rule (the
“Final BSE Rule”), which becomes effective on April 27, 2009 and finalizes
changes to 21 CFR 589.2000. Promulgated August 1997 to mitigate
the potential risk of spreading bovine spongiform encephalopathy (“BSE”)
in the U.S., 21 CFR 589.2000 prohibits the use of mammalian proteins, with
some exceptions, in feed for cattle, sheep and other ruminant
animals. The Final BSE Rule amends 21 CFR 589.2000 by
prohibiting the use of certain cattle materials in all feed and food for
animals. Such prohibited cattle materials include: (1) the
entire carcass of cattle positive for BSE; (2) brain and spinal cord from
cattle aged 30 months and older; and (3) the entire carcass of cattle aged
30 months and older that were not inspected and passed for human
consumption and from which the brain and spinal cord were not
“effectively” removed; and (4) tallow derived from the listed prohibited
cattle materials unless such tallow contains no more than 0.15% insoluble
impurities. The Final BSE Rule also prohibits the use of tallow derived
from any cattle materials in feed for cattle and other ruminant animals,
if such tallow contains more than 0.15% insoluble
impurities. Except for these new restrictions on tallow,
materials derived from cattle younger than 30 months of age and not
positive for BSE are not affected by the Final BSE Rule and may still be
used in feed and food for animals pursuant to 21 CFR
589.2000. The insoluble impurity restrictions for tallow,
however, do not affect its use in feed for poultry, pigs and other
non-ruminant animals, unless such tallow was derived from the cattle
materials prohibited by the Final BSE Rule. In connection with
its release of the Final BSE Rule, the FDA has stated that it will issue
further guidance on the implementation of certain aspects of the Final BSE
Rule. Affirmation that such guidance is forthcoming was
provided by the FDA on July 15, 2008, when it released “Feed Ban
Enhancement Implementation: Questions and Answers” to address initial
questions about the Final BSE Rule submitted to the FDA by industry;
however, such guidance had not been issued as of October 30,
2008. The Company will be unable to fully determine the
potential impact of the Final BSE Rule on the Company’s operations until
the guidance has been issued. However, the Company has followed this
rulemaking process throughout its history in order to assess and minimize
the impact of its implementation on the Company. Based on the
foregoing, while the Company believes that there are interpretive and
enforcement issues with respect to the Final BSE Rule that require
clarification and guidance from the FDA and that certain capital
expenditures will be required for compliance, the Company does not
currently anticipate that the Final BSE Rule will have a significant
impact on its operations or financial
performance. Notwithstanding the foregoing, the Company can
provide no assurance that unanticipated costs and/or reductions in raw
material volumes related to the Company’s implementation of and compliance
with the Final BSE Rule will not negatively impact the Company’s
operations and financial
performance.
|
·
|
Avian
influenza (“H5N1”), or Bird Flu, a highly contagious disease that affects
chickens and other poultry species, has spread throughout Asia and
Europe. The H5N1 strain is highly pathogenic, which has caused
concern that a pandemic could occur if the disease migrates from birds to
humans. This highly pathogenic strain has not been detected in
North or South America as of October 24, 2008, but low pathogenic strains
that are not a threat to human health were reported in the U.S. and Canada
in recent years, with the most recent incidence confirmed in an Arkansas
poultry flock in June 2008. The U.S. Department of Agriculture
(“USDA”) has developed safeguards to protect the U.S. poultry industry
from H5N1. These safeguards are based on import restrictions, disease
surveillance and a response plan for isolating and depopulating infected
flocks if the disease is detected. Notwithstanding these safeguards, any
significant outbreak of Bird Flu in the U.S. could have a negative impact
on the Company’s business by reducing demand for
MBM.
|
·
|
On
May 13, 2008, the FDA held a public meeting to present the agency’s
rulemaking intentions regarding the Food and Drug Administration
Amendments Act of 2007 (“the Act”) and to receive public comments on such
intended actions. The Act was signed into law on September 27, 2007 as a
result of Congressional concern for pet and livestock food safety,
following the discovery of adulterated imported pet and livestock food in
March 2007. The Act directs the Secretary of Health and Human
Services (“HHS”) and the FDA to promulgate significant new requirements
for the pet food and animal feed industries. The impact of the Act on the
Company, if any, will not be clear until the FDA completes the rulemaking
process and publishes written guidance or new
regulations.
|
·
|
On
November 7, 2007, the FDA released its Food Protection Plan (the “2007
Plan”), which describes prevention, intervention and response strategies
the FDA proposes to use for improving food and animal feed safety for
imported and domestically produced ingredients and products. The 2007 Plan
also lists additional resources and authorities that, in the FDA’s
opinion, are needed to implement the 2007 Plan. Legislation
will be necessary for the FDA to obtain these additional
authorities. As of October 30, 2008, Congress has not granted
such new authorities to the FDA.
|
·
|
Finished
product prices for commodities have declined significantly subsequent to
the third quarter of fiscal 2008. No assurance can be given
that this significant decline in commodity prices for BFT, YG and MBM will
not continue in the future. These declines, coupled with the
current decline of the general performance of the U.S. economy and the
inability of consumers and companies to obtain credit due to the current
lack of liquidity in the financial markets, could have a significant
impact on the Company’s earnings in the fourth quarter of fiscal 2008 and
into future periods.
|
·
|
Energy
prices for natural gas and diesel fuel have declined significantly
subsequent to the third quarter of fiscal 2008. No assurance
can be given that prices for natural gas and diesel fuel will continue to
decline or remain low in the future. The Company consumes
significant volumes of natural gas to operate boilers in its plants, which
generate steam to heat raw material. High natural gas prices
represent a significant cost of factory operation included in cost of
sales. The Company also consumes significant volumes of diesel
fuel to operate its fleet of tractors and trucks used to collect raw
material. High diesel fuel prices represent a significant
component of cost of collection expenses included in cost of
sales. Though the Company will continue to manage these costs
and attempt to minimize these expenses, prices remained relatively high in
the third quarter of 2008; however, energy prices have declined in the
fourth quarter of fiscal 2008. Volatile energy markets will
represent an ongoing challenge to the Company’s operating results for
future periods.
|
·
|
The
meat production industry has faced higher feed costs in the third quarter
of fiscal 2008. These higher costs, coupled with the general performance
of the U.S. economy and declining U.S. consumer confidence and the
inability of consumers and companies to obtain credit due to the current
lack of liquidity in the financial markets, could have a negative impact
on the Company’s raw material volume. Raw material volume will
be a challenge in future periods due to volatility of commodity
prices.
|
·
|
During
the third quarter of 2008, the Company incurred bad debts that were beyond
its historical trends due to delinquent accounts receivable and the lack
of liquidity in the financial markets. Volatile financial
markets will represent an ongoing challenge to the Company and no
assurance can be given that bad debt expense will not increase in the
future.
|
·
|
Higher
finished product prices.
|
|
These
increases were partially offset by:
|
·
|
Higher
raw material costs,
|
·
|
Higher
energy costs, primarily related to natural gas and diesel fuel,
and
|
·
|
Higher
bad debt expense.
|
·
|
Finished
product commodity prices,
|
·
|
Raw
material volume,
|
·
|
Production
volume and related yield of finished product, and
|
·
|
Collection
fees and collection operating
expense.
|
|
These
indicators and their importance are discussed below in greater
detail.
|
Avg.
Price
3rd
Quarter
2008
|
Avg.
Price
3rd
Quarter
2007 |
Increase
|
%
Increase
|
|
MBM
(Illinois)
|
$388.36
/ton
|
$242.27
/ton
|
$146.09
/ton
|
60.3%
|
BFT
(Chicago)
|
$
41.35 /cwt
|
$
30.08 /cwt
|
$ 11.27
/cwt
|
37.5%
|
YG
(Illinois)
|
$
34.64 /cwt
|
$
21.25 /cwt
|
$ 13.39
/cwt
|
63.0%
|
Avg.
Price
Month
of
October
2008
|
Avg.
Price
Month
of
October 2007 |
Increase/
(Decrease)
|
%
Increase/
(Decrease)
|
|
MBM
(Illinois)
|
$278.70/ton
|
$257.07
/ton
|
$21.63/ton
|
8.4%
|
BFT
(Chicago)
|
$ 24.50/cwt
|
$ 31.29
/cwt
|
($ 6.79/cwt)
|
(21.7%)
|
YG
(Illinois)
|
$ 19.84/cwt
|
$
23.76 /cwt
|
($ 3.92/cwt)
|
(16.5%)
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||
Higher
finished goods prices
|
$
58.6
|
$
19.0
|
$
—
|
$
77.6
|
||||||||
Other
sales decreases
|
(0.2
|
)
|
(0.4
|
)
|
—
|
(0.6
|
)
|
|||||
Decrease
in yield
|
(2.0
|
)
|
(1.1
|
)
|
—
|
(3.1
|
)
|
|||||
Purchase
of finished product for resale
|
(3.6
|
)
|
(0.1
|
)
|
—
|
(3.7
|
)
|
|||||
Decrease
in raw material volume
|
(4.6
|
)
|
(1.2
|
)
|
—
|
(5.8
|
)
|
|||||
Product
transfers
|
(2.2
|
)
|
2.2
|
—
|
—
|
|||||||
$
46.0
|
$ 18.4
|
$
—
|
$
64.4
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||
Higher
raw material costs
|
$ 31.2
|
$ 11.5
|
$
—
|
$
42.7
|
||||||||
Higher
energy costs, primarily natural gas
and
diesel fuel
|
5.3
|
1.1
|
0.5
|
6.9
|
||||||||
Other
expenses
|
0.9
|
1.9
|
(0.6
|
)
|
2.2
|
|||||||
Decreased
raw material volume
|
(1.4
|
)
|
(0.3
|
)
|
—
|
(1.7
|
)
|
|||||
Purchases
of finished product for resale
|
(3.3
|
)
|
—
|
—
|
(3.3
|
)
|
||||||
Product
transfers
|
(2.2
|
)
|
2.2
|
—
|
—
|
|||||||
$ 30.5
|
$
16.4
|
$ (0.1
|
)
|
$
46.8
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||
Bad
debt expense
|
$
0.6
|
$
0.4
|
$
—
|
$
1.0
|
||||||||
Other
expense
|
0.3
|
0.3
|
(0.5
|
)
|
0.1
|
|||||||
$
0.9
|
$
0.7
|
$ (0.5
|
)
|
$
1.1
|
·
|
Higher
finished product prices.
|
·
|
Higher
raw material costs,
|
·
|
Higher
energy costs, primarily related to natural gas and diesel
fuel,
|
·
|
Higher
payroll and related benefits, and
|
·
|
Higher
bad debt expense.
|
·
|
Finished
product commodity prices,
|
·
|
Raw
material volume,
|
·
|
Production
volume and related yield of finished product, and
|
·
|
Collection
fees and collection operating
expense.
|
Avg.
Price
Nine
Months
2008
|
Avg.
Price
Nine
Months
2007
|
Increase
|
%
Increase
|
|
MBM
(Illinois)
|
$357.04
/ton
|
$221.09
/ton
|
$135.95
/ton
|
61.5%
|
BFT
(Chicago)
|
$
39.75 /cwt
|
$
26.96 /cwt
|
$ 12.79
/cwt
|
47.4%
|
YG
(Illinois)
|
$
32.08 /cwt
|
$
21.01 /cwt
|
$ 11.07
/cwt
|
52.7%
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||
Higher
finished goods prices
|
$ 163.2
|
$ 44.0
|
$
—
|
$ 207.2
|
||||||||
Other
sales decreases
|
(1.4
|
)
|
(2.0
|
)
|
—
|
(3.4
|
)
|
|||||
Decreased
raw material volume
|
(0.5
|
)
|
(3.3
|
)
|
—
|
(3.8
|
)
|
|||||
Decrease
in yield
|
(3.1
|
)
|
(1.8
|
)
|
—
|
(4.9
|
)
|
|||||
Purchase
of finished product for resale
|
(7.0
|
)
|
1.0
|
—
|
(6.0
|
)
|
||||||
Product
transfers
|
(14.4
|
)
|
14.4
|
—
|
—
|
|||||||
$
136.8
|
$ 52.3
|
$
—
|
$
189.1
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||
Higher
raw material costs
|
$
89.8
|
$ 22.9
|
$
—
|
$
112.7
|
||||||||
Higher
energy costs, primarily natural gas
and
diesel fuel
|
11.6
|
3.2
|
—
|
14.8
|
||||||||
Payroll
and related benefits
|
2.2
|
0.8
|
—
|
3.0
|
||||||||
Other
expenses
|
1.4
|
1.0
|
(0.3
|
)
|
2.1
|
|||||||
Sale
of judgment
|
1.2
|
—
|
—
|
1.2
|
||||||||
Purchases
of finished product for resale
|
(5.9
|
)
|
1.3
|
—
|
(4.6
|
)
|
||||||
Product
transfers
|
(14.4
|
)
|
14.4
|
—
|
—
|
|||||||
$
85.9
|
$ 43.6
|
$
(0.3
|
)
|
$
129.2
|
Rendering
|
Restaurant
Services
|
Corporate
|
Total
|
|||||||||
Bad
debt expense
|
$
0.7
|
$
0.5
|
$
0.1
|
$
1.3
|
||||||||
Payroll
and related benefits
|
0.4
|
0.1
|
0.6
|
1.1
|
||||||||
Other expense
increases
|
0.2
|
0.5
|
0.4
|
1.1
|
||||||||
Sale
of judgment
|
—
|
—
|
1.0
|
1.0
|
||||||||
Lower
legal expense
|
—
|
—
|
(1.6
|
)
|
(1.6
|
)
|
||||||
$
1.3
|
$
1.1
|
$
0.5
|
$
2.9
|
·
|
The
Credit Agreement provides for a total of $175.0 million in financing
facilities, consisting of a $50.0 million term loan facility and a $125.0
million revolving credit facility, which includes a $35.0 million
letter of credit sub-facility.
|
·
|
The
$125.0 million revolving credit facility has a term of five years and
matures on April 7, 2011.
|
·
|
As
of September 27, 2008, the Company has borrowed all $50.0 million under
the term loan facility, which provides for scheduled quarterly
amortization payments of $1.25 million over a six-year term ending April
7, 2012. The Company has reduced the term loan facility by
quarterly payments totaling $10.0 million, for an aggregate of $40.0
million principal outstanding under the term loan facility at September
27, 2008.
|
·
|
Alternative
base rate loans under the Credit Agreement bear interest at a rate per
annum based on the greater of (a) the prime rate and (b) the federal funds
effective rate (as defined in the Credit Agreement) plus ½ of 1%, plus, in
each case, a margin determined by reference to a pricing grid and adjusted
according to the Company’s adjusted leverage ratio. Eurodollar
loans bear interest at a rate per annum based on the then-applicable LIBOR
multiplied by the statutory reserve rate plus a margin determined by
reference to a pricing grid and adjusted according to the Company’s
adjusted leverage ratio.
|
·
|
On
October 8, 2008, the Company entered into an amendment (the “Amendment”)
with its lenders under its Credit Agreement. The Amendment
increases the Company’s flexibility to make investments in third
parties. Pursuant to the Amendment, the Company can make
investments in third parties provided that (i) no default under the Credit
Agreement exists or would result at the time such investment is committed
to be made, (ii) certain specified defaults do not exist or would result
at the time such investment is actually made, and (iii) after giving pro
forma effect to such investment, the leverage ratio (as determined in
accordance with the terms of the Credit Agreement) is less than 2.00 to
1.00 for the most recent four fiscal quarter period then
ended. In addition, the Amendment increases the amount of
intercompany investments permitted among the Company and any of its
subsidiaries that are not parties to the Credit Agreement from $2.0
million to $10.0 million.
|
·
|
The
Credit Agreement contains restrictive covenants that are customary for
similar credit arrangements and requires the maintenance of certain
minimum financial ratios. The Credit Agreement also requires
the Company to make certain mandatory prepayments of outstanding
indebtedness using the net cash proceeds received from certain
dispositions of property, casualty or condemnation, any sale or issuance
of equity interests in a public offering or in a private placement,
unpermitted additional indebtedness incurred by the Company and excess
cash flow under certain
circumstances.
|
Credit
Agreement:
|
||
Term
Loan
|
$
40,000
|
|
Revolving
Credit Facility:
|
||
Maximum
availability
|
$ 125,000
|
|
Borrowings
outstanding
|
–
|
|
Letters
of credit issued
|
16,424
|
|
Availability
|
$ 108,576
|
|
PART
II: Other Information
|
The
following exhibits are filed herewith:
|
||||
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company.
|
|||
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the
Company.
|
|||
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, of Randall C. Stuewe, the Chief Executive
Officer of the Company, and of John O. Muse, the Chief Financial Officer
of the Company.
|
DARLING
INTERNATIONAL INC.
|
|||
Date: November
6, 2008
|
By:
|
/s/ Randall
C. Stuewe
|
|
Randall
C. Stuewe
|
|||
Chairman
and
|
|||
Chief
Executive Officer
|
Date: November
6, 2008
|
By:
|
/s/ John
O. Muse
|
|
John
O. Muse
|
|||
Executive
Vice President
|
|||
Administration
and Finance
|
|||
(Principal
Financial Officer)
|