UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
______________________________________
FORM
10-K
(Mark
One)
X
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ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 30,
2006
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the transition period from _______________ to
_______________
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Commission
File Number
0-24620
DARLING
INTERNATIONAL INC.
(Exact
name of registrant as specified in its charter)
Delaware
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36-2495346
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
Number)
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251
O'Connor
Ridge Blvd., Suite
300
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Irving,
Texas
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75038
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(Address
of
principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code:
(972) 717-0300
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
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Name
of Exchange on Which Registered
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Common
Stock $0.01 par value per share
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American
Stock Exchange (“AMEX”)
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in
Rule 405 of the Securities Act. Yes
X
No
____
Indicate
by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d)
of the
Act. Yes
No X
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 report(s)), and (2) has been subject
to
such
filing requirements for the past 90 days.
Yes X
No
____
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of
Regulation S-K is not contained herein, and will not be contained,
to the best
of the Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. X
Indicate
by check mark whether the Registrant is a large accelerated filer,
an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check
one):
Large
accelerated filer
____
Accelerated filer X
Non-accelerated
filer ____
Indicate
by check mark whether the Registrant is a shell company (as defined
in Rule
12b-2 of the Exchange Act). Yes
____ No X
As
of the
last day of the Registrant’s most recently completed second fiscal quarter, the
aggregate market value of the shares of common stock held by nonaffiliates
of
the Registrant was approximately $355,634,000 based upon the closing
price of
the common stock as reported on the American Stock Exchange (“AMEX”) on that
day. (In determining the market value of the Registrant’s common stock held by
non-affiliates, shares of common stock beneficially owned by directors,
officers
and holders of more than 10% of the Registrant’s common stock have been
excluded. This determination of affiliate status is not necessarily
a conclusive
determination for other purposes.)
There
were 80,826,667 shares of common stock, $0.01 par value, outstanding
at March 6,
2007.
DOCUMENTS
INCORPORATED BY REFERENCE
Selected
designated portions of the Registrant’s definitive Proxy Statement in connection
with the Registrant’s 2007 Annual Meeting of stockholders are incorporated by
reference into Part III of this Annual Report.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
FORM
10-K
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2006
TABLE
OF CONTENTS
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Page
No.
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PART
I.
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Item
1.
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BUSINESS
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4
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Item
1A.
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RISK
FACTORS
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9
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Item
1B.
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UNRESOLVED
STAFF COMMENTS
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15
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Item
2.
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PROPERTIES
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15
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Item
3.
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LEGAL
PROCEEDINGS
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17
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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17
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PART
II.
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Item
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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18
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Item
6.
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SELECTED
FINANCIAL DATA
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21
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Item
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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23
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Item
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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40
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Item
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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42
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Item
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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77
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Item
9A.
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CONTROLS
AND PROCEDURES
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77
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Item
9B.
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OTHER
INFORMATION
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78
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PART
III.
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Item
10.
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DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
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79
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Item
11.
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EXECUTIVE
COMPENSATION
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79
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Item
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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79
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Item
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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79
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Item
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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79
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PART
IV.
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Item
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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80
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SIGNATURES
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84
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PART
I
ITEM
1. BUSINESS
GENERAL
Founded
by the Swift meat packing interests and the Darling family in 1882,
Darling
International Inc. (“Darling”) was incorporated in Delaware in 1962 under the
name “Darling-Delaware Company, Inc.” On December 28, 1993, Darling changed its
name from “Darling-Delaware Company, Inc.” to “Darling International Inc.” The
address of Darling’s principal executive office is 251 O’Connor Ridge Boulevard,
Suite 300, Irving, Texas, 75038, and its telephone number at this
address is
(972) 717-0300.
Darling
is a leading provider of rendering, recycling and recovery solutions
to the
nation’s food industry. Darling collects and recycles animal by-products
and
used cooking oil from food service establishments and provides
grease trap
cleaning services to many of the same establishments. On May 15,
2006, Darling,
through
its wholly-owned subsidiary Darling
National LLC, a Delaware limited liability company (“Darling National”),
completed the acquisition of substantially all of the assets of
National
By-Products, LLC, an Iowa limited liability company (“NBP”). Darling
and its subsidiaries, including Darling National, are collectively
referred to
herein as (the “Company”). The Company now processes raw materials at 39
facilities located throughout the United States into finished products
such as
protein (primarily meat and bone meal, “MBM”), tallow (primarily bleachable
fancy tallow, “BFT”), yellow grease (“YG”) and hides. The Company sells these
products nationally and internationally, primarily to producers
of
oleo-chemicals, bio-fuels, soaps, pet foods, leather goods and
livestock feed
for use as ingredients in their products or for further processing.
As a
result of the acquisition of substantially
all of the assets of NBP
(the
“Transaction”), the Company’s business and operations in fiscal year 2006
include 33 weeks of contribution from the acquired NBP assets.
Commencing
in 1998, as part of an overall strategy to better commit financial
resources,
the Company’s operations were organized into two segments. These are: 1)
Rendering, the core business of turning inedible food by-products
from meat and
poultry processors into high quality feed ingredients and fats
for other
industrial applications; and 2) Restaurant Services, a group focused
on growing
the grease collection business and grease collection equipment
sales while
expanding the line of services, which includes grease trap servicing,
and the
National Service Center (“NSC”), offered to food service establishments and food
processors. The NSC schedules services such as fat and bone and
used cooking oil
collection as well as trap cleaning for contracted customers using
the Company’s
resources or third party providers. For the financial results of
the Company’s
business segments, see Note 16 of Notes to Consolidated Financial
Statements.
The
Company’s net external sales from continuing operations by operating segment
were as follows (in thousands):
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Fiscal
2006
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Fiscal
2005
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Fiscal
2004
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Continuing
operations:
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Rendering
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$279,011
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68.6%
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$192,340
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62.3%
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$201,138
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62.8%
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Restaurant Services
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127,979
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31.4
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116,527
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37.7
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119,091
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37.2
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Total
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$406,990
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100.0%
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$308,867
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100.0%
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$320,229
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100.0%
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PROCESSING
OPERATIONS
The
Company creates finished products primarily through the drying,
grinding,
separating and blending of its various raw materials. The process
starts with
the collection of animal processing by-products (fat, bones, feathers
and offal)
from meat packers, grocery stores, butcher shops, meat markets
and food service
establishments, as well as used cooking oil from food service establishments
and
grocery stores.
The
animal processing by-products are ground and heated to extract
water and
separate oils from animal tissue as well as to make the material
suitable as an
ingredient for animal feed. Protein is separated from the cooked
material by
pressing the material, then grinding and sifting it through screens.
The
separated tallow is centrifuged and/or refined for purity. The
primary finished
products derived from the processing of animal by-products are
tallow and
protein. Other by-products include feather meal and blood meal.
Used cooking oil
from food service establishments is processed under a separate
procedure that
involves heat processing and settling, as well as refining, resulting
in derived
yellow grease, feed-grade animal fat or oleo-chemical feedstocks.
PURCHASE
AND COLLECTION OF RAW MATERIALS
The
Company operates a fleet of approximately 970 trucks and tractor-trailers
to
collect raw materials from approximately 116,000 food service establishments,
butcher shops, grocery stores and independent meat and poultry
processors. The
raw materials collected are manufactured into the finished products
sold by the
Company. The Company replaces or upgrades its vehicle fleet as
needed to
maintain efficient operations.
Rendering
materials are collected in one of two manners. Certain large suppliers,
such as
large meat processors and poultry processors, are furnished with
bulk trailers
in which the raw material is loaded. The Company transports these
trailers
directly to a processing facility. Certain of the Company’s rendering facilities
are highly dependent on one or a few suppliers. Should any of these
suppliers
choose alternate methods of disposal, cease their operations, have
their
operations interrupted by casualty or otherwise cease using the
Company’s
collection services, these operating facilities would be materially
and
adversely affected. The Company provides the remaining suppliers,
primarily
grocery stores and butcher shops, with containers in which to deposit
the raw
material. The containers are picked up by or emptied into Company
trucks on a
periodic basis. The type and frequency of service is determined
by individual
supplier requirements, the volume of raw material generated by
the supplier,
supplier location and weather, among other factors.
Used
cooking oil from food service establishments is placed in various
sizes and
types of containers which are supplied by the Company. In some
instances, these
containers are loaded directly onto the trucks, while in other
instances the oil
is pumped through a vacuum hose into the truck. The Company also
sells a
container for used cooking oil collection to food service establishments
called
CleanStar®,
which
is a proprietary self-contained collection system that is housed
either inside
or outside the establishment, with the used cooking oil pumped
directly into
collection vehicles via an outside valve. The frequency of all
forms of raw
material collection is determined by the volume of oil generated
by the food
service establishment.
The
raw
materials collected by the Company are transported either directly
to a
processing plant or to a transfer station where materials from
several
collection routes are loaded into trailers and transported to a
processing
plant. Collections of animal processing by-products generally are
made during
the day, and materials are delivered to plants for processing within
24 hours of
collection to eliminate spoilage. Collection of used cooking oil
can be made at
any time of the day or night, depending on supplier preference;
these materials
may be held for longer periods of time before processing. Depending
on market
conditions, the Company charges a collection fee to offset a portion
of the
expense incurred in collecting raw material.
During
the 2006 fiscal year, the Company’s largest single supplier accounted for
approximately 6% of the total raw material processed by the Company,
and the 10
largest raw materials suppliers accounted for approximately 26%
of the total raw
material processed by the Company. For a discussion of the Company’s competition
for raw materials, see “Competition.” Many of the Company’s suppliers supply raw
material under long-term supplier agreements. While the Company
does not
anticipate problems in the availability or supply of raw material
in the future,
a significant decrease in raw material volume could materially
and adversely
affect the Company’s business and results of operations.
RAW
MATERIALS PRICING
The
Company has two primary pricing arrangements with its raw materials
suppliers.
Approximately 55% of the Company's annual volume of raw materials
is acquired on
a "formula" basis. Under a formula arrangement, the charge or credit
for raw
materials is tied to published finished product commodity prices
after deducting
a fixed service charge. The Company acquires the remaining annual
volume of raw
material under "non-formula" arrangements whereby suppliers are
either paid a
fixed price, are not paid, or are charged for the expense of collection,
depending on various economic and competitive factors.
The
credit received or amount charged for raw material under both formula
and
non-formula arrangements is based on various factors, including
the type of raw
materials, the expected value of the finished product to be produced,
the
anticipated yields, the volume of material generated by the supplier
and
processing and transportation costs. Competition among processors
to procure raw
materials also affects the price paid for raw materials. See
"Competition."
Formula
prices are generally adjusted on a weekly, monthly or quarterly
basis while
non-formula prices or charges are adjusted as needed to respond
to changes in
finished product prices or related operating costs.
FINISHED
PRODUCTS
The
finished products that result from processing of animal by-products
are oils,
primarily BFT and YG; MBM, a protein; and
hides.
Oils
are used as ingredients in the production of pet food, animal feed,
soaps and as
a substitute for traditional fuels. Oleo-chemical producers use
these oils as
feedstocks to produce specialty ingredients used in paint, rubber,
paper,
concrete, plastics and a variety of other consumer and industrial
products. MBM
is used primarily as a high protein additive in pet food and animal
feed. Hides
are sold to leather distributors and manufacturers for production
of leather
goods.
Predominantly
all of the Company's finished products are commodities or are priced
relative to
these commodities. While the Company's finished products are generally
sold at
prices prevailing at the time of sale, the Company’s ability to deliver large
quantities of finished products from multiple locations and to
coordinate sales
from a central location enables the Company to occasionally receive
a premium
over the then-prevailing market price.
MARKETING,
SALES AND DISTRIBUTION OF FINISHED PRODUCTS
The
Company sells its finished products worldwide. Commodity sales
are primarily
managed through the Company's commodity trading department which
is
headquartered in Irving, Texas. The Company also maintains sales
offices in Des
Moines, Iowa and Los Angeles, California for the sale and distribution
of
selected products. This sales force is in contact with several
hundred customers
daily and coordinates the sale and assists in the distribution
of most finished
products produced at the Company's processing plants. The Company
sells its
finished products internationally through commodities brokers and
through
Company agents in various countries.
The
Company has no material foreign operations, but exports a portion
of its
products to customers in various foreign countries or regions including
Asia,
the Pacific Rim, North Africa, Mexico and South America. Total
export sales were
$112.7 million, $77.6 million and $78.6 million for the years ended
December 30,
2006, December 31, 2005 and January 1, 2005, respectively. The
level of export
sales varies from year to year depending on the relative strength
of domestic
versus overseas markets. The Company obtains payment protection
for most of its
foreign sales by requiring payment before shipment or by requiring
bank letters
of credit or guarantees of payment from U.S. government agencies.
The Company
ordinarily is paid for its products in U.S. dollars and has not
experienced any
material currency translation losses or any material foreign exchange
control
difficulties. See Note 16 of Notes to Consolidated Financial Statements
for a
breakdown of the Company’s sales by country.
Following
diagnosis of the first U.S. case of bovine spongiform encephalopathy
(“BSE”) on
December 23, 2003, many countries banned imports of U.S.-produced
beef and beef
products, including MBM and initially BFT, though this initial
ban on tallow was
relaxed to permit imports of U.S.-produced tallow with less than
0.15%
impurities. As of March 1, 2007, most foreign markets that were
closed to U.S.
beef following the discovery of the first U.S. case of BSE had
been reopened,
including Japan and South Korea. However, individual shipments
are subject to
inspection, which has been a particular impediment to normalization
of beef
trade with South Korea. Export markets for MBM containing beef
material produced
in the U.S. have remained closed.
The
Company’s management monitors market conditions and prices for its finished
products on a daily basis. If market conditions or prices were
to significantly
change, the Company’s management would evaluate and implement any measures that
it may deem necessary to respond to the change in market conditions.
For larger
formula-based pricing suppliers, the indexing of finished product
price to raw
material cost effectively fixes the gross margin on finished product
sales at a
stable level, providing some protection to the Company from price
declines.
Finished
products produced by the Company are distributed primarily by truck
and rail
from the Company's plants shortly following production. While there
are some
temporary inventory accumulations at various port locations for
export
shipments, inventories rarely exceed three weeks’ production and, therefore, the
Company uses limited working capital to carry inventories and reduces
its
exposure to fluctuations in commodity prices. Other factors that
influence
competition, markets and the prices that the Company receives for
its finished
products include the quality of the Company's finished products,
consumer health
consciousness, worldwide credit conditions and U.S. government
foreign aid. From
time to time, the Company enters into arrangements with its suppliers
of raw
materials pursuant to which these suppliers buy back the Company’s finished
products.
COMPETITION
Management
of the Company believes that the most competitive aspect of the
business is the
procurement of raw materials rather than the sale of finished products.
During
the last ten plus years, pronounced consolidation within the meat
packing
industry has resulted in bigger and more efficient slaughtering
operations, the
majority of which utilize “captive” processors (rendering operations integrated
with the meat or poultry packing operation). Simultaneously, the
number of small
meat packers, which have historically been a dependable source
of supply for
non-captive processors, has decreased significantly. Although the
total amount
of slaughtering may be flat or only moderately increasing, the
availability,
quantity and quality of raw materials available to the independent
processors
from these sources have all decreased. These factors have been offset, in part,
however, by increasing environmental consciousness. The need for
food service
establishments to comply with environmental regulations concerning
the proper
disposal of used restaurant cooking oil is offering a growth area
for this raw
material source. The rendering and restaurant services industries
are highly
fragmented and very competitive. The Company competes with other
rendering and
restaurant services businesses and alternative methods of disposal
of animal
processing by-products and used restaurant cooking oil provided
by trash haulers
and waste management companies, as well as the alternative of illegal
disposal.
Major competitors for the collection of raw material include: Baker
Commodities
in the West and Griffin Industries in Texas and the Southeast.
Each of these
businesses competes in both the Rendering and Restaurant Services
segments.
Another major competitor in the restaurant services business is
Restaurant
Technologies Inc.
In
marketing its finished products domestically and abroad, the Company
faces
competition from other processors and from producers of other suitable
commodities. Tallows and greases are, in certain instances, substitutes
for
soybean oil and palm stearine, while protein is a substitute for
soybean meal.
Consequently, the prices of tallow, yellow grease and protein correlate
with
these substitute commodities. The markets for finished products
are impacted
mainly by the worldwide supply of and demand for fats, oils, proteins
and
grains.
SEASONALITY
The
amount of raw materials made available to the Company by its suppliers
is
relatively stable on a weekly basis except for those weeks which
include major
holidays, during which the availability of raw materials declines
because major
meat and poultry processors are not operating. Weather is also
a factor.
Extremely warm weather adversely affects the ability of the Company
to make
higher quality products because the raw material deteriorates more
rapidly than
in cooler weather, while extremely cold weather, in certain instances,
can
hinder the collection of raw materials. Weather can vary significantly
from one
year to the next and may impact comparability of operating results
of the
Company between periods.
INTELLECTUAL
PROPERTY
The
Company maintains valuable trademarks, service
marks, copyrights, trade names,trade secrets,
proprietary technologies and similar intellectual property, and
considers its intellectual property to be of material value. The
Company has
registered or applied for registration of certain of its intellectual
property,
including the tricolor triangle used in the Company’s signage and logos and the
names "Darling," "Darling Restaurant Services" and "CleanStar."
Company policy
generally is to pursue intellectual property protection considered
necessary or
advisable.
EMPLOYEES
AND LABOR RELATIONS
As
of
December 30, 2006, the Company employed approximately 1,830 persons
full-time.
Approximately 45.2% of the total number of employees are covered
by collective
bargaining agreements; however, the Company has no national or
multi-plant union
contracts. Management believes that the Company’s relations with its employees
and their representatives are good. There can be no assurance,
however, that new
agreements will be reached without union action or will be on terms
satisfactory
to the Company.
REGULATIONS
The
Company is subject to the rules and regulations of various federal,
state and
local governmental agencies. Material rules and regulations and
the applicable
agencies are as follows:
· |
The
Food and Drug Administration
(“FDA”), which regulates food and feed safety. Effective August
1997, the
FDA promulgated a rule prohibiting the use of mammalian
proteins, with
some exceptions, in feeds for cattle, sheep and other
ruminant animals (21
CFR 589.2000, referred to herein as the “BSE Feed Rule”). The intent of
this rule is to prevent further spread of BSE, commonly
referred to as
“mad cow disease.” Company management believes the Company is in
compliance with the provisions of this rule.
|
On
July
14, 2004, the FDA published interim regulations prohibiting: 1)
specified risk
materials (“SRM”) from human food and 2) SRM and non-ambulatory or dead cattle
from cosmetics. BFT that is either derived from SRM-free raw materials
or
contains less than 0.15% insoluble impurities are permitted in
human food
supplements and cosmetics. Derivatives of BFT (glycerin and fatty
acids) are
exempt from these regulations. On October 7, 2006 the FDA amended
its interim
regulation to remove the SRM classification from all except the
last 80 inches
(distal ileum) of beef
small intestine. In the amended rule, beef small intestine from
cattle inspected
and passed for human consumption may be used in food, except for
the distal
ileum which is an SRM and prohibited from food.
On
September 30, 2004, the FDA issued Guidance
Document #174,
which
cited the agency’s statutory authority to consider animal feed and feed
ingredients derived from a BSE-positive animal to be adulterated
and prohibit
the use of this adulterated material in animal feed.
On
October 6, 2005, the FDA proposed to amend the agency’s regulations to prohibit
certain cattle origin materials in the food or feed of all animals
(“Proposed
Rule”). The materials that were proposed to be banned include: 1) the
brain and
spinal cord from cattle 30 months and older that are inspected
and passed for
human consumption; 2) the brain and spinal cord from cattle of
any age not
inspected and passed for human consumption; and 3) the entire carcass
of cattle
not inspected and passed for human consumption if the brains and
spinal cords
have not been removed. As a result of comments that were submitted
to the docket
during the public comment period, including data submitted by affected
industries, the FDA commissioned new economic and environmental
studies on the
impact of finalizing the Proposed Rule. In addition, the Proposed
Rule provides
that tallow containing more than 0.15% insoluble impurities also
be banned from
all animal food and feed if this tallow is derived from the proposed
prohibited
materials. As of March 1, 2007, the FDA has not finalized the Proposed
Rule and
no new regulations affecting animal feed or modifying the Proposed
Rule have
been issued. The Company’s management will continue to monitor this and other
regulatory issues.
· |
The
United
States Department of Agriculture
(“USDA”), which regulates collection and production methods.
Within the
USDA, two agencies exercise direct regulatory oversight
of the Company’s
activities:
|
-
Animal
and Plant Health Inspection Service
(“APHIS”) certifies facilities and claims made for exported materials,
and
-
Food
Safety Inspection Service
(“FSIS”)
regulates sanitation and food safety programs.
On
December 30, 2003, the Secretary of Agriculture announced new beef
slaughter/meat processing regulations to assure consumers of the
safety of the
meat supply. These regulations prohibit non-ambulatory animals
from entering the
food chain, require removal of SRM at slaughter and prohibit carcasses
from
cattle tested for BSE from entering the food chain until the animals
are shown
negative for BSE.
· |
The
Environmental
Protection Agency
(“EPA”), which regulates air and water discharge requirements,
as well as
local and state agencies governing air and water
discharge.
|
· |
State
Departments of Agriculture,
which regulate animal by-product collection and transportation
procedures
and animal feed quality.
|
· |
The
United
States Department of Transportation
(“USDOT”), as well as local and state agencies, which regulate
the
operation of the Company’s commercial
vehicles.
|
· |
The
Securities
and Exchange Commission (“SEC”),
which regulates securities and information required in
annual and
quarterly reports filed by publicly traded
companies.
|
These
rules and regulations may influence the Company’s operating results at one or
more facilities.
AVAILABLE
INFORMATION
Under
the Securities Exchange Act of 1934, the Company is
required to file annual, quarterly and special reports, proxy
statements and other information with the SEC, which can be read
and/or copies
made at the SEC’s Public Reference Room at 100 F Street N.E., Room 1580,
Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further
information about the Public Reference Room. The SEC maintains
a web site at
http://www.sec.gov
that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The Company
files
electronically with the SEC.
The
Company makes available, free of charge, through
its investor relations web site, its
reports on Forms 10-K,
10-Q and 8-K, and amendments to those reports, as soon as
reasonably practicable after they are filed with,
or
furnished to, the SEC pursuant to Section 13(a) or 15(d) of the
Exchange Act.
The
Company’s website is http://www.darlingii.com
and the
address for the Company’s investor relations web site is http://www.darlingii.com/investors/investors.html.
ITEM
1A. RISK FACTORS
Any
investment in the Company will be subject to risks inherent to
the Company’s
business. Before making an investment decision in the Company,
you should carefully consider the risks described below together
with all of the
other information included in or incorporated by reference into
this report. If
any of the events described in the following risk factors actually
occurs, the
Company’s business, financial condition, prospects or results of operations
could be materially and adversely affected. If any of these events
occurs, the
trading price of the Company’s securities could decline and you may lose all or
part of your investment.
The
Company’s results of operations and cash flow may be reduced by decreases
in the
market price of its products.
The
Company’s finished products are commodities, the prices of which are quoted
on
established commodity markets. Accordingly, the Company’s results of operations
will be affected by fluctuations in the prevailing market prices
of these
finished products. A significant decrease in the market price of
the Company’s
products would have a material adverse effect on the Company’s results of
operations and cash flow.
The
most competitive aspect of the Company’s business is the procurement of raw
materials.
The
Company’s management believes that the most competitive aspect of the Company’s
business is the procurement of raw materials rather than the sale
of finished
products. Pronounced consolidation within the meat packing industry
has resulted
in bigger and more efficient slaughtering operations, the majority
of which
utilize “captive” processors. Simultaneously, the number of small meat packers,
which have historically been a dependable source of supply for
non-captive
processors, such as the Company, has decreased significantly. Although
the total
amount of slaughtering may be flat or only moderately increasing,
the
availability, quantity and quality of raw materials available to
the independent
processors from these sources have all decreased. In addition,
the Company has
seen an increase in the use of restaurant grease in the production
of
bio-diesel. A significant decrease in available raw materials could
materially
and adversely affect the Company’s business and results of
operations.
The
rendering and restaurant services industry is highly fragmented
and very
competitive. The Company competes with other rendering and restaurant
services
businesses and alternative methods of disposal of animal processing
by-products
and used restaurant cooking oil provided by trash haulers, waste
management
companies and bio-diesel companies, as well as the alternative
of illegal
disposal. Depending on market conditions, the Company charges a
collection fee
to offset a portion of the cost incurred in collecting raw material.
To the
extent suppliers of raw materials look to alternate methods of
disposal, whether
as a result of the Company’s collection fees being deemed too expensive or
otherwise, the Company’s raw material supply will decrease and the Company’s
collection fee revenues will decrease, which could materially and
adversely
affect the Company’s business and results of operations.
The
Company may be unable to successfully complete the integration
of National
By-Products, LLC and achieve the benefits expected to result from
the
Transaction.
On
May
15, 2006, the Company completed the acquisition of substantially
all of the
assets of NBP with the expectation that the Transaction would result
in mutual
benefits including, among other things, revenue growth, diversification
of raw
material supplies and the creation of a larger platform to grow
the restaurant
services segment. The integration of NBP began in the second quarter
of 2006 and
continued throughout the year. For example, several facilities
were
decommissioned, trucking routes were shortened and several thousand
raw material
suppliers were redirected within the Company's newly enhanced system.
Overall,
the Company anticipates integration improvements will deliver approximately
$5.0
million in annual benefits. Although, the operational and administrative
phase
of this integration is well underway, the following are among the
factors that
could affect the Company’s ability to achieve the full benefits of the
Transaction:
· |
Difficulties
in integrating information systems used by NBP into the
Company;
|
· |
The
failure to achieve internal control over financial reporting
mandated by
the Sarbanes Oxley Act of 2002 (“SOXA”) in respect of the NBP assets and
operation; and
|
· |
Any
future goodwill impairment charges that the Company could
incur with
respect to the assets of NBP.
|
The
Company may incur material costs and liabilities in complying with
government
regulations.
The
Company is subject to the rules and regulations of various federal,
state and
local governmental agencies. Material rules and regulations and
the applicable
agencies are:
· |
The
FDA, which regulates food and feed
safety;
|
· |
The
USDA, including its agencies APHIS and FSIS, which regulates
collection
and production methods;
|
· |
The
EPA, which regulates air and water discharge requirements,
as well as
local and state agencies governing air and water
discharge;
|
· |
State
Departments of Agriculture, which regulate animal by-product
collection
and transportation procedures and animal feed
quality;
|
· |
The
USDOT, as well as local and state transportation agencies,
which regulate
the operation of the Company’s commercial vehicles;
and
|
· |
The
SEC, which regulates securities and information required
in annual and
quarterly reports filed by publicly traded
companies.
|
These
rules and regulations may influence the Company’s operating results at one or
more facilities. There can be no assurance that the Company will
not incur
material costs and liabilities in connection with government regulations,
including compliance with regulations mandated by the SEC.
The
Company is highly dependent on natural gas and diesel
fuel.
The
Company’s operations are highly dependent on the use of natural gas and
diesel
fuel. Energy prices for natural gas and diesel fuel are expected
to remain
relatively high throughout 2007. The Company consumes significant
volumes of
natural gas to operate boilers in its plants to 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 remain relatively high in fiscal 2007 and represent an ongoing
challenge
to the Company’s operating results for future periods. A material increase in
energy prices for natural gas and diesel fuel over a sustained
period of time
could materially adversely affect the Company’s business, financial condition
and results of operations. See Item 7, “Management’s Discussion and Analysis,”
for a recent history of natural gas pricing.
Multi−employer
defined benefit pension plans to which the Company contributes
may be
under-funded.
The
Company contributes to several multi−employer defined benefit pension plans
based on obligations arising under collective bargaining agreements
covering
union−represented employees. The Company does not manage these multi−employer
plans. Based upon the most currently available information from
plan
administrators, some of which information is more than a year old,
the Company
believes that some of these multi−employer plans are under-funded due partially
to a decline in the value of the assets supporting these plans,
a reduction in
the number of actively participating members for whom employer
contributions are
required and the level of benefits provided by the plans. In addition,
the
Pension Protection Act, enacted in August 2006, will require under-funded
pension plans to improve their funding ratios within prescribed
intervals based
on the level of their under-funding, perhaps beginning as soon
as 2008. As a
result, the Company’s required contributions to these plans may increase in the
future. Furthermore, under current law regarding multi−employer defined benefit
plans, any of a plan’s termination, the Company’s voluntary withdrawal from any
under-funded plan, or the mass withdrawal of all contributing employers
from any
under-funded multi−employer defined benefit plan, would require the Company to
make payments to the plan for the Company’s proportionate share of the
multi−employer plan’s unfunded vested liabilities. Moreover, if a multi−employer
defined benefit plan fails to satisfy certain minimum funding requirements,
the
Internal Revenue Service may impose a nondeductible excise tax
of 5% on the
amount of the accumulated funding deficiency for those employers
contributing to
the fund. Requirements to pay increased contributions, withdrawal
liability and
excise taxes could negatively impact the Company’s liquidity and results of
operations.
Darling’s
business may be negatively impacted by a significant outbreak of
avian influenza
(“Bird Flu”) in the U.S.
Avian
influenza (“H5N1”), or Bird Flu, a highly contagious disease that affects
chickens and other poultry species, has spread throughout Asia
and Europe at an
unprecedented rate. 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 was not detected in North
or South America
during 2006, but low pathogenic strains that are not a threat to
human health
were reported in the U.S. during that period. The USDA has developed
safeguards
to protect the U.S. poultry industry from the H5N1 strain of Bird
Flu. 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.
The
Company’s business may be affected by the impact of BSE.
Effective
August 1997, the FDA promulgated the BSE Feed Rule in an effort
to prevent the
spread of BSE. Detection of the first case of BSE in the U.S. in
December 2003
resulted in additional U.S. government regulations, finished product
export
restrictions by foreign governments, market price fluctuations
for the Company’s
finished products and reduced demand for beef and beef products
by consumers.
Even
though the export markets for U.S. beef have been re-opened, these
markets
remain closed to U.S. MBM derived from beef. Continued
concern about BSE in the U.S. may result in additional regulatory
and market
related challenges that may affect the Company’s operations or increase the
Company’s operating costs. See Item 1, “Business -
Regulations.”
The
following are recent developments and recent regulatory history
with respect to
BSE in the U.S.:
· |
On
March 13, 2006, a beef cow at least 10 years of age tested
positive for
BSE. This was the third BSE-positive animal detected
in the U.S. since
December 23, 2003. This latest BSE-positive cow was euthanized
on an
Alabama farm and did not enter the food or feed chains.
|
· |
On
August 25, 2006, the USDA ended the enhanced BSE surveillance
plan that
began on June 1, 2004 and resulted in the detection of
only two positive
samples out of 787,711 cattle that were tested. The USDA
concluded that
the prevalence of BSE in the U.S. is extremely low with
an incidence of
less than 1 case per million adult cattle. Based on this
statistic and
following international standards, the agency developed
an on-going or
maintenance surveillance plan that was implemented on
August 28, 2006.
Only about 40,000 cattle per year will be tested under
the on-going
surveillance plan. The change from enhanced to on-going
surveillance will
reduce the average number of cattle tested in the U.S.
each week from more
than 6,000 head to fewer than 800 head. The plan to scale
back on testing
is expected to reduce future rendering revenues, but
the impact of this
reduction is not known at this
time.
|
· |
In
2005, the FDA
proposed the Proposed Rule to amend the BSE Feed Rule
by also prohibiting
from the food or feed of all animals: (1) brain and spinal
cord from
cattle 30 months and older that are inspected and passed
for human
consumption; (2) the brain and spinal cord from cattle
of any age not
inspected and passed for human consumption; and (3) the
entire carcass of
cattle not inspected and passed for human consumption
if the brain and
spinal cord has not been removed. The FDA has not finalized
this Proposed
Rule. Although management will continue to monitor the
Proposed Rule and
other regulatory issues, it is possible that the Proposed
Rule or other
FDA regulatory action could negatively impact the Company’s operations and
financial performance.
|
The
occurrence of BSE in the U.S. may result in additional U.S. government
regulations, finished product export restrictions by foreign governments,
market
price fluctuations for the Company’s finished products, reduced demand for beef
and beef products by consumers or increase the Company’s operating costs.
Certain
of the Company’s 39 operating facilities are highly dependent upon a few
suppliers.
Certain
of the Company’s rendering facilities are highly dependent on one or a few
suppliers. Should any of these suppliers choose alternate methods
of disposal,
cease their operations, have their operations interrupted by casualty
or
otherwise cease using the Company’s collection services, these operating
facilities may be materially and adversely affected, which could
materially and
adversely affect the Company.
The
Company’s success is dependent on the Company’s key
personnel.
The
Company’s success depends to a significant extent upon a number of key
employees, including members of senior management. The loss of
the services of
one or more of these key employees could have a material adverse
effect on the
Company’s results of operations and prospects. The Company believes that
its
future success will depend in part on its ability to attract, motivate
and
retain skilled technical, managerial, marketing and sales personnel.
Competition
for these types of skilled personnel is intense and there can be
no assurance
that the Company will be successful in attracting, motivating and
retaining key
personnel. The failure to hire and retain these personnel could
materially
adversely affect the Company’s business and results of operations.
In
certain markets the Company is highly dependent upon the continued
and
uninterrupted operation of a single operating facility.
In
the
event of a casualty or condemnation involving one of the Company’s facilities,
in a majority of the Company’s markets the Company would utilize a nearby
operating facility to continue to serve its customers in the affected
market. In
certain markets, however, the Company does not have alternate operating
facilities. In the event of a casualty, condemnation or unscheduled
shutdown in
these markets, the Company may experience an interruption in its
ability to
service its customers and to procure raw materials. This may materially
and
adversely affect the Company’s business and results of operations in those
markets. In addition, after an operating facility affected by a
casualty or
condemnation is restored, there could be no assurance that customers
who in the
interim choose to use alternative disposal services would return
to use the
Company’s services.
Restrictions
imposed by the Company’s credit agreement and future debt agreements may limit
its ability to finance future operations or capital needs or engage
in other
business activities that may be in the Company’s interest.
The
Company’s credit agreement currently, and future debt agreements may, restrict
its ability to:
· |
incur
additional indebtedness;
|
· |
pay
dividends and make other
distributions;
|
· |
make
restricted payments;
|
· |
merge,
consolidate or acquire other
businesses;
|
· |
sell
or otherwise dispose of assets;
|
· |
make
investments, loans and advances;
|
· |
guarantee
indebtedness or other obligations;
|
· |
enter
into operating leases or sale-leaseback, synthetic leases,
or similar
transactions;
|
· |
make
changes to its capital structure; and
|
· |
engage
in new lines of business unrelated to the Company’s current
businesses.
|
These
terms may negatively impact the Company’s ability to finance future operations,
implement its business strategy, fund its capital needs or engage
in other
business activities that may be in its interest. In addition, the
Company’s
credit agreement requires, and future indebtedness may require,
the Company to
maintain compliance with specified financial ratios. Although the
Company is
currently in compliance with the financial ratios and does not
plan on engaging
in transactions that may cause the Company not to be in compliance
with the
ratios, its ability to comply with these ratios may be affected
by events beyond
its control, including the risks described in the other risk factors
and
elsewhere in this report.
A
breach
of any restrictive covenant or the Company’s inability to comply with any
required financial ratio could result in a default under the credit
agreement.
In the event of a default under the credit agreement, the lenders
under the
credit agreement may elect to declare all borrowings outstanding,
together with
accrued and unpaid interest and other fees, to be immediately due
and
payable.
The
lenders will also have the right in these circumstances to terminate
any
commitments they have to provide further financing, including under
the
revolving credit facility.
If
the
Company is unable to repay these borrowings when due, whether as
a result of
acceleration of the debt or otherwise, the lenders under the credit
agreement
will have the right to proceed against the collateral, which consists
of
substantially all of the Company’s assets, including real property and cash. If
the indebtedness under the credit agreement were accelerated, the
Company’s
assets may be insufficient to repay this indebtedness in full under
those
circumstances. Any future credit agreements or other agreement
relating to the
Company’s indebtedness to which the Company may become a party may include
the
covenants described above and other restrictive covenants.
The
Company’s ability to pay any dividends on its common stock may be
limited.
The
Company has not paid any dividends on its common stock since January
3, 1989.
The Company’s current financing arrangements permit the Company to pay cash
dividends on its common stock within limitations defined in its
credit
agreement. Any future determination to pay cash dividends on the
Company’s
common stock will be at the discretion of the Company’s board of directors and
will be based upon the Company’s financial condition, operating results, capital
requirements, plans for expansion, restrictions imposed by any
financing
arrangements, and any other factors that the board of directors
determines are
relevant.
The
Company’s ability to pay any cash or non-cash dividends on its common stock
is
subject to applicable provisions of state law and to the terms
of its credit
agreement. The Company’s credit agreement permits the Company to pay cash
dividends on the Company’s common stock under defined circumstances. Moreover,
under Delaware law, the Company is permitted to pay cash or accumulated
dividends on the Company’s capital stock, including the Company’s common stock,
only out of surplus, or if there is no surplus, out of the Company’s net profits
for the fiscal year in which a dividend is declared or for the
immediately
preceding fiscal year. Surplus is defined as the excess of a company’s total
assets over the sum of its total liabilities plus the par value
of its
outstanding capital stock. In order to pay dividends, the Company
must have
surplus or net profits equal to the full amount of the dividends
at the time the
dividend is declared. In determining the Company’s ability to pay dividends,
Delaware law permits the Company’s board of directors to revalue the Company’s
assets and liabilities from time to time to their fair market values
in order to
establish the amount of surplus. The Company cannot predict what
the value of
the Company’s assets or the amount of the Company’s liabilities will be in the
future or what dividend restrictions will be contained in the Company’s credit
facilities and, accordingly, the Company cannot assure the holders
of the
Company’s common stock that the Company will be able to pay dividends on
the
Company’s common stock.
The
market price of the Company’s common stock could be
volatile.
The
market price of the Company’s common stock has been subject to volatility and,
in the future, the market price of the Company’s common stock could fluctuate
widely in response to numerous factors, many of which are beyond
the Company’s
control. These factors include, among other things, fluctuations
in commodities
prices, actual or anticipated variations in the Company’s operating results,
earnings releases by the Company, changes in financial estimates
by securities
analysts, sales of substantial amounts of the Company’s common stock, market
conditions in the industry and the general state of the securities
markets,
governmental legislation or regulation, currency and exchange rate
fluctuations,
as well as general economic and market conditions, such as
recessions.
The
Company may issue additional common stock or preferred stock, which
could dilute
shareholder interests.
The
Company’s certificate of incorporation, as amended, does not limit the
issuance
of additional common stock or the issuance of preferred stock.
As of March 6,
2007, the Company has available for issuance 19,114,197 authorized
but unissued
shares of common stock and 1,000,000 authorized but unissued shares
of preferred
stock that may be issued in additional series. Depending on the
Company’s stock
price for an average of 90 days ending June 30, 2007, up to 3.2
million shares
may be issuable in connection with the acquisition of NBP.
The
Company has debt and interest payment requirements which could
adversely affect
its ability to operate its business.
As
discussed above, the Company has indebtedness that could have important
consequences to the holders of the Company’s securities including the risks
that:
· |
the
Company will be required to use $5.0 million of its cash
flow from
operations in fiscal 2007 for scheduled repayments of
its indebtedness,
thereby reducing the availability of its cash flow to
fund the
implementation of the Company’s business strategy, working capital,
capital expenditures, product development efforts and
other general
corporate purposes;
|
· |
the
Company’s interest expense could increase if interest rates in
general
increase because a portion of the Company’s debt bears interest based on
market rates;
|
· |
the
Company’s level of indebtedness will increase its vulnerability
to general
adverse economic and industry
conditions;
|
· |
the
Company’s debt service obligations could limit the Company’s flexibility
in planning for, or reacting to, changes in the Company’s
business;
|
· |
the
Company’s level of indebtedness may place it at a competitive
disadvantage
compared to its competitors that have less debt; and
|
· |
a
failure by the Company to make scheduled debt payments
or to comply with
financial and other restrictive covenants in any agreement
governing the
Company’s indebtedness could result in an event of default and
could have
a material adverse effect on the
Company.
|
As
of March
6, 2007, the Company had outstanding term loans of $47.5 million
and outstanding
revolving loans under the Company’s revolving credit agreement of $29.5 million.
As of that date, eight letters of credit in the face amounts of
$8.3 million,
$3.3 million, $2.6 million, $2.3 million, $0.8 million, $0.7 million,
$0.4
million and $0.4 million for a total of $18.8 million in letters of credit,
were issued and outstanding under the credit agreement. As of March
6, 2007, the
Company is able to incur additional indebtedness, including approximately
$76.7
million of additional debt available under the Company’s revolving credit
agreement. All borrowings under the Company’s credit agreement are secured and
senior to the Company’s securities, including its common stock.
The
Company could incur a material weakness in its internal control
over financial
reporting that requires remediation.
In
fiscal
2005 the Company’s disclosure controls and procedures were not effective because
of a material weakness in its internal control of financial reporting
as
discussed in detail in the Company’s Annual Report on Form 10-K for fiscal 2005
under Item 9A, “Controls and Procedures.” Although the Company has completed the
remediation of the fiscal 2005 material weakness and this remediation
was tested
and determined to be effective in 2006, any future failures by
the Company to
maintain the effectiveness of its disclosure controls and procedures,
including
its internal control over financial reporting, could subject the
Company to a
loss of public confidence in its internal control over financial
reporting and
in the integrity of the Company’s public filings and financial statements and
could harm the Company’s operating results or cause the Company to fail to
timely meet its regulatory reporting obligations. Consequences
of a material
weakness such as those listed in the foregoing sentence could have
a negative
effect on the trading price of the Company’s stock.
Terrorist
attacks or acts of war may cause damage or disruption to the Company
and its
employees, facilities, information systems, security systems, suppliers
and
customers, which could significantly impact the Company’s net sales, costs and
expenses and financial condition.
Terrorist
attacks, such as those that occurred on September 11, 2001, have
contributed to
economic instability in the U.S., and further acts of terrorism,
bioterrorism,
violence or war could affect the markets in which the Company operates,
the
Company’s business operations, the Company’s expectations and other
forward-looking statements contained or incorporated in this report.
The
threat of terrorist attacks in the U.S. since September 11, 2001
continues to
create many economic and political uncertainties. The potential for future
terrorist attacks, the U.S. and international responses to terrorist
attacks and
other acts of war or hostility, including the ongoing war in Iraq,
may cause
greater uncertainty and cause the Company’s business to suffer in ways that
cannot currently be predicted. Events such as those referred to
above could
cause or contribute to a general decline in investment valuations,
which in turn
could reduce the market value of shareholder investments. In addition,
terrorist attacks, particularly acts of bioterrorism, that directly
impact the
Company’s facilities or those of the Company’s suppliers or customers could have
an impact on the Company’s sales, supply chain, production capability and costs
and the Company’s ability to deliver its finished products.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
The
Company’s corporate headquarters is located at 251 O’Connor Ridge Boulevard,
Suite 300, Irving, Texas, in an office facility where the Company
leases
approximately 27,000 square feet.
The
Company’s 39 operating facilities consist of 25 full service rendering
plants,
six yellow grease/trap plants, four blending plants, one edible
meat plant, one
technical tallow plant, one hides plant and one pet food plant.
Except for three
leased facilities, all of these facilities are owned by the Company.
In
addition, the Company owns or leases 38 transfer stations in the
U.S., some of
which also process yellow grease and trap. These transfer stations
serve as
collection points for routing raw material to the processing plants
set forth
below. Some locations service a single business segment while others
service
both business segments. The following is a listing of the Company’s operating
facilities by business segment:
Combined
Rendering and Restaurant Services Business Segments
Bellevue,
NE
|
Rendering/Yellow
Grease
|
Berlin,
WI
|
Rendering/Yellow
Grease
|
Blue
Earth, MN
|
Rendering/Yellow
Grease
|
Boise,
ID
|
Rendering/Yellow
Grease
|
Clinton,
IA
|
Rendering/Yellow
Grease
|
Coldwater,
MI
|
Rendering/Yellow
Grease
|
Collinsville,
OK
|
Rendering/Yellow
Grease
|
Dallas,
TX
|
Rendering/Yellow
Grease
|
Denver,
CO
|
Rendering/Yellow
Grease
|
Des
Moines, IA
|
Rendering/Yellow
Grease
|
Detroit,
MI
|
Rendering/Yellow
Grease/Trap
|
E.
St. Louis, IL
|
Rendering/Yellow
Grease/Trap
|
Fresno,
CA
|
Rendering/Yellow
Grease
|
Houston,
TX
|
Rendering/Yellow
Grease/Trap
|
Kansas
City, KS
|
Rendering/Yellow
Grease/Trap
|
Los
Angeles, CA
|
Rendering/Yellow
Grease/Trap
|
Mason
City, IL
|
Rendering/Yellow
Grease
|
Newark,
NJ
|
Rendering/Yellow
Grease/Trap
|
San
Francisco, CA *
|
Rendering/Yellow
Grease/Trap
|
Sioux
City, IA
|
Rendering/Yellow
Grease
|
Tacoma,
WA *
|
Rendering/Yellow
Grease/Trap
|
Turlock,
CA
|
Rendering/Yellow
Grease
|
Wahoo,
NE
|
Rendering/Yellow
Grease
|
Wichita,
KS
|
Rendering/Yellow
Grease/Trap
|
Rendering
Business Segment
Denver,
CO
|
Edible
Meat and Tallow
|
Fairfax,
MO
|
Protein
Blending
|
Grand
Island, NE *
|
Pet
Food
|
Kansas
City, KS
|
Protein
Blending
|
Kansas
City, MO
|
Hides
|
Lynn
Center, IL
|
Protein
Blending
|
Omaha,
NE
|
Rendering
|
Omaha,
NE
|
Protein
Blending
|
Omaha,
NE
|
Technical
Tallow
|
Restaurant
Services Business Segment
Chicago,
IL
|
Yellow
Grease/Trap
|
Ft.
Lauderdale, FL
|
Yellow
Grease/Trap
|
Indianapolis,
IN
|
Yellow
Grease/Trap
|
Little
Rock, AR
|
Yellow
Grease/Trap
|
No.
Las Vegas, NV
|
Yellow
Grease/Trap
|
Tampa,
FL
|
Yellow
Grease/Trap
|
|
|
*
Property is leased. Rent expense for these leased properties was
$0.6 million in
the aggregate in fiscal 2006.
Substantially
all assets of the Company, including real property, are either
pledged or
mortgaged as collateral for borrowings under the Company’s credit
agreement.
ITEM
3. LEGAL PROCEEDINGS
LITIGATION
The
Company is a party to several lawsuits, claims and loss contingencies
arising in
the ordinary course of its business, including assertions by certain
regulatory
agencies related to air, wastewater and storm water discharges
from the
Company’s processing facilities.
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 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 and litigation matters. At December
30, 2006 and
December 31, 2005, the reserves for insurance, environmental and
litigation
contingencies reflected on the balance sheet in accrued expenses
and other
non-current liabilities were approximately $21.5 million and $15.0
million,
respectively. Management of the Company 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 matters will
not exceed
current estimates. The
Company believes that the likelihood is remote that any additional
liability
from these lawsuits and claims that may not be covered by insurance
would have a
material effect on the financial statements.
In
June
2006, the Company was awarded damages of approximately $7.4 million
as a result
of a service provider’s failure to provide steam under a service agreement to
one of the Company’s plants. At the time the damages were awarded,
collectibility of such damages was uncertain; however on October
12, 2006, the
Company entered into an agreement to sell its rights to such damages
to a third
party for $2.2 million in cash. The agreement was made subject
to certain
conditions which were satisfied on March 1, 2007. On March 8, 2007,
the Company
received $2.2 million, completing the transaction. The Company
has recorded a
gain with the receipt of the $2.2 million in proceeds in the first
quarter of
2007.
During
the third quarter of fiscal 2004, the Company concluded a settlement
with
certain past insurers on certain policies of insurance issued primarily
before
1972, whereby the Company received a cash payment of approximately
$2.8 million
in return for an executed Settlement Agreement and Release in which
the Company
released the participating insurers from all actual and potential
claims and
liability under the subject insurance policies. The Company recorded
receipt of
the payment as a credit (recovery) of claims expense and previous
insurance
premiums included in cost of sales within the Corporate segment.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders during the
quarter ended
December 30, 2006.
PART
II
ITEM
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
AND
ISSUER PURCHASES OF EQUITY SECURITIES
The
Company’s common stock is traded on the American Stock Exchange (“AMEX”) under
the symbol “DAR”. The following table sets forth, for the quarters indicated,
the high and low closing sales prices per share for the Company’s common stock
as reported on the AMEX.
|
|
Market
Price
|
|
Fiscal
Quarter
|
High
|
Low
|
|
2006:
|
|
|
|
First
Quarter
|
$4.80
|
$3.79
|
|
Second
Quarter
|
$4.92
|
$3.91
|
|
Third
Quarter
|
$4.59
|
$3.95
|
|
Fourth
Quarter
|
$5.55
|
$3.96
|
|
2005:
|
|
|
|
First
Quarter
|
$4.50
|
$3.85
|
|
Second
Quarter
|
$4.00
|
$3.52
|
|
Third
Quarter
|
$3.96
|
$3.40
|
|
Fourth
Quarter
|
$4.05
|
$3.26
|
|
|
|
|
On
March
6, 2007, the closing sales price of the Company’s common stock on the AMEX was
$5.36. The Company has been notified by its stock transfer agent
that as of
March 6, 2007, there were 188 holders of record of the common stock.
The
Company has not paid any dividends on its common stock since January
3, 1989 and
does not expect to pay cash dividends in 2007. The Company’s current financing
arrangements permit the Company to pay cash dividends on its common
stock within
limitations defined in its credit agreement. Any future determination
to pay
cash dividends on the Company’s common stock will be at the discretion of the
Company’s board of directors and will be based upon the Company’s financial
condition, operating results, capital requirements, plans for expansion,
restrictions imposed by any financing arrangements, and any other
factors that
the board of directors determines are relevant.
Set
forth
below is a line graph comparing the change in the cumulative total
stockholder
return on the Company’s common stock with the cumulative total return of the
AMEX Stock Market-U.S. Index, the Dow Jones US Waste and Disposal
Service Index,
and the CSFB-Nelson Agribusiness Index for the period from December
29, 2001 to
December 30, 2006, assuming the investment of $100 on December
29, 2001 and the
reinvestment of dividends.
The
stock
price performance shown on the graph only reflects the change in
the Company’s
stock price relative to the noted indices and is not necessarily
indicative of
future price performance.
EQUITY
COMPENSATION PLANS
The
following table sets forth certain information as of December 30,
2006 with
respect to the Company’s equity compensation plans (including individual
compensation arrangements) under which the Company’s equity securities are
authorized for issuance, aggregated by i) all compensation plans
previously
approved by the Company’s security holders, and ii) all compensation plans not
previously approved by the Company’s security holders. The table
includes:
· |
the
number of securities to be issued upon the exercise of
outstanding
options;
|
· |
the
weighted-average exercise price of the outstanding options;
and
|
· |
the
number of securities that remain available for future
issuance under the
plans.
|
Plan
Category
|
(a)
Number
of securities to be issued upon exercise of outstanding
options,
warrants and rights
|
(b)
Weighted-average
exercise price of outstanding
options,
warrants
and
rights
|
(c)
Number
of securities remaining available
for
future issuance
under
equity
compensation
plans
(excluding
securities reflected in column (a))
|
Equity
compensation plans approved
by security holders
|
1,673,985
(1)
|
$
2.71
|
3,797,475
|
Equity
compensation plans not
approved by security holders
|
–
|
–
|
–
|
Total
|
1,673,985
|
$ 2.71
|
3,797,475
|
(1) |
Includes
shares underlying options that have been issued pursuant
to the Company’s
2004 Omnibus Incentive Plan (the “2004 Plan”)
as
approved by the Company‘s stockholders. See
Note 12 of Notes to Consolidated Financial Statements
for information
regarding
the
material features of the 2004 Plan.
|
ITEM
6. SELECTED FINANCIAL DATA
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The
following table presents selected consolidated historical financial
data for the
periods indicated. The selected historical consolidated financial
data set forth
below should be read in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and the Consolidated Financial
Statements of the Company for the three years ended December 30,
2006, December
31, 2005, and January 1, 2005, and the related notes thereto.
|
Fiscal
2006
|
Fiscal
2005
|
Fiscal
2004
|
Fiscal
2003
|
Fiscal
2002
|
|
Fifty-two
Weeks
Ended
December
30,
2006
(f)
|
Fifty-two
Weeks
Ended
December
31,
2005
|
Fifty-two
Weeks
Ended
January
1,
2005
|
Fifty-three
Weeks
Ended
January
3,
2004
|
Fifty-two
Weeks
Ended
December
28,
2002
|
(dollars in thousands, except per share data)
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
406,990
|
|
$
|
308,867
|
|
$
|
320,229
|
|
$
|
323,267
|
|
$
|
261,059
|
|
Cost
of sales and operating expenses (a)
|
|
|
321,416
|
|
|
241,707
|
|
|
237,925
|
|
|
245,175
|
|
|
193,632
|
|
Selling,
general and administrative expenses
|
|
|
45,649
|
|
|
35,240
|
|
|
36,509
|
|
|
35,808
|
|
|
30,169
|
|
Depreciation
and amortization
|
|
|
20,686
|
|
|
15,787
|
|
|
15,224
|
|
|
15,124
|
|
|
16,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
19,239
|
|
|
16,133
|
|
|
30,571
|
|
|
27,160
|
|
|
20,843
|
|
Interest
expense
|
|
|
7,184
|
|
|
6,157
|
|
|
6,759
|
|
|
2,363
|
|
|
6,408
|
|
Other
(income)/expense, net (b) (c)
|
|
|
4,682
|
|
|
(903
|
)
|
|
299
|
|
|
(3,914
|
)
|
|
(2,006
|
)
|
Income
from continuing operations before income taxes
|
|
|
7,373
|
|
|
10,879
|
|
|
23,513
|
|
|
28,711
|
|
|
16,441
|
|
Income
tax expense
|
|
|
2,266
|
|
|
3,184
|
|
|
9,245
|
|
|
10,632
|
|
|
7,151
|
|
Income
from continuing operations
|
|
|
5,107
|
|
|
7,695
|
|
|
14,268
|
|
|
18,079
|
|
|
9,290
|
|
Income/(loss)
from discontinued operations, net
of tax
|
|
|
-
|
|
|
46
|
|
|
(376
|
)
|
|
112
|
|
|
(327
|
)
|
Net
Income
|
|
$
|
5,107
|
|
$
|
7,741
|
|
$
|
13,892
|
|
$
|
18,191
|
|
$
|
8,963
|
|
Basic
earnings per common share
|
|
$
|
0.07
|
|
$
|
0.12
|
|
$
|
0.22
|
|
$
|
0.29
|
|
$
|
0.18
|
|
Diluted
earnings per common share
|
|
$
|
0.07
|
|
$
|
0.12
|
|
$
|
0.22
|
|
$
|
0.29
|
|
$
|
0.18
|
|
Weighted
average shares outstanding
|
|
|
74,310
|
|
|
63,929
|
|
|
63,840
|
|
|
62,588
|
|
|
45,003
|
|
Diluted
weighted average shares outstanding
|
|
|
75,259
|
|
|
64,525
|
|
|
64,463
|
|
|
63,188
|
|
|
45,577
|
|
Other
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA (d)
|
|
$
|
39,925
|
|
$
|
31,920
|
|
$
|
45,795
|
|
$
|
42,284
|
|
$
|
37,258
|
|
Depreciation
|
|
|
16,134
|
|
|
11,903
|
|
|
11,345
|
|
|
10,958
|
|
|
12,135
|
|
Amortization
|
|
|
4,552
|
|
|
3,884
|
|
|
3,879
|
|
|
4,166
|
|
|
4,280
|
|
Capital
expenditures (e)
|
|
|
11,800
|
|
|
21,406
|
|
|
13,312
|
|
|
11,586
|
|
|
13,433
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
17,865
|
|
$
|
40,407
|
|
$
|
39,602
|
|
$
|
31,189
|
|
$
|
13,797
|
|
Total
assets
|
|
|
320,806
|
|
|
190,772
|
|
|
182,809
|
|
|
174,649
|
|
|
162,912
|
|
Current
portion of long-term debt
|
|
|
5,004
|
|
|
5,026
|
|
|
5,030
|
|
|
7,489
|
|
|
8,372
|
|
Total
long-term debt less current portion
|
|
|
78,000
|
|
|
44,502
|
|
|
49,528
|
|
|
48,188
|
|
|
60,055
|
|
Stockholders’
equity
|
|
|
151,325
|
|
|
73,680
|
|
|
67,235
|
|
|
55,282
|
|
|
35,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Included
in cost of sales and operating expenses is a settlement
with certain past
insurers of approximately $2.8 million recorded in fiscal
2004 as a credit
(recovery) of claims expense and previous
insurance premiums.
|
(b) |
Included in
other (income)/expense in fiscal 2006 is a write-off
of deferred loan
costs of approximately $2.6 million and early retirement
fees
of approximately $1.9 million for the early retirement
of
senior
subordinated notes and termination of the previous
senior
credit
agreement.
|
(c) |
Included
in other (income)/expense is gain on early retirement
of debt of
approximately $1.3 million in fiscal 2004, $4.7 million
in fiscal 2003
and
$0.8 million in fiscal 2002. Also included in other
(income)/expense is
loss on
redemption of preferred stock of approximately $1.7 million
in fiscal 2004.
|
(d) |
Adjusted
EBITDA is presented here not as an alternative to net
income, but rather
as a measure of the Company’s operating
performance
and is not intended to be a presentation in accordance
with generally
accepted
accounting principles. Since EBITDA is
not
calculated identically by all companies, the presentation
in this report
may not be comparable to those disclosed by other
companies.
|
Adjusted
EBITDA is calculated below and represents, for any relevant period,
net
income/(loss) plus depreciation and amortization, interest expense,
income/(loss) from discontinued operations, net of tax, income
tax provision and
other income/(expense). The Company believes adjusted EBITDA is
a useful measure
for investors because it is frequently used by securities analysts,
investors
and other interested parties in the evaluation of companies in
our industry. In
addition, management believes that adjusted EBITDA is useful in
evaluating our
operating performance compared to that of other companies in our
industry
because the calculation of adjusted EBITDA generally eliminates
the effects of
financing, income taxes and certain non-cash and other items that
may vary for
different companies for reasons unrelated to overall operating
performance. As a
result, the Company’s management uses adjusted EBITDA as a measure to evaluate
performance and for other discretionary purposes. However, adjusted
EBITDA is
not a recognized measurement under U.S. GAAP, should not be considered
as an
alternative to net income as a measure of operating results or
to cash flow as a
measure of liquidity, and is not intended to be a presentation
in accordance
with generally accepted accounting principles. Also, since adjusted
EBITDA is
not calculated identically by all companies, the presentation in
this report may
not be comparable to those disclosed by other companies.
In
addition to the foregoing, management also uses or will use adjusted
EBITDA to
measure compliance with certain financial covenants under the Company’s credit
agreement. The amounts shown below for adjusted EBITDA differ from
the amounts
calculated under similarly titled definitions in the Company’s credit agreement,
as those definitions permit further adjustment to reflect certain
other non-cash
charges.
Reconciliation of Net Income to Adjusted EBITDA
(dollars
in thousands)
|
|
|
December
30,
2006
|
|
|
December
31,
2005
|
|
|
January
1,
2005
|
|
|
January
3,
2004
|
|
|
December
28,
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,107
|
|
$
|
7,741
|
|
$
|
13,892
|
|
$
|
18,191
|
|
$
|
8,963
|
|
Depreciation
and amortization
|
|
|
20,686
|
|
|
15,787
|
|
|
15,224
|
|
|
15,124
|
|
|
16,415
|
|
Interest
expense
|
|
|
7,184
|
|
|
6,157
|
|
|
6,759
|
|
|
2,363
|
|
|
6,408
|
|
(Income)/loss
from discontinued
operations, net of tax
|
|
|
-
|
|
|
(46
|
)
|
|
376
|
|
|
(112
|
)
|
|
327
|
|
Income
tax expense
|
|
|
2,266
|
|
|
3,184
|
|
|
9,245
|
|
|
10,632
|
|
|
7,151
|
|
Other
(income)/expense
|
|
|
4,682
|
|
|
(903
|
)
|
|
299
|
|
|
(3,914
|
)
|
|
(2,006
|
)
|
Adjusted
EBITDA
|
|
$
|
39,925
|
|
$
|
31,920
|
|
$
|
45,795
|
|
$
|
42,284
|
|
$
|
37,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
e) |
Excludes
the capital assets acquired as part of substantially
all of the assets of
NBP of approximately $51.9 million in fiscal
2006.
|
f) |
Fiscal
2006 includes 33 weeks of contribution from the acquired
NBP
assets.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
|
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that
involve risks and
uncertainties. The Company’s actual results could differ materially from those
anticipated in these forward-looking statements as a result of
certain factors,
including those set forth in Item 1A of this report under the heading
“Risk
Factors.”
The
following discussion should be read in conjunction with the historical
consolidated financial statements and notes thereto included in
Item 8 of this
report. The Company is organized along two operating business segments,
Rendering and Restaurant Services. See Note 16 of Notes to Consolidated
Financial Statements.
Overview
The
Company is a leading provider of rendering, recycling and recovery
solutions to
the nation’s food industry. The Company collects and recycles animal by-products
and used cooking oil from food service establishments and provides
grease trap
cleaning services to many of the same establishments. The Company’s operations
are organized into two segments: Rendering and Restaurant Services.
With the May
15, 2006 acquisition of substantially
all of the assets of NBP,
the
Company now processes such raw materials at 39 facilities located
throughout the
U.S. into finished products such as protein (primarily meat and
bone meal,
“MBM”), tallow (primarily bleachable fancy tallow, “BFT”), yellow grease (“YG”)
and hides. The Company sells these products nationally and internationally,
primarily to producers of oleo-chemicals, bio-fuels, soaps, pet
foods, leather
goods and livestock feed for use as ingredients in their products
or for further
processing As a result of the acquisition of substantially
all of the assets of NBP
(the
“Transaction”), the Company’s year end results for 2006 reflect 33 weeks of
contribution from the NBP assets. The Company’s operations are currently
organized into two segments: Rendering and Restaurant Services.
For additional
information on the Company’s business, see Item 1, “Business,” and for
additional information on the Company’s segments, see Note
16
of Notes
to Consolidated Financial Statements.
The
major
challenges faced by the Company during fiscal 2006 were a continuation
of
historically high energy costs and lower finished product commodity
prices
throughout most of the year. Raw material volumes improved modestly
during the
year, but export markets in some foreign countries for U.S. produced
finished
beef products and cattle by-products continued to be closed. Additionally,
on
May 15, 2006, the Company completed the acquisition of substantially
all of the
assets of NBP and began the process of integrating the new facilities
into the
Company’s existing infrastructure and operations.
Operating
income increased by $3.1 million in fiscal 2006 compared to fiscal
2005. The
continuing challenges faced by the Company indicate there can be
no assurance
that operating results achieved by the Company in fiscal 2006 are
indicative of
future operating performance of the Company.
Summary
of Critical Issues Faced by the Company during Fiscal
2006
· |
The
average price of the Company’s finished products was lower during fiscal
2006 compared to the fiscal 2005. Prices for MBM declined
by nearly 10%,
YG by 12 % and BFT by 3%. Continued closure of export
markets coupled with
ample supplies of feed grains and fats and oils persisted
throughout most
of fiscal 2006. By the fourth quarter, anticipation of
renewable fuels
demand on both feed grains and oils led to a sharp price
increase for the
Company’s finished products.
|
· |
Energy
costs continued at near historical highs for both natural
gas and diesel
fuel. The Company relies on natural gas to provide fuel
for the production
of steam to process its raw material and diesel fuel
to power its fleet of
trucks. The Company was able to mitigate some of the
increase in natural
gas by burning alternative bio-fuels in its plant boilers
when
economically and environmentally feasible to do
so.
|
· |
Raw
material volumes during fiscal 2006 improved modestly
as some of our
export oriented suppliers processed additional volumes
and overall
consumption of meat products improved. Contributing to
this increase was
the addition of 33 weeks of contributions from the acquired
NBP locations.
|
· |
The
integration of NBP commenced in the second quarter of
2006 and continued
throughout the fiscal year. Several facilities were decommissioned,
trucking routes were shortened and several thousand raw
material suppliers
were redirected within the Company’s newly enhanced system. Overall, the
operational and administrative integration phase is well
underway.
|
Summary
of Critical Issues and Known Trends Faced by the Company in Fiscal
2006 and
Thereafter
BSE
Related Issues
Effective
August 1997, the FDA promulgated a rule prohibiting the use of
mammalian
proteins, with some exceptions, in feeds for cattle, sheep and
other ruminant
animals. The intent of this rule is to prevent the spread of BSE,
commonly
referred to as “mad cow disease.” See the risk factor entitled “The Company’s
business may be affected by the impact of BSE,” beginning on page 11, for more
information about BSE and its potential effects on the Company,
including the
effects of potential additional government regulations, finished
product export
restrictions by foreign governments, market price fluctuations
for finished
goods, reduced demand for beef and beef products by consumers and
increases in
operating costs resulting from BSE-related concerns.
Other
Critical Issues and Challenges
· |
During
fiscal 2007, the integration of information systems used
by NBP into the
Company’s information systems could have a significant impact
on the
Company’s operations. See the risk factor entitled “The Company may be
unable to successfully complete the integration of NBP
and achieve the
benefits expected to result from the Transaction” beginning on page 10 for
more information.
|
· |
Expenses
related to compliance with requirements of Section 404
of the SOXA are
expected to continue throughout 2007 and thereafter.
The Company expects
recurring compliance costs related to the required updating
of
documentation and the testing and auditing of the Company’s system of
internal control over financial reporting, as required
by the
SOXA.
|
· |
Energy
prices for natural gas and diesel fuel are expected to
remain relatively
high in fiscal 2007. 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
beginning of the
first quarter of 2007 and represent an ongoing challenge
to the Company’s
operating results for future periods.
|
· |
Avian
influenza (“H5N1”), or Bird Flu, a highly contagious disease that affects
chickens and other poultry species, has spread throughout
Asia and Europe
at an unprecedented rate. 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 was not
detected in North
or South America during 2006, but low pathogenic strains
that are not a
threat to human health were reported in the U.S. during
that period. The
USDA has developed safeguards to protect the U.S. poultry
industry from
the H5N1 strain of Bird Flu. 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.
|
These
challenges indicate there can be no assurance that fiscal 2006
operating results
are indicative of future operating performance of the Company.
Results
of Operations
Fifty-two
Week Fiscal Year Ended December 30, 2006 (“Fiscal 2006”) Compared to Fifty-two
Week Fiscal Year Ended December 31, 2005 (“Fiscal
2005”)
Summary
of Key Factors Impacting Fiscal 2006 Results:
Principal
factors that contributed to a $3.1 million (19.3%) increase in
operating income,
which are discussed in greater detail in the following section,
were:
·
|
The
inclusion of the operations of NBP,
|
·
|
Higher
raw material volume, and
|
·
|
Improved
recovery of collection expenses.
|
These
increases to operating income were partially offset by:
·
|
Lower
finished product sales prices,
|
·
|
Higher
plant repair and maintenance expenses, and
|
·
|
Higher
legal fees.
|
Summary
of Key Indicators of Fiscal 2006 Performance:
Principal
indicators that management routinely monitors and compares to previous
periods
as an indicator of problems or improvements in operating results
include:
·
|
Finished
product commodity prices quoted on the Jacobsen index,
|
·
|
Raw
material volume,
|
·
|
Production
volume and related yield of finished product,
|
·
|
Energy
prices for natural gas quoted on the NYMEX index and
diesel
fuel,
|
·
|
Collection
fees and collection operating expense, and
|
·
|
Factory
operating expenses.
|
These
indicators and their importance are discussed below in greater
detail.
Prices
for finished product commodities that the Company produces are
quoted each
business day on the Jacobsen index, an established trading exchange
price
publisher. These finished products are MBM, BFT and YG. The prices
quoted are
for delivery of the finished product at a specified location. These
prices are
relevant because they provide an indication of a component of revenue
and
achievement of business plan benchmarks on a daily basis. The Company’s actual
sales prices for its finished products may vary from the Jacobsen
index because
the Company’s finished products are delivered to multiple locations in different
geographic regions which utilize different price indexes. Average
Jacobsen
prices (at the specified delivery point) for Fiscal 2006, compared
to average
Jacobsen prices for Fiscal 2005 follow:
|
Avg.
Price
Fiscal
2006
|
Avg.
Price
Fiscal
2005
|
Increase/
(Decrease)
|
%
Change
|
MBM
(Illinois)
|
$153.48/ton
|
$167.53
/ton
|
$(14.05/ton)
|
(8.4%)
|
MBM
(California)
|
$126.27/ton
|
$142.26
/ton
|
$(15.99/ton)
|
(11.2%)
|
BFT
(Chicago)
|
$
16.87/cwt
|
$
17.46 /cwt
|
$(0.59/cwt)
|
(3.4%)
|
YG
(Illinois)
|
$
12.64/cwt
|
$
14.44 /cwt
|
$(1.80/cwt)
|
(12.5%)
|
The
decrease in the average prices of the finished products the Company
sells had an
unfavorable impact on revenue which is partially offset by a positive
impact to
the Company’s raw material cost, due to formula pricing arrangements which
compute raw material cost based upon the price of finished
product.
Raw
material volume represents the quantity (pounds) of raw material
collected from
suppliers, including beef, pork, poultry and used cooking oils.
Raw material
volumes provide an indication of future production of finished
products
available for sale and are a component of potential future revenue.
Finished
product production volumes are the end result of the Company’s production
processes, and directly impact goods available for sale, and thus
become an
important component of sales revenue. Yield on production is a
ratio of
production volume (pounds) divided by raw material volume (pounds)
and provides
an indication of effectiveness of the Company’s production process. Factors
impacting yield on production include quality of raw material and
warm weather
during summer months, which rapidly degrades raw material. Both
of these factors
negatively impacted the Company’s yield during Fiscal 2006.
Natural
gas commodity prices are quoted each day on the NYMEX exchange
for future months
of delivery of natural gas. The prices are important to the Company
because
natural gas is a major component of factory operating costs and
natural gas
prices are an indicator of achievement of the Company’s business plan.
The
Company charges collection fees which are included in net sales
in order to
offset a portion of the expense incurred in collecting raw material.
Each month
the Company monitors both the collection fee charged to suppliers,
which is
included in net sales, and collection expense, which is included
in cost of
sales. The importance of monitoring collection fees and collection
expense is
that they provide an indication of achievement of the Company’s business
plan.
The
Company incurs factory operating expenses which are included in
cost of sales.
Each month the Company monitors factory operating expense. The
importance of
monitoring factory operating expense is that it provides an indication
of
achievement of the Company’s business plan.
Net
Sales. The
Company collects and processes animal by-products (fat, bones and
offal),
including hides, and used restaurant cooking oil to principally
produce finished
products of MBM, BFT, YG and hides. Sales are significantly affected
by finished
goods prices, quality and mix of raw material, and volume of raw
material. Net
sales include the sales of produced finished goods, collection
fees, fees for
grease trap services, and finished goods purchased for resale.
During
Fiscal 2006, net sales increased by $98.1 million (31.8%) to $407.0
million as
compared to $308.9 million during Fiscal 2005. The increase in
net sales was
primarily due to the following increases/(decreases) (in millions
of dollars):
|
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Net
sales due to acquisition of NBP
|
|
|
$
110.7
|
|
|
$
7.3
|
|
|
$
-
|
|
|
$
118.0
|
|
Higher
raw material volume
|
|
|
8.1
|
|
|
(1.7
|
)
|
|
-
|
|
|
6.4
|
|
Improved
recovery of collection expenses
|
|
|
2.6
|
|
|
1.9
|
|
|
-
|
|
|
4.5
|
|
Higher
yields on production
|
|
|
0.8
|
|
|
(0.7
|
)
|
|
-
|
|
|
0.1
|
|
Lower
finished goods prices
|
|
|
(18.1
|
)
|
|
(3.2
|
)
|
|
-
|
|
|
(21.3
|
)
|
Purchases
of finished product for resale
|
|
|
(6.0
|
)
|
|
(2.6
|
)
|
|
-
|
|
|
(8.6
|
)
|
Other
sales decreases
|
|
|
(1.4
|
)
|
|
0.4
|
|
|
-
|
|
|
(1.0
|
)
|
Product
transfers
|
|
|
(10.0
|
)
|
|
10.0
|
|
|
-
|
|
|
-
|
|
|
|
|
$
86.7
|
|
|
$
11.4
|
|
|
$
-
|
|
|
$ 98.1
|
|
Cost
of Sales and Operating Expenses.
Cost of
sales and operating expenses include the cost of raw material,
the cost of
product purchased for resale and the cost to collect, which includes
diesel fuel
and processing costs including natural gas. The Company utilizes
both fixed and
formula pricing methods for the purchase of raw materials. Fixed
prices are
adjusted where possible for changes in competition and significant
changes in
finished goods market conditions, while raw materials purchased
under formula
prices are correlated with specific finished goods prices. Energy
costs, particularly diesel fuel and natural gas, are significant
components of
the Company’s cost structure. The Company has the ability to burn alternative
fuels at some of its plants to help manage the Company’s price exposure to
volatile energy markets.
During
Fiscal 2006, cost of sales and operating expenses increased $79.7
million
(33.0%) to $321.4 million as compared to $241.7 million during
Fiscal 2005. The
increase in cost of sales and operating expenses was primarily
due to the
following (in millions of dollars):
|
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Cost
of sales and operating expenses of NBP
|
|
|
$
94.4
|
|
|
$
3.3
|
|
|
$
(0.1
|
)
|
|
$
97.6
|
|
Payroll
and related benefits
|
|
|
0.9
|
|
|
1.1
|
|
|
0.1
|
|
|
2.1
|
|
Plant
repairs and maintenance
|
|
|
2.0
|
|
|
-
|
|
|
-
|
|
|
2.0
|
|
Higher
raw material volume
|
|
|
1.8
|
|
|
(0.4
|
)
|
|
-
|
|
|
1.4
|
|
Sewer
and trap disposal
|
|
|
0.4
|
|
|
0.7
|
|
|
-
|
|
|
1.1
|
|
Lower
raw material prices
|
|
|
(13.0
|
)
|
|
(2.7
|
)
|
|
-
|
|
|
(15.7
|
)
|
Purchases
of finished product for resale
|
|
|
(6.0
|
)
|
|
(2.6
|
)
|
|
-
|
|
|
(8.6
|
)
|
Lower
energy costs, primarily natural gas and diesel
fuel
|
|
|
(0.2
|
)
|
|
0.3
|
|
|
(0.2
|
)
|
|
(0.1
|
)
|
Other
|
|
|
(1.0
|
)
|
|
0.9
|
|
|
-
|
|
|
(0.1
|
)
|
Product
transfers
|
|
|
(10.0
|
)
|
|
10.0
|
|
|
-
|
|
|
-
|
|
|
|
|
$
69.3
|
|
|
$
10.6
|
|
|
$
(0.2
|
)
|
|
$
79.7
|
|
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses were $45.6 million during Fiscal
2006, a
$10.4 million increase (29.5%) from $35.2 million during Fiscal
2005. The
increase is primarily due to increase costs associated with the
Transaction,
higher legal expense, particularly related to matters in which
the Company seeks
affirmative relief, as well as higher audit fees and payroll related
expenses,
as follows (in millions of dollars):
|
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Selling,
general and administrative expenses of
NBP
|
|
|
$
3.0
|
|
|
$
0.3
|
|
|
$
2.3
|
|
|
$
5.6
|
|
Payroll
and related benefits expense
|
|
|
0.1
|
|
|
0.5
|
|
|
1.7
|
|
|
2.3
|
|
Higher
legal expense
|
|
|
-
|
|
|
-
|
|
|
2.0
|
|
|
2.0
|
|
Higher
audit fees
|
|
|
-
|
|
|
-
|
|
|
0.7
|
|
|
0.7
|
|
Other
expenses
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
0.2
|
|
|
(0.2
|
)
|
|
|
|
$
2.8
|
|
|
$
0.7
|
|
|
$
6.9
|
|
|
$
10.4
|
|
Depreciation
and Amortization. Depreciation
and amortization charges increased $4.9 million (31.0%) to $20.7
million during
Fiscal 2006 as compared to $15.8 million during Fiscal 2005. The
increase is
primarily due to the acquisition of capital assets from NBP in
the Transaction
and increased capital expenditures made in Fiscal 2005.
Interest
Expense.
Interest
expense was $7.2 million during Fiscal 2006 compared to $6.2 million
during
Fiscal 2005, an increase of $1.0 million (16.1%), primarily due
to the overall
increase in debt outstanding as a result of the Transaction.
Other
Income/Expense.
Other
expense was $4.7 million in Fiscal 2006, a $5.6 million increase
from other
income of $0.9 million in Fiscal 2005. The increase in other expense
in Fiscal
2006 is primarily due to the following (in millions of
dollars):
|
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Write-off
of deferred loan costs
|
|
|
$
-
|
|
|
$
-
|
|
|
$
2.6
|
|
|
$
2.6
|
|
Subordinated
debt prepayment fees
|
|
|
-
|
|
|
-
|
|
|
1.9
|
|
|
1.9
|
|
Decrease
in gain on disposal of assets
|
|
|
-
|
|
|
-
|
|
|
0.5
|
|
|
0.5
|
|
Decrease
in interest income
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
|
0.4
|
|
Increase
in other expense
|
|
|
-
|
|
|
-
|
|
|
0.2
|
|
|
0.2
|
|
|
|
|
$
-
|
|
|
$
-
|
|
|
$
5.6
|
|
|
$
5.6
|
|
The
decrease in gain on sale of assets was primarily the result of
the gain on the
sale of the Matamoras, Pennsylvania property that occurred during
Fiscal
2006,amounting to less than the gain recognized on the sale of
two properties
sold during Fiscal 2005. In addition, interest income decreased
by $0.4 million
in Fiscal 2006 as a result of less cash investment on the balance
sheet.
During
the second quarter of 2006, the Company retired its subordinated
debt and
incurred charges of $1.9 million for prepayment fees and $1.1 million
to write
off deferred loan costs. In addition, the Company entered into
a new revolving
credit facility during the second quarter of 2006 which resulted
in a charge of
$1.5 million to write off deferred loan costs related to the previous
revolving
credit facility.
Income
Taxes. The
Company recorded income tax expense of $2.3 million for Fiscal
2006, compared to
income tax expense of $3.2 million recorded in Fiscal 2005, a decrease
of $0.9
million (28.1%), primarily due to the decreased pre-tax earnings
of the Company
in fiscal 2006. The effective tax rate of 30.7% for 2006 differed
from the
statutory rate of 35% primarily due to federal and state income
tax credits as
well as the release and reversal of certain tax contingencies.
The impact of
state income taxes for 2006 of $0.3 million was offset by certain
state tax
credits recorded in 2006 of $0.1 million.
Discontinued
Operations.
The
Company recorded a profit from discontinued operations, net of
applicable taxes,
related to the closure and sale of certain assets of the Company’s London,
Ontario, Canadian subsidiary in fiscal 2005, which was not
significant.
Fifty-two
Week Fiscal Year Ended December 31, 2005 (“Fiscal 2005”) Compared to Fifty-two
Week Fiscal Year Ended January 1, 2005 (“Fiscal
2004”)
Summary
of Key Factors Impacting Fiscal 2005 Results:
Principal
factors that contributed to a $14.4 million (47.1%) decrease in
operating
income, which are discussed in greater detail in the following
section,
were:
·
|
Lower
finished product sales prices,
|
·
|
Lower
raw material volume,
|
·
|
Higher
natural gas and diesel fuel expense, and
|
·
|
Prior
year insurance settlement with certain of the Company’s past
insurers.
|
These
decreases to operating income were partially offset by:
·
|
Lower
raw material prices, and
|
·
|
Improved
recovery of collection expense.
|
Summary
of Key Indicators of Fiscal 2005 Performance:
Principal
indicators that management routinely monitors and compares to previous
periods
as an indicator of problems or improvements in operating results
include:
·
|
Finished
product commodity prices quoted on the Jacobsen index,
|
·
|
Raw
material volume,
|
·
|
Production
volume and related yield of finished product,
|
·
|
Natural
gas prices quoted on the NYMEX index,
|
·
|
Collection
fees and collection operating expense, and
|
·
|
Factory
operating expenses.
|
These
indicators and their importance are discussed below in greater
detail.
Prices
for finished product commodities that the Company produces are
quoted each
business day on the Jacobsen index, an established trading exchange
price
publisher. These finished products are MBM, BFT and YG. The prices
quoted are
for delivery of the finished product at a specified location. These
prices are
relevant because they provide an indication of a component of revenue
and
achievement of business plan benchmarks on a daily basis. The Company’s actual
sales prices for its finished products may vary from the Jacobsen
index because
the Company’s finished products are delivered to multiple locations in different
geographic regions which utilize different price indexes. Average
Jacobsen
prices (at the specified delivery point) for Fiscal 2005, compared
to average
Jacobsen prices for Fiscal 2004 follow:
|
Avg.
Price
Fiscal
2005
|
Avg.
Price
Fiscal
2004
|
Increase/
(Decrease)
|
%
Change
|
MBM
(Illinois)
|
$167.53/ton
|
$190.36
/ton
|
$(22.83/ton)
|
(12.0%)
|
BFT
(Chicago)
|
$
17.46/cwt
|
$
17.95 /cwt
|
$(0.49/cwt)
|
(2.7%)
|
YG
(Illinois)
|
$
14.44/cwt
|
$
15.12 /cwt
|
$(0.68/cwt)
|
(4.5%)
|
The
decrease in the average prices of the finished products the Company
sells had an
unfavorable impact on revenue which is partially offset by a positive
impact to
the Company’s raw material cost, due to formula pricing arrangements which
compute raw material cost based upon the price of finished product.
Raw
material volume represents the quantity (pounds) of raw material
collected from
suppliers, including beef, pork, poultry, and used cooking oils.
Raw material
volumes provide an indication of future production of finished
products
available for sale and are a component of potential future revenue.
Finished
product production volumes are the end result of the Company’s production
processes, and directly impact goods available for sale, and thus
become an
important component of sales revenue. Yield on production is a
ratio of
production volume (pounds) divided by raw material volume (pounds)
and provides
an indication of effectiveness of the Company’s production process. Factors
impacting yield on production include quality of raw material and
warm weather
during summer months, which rapidly degrades raw material. Both
of these factors
negatively impacted the Company’s yield during Fiscal 2005.
Natural
gas commodity prices are quoted each day on the NYMEX exchange
for future months
of delivery of natural gas. The prices are important to the Company
because
natural gas is a major component of factory operating costs and
natural gas
prices are an indicator of achievement of the Company’s business plan. Average
NYMEX pricing for natural gas for the last two fiscal years are
set forth
below.
|
Avg.
Price
Fiscal
2005
|
Avg.
Price
Fiscal
2004
|
Increase
|
%
Increase
|
Natural
Gas
|
$8.62
/mmbtu
|
$6.14
/mmbtu
|
$2.48
/mmbtu
|
40.4%
|
The
Company charges collection fees which are included in net sales
in order to
offset a portion of the expense incurred in collecting raw material.
Each month
the Company monitors both the collection fee charged to suppliers,
which is
included in net sales, and collection expense, which is included
in cost of
sales. The importance of monitoring collection fees and collection
expense is
that they provide an indication of achievement of the Company’s business
plan.
The
Company incurs factory operating expenses which are included in
cost of sales.
Each month the Company monitors factory operating expense. The
importance of
monitoring factory operating expense is that it provides an indication
of
achievement of the Company’s business plan.
Net
Sales. The
Company collects and processes animal by-products (fat, bones and
offal) and
used restaurant cooking oil to produce finished products of BFT,
MBM and YG.
Sales are significantly affected by finished goods prices, quality
and mix of
raw material, and volume of raw material. Net sales include the
sales of
produced finished goods, collection fees, grease trap services,
and finished
goods purchased for resale.
During
Fiscal 2005, net sales decreased by $11.3 million (3.5%) to $308.9
million as
compared to $320.2 million during Fiscal 2004. The decrease in
net sales was
primarily due to the following increases/(decreases) (in millions
of dollars):
|
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Lower
finished goods prices
|
|
|
$
(7.5
|
)
|
|
$
(7.8
|
)
|
|
$
-
|
|
|
$
(15.3
|
)
|
Lower
raw material volume
|
|
|
(2.7
|
)
|
|
(1.5
|
)
|
|
-
|
|
|
(4.2
|
)
|
Lower
yields on production
|
|
|
(2.7
|
)
|
|
0.2
|
|
|
-
|
|
|
(2.5
|
)
|
Improved
recovery of collection expenses
|
|
|
2.7
|
|
|
3.0
|
|
|
-
|
|
|
5.7
|
|
Management
fees and third party revenue
|
|
|
-
|
|
|
0.8
|
|
|
-
|
|
|
0.8
|
|
Purchases
of finished product for resale
|
|
|
3.2
|
|
|
0.8
|
|
|
-
|
|
|
4.0
|
|
Other
sales decreases
|
|
|
-
|
|
|
0.2
|
|
|
-
|
|
|
0.2
|
|
Product
transfers
|
|
|
(1.7
|
)
|
|
1.7
|
|
|
-
|
|
|
-
|
|
|
|
|
$
(8.7
|
)
|
|
$
(2.6
|
)
|
|
$
-
|
|
|
$
(11.3
|
)
|
Cost
of Sales and Operating Expenses.
Cost of
sales and operating expenses include the cost of raw material,
the cost of
product purchased for resale, and the cost to collect, which includes
diesel
fuel and processing costs including natural gas. The Company utilizes
both fixed
and formula pricing methods for the purchase of raw materials.
Fixed prices are
adjusted where possible for changes in competition and significant
changes in
finished goods market conditions, while raw materials purchased
under formula
prices are correlated with specific finished goods prices. Energy
costs, particularly diesel fuel and natural gas, are significant
components of
the Company’s cost structure. The Company has the ability to burn alternative
fuels at the plants to help manage the Company’s price exposure to volatile
energy markets.
During
Fiscal 2005, cost of sales and operating expenses increased $3.8
million (1.6%)
to $241.7 million as compared to $237.9 million during Fiscal 2004.
The increase
in cost of sales and operating expenses was primarily due to the
following (in
millions of dollars):
|
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Higher
energy costs, primarily natural gas
|
|
|
$
7.0
|
|
|
$
2.2
|
|
|
$
-
|
|
|
$
9.2
|
|
Purchases
of finished product for resale
|
|
|
3.2
|
|
|
0.8
|
|
|
-
|
|
|
4.0
|
|
Prior
year insurance settlement with certain of
the
Company’s past insurers
|
|
|
-
|
|
|
-
|
|
|
2.8
|
|
|
2.8
|
|
Other
|
|
|
0.6
|
|
|
0.6
|
|
|
(0.5
|
)
|
|
0.7
|
|
Third
party cost of service
|
|
|
-
|
|
|
0.7
|
|
|
-
|
|
|
0.7
|
|
Sewer
and trap disposal
|
|
|
(0.1
|
)
|
|
1.0
|
|
|
-
|
|
|
0.9
|
|
Lower
raw material prices
|
|
|
(7.4
|
)
|
|
(6.0
|
)
|
|
-
|
|
|
(13.4
|
)
|
Lower
raw material volume
|
|
|
(0.8
|
)
|
|
(0.3
|
)
|
|
-
|
|
|
(1.1
|
)
|
Payroll
and related benefits
|
|
|
(1.3
|
)
|
|
1.3
|
|
|
-
|
|
|
-
|
|
Product
transfers
|
|
|
(1.7
|
)
|
|
1.7
|
|
|
-
|
|
|
-
|
|
|
|
|
$
(0.5
|
)
|
|
$
2.0
|
|
|
$
2.3
|
|
|
$
3.8
|
|
Selling,
General and Administrative Expenses. Selling,
general and administrative expenses were $35.2 million during Fiscal
2005, a
$1.3 million decrease (3.6%) from $36.5 million during Fiscal 2004,
primarily
due to the following (in millions of dollars):
|
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Payroll
and related benefits expense
|
|
|
$
0.3
|
|
|
$
0.4
|
|
|
$
(2.2
|
)
|
|
$
(1.5
|
)
|
Lower
audit fees
|
|
|
-
|
|
|
-
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Other
expenses
|
|
|
0.2
|
|
|
0.3
|
|
|
(0.6
|
)
|
|
(0.1
|
)
|
Higher
legal and professional fees
|
|
|
-
|
|
|
-
|
|
|
0.5
|
|
|
0.5
|
|
|
|
|
$
0.5
|
|
|
$
0.7
|
|
|
$
(2.5
|
)
|
|
$
(1.3
|
)
|
Depreciation
and Amortization. Depreciation
and amortization charges increased $0.6 million (4.0%) to $15.8
million during
Fiscal 2005 as compared to $15.2 million during Fiscal 2004. The
increase is
primarily due to capital expenditure increases from the prior year.
Interest
Expense.
Interest
expense was $6.2 million during Fiscal 2005 compared to $6.8 million
during
Fiscal 2004, a decrease of $0.6 million (8.8%). A summary of items
contributing
to the net decrease in interest expense follows (in millions of
dollars):
|
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Decrease
in preferred stock dividends and accretion
|
|
|
$
-
|
|
|
$
-
|
|
|
$
(0.4
|
)
|
|
$
(0.4
|
)
|
Capitalized
interest
|
|
|
-
|
|
|
-
|
|
|
(0.3
|
)
|
|
(0.3
|
)
|
Other
increases
|
|
|
-
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
$
-
|
|
|
$
-
|
|
|
$
(0.6
|
)
|
|
$
(0.6
|
)
|
The
decrease in interest expense is partially due to reduced preferred
stock
dividends and accretion that was charged to interest expense as
a result of
application of SFAS 150, which was adopted the first day of the
third quarter of
Fiscal 2003. The Company’s outstanding preferred stock was redeemed during the
second quarter of Fiscal 2004.
Other
Income/Expense.
Other
income was $0.9 million in Fiscal 2005, a $1.2 million increase
in income from
other expense of $0.3 million in Fiscal 2004. The increase in other
income in
Fiscal 2005 is primarily due to the following (in millions of
dollars):
|
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Decrease
in gain on extinguishment of bank debt
|
|
|
$
-
|
|
|
$
-
|
|
|
$
(1.3
|
)
|
|
$
(1.3
|
)
|
Decrease
in loss on early redemption of preferred
stock
|
|
|
-
|
|
|
-
|
|
|
1.7
|
|
|
1.7
|
|
Increase
in gain on disposal of assets
|
|
|
-
|
|
|
-
|
|
|
0.2
|
|
|
0.2
|
|
Increase
in interest income
|
|
|
-
|
|
|
-
|
|
|
0.7
|
|
|
0.7
|
|
Decrease
in other expense
|
|
|
-
|
|
|
-
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
|
|
$
-
|
|
|
$
-
|
|
|
$
1.2
|
|
|
$
1.2
|
|
Interest
income increased by $0.7 million in Fiscal 2005 as a result of
the investment of
the cash on the balance sheet. Also included in other income in
Fiscal 2005 is
the increase in gain on the sale of property and equipment of approximately
$0.2
million, which included the sale of the Company’s properties in Tyler, Texas,
and Sunnyside, Washington.
Included
in other income in Fiscal 2004 was a gain on extinguishment of
debt of $1.3
million, which resulted from retirement of debt with a carrying
value of $20.1
million with a cash payment of $18.0 million, due to SFAS 15 accounting,
net of
related deferred loan costs of $0.8 million, also extinguished
upon payment of
debt. Also included in other income in Fiscal 2004 was a gain on
the sale of
property and equipment of approximately $0.3 million, which included
the sale of
the Company’s land in Oklahoma City, Oklahoma.
In
Fiscal
2004, the Company’s senior credit agreement required early redemption of the
Company’s preferred stock outstanding at its face value of $10.0 million
and
accumulated dividends of approximately $1.2 million, or total aggregate
consideration of $11.2 million. The Company’s preferred stock had a carrying
value of approximately $9.5 million at April 3, 2004. Subsequent
to April 3,
2004, the Company incurred a loss of approximately $1.7 million,
which was
included in other expense in Fiscal 2004 on the early redemption
of the
preferred stock.
Income
Taxes.
The
Company recorded income tax expense of $3.2 million for Fiscal
2005, compared to
income tax expense of $9.2 million recorded in Fiscal 2004, a decrease
of $6.0
million (65.2%), primarily due to the decreased pre-tax earnings
of the Company
in Fiscal 2005. The effective tax rate of 29.3% for 2005 differed
from the
statutory rate of 34% primarily due to the reversal of approximately
$700,000 in
reserves for tax contingencies as a result of the expiration of
the statute of
limitations for these contingencies. The impact of state income
taxes for 2005
of $0.4 million was offset by certain state tax credits recorded
in 2005 of $0.3
million. The effective tax rate of 39.3% for 2004 differed from
the statutory
rate of 35% primarily due to state income taxes.
Discontinued
Operations.
The
Company recorded a slight profit from discontinued operations,
net of applicable
taxes, related to the closure and sale of certain assets of the
Company’s
London, Ontario, Canadian subsidiary in Fiscal 2005, compared to
a loss from
discontinued operations of approximately $0.4 million in Fiscal
2004. The loss
in Fiscal 2004 was primarily due to accrued severance and pension
costs accrued
as a result of the decision to close the Company’s London, Ontario, Canadian
subsidiary.
FINANCING,
LIQUIDITY, AND CAPITAL RESOURCES
On
April
7, 2006, the Company entered into a new $175 million credit agreement
(the
“Credit Agreement”) with new lenders that replaced the senior credit agreement
executed in April 2004. The principal components of the Credit
Agreement consist
of the following.
· |
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 revolver 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 December 30, 2006, 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
Credit Agreement bears interest at a rate per annum based
on the greater
of (a) the prime rate and (b) the Federal Funds Effective
Rate 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
London Inter-Bank Offer Rate ("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.
|
· |
The
Credit Agreement provided sufficient liquidity to complete
the Transaction
and to retire the Company’s senior subordinated notes. Additionally, the
Credit Agreement has an extended term, lower interest
rates, fewer
restrictions on investments, and improved flexibility
for paying dividends
or repurchasing Company stock (all of which are subject
to the terms of
the Credit Agreement) than the Company’s prior credit
facility.
|
· |
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.
|
On
December 31, 2003, the Company issued senior subordinated notes
in the amount of
$35.0 million.
On
June
1, 2006, the Company retired the senior subordinated notes using
money available
under the Credit Agreement and incurred charges of $1.925 million
for prepayment
fees and approximately $1.1 million to write off deferred loan
costs.
The
Company’s Credit Agreement consists of the following elements at December
30,
2006 (in thousands):
Credit
Agreement:
|
|
|
|
|
Term
Loan
|
|
$
|
47,500
|
|
Revolving
Credit Facility:
|
|
|
|
|
Maximum
availability
|
|
$
|
125,000
|
|
Borrowings
outstanding
|
|
|
35,500
|
|
Letters
of credit issued
|
|
|
18,391
|
|
Availability
|
|
$
|
71,109
|
|
The
obligations under the Credit Agreement are guaranteed by Darling
National LLC, a
Delaware limited liability company and a wholly-owned subsidiary
of the Company
(“Darling National”), and are secured by substantially all of the property of
the Company and Darling National, including a pledge of all equity
interests in
Darling National. As of December 30, 2006, the Company was in compliance
with
all of the covenants contained in the Credit Agreement.
The
classification of long-term debt in the Company’s December 30, 2006 consolidated
balance sheet is based on the contractual repayment terms of the
debt issued
under the Credit Agreement.
On
December 30, 2006, the Company had working capital of $17.9 million
and its
working capital ratio was 1.31 to 1 compared to working capital
of $40.4 million
and a working capital ratio of 1.95 to 1 on December 31, 2005.
At December 30,
2006, the Company had unrestricted cash of $5.3 million and funds
available
under the revolving credit facility of $71.1 million, compared
to unrestricted
cash of $36.0 million and funds available under the revolving credit
facility of
$35.1 million at December 31, 2005.
Net
cash
provided by operating activities was $28.8 million and $24.6 million
for the
fiscal years ended December 30, 2006 and December 31, 2005, respectively,
an
increase of $4.2 million, primarily due to an increase in non-cash
expenses
included in net income of approximately $6.3 million and changes
in operating
assets and liabilities, which includes a reduction in accounts
receivable of
approximately $3.6 million, a reduction in accounts payable of
approximately
$2.6 million and an increase in prepaid expenses of approximately
$4.1 million.
Cash used by investing activities was $91.2 million during Fiscal
2006, compared
to $20.6 million in Fiscal 2005, an increase of $70.6 million,
primarily due to
$80.2 million in cash used for the Transaction. Net cash provided
by financing
activities was $31.7 million in the year ended December 30, 2006
compared to
cash used of $5.2 million in the year ended December 31, 2005,
an increase of
cash provided of $36.9 million, principally due to borrowing related
to the
acquisition of NBP in the second quarter of Fiscal 2006.
Capital
expenditures of $11.8 million were made during Fiscal 2006 as compared
to $21.4
million in Fiscal 2005, a decrease of $9.6 million (44.9%) primarily
due to less
expenditures in Fiscal 2006 on two major projects at the Fresno,
California and
Wahoo, Nebraska facilities that were identified over normal maintenance
and
compliance capital expenditures in Fiscal 2005. Capital expenditures
related to
compliance with environmental regulations were $0.8 million in
Fiscal 2006, $1.9
million in Fiscal 2005 and $1.5 million in Fiscal 2004. In addition,
the Company
continues to explore various alternatives in regards to the use
of its end
products in bio-fuel renewable energies.
Based
upon the underlying terms of the Credit Agreement, approximately
$5.0 million in
current debt, which is included in current liabilities on the Company’s balance
sheet at December 30, 2006, will be due during the next twelve
months,
consisting of scheduled quarterly installment payments of $1.25
million.
On
April
7, 2006, the Company repaid the balance on the term loan facility
under the old
senior credit agreement and incurred a write-off of deferred loan
costs of
approximately $1.5 million.
Based
upon the annual actuarial estimate, current accruals, and claims
paid during
Fiscal 2006, the Company has accrued approximately $5.7 million
it expects will
become due during the next twelve months in order to meet obligations
related to
the Company’s self insurance reserves and accrued insurance obligations, which
are included in current accrued expenses at December 30, 2006.
The self
insurance reserve is composed of estimated liability for claims
arising for
workers’ compensation and for auto liability and general liability claims.
The
self insurance reserve liability is determined annually, based
upon a third
party actuarial estimate. The actuarial estimate may vary from
year to year, due
to changes in costs of health care, the pending number of claims
and other
factors beyond the control of management of the Company. No assurance
can be
given that the Company’s funding obligations under its self insurance reserve
will not increase in the future.
Based
upon current actuarial estimates, the Company expects to make $0.5
million in
payments in order to meet minimum pension funding requirements
during fiscal
2007. The minimum pension funding requirements are determined annually,
based
upon a third party actuarial estimate. The actuarial estimate may
vary from year
to year, due to fluctuations in return on investments or other
factors beyond
the control of management of the Company or the administrator of
the Company’s
pension funds. No assurance can be given that the minimum pension
funding
requirements will not increase in the future.
In
August
2006, the Pension Protection Act of 2006 (“PPA”) was signed into law and goes
into effect in January 2008. The stated goal of the PPA is to improve
the
funding of pension plans. Plans in an under-funded status will
be required to
increase employer contributions to improve the funding level within
PPA
timelines. The Company participates in several multi-employer 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. Current
information
with respect to the Company’s proportionate share of the over and under-funded
status of all actuarially computed value of vested benefits over
these pension
plans’ net assets is not available. The Company knows that three of these
multi-employer plans were under-funded as of the latest available
information,
some of which is over a year old. The Company has no ability to
compel the plan
trustees to provide more current information. While we have no
ability to
calculate a possible current liability for under-funded multi-employer
plans
that could terminate, the amounts could be material.
The
Company has the ability to burn alternative fuels at some of its
plants to help
manage the Company’s exposure to high natural gas prices. Due to high natural
gas costs, during Fiscal 2006 the Company used alternative fuels
at some of its
plants that have the ability to burn alternative fuels. The Company
expects to
continue to burn alternative fuels at these plants in future periods
as long as
natural gas prices remain high. In addition, the Company began
to file in the
fourth quarter of 2006 with the government for the Alternative
Fuel Mixture Tax
Credits that started on October 1, 2006 for the use of alternative
fuel mixtures
related to the Company’s burning fat to fuel boilers. If the Company’s
application to the IRS for the utilization of Alternative Fuel
Mixture Tax
Credits in fiscal 2007 is approved, the recovery amounts received
by the Company
related to the fourth quarter of 2006 was insignificant. Depending
on natural
gas prices and the market price of fat in fiscal 2007 the Company
will make the
decision on whether to burn fat or natural gas based on their respective
prices.
If the Company’s application to the IRS for the utilization of Alternative Fuel
Mixture Tax Credits is approved, the recovery amounts received,
if any, from the
government for Alternative Fuel Mixture Tax Credits in fiscal 2007
could be
material.
The
Company’s management believes that cash flows from operating activities
consistent with the current level in Fiscal 2006, unrestricted
cash and funds
available under the Credit Agreement will be sufficient to meet
the Company’s
working capital needs and maintenance and compliance related capital
expenditures through the next twelve months. Numerous factors could
have adverse
consequences to the Company that cannot be estimated at this time,
such as; any
additional occurrence of BSE in the U.S. or elsewhere; the occurrence
of Bird
Flu in the U.S.; reductions in raw material volumes available to
the Company due
to weak margins in the meat processing industry or otherwise; unforeseen
new
U.S. or foreign regulations affecting the rendering industry (including
new or
modified BSE or Bird Flu regulations); increased contributions
to the Company’s
multi-employer defined benefit pension plans as required by the
PPA; and/or
unfavorable export markets. These factors, coupled with high prices
for natural
gas and diesel fuel, among others, could either positively or negatively
impact
the Company’s results of operations in 2007 and thereafter. The Company cannot
provide assurance that the cash flows from operating activities
generated in
Fiscal 2006 are indicative of the future cash flows from operating
activities
which will be generated by the Company’s operations. The Company reviews the
appropriate use of unrestricted cash periodically. Although no
decision has been
made as to non-ordinary course cash usages at this time, potential
usages could
include opportunistic capital expenditures and/or acquisitions,
investments in
response to governmental regulations relating to BSE or other regulations,
unforeseen problems relating to the integration of NBP, and paying
dividends or
repurchasing stock, subject to limitations under the Credit Agreement,
as well
as suitable cash conservation to withstand adverse commodity
cycles.
The
current economic environment in the Company’s markets has the potential to
adversely impact its liquidity in a variety of ways, including
through reduced
sales, potential inventory buildup and/or higher operating costs.
The
principal products that the Company sells are commodities, the
prices of which
are based on established commodity markets and are subject to volatile
changes.
Any decline in these prices has the potential to adversely impact
the Company’s
liquidity. Any of further disruption in international sales, a
decline in
commodities prices, or further increases in energy prices resulting
from the
ongoing war with Iraq and the subsequent political instability
and uncertainty
and the impact of the Pension Protection Act of 2006 has the potential
to
adversely impact the Company’s liquidity. A decline in commodities prices, a
rise in energy prices, a slowdown in the U.S. or international
economy, or other
factors, including political instability in the Middle East or
elsewhere, and
the macroeconomic effects of these events, could cause the Company
to fail to
meet management’s expectations or could cause liquidity concerns.
CONTRACTUAL
OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The
following table summarizes the Company’s expected material contractual payment
obligations, including both on- and off-balance sheet arrangements
at December
30, 2006 (in thousands):
|
Total
|
Less
than
1
Year
|
1
-
3
Years
|
3
-
5
Years
|
More
than
5
Years
|
Contractual
obligations:
|
|
|
|
|
|
Long-term
debt obligations
|
$
83,004
|
$
5,004
|
$
10,000
|
$45,500
|
$
22,500
|
Operating
lease obligations
|
36,052
|
8,269
|
12,402
|
5,630
|
9,751
|
Estimated
accrued interest payable
|
25,891
|
6,241
|
11,379
|
7,803
|
468
|
Purchase
commitments
|
5,205
|
5,205
|
-
|
-
|
-
|
Pension
funding obligation (a)
|
536
|
536
|
-
|
-
|
-
|
Other
long-term liabilities
|
392
|
159
|
233
|
-
|
-
|
Total
|
$151,080
|
$25,414
|
$34,014
|
$58,933
|
$32,719
|
(a)
Pension funding requirements are determined annually based upon
a third party
actuarial estimate. The Company expects to contribute $0.5 million
to its
pension plan in fiscal 2007. The Company is not able to estimate
pension funding
requirements beyond the next twelve months. The accrued pension
benefit
liability was approximately $18.7 million at the end of Fiscal
2006. The Company
knows that three of the multi-employer pension plans to which it
contributes and
which are not administered by the Company were under-funded as
of the latest
available information, and while we have no ability to calculate
a possible
current liability for the under-funded multi-employer plans to
which the Company
contributes, the amounts could be material.
The
Company’s off-balance sheet contractual obligations and commercial commitments
as of December 30, 2006 relate to operating lease obligations,
letters of
credit, forward purchase agreements, and employment agreements.
The Company has
excluded these items from the balance sheet in accordance with
accounting
principles generally accepted in the U.S.
The
following table summarizes the Company’s other commercial commitments, including
both on- and off-balance sheet arrangements at December 30, 2006.
Other
commercial commitments:
|
|
Standby
letters of credit
|
$
18,391
|
Total
other commercial commitments:
|
$
18,391
|
OFF
BALANCE SHEET OBLIGATIONS
Based
upon underlying purchase agreements, the Company has commitments
to purchase
$5.2 million of finished products and natural gas during fiscal
2007, which are
not included in liabilities on the Company’s balance sheet at December 30, 2006.
These purchase agreements are entered into in the normal course
of the Company’s
business and are not subject to derivative accounting. The commitments
will be
recorded on the balance sheet of the Company when delivery of these
commodities
occurs and ownership passes to the Company during fiscal 2007,
in accordance
with accounting principles generally accepted in the U.S.
Based
upon underlying lease agreements, the Company expects to pay approximately
$8.3
million in operating lease obligations during fiscal 2007 which
are not included
in liabilities on the Company’s balance sheet at December 30, 2006. This amount
includes amounts related to the obligations assumed in connections
with the
Transaction. These lease obligations are included in cost of sales
or selling,
general and administrative expense as the underlying lease obligation
comes due,
in accordance with accounting principles generally accepted in
the
U.S.
CRITICAL
ACCOUNTING POLICIES
The
Company follows certain significant accounting policies when preparing
its
consolidated financial statements. A complete summary of these
policies is
included in Note 1 to the Consolidated Financial Statements included
in this
report.
Certain
of the policies require management to make significant and subjective
estimates
or assumptions these may deviate from actual results. In particular,
management
makes estimates regarding valuation of inventories, estimates of
useful life of
long-lived assets related to depreciation and amortization expense,
estimates
regarding fair value of the Company’s reporting units and future cash flows with
respect to assessing potential impairment of both long-lived assets
and
goodwill, self-insurance, environmental and litigation reserves,
pension
liability, estimates of income tax expense, and estimates of pro-forma
expense
related to stock options granted. Each of these estimates is discussed
in
greater detail in the following discussion.
Inventories
The
Company’s inventories are valued at the lower of cost or market. Finished
product manufacturing cost is calculated using the first-in, first-out
(FIFO)
method, based upon the Company’s raw material costs, collection and factory
production operating expenses, and depreciation expense on collection
and
factory assets. Market values of inventory are estimated at each
plant location,
based upon either the backlog of unfilled sales orders at the balance
sheet
date, or for unsold inventory, upon regional finished product prices
quoted in
the Jacobsen index at the balance sheet date. Estimates of market
value, based
upon the backlog of unfilled sales orders or upon the Jacobsen
index, assume
that the inventory held by the Company at the balance sheet date
will be sold at
the estimated market finished product sales price, subsequent to
the balance
sheet date. Actual sales prices received on future sales of inventory
held at
the end of a period may vary from either the backlog unfilled sales
order price
or the Jacobsen index quotation at the balance sheet date. These
variances could
cause actual sales prices realized on future sales of inventory
to be different
than the estimate of market value of inventory at the end of the
period.
Inventories were approximately $14.6 million and $6.6 million at
December 30,
2006 and December 31, 2005, respectively. The increase in inventory
balances is
primarily due to the Transaction.
Long-Lived
Assets Depreciation and Amortization Expense and Valuation
The
Company’s property, plant and equipment are recorded at cost when acquired.
Depreciation expense is computed on property, plant and equipment
based upon a
straight line method over the estimated useful life of the assets,
which is
based upon a standard classification of the asset group. Buildings
and
improvements are depreciated over a useful life of 15 to 30 years,
machinery and
equipment are depreciated over a useful life of 3 to 10 years and
vehicles are
depreciated over a life of 2 to 6 years. These useful life estimates
have been
developed based upon the Company’s historical experience of asset life utility,
and whether the asset is new or used when placed in service. The
actual life and
utility of the asset may vary from this estimated life. Useful
lives of the
assets may be modified from time to time when the future utility
or life of the
asset is deemed to change from that originally estimated when the
asset was
placed in service. Depreciation expense was approximately $16.1
million, $11.9
million and $11.3 million in fiscal years ending December 30, 2006,
December 31,
2005 and January 1, 2005, respectively. The increase in depreciation
expense as
compared to historical amounts is primarily due to the Transaction.
The
Company’s intangible assets, including permits, routes and non-compete
agreements are recorded at fair value when acquired. Amortization
expense is
computed on these intangible assets based upon a straight line
method over the
estimated useful life of the assets, which is based upon a standard
classification of the asset group. Collection routes are amortized
over a useful
life of 8 to 20 years; non-compete agreements are amortized over
a useful life
of 3 to 10 years; and permits are amortized over a useful life
of 20 years. The
actual economic life and utility of the asset may vary from this
estimated life.
Useful lives of the assets may be modified from time to time when
the future
utility or life of the asset is deemed to change from that originally
estimated
when the asset was placed in service. Intangible asset amortization
expense was
approximately $4.6 million, $3.9 million and $3.9 million in fiscal
years ending
December 30, 2006, December 31, 2005 and January 1, 2005, respectively.
The
increase in intangible amortization expense as compared to historical
amounts is
primarily due to the Transaction.
The
Company reviews the carrying value of long-lived assets for impairment
when
events or changes in circumstances indicate that the carrying amount
of an
asset, or related asset group, may not be recoverable from estimated
future
undiscounted cash flows. Recoverability of assets to be held and
used is
measured by a comparison of the carrying amount of an asset or
asset group to
estimated undiscounted future cash flows expected to be generated
by the asset
or asset group. If the carrying amount of the asset exceeds its
estimated future
cash flows, an impairment charge is recognized by the amount by
which the
carrying amount of the asset exceeds the fair value of the asset.
The
net
book value of property, plant and equipment was approximately $132.1
million and
$85.2 million at December 30, 2006 and December 31, 2005, respectively.
The net
book value of intangible assets was approximately $33.7 million
and $12.5
million at December 30, 2006 and December 31, 2005, respectively.
The increase
in property, plant and equipment, and intangible assets is primarily
due to the
Transaction.
Goodwill
Valuation
The
Company reviews the carrying value of goodwill on a regular basis,
including at
the end of each fiscal year, for indications of impairment at each
reporting
unit that has recorded goodwill as an asset. Impairment is indicated
whenever
the carrying value of reporting unit assets exceeds the estimated
fair value of
reporting unit assets. For purposes of evaluating impairment of
goodwill, the
Company estimates fair value of reporting unit assets at each reporting
unit,
based upon future discounted net cash flows from use of those assets.
In
calculating these estimates, actual historical operating results
and anticipated
future economic factors, such as future business volume, future
finished product
prices, and future operating costs and expenses are evaluated and
estimated as a
component of the calculation of future discounted cash flows for
each reporting
unit with recorded goodwill. The estimates of fair value of assets
at these
reporting units and of future discounted net cash flows from operation
of these
assets could change if actual volumes, prices, costs or expenses
vary from these
estimates. A future reduction of earnings in the reporting units
with recorded
goodwill could result in an impairment charge because the estimate
of fair value
would be negatively impacted by a reduction of earnings at those
reporting
units. Goodwill was approximately $71.9 million and $4.4 million
at December 30,
2006 and December 31, 2005, respectively. The increase in goodwill
is due to the
Transaction.
Self
Insurance, Environmental and Legal Reserves
The
Company’s workers compensation, auto and general liability policies contain
significant deductibles or self insured retentions. The Company
estimates and
accrues for its expected ultimate claim costs related to accidents
occurring
during each fiscal year and carries this accrual as a reserve until
these claims
are paid by the Company. In developing estimates for self insured
losses, the
Company utilizes its staff, a third party actuary and outside counsel
as sources
of information and judgment as to the expected undiscounted future
costs of the
claims. The Company accrues reserves related to environmental and
litigation
matters based on estimated undiscounted future costs. With respect
to the
Company’s self insurance, environmental and litigation reserves, estimates
of
reserve liability could change if future events are different than
those
included in the estimates of the actuary, consultants and management
of the
Company. The reserve for self insurance, environmental and litigation
contingencies included in accrued expenses and other non-current
liabilities was
approximately $21.5 million and $15.0 million at December 30, 2006
and December
31, 2005, respectively. The increase in the reserve for self insurance,
environmental and litigation contingencies included in accrued
expenses, and
other non-current liabilities is primarily due to the acquisition
of
substantially all of the assets of NBP.
Pension
Liability
The
Company provides retirement benefits to employees under separate
final-pay
noncontributory pension plans for salaried and hourly employees
(excluding those
employees covered by a union-sponsored plan), who meet service
and age
requirements. Benefits are based principally on length of service
and earnings
patterns during the five years preceding retirement. Pension expense
and pension
liability recorded by the Company is based upon an annual actuarial
estimate
provided by a third party administrator. Factors included in estimates
of
current year pension expense and pension liability at the balance
sheet date
include estimated future service period of employees, estimated
future pay of
employees, estimated future retirement ages of employees, and the
projected time
period of pension benefit payments. Two of the most significant
assumptions used
to calculate future pension obligations are the discount rate applied
to pension
liability and the expected rate of return on pension plan assets.
These
assumptions and estimates are subject to the risk of change over
time, and each
factor has inherent uncertainties which neither the actuary nor
the Company is
able to control or to predict with certainty.
The
discount rate applied to the Company’s pension liability is the interest rate
used to calculate the present value of the pension benefit obligation.
The
discount rate is based on the yield of long-term corporate fixed
income
securities at the measurement date of October 1 in the year of
calculation. The
Company considered the Citigroup Pension Discount Liability Index
(5.83% as of
October 1, 2006) as well as the Lehman A/AA/AAA Indices which combined
to
average 5.78% as of October 1, 2006. With estimated liability payment
streams
under the plans being 30 to 40 years out and no bonds available
with maturity
dates that far into the future, but with the yield curve historically
flat, the
Company believes it is appropriate to reference from the Citigroup
and Lehman
bond rates. The weighted average discount rate was 5.75% and 5.5%
at October 1
in Fiscal 2006 and Fiscal 2005, respectively. The net periodic
benefit cost for
fiscal 2007 would increase by approximately $0.8 million if the
discount rate
was 0.5% lower at 5.25%. The net periodic benefit cost for fiscal
2007 would
decrease by approximately $0.7 million if the discount rate was
0.5% higher at
6.25%.
The
expected rate of return on the Company’s pension plan assets is the interest
rate used to calculate future returns on investment of the plan
assets. The
expected return on plan assets is a long-term assumption whose
accuracy can only
be assessed over a long period of time. The weighted average expected
return on
pension plan assets was 8.38% and 8.75% for Fiscal 2006 and Fiscal
2005,
respectively.
The
Company has recorded a pension liability of approximately $18.7
million and
$14.6 million at December 30, 2006 and December 31, 2005, respectively.
The
Company’s net pension cost was approximately $3.7 million, $3.2 million
and $2.7
million for the fiscal years ending December 30, 2006, December
31, 2005 and
January 1, 2005, respectively.
Income
Taxes
In
calculating net income, the Company includes estimates in the calculation
of tax
expense, the resulting tax liability and in future utilization
of deferred tax
assets that arise from temporary timing differences between financial
statement
presentation and tax recognition of revenue and expense. The Company’s deferred
tax assets include a net operating loss carry-forward which is
limited to
approximately $0.7 million per year in future utilization due to
the change in
majority control resulting from the May 2002 recapitalization of
the Company.
Valuation allowances for deferred tax assets are recorded when
it is more likely
than not that deferred tax assets will expire before they are utilized
and the
tax benefit is realized. Based upon the Company’s evaluation of these matters, a
significant portion of the Company’s net operating loss carry-forwards will
expire unused. The valuation allowance established to provide a
reserve against
these deferred tax assets was approximately $9.4 million and $19.1
million at
December 30, 2006 and December 31, 2005, respectively. The decrease
in the
Company’s valuation allowance is primarily due to the expiration of the
Company’s ability to utilize its net operating losses.
Stock
Option Expense
Effective
January 1, 2006, the Company adopted the provisions of Statement
of Financial
Accounting Standard No. 123 (revised 2004),
Share-Based Payment (“SFAS
123(R)”) and related interpretations, using the modified prospective method.
The
calculation of expense of stock options issued utilizes the Black-Scholes
mathematical model which estimates the fair value of the option
award to the
holder and the compensation expense to the Company, based upon
estimates of
volatility, risk-free rates of return at the date of issue and
projected vesting
of the option grants. The Company recorded compensation expense
related to stock
options expense for the year ended December 30, 2006 of approximately
$0.5
million. Prior to adopting SFAS 123(R) the Company accounted for
its stock
options under APB Opinion No. 25 and related interpretations, which
utilized the
intrinsic value method. Under the intrinsic-value method compensation
expense is
recorded only to the extent that the grant price is less than market
on the
measurement date. Accordingly, the Company would have recorded
additional
compensation expense of $0.6 million for the years ended December
31, 2005 and
January 1, 2005, respectively, had the Company accounted for stock
options using
the fair value-based method.
NEW
ACCOUNTING PRONOUNCEMENTS
In
July
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. The provisions of FIN 48
are effective
as of the beginning of the Company’s 2007 fiscal year, with the cumulative
effect of the change in accounting principle recorded as an adjustment
to
opening retained earnings. The Company is currently evaluating
the impact of
adopting FIN 48 on the consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
(“SAB
108”), to address diversity in practice in quantifying financial statement
misstatements. SAB 108 requires that registrants quantify uncorrected
misstatements using both the “rollover” and “iron curtain” methods, with
adjustment required if either method results in a misstatement
that is material.
The Company has identified a $2.8 million overstatement of income
tax
liabilities. The Company has not been able to determine how these
excess
liabilities arose; however, the Company has determined that these
liabilities
were recorded prior to 2002. The Company had previously concluded
that the $2.8
million misstatement was immaterial using the rollover method for
evaluating
misstatements. As a result of adopting SAB 108, the Company has
corrected the
misstatement by recording a cumulative effect adjustment to retained
earnings at
the beginning of Fiscal 2006.
In
September 2006, the FASB issued Statement of Financial Accounting
Standards No.
157,
Fair
Value Measurements
(“SFAS
157”),
which
defines fair value, establishes a framework for measuring fair
value, and
expands disclosures about fair value measurements. The provisions
of SFAS 157
are effective as of the beginning of fiscal year 2008. The Company
is currently
evaluating the impact of adopting SFAS 157 on the consolidated
financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting
Standards No.
158, Employers’
Accounting for Defined Benefit Pension and Other Post-Retirement
Plans - an
Amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS
158”),
which
requires that the Company recognize the over-funded or under-funded
status of
the Company’s defined benefit post-retirement plans as an asset or liability
in
the Company’s 2006 year-end balance sheet, with changes in the funded status
recognized through comprehensive income in the year in which they
occur.
Based
on
the funded status of the Company’s pension plans as of December 30, 2006, the
adoption of SFAS 158 increased the Company’s total assets by approximately $2.2
million, increased total liabilities by approximately $6.7 million
and reduced
total stockholder’s equity by approximately $4.5 million, net of taxes. The
adoption of funded status portion of SFAS 158 did not affect the
Company’s
results of operations. SFAS
158
also requires the Company to measure the funded status of its defined
benefit
plans as of the year-end balance sheet date no later than 2008.
The Company has
not adopted the measurement provision of SFAS 158 as of December
30, 2006. The
Company does not expect the impact of the change in measurement
date, when
adopted, to have a material impact on the consolidated financial
statements.
FORWARD
LOOKING STATEMENTS
This
Annual Report on Form 10-K includes “forward-looking” statements that involve
risks and uncertainties. The words “believe,” “anticipate,” “expect,”
“estimate,” “intend,” and similar expressions identify forward-looking
statements. All statements other than statements of historical
facts included in
the Annual Report on Form 10-K, including, without limitation,
the statements
under the section entitled “Business,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Legal Proceedings” and
located elsewhere herein regarding industry prospects and the Company’s
financial position are forward-looking statements. Actual results
could differ
materially from those discussed in the forward-looking statements
as a result of
certain factors, including many that are beyond the control of
the Company.
Although the Company believes that the expectations reflected in
these
forward-looking statements are reasonable, it can give no assurance
that these
expectations will prove to be correct.
In
addition to those factors discussed under the heading “Risk Factors” in Item 1A
of this report and elsewhere in this report, and in the Company’s other public
filings with the SEC, important factors that could cause actual
results to
differ materially from the Company’s expectations include: the Company’s
continued ability to obtain sources of supply for its rendering
operations;
general economic conditions in the American, European and Asian
markets; prices
in the competing commodity markets which are volatile and are beyond
the
Company’s control; the impact of the Pension Protection Act of 2006 and
BSE and
its impact on finished product prices, export markets and government
regulation
are still evolving and are beyond the Company’s control. Among other things,
future profitability may be affected by the Company’s ability to grow its
business, which faces competition from companies that may have
substantially
greater resources than the Company.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
Market
risks affecting the Company are exposures to changes in prices
of the finished
products the Company sells, interest rates on debt, availability
of raw material
supply and the price of natural gas used in the Company’s plants. Raw materials
available to the Company are impacted by seasonal factors, including
holidays,
when raw material volume declines; warm weather, which can adversely
affect the
quality of raw material processed and finished products produced;
and cold
weather, which can impact the collection of raw material. Predominantly
all of
the Company’s finished products are commodities that are generally sold at
prices prevailing at the time of sale.
The
Company makes limited use of derivative instruments to manage cash
flow risks
related to interest and natural gas expense. The Company uses interest
rate
swaps with the intent of managing overall borrowing costs by reducing
the
potential impact of increases in interest rates on floating-rate
long-term debt.
The interest rate swaps are subject to the requirements of Statement
of
Financial Accounting Standards
No. 133, Accounting
for Derivative Instruments and Hedging Activities (“SFAS
133”). The
Company’s natural gas instruments are not subject to the requirements of
SFAS
133,
because
the natural gas instruments qualify as normal purchases as defined
in the SFAS
133. The
Company does not use derivative instruments for trading purposes.
On
May
19, 2006, the Company entered into two interest rate swap agreements
that are
considered cash flow hedges according to SFAS 133. Under the terms
of these swap
agreements, beginning June 30, 2006, the cash flows from the Company’s $50.0
million floating-rate term loan facility under the Credit Agreement
have been
exchanged for fixed rate contracts that bear interest, payable
quarterly. The
First swap agreement for $25.0 million matures April 7, 2012 and
bears interest
at 5.42%, which does not include the borrowing spread per the Credit
Agreement,
with amortizing payments that mirror the term loan facility. The
second swap
agreement for $25.0 million matures April 7, 2012 and bears interest
at 5.415%,
which does not include the borrowing spread per the Credit Agreement,
with
amortizing payments that mirror the term loan facility. The Company’s receive
rate on each swap agreement is based on three-month LIBOR. At December
30, 2006,
the fair value of these interest swap agreements was $0.7 million
and is
included in non-current liabilities on the balance sheet, with
an offset
recorded to accumulated other comprehensive income.
As
of
December 30, 2006, the Company had forward purchase agreements
in place for
purchases of approximately $4.8 million of natural gas for the
months of January
2007 through March 2007. As of December 30, 2006, the Company had
forward
purchase agreements in place for purchases of approximately $0.4
million of
finished product in the month of January 2007.
Interest
Rate Sensitivity
The
Company’s obligations subject to fixed or variable interest rates include
(in
thousands, except interest rates):
|
|
|
Total
|
|
|
Less
than
1
Year
|
|
|
1
- 3
Years
|
|
|
3
- 5
Years
|
|
|
More
than
5
Years
|
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate
|
|
|
$
4
|
|
|
$
4
|
|
|
$
-
|
|
|
$
-
|
|
|
$
-
|
|
Average
interest rate
|
|
|
4.90
|
%
|
|
4.90
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
Variable
rate
|
|
|
83,000
|
|
|
5,000
|
|
|
10,000
|
|
|
45,500
|
|
|
22,500
|
|
Average
interest rate
|
|
|
7.25
|
%
|
|
7.13
|
%
|
|
7.13
|
%
|
|
7.35
|
%
|
|
7.13
|
%
|
Total
|
|
|
$
83,004
|
|
|
$
5,004
|
|
|
$
10,000
|
|
|
$
45,500
|
|
|
$
22,500
|
|
The
Company’s fixed rate debt obligations consist of an equipment note that
accrues
interest at an annual fixed rate of 4.90%. This obligation is not
affected by
changes in interest rates.
The
Company has $83.0 million in variable rate debt, which includes
$47.5 million
whose interest risk is hedged by interest rate swaps discussed
above, that
represents the balance outstanding at December 30, 2006 under the
Credit
Agreement. The remaining portion of the Company’s debt equaling $35.5 million is
sensitive to fluctuations in interest rates. The Company estimates
that a 1%
increase in interest rates will increase the Company’s interest expense by
approximately $0.4 million in fiscal 2007.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
43
|
|
Report
of Independent Registered Public Accounting Firm on Internal
Control
Over
Financial
Reporting
|
44
|
|
Consolidated
Balance Sheets -
|
|
|
December
30, 2006 and December 31, 2005
|
46
|
|
Consolidated
Statements of Operations -
|
|
|
Three
years ended December 30, 2006
|
47
|
|
Consolidated
Statements of Stockholders’ Equity -
|
|
|
Three
years ended December 30, 2006
|
48
|
|
Consolidated
Statements of Cash Flows -
|
|
|
Three
years ended December 30, 2006
|
49
|
|
Notes
to Consolidated Financial Statements
|
50
|
|
|
|
|
Financial
Statement Schedule:
|
|
|
II
- Valuation and Qualifying Accounts -
|
|
|
Three
years ended December 30, 2006
|
76
|
|
|
|
All
other
schedules are omitted since the required information is not present
or is not
present in amounts sufficient to require submission of the schedule,
or because
the information required is included in the consolidated financial
statements
and notes thereto.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Darling
International Inc.:
We
have
audited the consolidated financial statements of Darling International
Inc. and
subsidiaries as listed in the accompanying index. In connection
with our audits
of the consolidated financial statements, we also have audited
the financial
statement schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule
based on our
audits.
We
conducted our audits in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audit to obtain reasonable assurance about whether
the financial
statements are free of material misstatement. An audit includes
examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial
statements. An audit also includes assessing the accounting principles
used and
significant estimates made by management, as well as evaluating
the overall
financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above
present fairly,
in all material respects, the financial position of Darling International
Inc.
and subsidiaries as of December 30, 2006 and December 31, 2005,
and the results
of their operations and their cash flows for each of the years
in the three-year
period ended December 30, 2006, in conformity with U.S. generally
accepted
accounting principles. Also in our opinion, the related financial
statement
schedule, when considered in relation to the basic consolidated
financial
statements taken as a whole, present fairly, in all material respects,
the
information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, effective
January
1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123
(R), Share-Based
Payment.
As
discussed in Note 18 to the consolidated financial statements,
effective January
1, 2006, the Company adopted the provision of Securities and Exchange
Commission
Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements When Quantifying Misstatements
in the
Current Year Financial Statements.
As
discussed in Note 13 to the consolidated financial statements,
effective
December 30, 2006, the Company adopted Statement of Financial Accounting
Standards No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
We
also
have audited, in accordance with the standards of the Public Company
Accounting
Oversight Board (United States), the effectiveness of Darling International
Inc.’s internal control over financial reporting as of December 30,
2006, based
on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO),
and our report dated March 15, 2007 expressed an unqualified opinion
on
management’s assessment of, and the effective operation of, internal control
over financial reporting.
/s/
KPMG LLP
Dallas,
Texas
March
15,
2007
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Darling
International Inc.:
We
have
audited management's assessment, included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting (Item
9A(a)), that
Darling International Inc. maintained effective internal control
over financial
reporting as of December 30, 2006, based on criteria established
in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Darling
International Inc.'s management is responsible for maintaining
effective
internal control over financial reporting and for its assessment
of the
effectiveness of internal control over financial reporting. Our
responsibility
is to express an opinion on management's assessment and an opinion
on the
effectiveness of the Company’s internal control over financial reporting based
on our audit.
We
conducted our audit in accordance with the standards of the Public
Company
Accounting Oversight Board (United States). Those standards require
that we plan
and perform the audit to obtain reasonable assurance about whether
effective
internal control over financial reporting was maintained in all
material
respects. Our audit included obtaining an understanding of internal
control over
financial reporting, evaluating management's assessment, testing
and evaluating
the design and operating effectiveness of internal control, and
performing such
other procedures as we considered necessary in the circumstances.
We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process
designed to
provide reasonable assurance regarding the reliability of financial
reporting
and the preparation of financial statements for external purposes
in accordance
with generally accepted accounting principles. A company's internal
control over
financial reporting includes those policies and procedures that
(1) pertain to
the maintenance of records that, in reasonable detail, accurately
and fairly
reflect the transactions and dispositions of the assets of the
company; (2)
provide reasonable assurance that transactions are recorded as
necessary to
permit preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
company are
being made only in accordance with authorizations of management
and directors of
the company; and (3) provide reasonable assurance regarding prevention
or timely
detection of unauthorized acquisition, use, or disposition of the
company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Also, projections of any evaluation
of
effectiveness to future periods are subject to the risk that controls
may become
inadequate because of changes in conditions, or that the degree
of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management's assessment that Darling International Inc.
maintained
effective internal control over financial reporting as of December
30, 2006, is
fairly stated, in all material respects, based on criteria established
in
Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also,
in our
opinion, Darling International Inc. maintained, in all material
respects,
effective internal control over financial reporting as of December
30, 2006,
based on criteria
established in Internal Control—Integrated Framework issued by the
Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Darling
International Inc. acquired substantially all of the assets of
National By
Products, LLC ("NBP") during 2006, and management excluded from its
assessment of the effectiveness of Darling International Inc.’s internal control
over financial reporting as of December 30, 2006,
NBP's
internal
control over financial reporting associated with total assets of
$159 million
and total revenues of $118 million included in the consolidated
financial
statements of Darling International Inc. and subsidiaries as of
and for the year
ended December 30, 2006. Our
audit
of internal control over financial reporting of Darling International
Inc. also
excluded an evaluation of the internal control over financial reporting
of
NBP.
We
also
have audited, in accordance with the standards of the Public Company
Accounting
Oversight Board (United States), the consolidated financial statements
of
Darling International Inc. and subsidiaries as listed in the accompanying
index,
and our report dated March 15, 2007 expressed an
unqualified opinion on those consolidated financial statements.
/s/
KPMG LLP
Dallas,
Texas
March
15,
2007
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
December
30, 2006 and December 31, 2005
(in
thousands, except share and per share data)
ASSETS
|
|
|
December
30,
2006
|
|
|
December
31,
2005
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,281
|
|
$
|
36,000
|
|
Restricted
cash
|
|
|
480
|
|
|
2,349
|
|
Accounts
receivable, less allowance for bad debts of $1,639 at
December 30, 2006 and
$728 at December 31, 2005
|
|
|
42,381
|
|
|
25,886
|
|
Inventories
|
|
|
14,562
|
|
|
6,601
|
|
Other
current assets
|
|
|
5,036
|
|
|
6,237
|
|
Deferred
income taxes
|
|
|
6,921
|
|
|
6,002
|
|
Total
current assets
|
|
|
74,661
|
|
|
83,075
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
132,149
|
|
|
85,178
|
|
Intangible
assets, less accumulated amortization of $37,599 at December
30, 2006
and
|
|
|
|
|
|
|
|
$33,047 at December 31, 2005
|
|
|
33,657
|
|
|
12,469
|
|
Goodwill
|
|
|
71,856
|
|
|
4,429
|
|
Other
assets
|
|
|
6,683
|
|
|
5,621
|
|
Deferred
income taxes
|
|
|
1,800
|
|
|
-
|
|
|
|
$
|
320,806
|
|
$
|
190,772
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
5,004
|
|
$
|
5,026
|
|
Accounts
payable, principally trade
|
|
|
17,473
|
|
|
12,264
|
|
Accrued
expenses
|
|
|
34,319
|
|
|
25,378
|
|
Total
current liabilities
|
|
|
56,796
|
|
|
42,668
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net
|
|
|
78,000
|
|
|
44,502
|
|
Other
noncurrent liabilities
|
|
|
34,685
|
|
|
27,372
|
|
Deferred
income taxes
|
|
|
-
|
|
|
2,550
|
|
Total
liabilities
|
|
|
169,481
|
|
|
117,092
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; 100,000,000 shares authorized,
|
|
|
|
|
|
|
|
80,875,453 and 64,458,410 shares issued
|
|
|
|
|
|
|
|
at December 30, 2006 and December 31, 2005, respectively
|
|
|
809
|
|
|
644
|
|
Additional
paid-in capital
|
|
|
150,045
|
|
|
79,370
|
|
Treasury
stock, at cost; 21,000 shares at December 30, 2006 and
December 31, 2005
|
|
|
(172
|
)
|
|
(172
|
)
|
Accumulated
other comprehensive loss
|
|
|
(11,733
|
)
|
|
(9,282
|
)
|
Accumulated
earnings
|
|
|
12,376
|
|
|
4,447
|
|
Unearned
compensation
|
|
|
-
|
|
|
(1,327
|
)
|
Total
stockholders’ equity
|
|
|
151,325
|
|
|
73,680
|
|
|
|
$
|
320,806
|
|
$
|
190,772
|
|
The
accompanying notes are an integral part of these
consolidated
financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
Three
years ended December 30, 2006
(in
thousands, except per share data)
|
|
|
December
30,
2006
|
|
|
December
31,
2005
|
|
|
January 1,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
406,990
|
|
$
|
308,867
|
|
$
|
320,229
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and operating expenses
|
|
|
321,416
|
|
|
241,707
|
|
|
237,925
|
|
Selling,
general and administrative expenses
|
|
|
45,649
|
|
|
35,240
|
|
|
36,509
|
|
Depreciation
and amortization
|
|
|
20,686
|
|
|
15,787
|
|
|
15,224
|
|
Total
costs and expenses
|
|
|
387,751
|
|
|
292,734
|
|
|
289,658
|
|
Operating
income
|
|
|
19,239
|
|
|
16,133
|
|
|
30,571
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expense):
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(7,184
|
)
|
|
(6,157
|
)
|
|
(6,759
|
)
|
Other,
net
|
|
|
(4,682
|
)
|
|
903
|
|
|
(299
|
)
|
Total
other income/(expense)
|
|
|
(11,866
|
)
|
|
(5,254
|
)
|
|
(7,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations before income
taxes
|
|
|
7,373
|
|
|
10,879
|
|
|
23,513
|
|
Income
taxes
|
|
|
2,266
|
|
|
3,184
|
|
|
9,245
|
|
Income
from continuing operations
|
|
|
5,107
|
|
|
7,695
|
|
|
14,268
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
from discontinued operations, net
of tax
|
|
|
-
|
|
|
46
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,107
|
|
$
|
7,741
|
|
$
|
13,892
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
0.07
|
|
$
|
0.12
|
|
$
|
0.22
|
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
0.07
|
|
$
|
0.12
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part
of
these
consolidated financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity
Three
years ended December 30, 2006
(in
thousands, except share data)
|
Common
|
Stock |
|
|
|
|
|
|
|
Number
of Outstanding Shares
|
$0.1
par
Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Other Comprehensive Loss
|
Retained
Earnings (Accmulated Deficit)
|
Unearned
Compensation
|
Total
Stockholders' Equity/(Deficit)
|
Balances
at January 3, 2004
|
63,633,240
|
$
637
|
$
77,179
|
$
(172)
|
$
(5,176)
|
$ (17,186)
|
$
-
|
$
55,282
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
13,892
|
-
|
13,892
|
Minimum
pension liability adjustment,
net of tax
|
-
|
-
|
-
|
-
|
(1,958)
|
-
|
-
|
(1,958)
|
Natural
gas hedge derivative
adjustment
|
-
|
-
|
-
|
-
|
(197)
|
-
|
-
|
(197)
|
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
11,737
|
Issuance
of common stock
|
264,106
|
2
|
214
|
-
|
-
|
-
|
-
|
216
|
Balances
at January 1, 2005
|
63,897,346
|
$
639
|
$
77,393
|
$
(172)
|
$
(7,331)
|
$
(3,294)
|
$
-
|
$
67,235
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
7,741
|
-
|
7,741
|
Minimum
pension liability
adjustment, net of tax
|
-
|
-
|
-
|
-
|
(2,148)
|
-
|
-
|
(2,148)
|
Natural
gas hedge derivative adjustment
|
-
|
-
|
-
|
-
|
197
|
-
|
-
|
197
|
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5,790
|
Issuance
of non-vested stock
|
489,150
|
5
|
1,923
|
-
|
-
|
-
|
(1,928)
|
-
|
Amortization
of unearned compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
601
|
601
|
Issuance
of common stock
|
50,914
|
-
|
54
|
-
|
-
|
-
|
-
|
54
|
Balances
at December 31, 2005
|
64,437,410
|
$
644
|
$
79,370
|
$
(172)
|
$
(9,282)
|
$
4,447
|
$
(1,327)
|
$
73,680
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
5,107
|
-
-
|
5,107
|
Pension
liability
adjustment, net of tax
|
-
|
-
|
-
|
-
|
(2,043)
|
-
|
-
|
(2,043)
|
Interest
rate swap derivative
adjustment, net of tax
|
-
|
-
|
-
|
-
|
(408)
|
-
|
-
|
(408)
|
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,656
|
Adjustment
to opening
stockholders’ equity
|
-
|
-
|
-
|
-
|
-
|
2,822
|
-
|
2,822
|
Adjustment
to initially apply
SFAS No. 123R
|
-
|
-
|
(1,327)
|
-
|
-
|
-
|
1,327
|
-
|
Stock-based
compensation
|
-
|
-
|
1,488
|
-
|
-
|
-
|
-
|
1,488
|
Tax
benefits associated with
stock-based compensation
|
-
|
-
|
50
|
-
|
-
|
-
|
-
|
50
|
Issuance
of common stock
|
16,417,043
|
165
|
70,464
|
-
|
-
|
-
|
-
|
70,629
|
Balances
at December 30, 2006
|
80,854,453
|
$
809
|
$150,045
|
$
(172)
|
$(11,733)
|
$
12,376
|
$
-
|
$151,325
|
The
accompanying notes are an integral part
of
these
consolidated financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Three
years ended December 30, 2006
(in
thousands)
|
|
|
December
30,
2006
|
|
|
December
31,
2005
|
|
|
January 1,
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,107
|
|
$
|
7,741
|
|
$
|
13,892
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
20,686
|
|
|
15,787
|
|
|
15,224
|
|
Deferred
income taxes
|
|
|
(3,929
|
)
|
|
(3,850
|
)
|
|
779
|
|
Gain
on sale of assets
|
|
|
(42
|
)
|
|
(555
|
)
|
|
(364
|
)
|
Increase
in long-term pension liability
|
|
|
3,379
|
|
|
2,863
|
|
|
3,190
|
|
Stock-based
compensation expense
|
|
|
1,588
|
|
|
601
|
|
|
-
|
|
Write-off
deferred loan costs
|
|
|
2,569
|
|
|
-
|
|
|
-
|
|
Gain
on early retirement of debt
|
|
|
-
|
|
|
-
|
|
|
(1,306
|
)
|
Loss
on early redemption of preferred stock
|
|
|
-
|
|
|
-
|
|
|
1,678
|
|
Changes
in operating assets and liabilities, net of
effects from acquisition:
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
1,869
|
|
|
30
|
|
|
(1,799
|
)
|
Accounts
receivable
|
|
|
(2,787
|
)
|
|
793
|
|
|
2,702
|
|
Inventories
and prepaid expenses
|
|
|
867
|
|
|
(3,074
|
)
|
|
2,621
|
|
Accounts
payable and accrued expenses
|
|
|
(1,336
|
)
|
|
1,276
|
|
|
3,297
|
|
Other
|
|
|
861
|
|
|
2,926
|
|
|
(1,421
|
)
|
Net
cash provided/(used) by discontinued operations
|
|
|
-
|
|
|
46
|
|
|
(370
|
)
|
Net
cash provided by operating activities
|
|
|
28,832
|
|
|
24,584
|
|
|
38,123
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(11,800
|
)
|
|
(21,406
|
)
|
|
(13,312
|
)
|
Acquisition
of NBP, net of cash acquired
|
|
|
(80,166
|
)
|
|
-
|
|
|
-
|
|
Gross
proceeds from sale of property, plant and equipment and
other assets
|
|
|
739
|
|
|
1,115
|
|
|
589
|
|
Payments
related to routes and other intangibles
|
|
|
-
|
|
|
(347
|
)
|
|
(428
|
)
|
Net
cash used in investing activities
|
|
|
(91,227
|
)
|
|
(20,638
|
)
|
|
(13,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
126,500
|
|
|
-
|
|
|
92,302
|
|
Payments
on long-term debt
|
|
|
(93,024
|
)
|
|
(5,030
|
)
|
|
(91,354
|
)
|
Contract
payments
|
|
|
(245
|
)
|
|
(178
|
)
|
|
(177
|
)
|
Deferred
loan costs
|
|
|
(1,634
|
)
|
|
(41
|
)
|
|
(2,209
|
)
|
Redemption
of preferred stock
|
|
|
-
|
|
|
-
|
|
|
(10,000
|
)
|
Payment
of preferred dividends
|
|
|
-
|
|
|
-
|
|
|
(1,240
|
)
|
Issuance
of common stock
|
|
|
29
|
|
|
54
|
|
|
152
|
|
Excess
tax benefits from stock-based compensation
|
|
|
50
|
|
|
-
|
|
|
-
|
|
Net
cash provided/(used) in financing activities
|
|
|
31,676
|
|
|
(5,195
|
)
|
|
(12,526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in cash and cash equivalents
|
|
|
(30,719
|
)
|
|
(1,249
|
)
|
|
12,446
|
|
Cash
and cash equivalents at beginning of year
|
|
|
36,000
|
|
|
37,249
|
|
|
24,803
|
|
Cash
and cash equivalents at end of year
|
|
$
|
5,281
|
|
$
|
36,000
|
|
$
|
37,249
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6,345
|
|
$
|
5,765
|
|
$
|
5,879
|
|
Income
taxes, net of refunds
|
|
$
|
2,684
|
|
$
|
3,859
|
|
$
|
8,104
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part
of
these
consolidated financial statements.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
NOTE
1.
|
GENERAL
|
|
|
(a)
|
NATURE
OF OPERATIONS
|
Darling
International Inc., a Delaware corporation (“Darling”), is a recycler of food
and animal by-products and provides grease trap services to food
service
establishments. Darling collects and recycles animal by-products
and used
cooking oil from food service establishments. Darling processes
raw materials at
39 facilities located throughout the United States into finished
products such
as protein (primarily meat and bone meal, “MBM”), tallow (primarily bleachable
fancy tallow, “BFT”), yellow grease (“YG”) and hides. Darling sells these
products nationally and internationally, primarily to producers
of
oleo-chemicals, soaps, pet foods, leather goods, livestock feed
and bio-fuels
for use as ingredients in their products or for further processing.
As
further discussed in Note 3, on May 15, 2006, Darling, through
its wholly-owned
subsidiary Darling
National LLC, a Delaware limited liability company (“Darling National”),
completed the acquisition of substantially all of the assets of
National
By-Products, LLC, an Iowa limited liability company (“NBP”). Darling
and its subsidiaries, including Darling National, are collectively
referred to
herein as (the Company). The Company’s operations are currently organized into
two segments: Rendering and Restaurant Services. For additional
information on
the Company’s segments, see Note 16.
(b)
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(1)
|
Basis
of Presentation
The
consolidated financial statements include the accounts
of the Company and
its subsidiaries. All significant intercompany balances
and transactions
have been eliminated in consolidation. As disclosed in
Note 6, the
operations of the London, Ontario, Canada facility, as
defined below, are
classified as discontinued
operations.
|
|
(2)
|
Fiscal
Year
The
Company has a 52/53 week fiscal year ending on the Saturday
nearest
December 31. Fiscal years for the consolidated financial
statements
included herein are for the 52 weeks ended December 30,
2006, the 52 weeks
ended December 31, 2005, and the 52 weeks ended January
1,
2005.
|
|
(3)
|
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined
using the
first-in, first-out (FIFO) method.
|
|
(4)
|
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Depreciation
is computed by the
straight-line method over the estimated useful lives
of assets: 1)
Buildings and improvements, 15 to 30 years; 2)
Machinery and equipment, 3 to 10 years; and 3) Vehicles,
2 to 6
years.
Maintenance
and repairs are charged to expense as incurred and expenditures
for major
renewals and improvements are
capitalized.
|
|
(5)
|
Goodwill
and Other Intangible Assets
|
Goodwill
and other intangible assets not subject to amortization are tested
for
impairment annually or more frequently if events or changes in
circumstances
indicate that the asset might be impaired. Statement of Financial
Accounting
Standards No. 142, Goodwill
and Other Intangible Assets
(“SFAS
142”) requires a two-step process for testing impairment. First, the
fair value
of each reporting unit is compared to its carrying value to determine
whether an
indication of impairment exists. If impairment is indicated, then
the fair value
of the reporting unit’s goodwill is determined by allocating the unit’s fair
value of its assets and liabilities (including any unrecognized
intangible
assets) as if the reporting unit had been acquired in a business
combination.
The amount of impairment for goodwill is measured as the excess
of its carrying
value over its fair value.
The
fair
values of the Company’s reporting units containing goodwill exceed the related
carrying values; consequently, there has been no impairment of
goodwill for the
periods presented. Goodwill
was approximately $71.9 million and $4.4 million at December 30,
2006 and
December 31, 2005, respectively.
Intangible
assets subject to amortization consist of: 1) collection
routes which are made up of groups of suppliers of raw materials
in similar
geographic areas from which the Company derives collection fees
and a dependable
source of raw materials for processing into finished products;
2)
permits
that represent licensing of operating plants that have been acquired,
giving
those plants the ability to operate; 3) non-compete
agreements that represent contractual arrangements with former
competitors whose
businesses were acquired; and 4) royalty and consulting agreements.
Amortization
expense is calculated using the straight-line method over the estimated
useful
lives of the assets ranging from: 8-20 years for collection routes;
20 years for
permits; and 3-10 years for non-compete covenants.
The
gross
carrying amount of intangible assets subject to amortization include
(in
thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
Intangible
Assets:
|
|
|
|
|
|
|
|
Routes
|
|
$
|
47,987
|
|
$
|
42,887
|
|
Permits
|
|
|
20,500
|
|
|
-
|
|
Non-compete
agreements
|
|
|
2,356
|
|
|
2,216
|
|
Royalty
and consulting agreements
|
|
|
413
|
|
|
413
|
|
|
|
|
71,256
|
|
|
45,516
|
|
Accumulated
Amortization:
|
|
|
|
|
|
|
|
Routes
|
|
|
(34,779
|
)
|
|
(31,175
|
)
|
Permits
|
|
|
(650
|
)
|
|
-
|
|
Non-compete
agreements
|
|
|
(1,880
|
)
|
|
(1,602
|
)
|
Royalty
and consulting agreements
|
|
|
(290
|
)
|
|
(270
|
)
|
|
|
|
(37,599
|
)
|
|
(33,047
|
)
|
Intangible
assets, less accumulated
amortization
|
|
$
|
33,657
|
|
$
|
12,469
|
|
Amortization
expense for the three years ended December 30, 2006, December 31,
2005 and
January 1, 2005, was approximately $4,552,000, $3,884,000 and $3,879,000,
respectively. Amortization expense for the next five fiscal years
is estimated
to be $4,869,000, $4,906,000, $2,038,000, $1,783,000 and
$1,531,000.
|
(6)
|
Environmental
Expenditures
|
Environmental
expenditures incurred to mitigate or prevent environmental impacts
that has yet to occur and that otherwise may result from future
operations are
capitalized. Expenditures that relate to an existing condition
caused by past
operations and that do not contribute to current or future revenues
are expensed
or charged against established environmental reserves. Reserves
are established
when environmental impacts have been identified which are probable
to require
mitigation and/or remediation and the costs are reasonably
estimable.
The
Company accounts for income taxes using the asset and liability
method. Under
the asset and liability method, deferred tax assets and liabilities
are
recognized for the future tax consequences attributable to differences
between
the financial statement carrying amounts of existing assets and
liabilities and
their respective tax bases. 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.
|
(8)
|
Net
Income per Common Share
|
Basic
income per common share is computed by dividing net income by the
weighted
average number of common shares outstanding during the year. Diluted
income per
common share is computed by dividing net income by the weighted
average number
of common shares outstanding during the year increased by dilutive
common
equivalent shares determined using the treasury stock method.
Net
Income per Common
Share (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
30,
2006
|
|
|
|
December
31,
2005
|
|
|
|
January
1,
2005
|
|
|
Income
|
Shares
|
Per-Share
|
|
Income
|
Shares
|
Per-Share
|
|
Income
|
Shares
|
Per-Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
$5,107
|
74,310
|
$0.07
|
|
$7,695
|
63,929
|
$0.12
|
|
$14,268
|
63,840
|
$0.22
|
Income/(loss)
from discontinued
|
|
|
|
|
|
|
|
|
|
|
|
operations, net of tax
|
–
|
74,310
|
–
|
|
46
|
63,929
|
–
|
|
(376)
|
63,840
|
–
|
Net
income
|
5,107
|
74,310
|
0.07
|
|
7,741
|
63,929
|
0.12
|
|
13,892
|
63,840
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Option shares in the money and
|
|
|
|
|
|
|
|
|
|
|
|
dilutive effect of restricted stock
|
–
|
1,264
|
–
|
|
–
|
1,053
|
–
|
|
–
|
1,079
|
–
|
Less:
Pro-forma treasury shares
|
–
|
(315)
|
–
|
|
–
|
(457)
|
–
|
|
–
|
(456)
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
$5,107
|
75,259
|
$0.07
|
|
$7,695
|
64,525
|
$0.12
|
|
$14,268
|
64,463
|
$0.22
|
Income/(loss)
from discontinued
|
|
|
|
|
|
|
|
|
|
|
|
operations, net of tax
|
–
|
75,259
|
–
|
|
46
|
64,525
|
–
|
|
(376)
|
64,463
|
–
|
Net
income
|
$5,107
|
75,259
|
$0.07
|
|
$7,741
|
64,525
|
$0.12
|
|
$13,892
|
64,463
|
$0.22
|
For
fiscal 2006, 2005 and 2004, respectively, 771,950, 726,092 and
195,879
outstanding stock options were excluded from diluted income per
common share as
the effect was antidilutive. For fiscal 2006, 2005 and 2004, respectively,
248,848, 286,168 and zero shares of non-vested stock and restricted
stock were
excluded from diluted income per common share as the effect was
antidilutive.
For fiscal 2006, 2005 and 2004, respectively, 99,821, zero and
zero shares of
contingent issuable stock were excluded from diluted income per
common share as
the effect was antidilutive.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 123 (revised 2004),
Share-Based Payment (“SFAS
123(R)”). SFAS 123(R) requires all entities to recognize compensation
expense in
an amount equal to the fair value of the share-based payments (e.g.,
stock
options and
non-vested and
restricted stock) granted to employees or by incurring liabilities
to an
employee or other supplier (a) in amounts based, at least in part,
on the price
of the entity’s shares or other equity instruments, or (b) that require or may
require settlement by issuing the entity’s equity shares or other equity
instruments.
Effective
January 1, 2006, the Company adopted the provisions of SFAS 123(R)
and related
interpretations, using the modified prospective method. Using the
modified
prospective method of SFAS 123(R), the Company began recognizing
compensation
expense for the remaining unvested portions of stock-based compensation
granted
prior to January 1, 2006. As a result of adopting SFAS 123(R),
for the year
ended December 30, 2006, the Company recorded additional stock
option expense of
approximately $0.5 million, which reduced income from continuing
operations and
income before income taxes by approximately $0.5 million, reduced
net income by
$0.4 million, and reduced basic and diluted earnings per share
by $0.01 per
share. Total stock-based compensation recognized under SFAS 123(R)
in the
statement of operations for the year ended December 30, 2006 was
approximately
$1.6 million, which is included in selling, general and administrative
costs,
and the related income tax benefit recognized was approximately
$0.6 million.
For the year ended December 31, 2005, approximately $0.6 million
in equity-based
compensation expense and the related deferred tax benefit of $0.2
million were
recognized in the Company’s financial statements. There was no equity-based
compensation expense recognized in the Company’s financial statements for the
year ended January 1, 2005. See Note 12 for further information
on the Company’s
stock-based compensation plans.
SFAS
123(R) requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather
than as an
operating cash flow as required under the Accounting Principles
Board (“APB”)
Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations. As a result of adopting FAS 123(R), for
the year ended
December 30, 2006, the Company recognized $50,000 in such tax deductions,
which
were recorded as an increase in financing cash flows and a reduction
in
operating cash flows.
Prior
to
adopting SFAS 123(R), the Company accounted for its stock options
under the
Company’s 2004 Plan in accordance with the provisions of APB Opinion No.
25.
Under the intrinsic-value method, compensation expense is recorded
only to the
extent that the grant price is less than market on the measurement
date. All
options granted under the 2004 Plan were issued at or above market
price, and
therefore no stock-based compensation was recorded due to option
grants.
The
following table illustrates the effect on net income and income
per share if the
fair value based method, net of applicable taxes, had been applied
to all
outstanding and vested awards in each period (in thousands, except
per share
amounts).
|
|
|
December
31,
2005
|
|
January 1,
2005
|
Reported
net income
|
|
$
|
7,741
|
|
$
|
13,892
|
|
Add:
Stock-based employee compensation
expense included
in reported
net income, net
of tax
|
|
|
391
|
|
|
-
|
|
Deduct:
Total stock-based employee compensation expense
determined under
fair-value-based method
for all rewards,
net
of tax
|
|
|
(973
|
)
|
|
(569
|
)
|
Pro
forma net income
|
|
$
|
7,159
|
|
$
|
13,323
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.12
|
|
$
|
0.22
|
|
Basic
- pro forma
|
|
$
|
0.11
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.12
|
|
$
|
0.22
|
|
Diluted
- pro forma
|
|
$
|
0.11
|
|
$
|
0.21
|
|
|
|
The
fair value of each stock option grant under the
Company’s stock option
plan was estimated on the date of grant using the
Black Scholes
option-pricing model with the following weighted
average assumptions and
results for fiscal 2005 and 2004. There were no
options granted during
fiscal 2006.
|
Weighted Average
|
|
2005
|
2004
|
Expected dividend yield
|
|
0.0%
|
0.0%
|
Risk-free interest rate
|
|
3.94%
|
3.86%
|
Expected term
|
|
5.9
years
|
10
years
|
Expected volatility
|
|
55.0%
|
100.32%
|
Fair value of options granted
|
|
$2.04
|
$3.56
|
|
|
The
expected lives for options granted during 2005 were
computed using the
simplified method as prescribed by Staff Accounting
Bulletin No.
107.
At
December 30, 2006, $1.5 million of total future equity-based
compensation
expense (determined using the Black-Scholes option
pricing model) related
to outstanding non-vested options and stock awards
is expected to be recognized over a weighted average
period of 1.3
years.
|
|
(10)
|
Statements
of Cash Flows
The
Company considers all short-term highly liquid instruments,
with an
original maturity of three months or less, to be cash
equivalents.
|
|
(11)
|
Use
of Estimates
The
preparation of the consolidated financial statements
in conformity with
U.S. generally accepted accounting principles requires
management to make
estimates and assumptions that affect the reported amounts
of assets and
liabilities and disclosure of contingent assets and liabilities
at the
date of the consolidated financial statements and the
reported amounts of
revenues and expenses during the reporting period. Actual
results could
differ from those estimates.
|
|
|
If
it is at least reasonably possible that the estimate
of the effect on the
financial statements of a condition, situation, or set
of circumstances
that exist at the date of the financial statements will
change in the near
term due to one or more future confirming events and
the effect of the
change would be material to the financial statements,
the Company will
disclose the nature of the uncertainty and include an
indication that it
is at least reasonably possible that a change in the
estimate will occur
in the near term. If the estimate involves a loss contingency
covered by
FASB Statement No. 5, the disclosure will also include
an estimate of the
possible loss or range of loss or state that an estimate
cannot be
made.
|
|
(12)
|
Impairment
of Long-Lived Assets and Long-Lived Assets to be Disposed
Of
The
Company follows Statement of Financial Accounting Standards
No. 144,
Accounting
for the Impairment of Disposal of Long-Lived Assets (“SFAS
144”). The Company reviews the carrying value of long-lived
assets for
impairment when events or changes in circumstances indicate
that the
carrying amount of an asset, or related asset group,
may not be
recoverable from estimated future undiscounted cash flows.
Recoverability
of assets to be held and used is measured by a comparison
of the carrying
amount of an asset or asset group to estimated undiscounted
future cash
flows expected to be generated by the asset or asset
group. If the
carrying amount of the asset exceeds its estimated future
cash flows, an
impairment charge is recognized by the amount by which
the carrying amount
of the asset exceeds the fair value of the asset. SFAS
144 requires
discontinued operations to be carried at the lower of
cost or fair value
less costs to sell and requires the classification of
operating results of
discontinued operations to be separately presented, net
of tax, within the
statement of operations.
|
|
(13)
|
Financial
Instruments
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.
In addition,
the carrying amount of the Company’s outstanding borrowings under the
Credit Agreement described in Notes 2 and 9 approximates
the fair value
due to the floating interest rates on the
borrowings.
|
|
(14)
|
Derivative
Instruments
The
Company makes limited use of derivative instruments
to manage cash flow
risks related to interest expense. Interest rate swaps
are entered into
with the intent of managing overall borrowing costs
by reducing the
potential impact of increases in interest rates on
floating-rate long-term
debt. The Company does not use derivative instruments
for trading
purposes.
Under
Financial
Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities (“SFAS
133”),
entities are required to report all derivative instruments
in the
statement of financial position at fair value. The
accounting for changes
in the fair value (i.e., gains or losses) of a derivative
instrument
depends on whether it has been designated and qualifies
as part of a
hedging relationship and, if so, on the reason for
holding the instrument.
If certain conditions are met, entities may elect to
designate a
derivative instrument as a hedge of exposures to changes
in fair value,
cash flows or foreign currencies. If the hedged exposure
is a cash flow
exposure, the effective portion of 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
as well as the
ineffective portion of the gain or loss 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.
|
On
May
19, 2006, the Company entered into two interest rate swap agreements
that are
considered cash flow hedges according to SFAS 133. Under the terms
of these swap
agreements, beginning June 30, 2006, the cash flows from the Company’s $50.0
million floating-rate term loan facility under the Company’s credit agreement
have been exchanged for fixed-rate contracts that bear interest,
payable
quarterly. The first swap agreement for $25.0 million matures April
7, 2012 and
bears interest at 5.42%, which does not include the borrowing spread
per the
Company’s credit agreement, with amortizing payments that mirror the term
loan
facility. The second swap agreement for $25.0 million matures April
7, 2012 and
bears interest at 5.415%, which does not include the borrowing
spread per the
Company’s credit agreement, with amortizing payments that mirror the term
loan
facility. The Company’s receive rate on each swap agreement is based on
three-month LIBOR. At December 30, 2006, the fair value of these
interest swap
agreements was $0.7 million and is included in non-current other
liabilities on
the balance sheet, with the offset recorded to accumulated other
comprehensive
loss.
A
summary
of the derivative adjustment recorded to accumulated other comprehensive
income,
the net change arising from hedging transactions, and the amounts
recognized in
earnings during the year ended December 30, 2006 is as follows
(in
thousands):
|
2006
|
Derivative
adjustment included in accumulated other comprehensive
loss
at December 31, 2005
|
$
-
|
Net
change arising from current period hedging
transactions
|
404
|
Reclassifications
into earnings
|
4
|
Accumulated
other comprehensive loss at December 30, 2006 (a)
|
$
408
|
(a) Reported
as accumulated other comprehensive loss of approximately $0.7 million
recorded
net of taxes of approximately $0.3 million at December 30, 2006.
The
Company estimates the amount that will be reclassified from accumulated
other
comprehensive loss at December 30, 2006 into earnings in fiscal
2007 will be
insignificant.
At
December 30, 2006, the Company has forward purchase agreements
in place for
purchases of approximately $4.8 million of natural gas for the
months of January
through March of 2007. These forward purchase agreements have no
net settlement
provisions and the Company intends to take physical delivery. Accordingly,
the
forward purchase agreements are not subject to the requirements
of SFAS 133
because they qualify as normal purchases as defined in the standard.
|
(15)
|
Comprehensive
Income
The
Company follows the provisions of SFAS No.
130, Reporting
Comprehensive Income
(“SFAS 130”). SFAS 130 establishes standards for reporting and
presentation of comprehensive income and its components.
In accordance
with SFAS 130, the Company has presented the components
of comprehensive
income in its consolidated statements of stockholders’
equity.
|
|
(16)
|
Revenue
Recognition
The
Company recognizes revenue on sales when
products are shipped and the customer takes ownership
and assumes risk of
loss. Collection fees are recognized in the month the
service is
provided.
|
|
(17)
|
Discontinued
Operations
At
a scheduled meeting held during the fourth
quarter of 2004, the Company’s board of directors approved a plan for the
Company to dispose of its operations at London, Ontario,
Canada. Results
of operations of the London facility were previously
included in results
of the Company’s rendering segment and have been reclassified to
income/(loss) from discontinued operations in the accompanying
consolidated statements of operations, as discussed elsewhere
herein.
|
NOTE
2.
|
FINANCING
|
|
|
(a)
|
Credit
Agreement and Former Senior Credit
Agreement
|
The
Company entered into a new $175 million credit agreement (the “Credit
Agreement”) with new lenders on April 7, 2006 which replaces the former senior
credit agreement executed in April 2004. 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
revolver
facility, which includes a $35.0 million letter of credit
sub-facility.
As of
December 30, 2006, the Company has borrowed all $50.0 million under
the term
loan facility which provides for quarterly scheduled amortization
payments of
$1.25 million over the six-year term ending April 7, 2012; at that
point, the
remaining balance of $22.5 million will be payable in full. The
revolving credit
facility has a five-year term ending April 7, 2011. The proceeds
of the term
loan facility under the Credit Agreement were used for the payment
of a portion
of the cash consideration for the acquisition of substantially
all of the assets
of NBP. The proceeds of the revolving credit facility may be used
for: (i) the
payment of fees and expenses payable in connection with the Credit
Agreement,
acquisitions and the repayment of indebtedness; (ii) financing
the working
capital needs of the Company and its subsidiaries; and (iii) other
general
corporate purposes. A portion of the revolving credit facility
was used to pay a
portion of the acquisition of the assets of NBP. See Note 3 for
further
discussion regarding the acquisition of substantially all of the
assets of
NBP.
The
Credit Agreement allows for borrowings at per annum rates based
on the following
loan types. Alternate base rate loans under the Credit Agreement
will bear
interest at a rate per annum based on the greater of (a) the prime
rate and (b)
the Federal Funds Effective Rate plus 1/2 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 will bear interest
at a rate
per annum based on the then applicable London Inter-Bank Offer
Rate ("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. At
December 30, 2006 under the Credit Agreement, the interest rate
for the $47.5
million term loan that was outstanding was based on LIBOR plus
a margin of 1.75%
per annum for a total of 7.125% per annum. The interest rate for
$30.0 million
of the revolving loan amount outstanding was based on LIBOR plus
a margin of
1.75% per annum for a total of 7.125%, and the remaining $5.5 million
under the
revolving loan amount was based on prime plus a margin of 0.75%
per annum for a
total of 9.00% per annum. On April 7, 2006, the Company repaid
the balance on
the term facility under the former senior credit agreement and
incurred a
write-off of deferred loan costs of approximately $1.5 million.
The
Credit Agreement contains certain 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.
On
April
2, 2004, proceeds from the former senior credit agreement and cash
on hand were
used to redeem the Company’s preferred stock at face value of $10.0 million plus
accumulated preferred dividends of approximately $1.2 million,
for a total
aggregate consideration of $11.2 million. The preferred stock had
a carrying
value of approximately $9.5 million at April 3, 2004. Consequently,
redemption
of the preferred stock and accumulated dividends during the second
quarter of
2004 resulted in a loss on extinguishment of approximately $1.7
million, which
is included in other expense.
On
May
13, 2002, the Company consummated a recapitalization and executed
an amended and
restated credit agreement with its lenders. The 2002 amended and
restated credit
agreement reflects the effect of applying the provisions of Statement
of
Financial Accounting Standards No. 15, Accounting
by Debtors and Creditors for Troubled Debt Restructurings (“SFAS
15”). SFAS 15 requires that the previously existing amount of debt
owed by the
Company to the lenders be reduced by the fair value of the equity
interest
granted and that no gain from restructuring the Company’s bank debt be
recognized. As a result, the carrying amount of the debt of $20.6
million
exceeded its contractual amount of $18.3 million by $2.3 million
at January 3,
2004. The outstanding balance of the 2002 amended and restated
credit agreement
at April 2, 2004 of approximately $20.1 million was reduced to
zero through a
payment of approximately $18.0 million in cash proceeds from the
former senior
credit agreement. The remaining balance related to the SFAS 15
effect of
approximately $2.1 million was recorded as a gain on early retirement
of debt,
included in other income in the operating statement, net of related
deferred
loan costs of approximately $0.8 million, also extinguished upon
payment of the
related debt, which results in a net gain on early retirement of
debt of
approximately $1.3 million recorded in the first quarter of fiscal
2004.
(b)
|
Senior
Subordinated Notes
|
On
December 31, 2003, the Company issued senior subordinated notes
in the principal
amount of $35.0 million. On June 1, 2006, the Company retired the
senior
subordinated notes using money available under the Credit Agreement
and incurred
charges of $1.925 million for prepayment fees and approximately
$1.1 million to
write off deferred loan costs.
The
Company’s Credit Agreement, former senior credit agreement and senior
subordinated notes consisted of the following elements at December
30, 2006 and
December 31, 2005, respectively (in thousands):
|
December 30,
2006
|
December 31,
2005
|
Credit
and Former Senior Credit Agreement:
|
|
|
Term
Loan
|
$
47,500
|
$
14,500
|
Revolving
Credit Facility:
|
|
|
Maximum
availability
|
$
125,000
|
$
50,000
|
Borrowings
outstanding
|
35,500
|
-
|
Letters
of credit issued
|
18,391
|
14,872
|
Availability
|
$
71,109
|
$
35,128
|
Senior
Subordinated Notes Payable:
|
$
-
|
$
35,000
|
|
|
|
The
obligations under the Credit Agreement are guaranteed by Darling
National and
are secured by substantially all of the property of the Company,
including a
pledge of all equity interests in Darling National. As of December
30, 2006, the
Company was in compliance with all the covenants contained in the
Credit
Agreement.
On
May
15, 2006, Darling, through its wholly-owned subsidiary Darling
National, completed the acquisition of substantially
all of the assets of NBP
(the
“Transaction”). The purchase was accounted for as an asset purchase pursuant
to
the terms of the asset purchase agreement, by and among Darling,
Darling
National and NBP, whereby Darling National acquired substantially
all of the
assets and liabilities of NBP. The
assets acquired in the Transaction will increase Darling’s capabilities by
growing revenues, diversifying the raw material supplies and creating
a larger
platform to grow Darling’s restaurant services business.
As
a
result of the Transaction, effective May 15, 2006, the Company
began including
the operations of NBP into the Company’s consolidated financial statements. The
following table presents selected pro forma information, for comparative
purposes, assuming the Transaction had occurred on January 2, 2005
for the
periods presented (unaudited) (in thousands, except per share
data):
The
selected unaudited pro forma information is not necessarily indicative
of the
consolidated results of operations for future periods or the results
of
operations that would have been realized had the Transaction actually
occurred
on January 2, 2005.
|
December 30,
2006
|
December 31,
2005
|
Net
sales
|
$480,347
|
$497,039
|
Income
from continuing operations
|
9,194
|
18,040
|
Net
income
|
9,194
|
18,086
|
Earnings
per share
|
|
|
Basic
and diluted
|
$
0.11
|
$
0.22
|
The
Transaction was accounted for using the purchase method of accounting
for
business combinations and, accordingly, the results of operations
related to the
Transaction have been included in the Company’s consolidated financial
statements since the date of acquisition.
The
purchase price for the Transaction totaled $150.7 million and comprises
$70.9
million in cash (before transaction costs and expenses), additional
cash
consideration of $3.5 million for working capital, transaction
costs of $5.8
million and the issuance of approximately 16.3
million shares of Darling common stock valued at $70.5 million.
The asset
purchase agreement contains a true-up adjustment in which additional
shares
(“Contingent Shares”) may be issuable to NBP based on Darling’s stock price for
an average of 90 days ending on the last day of the 13th
month
following the date of closing (the “True-up Market Price”). To the extent the
True-up Market Price exceeds $4.31, no Contingent Shares will be
issuable. If
the True-up Market Price is less than $4.31, the number of Contingent
Shares
issuable is determined by dividing the “Value Gap” by the greater of $3.60 and
the True-up Market Price.
The
Value
Gap is determined by multiplying the number of shares issued at
closing by the
excess of (i) $4.31 over (ii) the greater of the True-up Market
Price and $3.60.
Only holders of shares that were issued at closing and have not
been transferred
(except by gift or into trust) as of the date used to calculate
the True-up
Market Price will be eligible to receive Contingent Shares.
As
the
price of Darling’s common stock on December 30, 2006 exceeded $4.31, there is
currently no Value Gap. However, the Value Gap used to calculate
the Contingent
Shares will not be known until the True-up Market Price is determined.
In
accordance with Emerging Issues Task Force 97-15, Accounting
for Contingency Arrangements Based on Security Prices in a Purchase
Business
Combination
(“EITF
97-15”), the value of the Contingent Shares issued, if any, will be recorded
in
stockholders’ equity.
In
accordance with EITF 97-15, the 16.3 million shares of common stock
issued by
Darling to the seller were valued at $70.5 million, which represents
the lowest
value at which additional consideration would not be required to
be
issued.
The
following table summarizes the fair value of the assets acquired
and liabilities
assumed as of May 15, 2006 (in thousands):
Accounts
receivable, net
|
|
$
|
13,708
|
|
Inventory,
net
|
|
|
7,184
|
|
Other
current assets
|
|
|
135
|
|
Deferred
tax asset
|
|
|
425
|
|
Identifiable
intangibles
|
|
|
25,740
|
|
Property
and equipment
|
|
|
51,892
|
|
Goodwill
|
|
|
68,343
|
|
Accounts
payable
|
|
|
(7,837
|
)
|
Accrued
expenses
|
|
|
(7,650
|
)
|
Other
liabilities
|
|
|
(1,274
|
)
|
Purchase
price
|
|
$
|
150,666
|
|
As
a
result of the acquisition of NBP, the Company reduced its valuation
allowance
for pre-acquisition deferred tax assets of approximately $0.9 million,
resulting
in a reduction of the $68.3 million of goodwill to $67.4 million.
The
$67.4
million of goodwill was assigned to the rendering and restaurant
services
segments in the amounts of $53.0 million and $14.4 million, respectively.
Of the
total amount, $62.0 million is expected to be deductible for tax
purposes.
Identifiable intangibles include $5.1 million in routes with a
weighted average
useful life of 20 years, $20.5 million in permits with a weighted
average useful
life of 20 years, and $0.1 million in non-compete agreements with
a useful life
of 5 years.
A
summary
of inventories follows (in thousands):
|
|
|
December
30,
2006
|
|
|
December
31,
2005
|
|
Finished product
|
|
$
|
11,909
|
|
$
|
4,904
|
|
Supplies
and
other
|
|
|
2,653
|
|
|
1,697
|
|
|
|
$
|
14,562
|
|
$
|
6,601
|
|
NOTE
5.
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
A
summary
of property, plant and equipment follows (in thousands):
|
|
|
December
30,
2006
|
|
|
December
31,
2005
|
|
Land
|
|
$
|
17,971
|
|
$
|
11,234
|
|
Buildings
and
improvements
|
|
|
44,450
|
|
|
31,149
|
|
Machinery
and
equipment
|
|
|
195,702
|
|
|
166,973
|
|
Vehicles
|
|
|
54,960
|
|
|
42,957
|
|
Construction
in
process
|
|
|
3,127
|
|
|
6,136
|
|
|
|
|
316,210
|
|
|
258,449
|
|
Accumulated
depreciation
|
|
|
(184,061
|
)
|
|
(173,271
|
)
|
|
|
$
|
132,149
|
|
$
|
85,178
|
|
NOTE
6.
|
DISCONTINUED
OPERATIONS
|
|
|
Revenue,
costs and expenses, net of applicable taxes of the London location
for fiscal
2005 and 2004, are as follows (in thousands):
|
|
Fiscal
Year Ended
|
|
|
|
December 31,
2005
|
|
|
January 1,
2005
|
|
Net
sales
|
|
$
|
-
|
|
$
|
685
|
|
Cost
of
sales and operating expenses
|
|
|
-
|
|
|
572
|
|
Selling,
general and administrative
|
|
|
-
|
|
|
248
|
|
Depreciation
and amortization
|
|
|
-
|
|
|
6
|
|
Total
costs and expenses
|
|
|
-
|
|
|
826
|
|
Operating
and
pretax loss, now classified as loss from discontinued
operations
|
|
|
-
|
|
|
(141
|
)
|
Other
income/(expense)
|
|
|
69
|
|
|
(442
|
)
|
Income/(loss)
before income taxes
|
|
|
69
|
|
|
(583
|
)
|
Income
tax (expense)/benefit
|
|
|
(23
|
)
|
|
207
|
|
Income/(loss)
from discontinued operations, net of tax
|
|
$
|
46
|
|
$
|
(376
|
)
|
Accrued
expenses consist of the following (in thousands):
|
|
|
December
30,
2006
|
|
|
December
31,
2005
|
|
Compensation
and benefits
|
|
$
|
7,175
|
|
$
|
4,719
|
|
Utilities
and
sewage
|
|
|
4,599
|
|
|
3,447
|
|
Accrued
income,
ad valorem, and franchise taxes
|
|
|
4,478
|
|
|
1,782
|
|
Reserve
for
self insurance, litigation, environmental and
tax
matters
(Note 15)
|
|
|
6,414
|
|
|
5,422
|
|
Medical
claims
liability
|
|
|
3,494
|
|
|
2,808
|
|
Other
accrued
expense
|
|
|
8,159
|
|
|
7,200
|
|
|
|
$
|
34,319
|
|
$
|
25,378
|
|
The
Company leases four
plants and storage locations, three office locations and a portion
of its
transportation equipment under operating leases. Leases are noncancellable
and
expire at various times through the year 2028. Minimum rental commitments
under
noncancellable leases as of December 30, 2006, are as follows (in
thousands):
Period
Ending Fiscal
|
|
|
Operating
Leases
|
|
2007
|
|
$
|
8,269
|
|
2008
|
|
|
6,927
|
|
2009
|
|
|
5,475
|
|
2010
|
|
|
3,461
|
|
2011
|
|
|
2,169
|
|
Thereafter
|
|
|
9,751
|
|
Total
|
|
$
|
36,052
|
|
Rent
expense for the fiscal
years ended December 30, 2006, December 31, 2005 and January 1,
2005 was $6.2
million, $5.5 million and $4.8 million, respectively.
Debt
consists of the following (in thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
Credit
and Former Senior Credit Agreement (Note 2):
|
|
|
|
|
|
|
|
Revolving
Credit Facility
|
|
$
|
35,500
|
|
$
|
-
|
|
Term
Loan
|
|
|
47,500
|
|
|
14,500
|
|
Senior
Subordinated Notes
|
|
|
-
|
|
|
35,000
|
|
Other
Notes
|
|
|
4
|
|
|
28
|
|
|
|
|
83,004
|
|
|
49,528
|
|
Less
Current Maturities
|
|
|
5,004
|
|
|
5,026
|
|
|
|
$
|
78,000
|
|
$
|
44,502
|
|
Maturities
of long-term debt at December 30, 2006 follow (in thousands):
|
|
|
Contractual
Debt
Payment
|
|
2007
|
|
$
|
5,004
|
|
2008
|
|
|
5,000
|
|
2009
|
|
|
5,000
|
|
2010
|
|
|
5,000
|
|
2011
|
|
|
40,500
|
|
Thereafter
|
|
|
22,500
|
|
|
|
$
|
83,004
|
|
Under
the
terms of the Credit Agreement, $5.0 million included in current
maturities of
debt at December 30, 2006, will be due during fiscal 2007, consisting
of
scheduled installment payments of $1.25 million due each quarter.
NOTE
10.
|
OTHER
NONCURRENT LIABILITIES
|
|
|
Other noncurrent
liabilities consist of the following (in thousands):
|
|
|
December
30,
2006
|
|
|
December
31,
2005
|
|
Accrued pension liability
|
|
$
|
18,698
|
|
$
|
14,590
|
|
Reserve for self insurance, litagation, environmental
and tax
matters
(Note 15) |
|
|
15,087 |
|
|
12,389 |
|
Other
|
|
|
900
|
|
|
393
|
|
|
|
$
|
34,685
|
|
$
|
27,372
|
|
Income
tax expense/(benefit) attributable to income from continuing operations
before
income taxes consists of the following (in thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
|
January
1,
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,294
|
|
$
|
4,826
|
|
$
|
7,265
|
|
State
|
|
|
523
|
|
|
176
|
|
|
1,201
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,551
|
)
|
|
(1,818
|
)
|
|
779
|
|
|
|
$
|
2,266
|
|
$
|
3,184
|
|
$
|
9,245
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense for the years ended December 30, 2006, December 31,
2005 and January
1, 2005, differed from the amount computed by applying the statutory
U.S.
federal income tax rate to income from continuing operations before
income taxes
as a result of the following (in thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
|
January
1,
2005
|
|
Computed
“expected” tax expense
|
|
$
|
2,581
|
|
$
|
3,753
|
|
$
|
8,230
|
|
State
income taxes
|
|
|
273
|
|
|
393
|
|
|
729
|
|
Change
in valuation allowance
|
|
|
-
|
|
|
-
|
|
|
(334
|
)
|
Tax
credits
|
|
|
(208
|
)
|
|
(257
|
)
|
|
-
|
|
Reversal
of
reserve for taxes
|
|
|
(272
|
)
|
|
(700
|
)
|
|
-
|
|
Other,
net
|
|
|
(108
|
)
|
|
(5
|
)
|
|
620
|
|
|
|
$
|
2,266
|
|
$
|
3,184
|
|
$
|
9,245
|
|
|
|
|
|
|
|
|
|
|
|
|
The
tax
effects of temporary differences that give rise to significant
portions of the
deferred tax assets and deferred tax liabilities at December 30,
2006 and
December 31, 2005 are presented below (in thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
Deferred
tax
assets:
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
12,163
|
|
$
|
21,179
|
|
Loss
contingency reserves
|
|
|
6,938
|
|
|
5,583
|
|
Employee
benefits
|
|
|
2,746
|
|
|
2,102
|
|
Pension
|
|
|
7,306
|
|
|
5,975
|
|
Other
|
|
|
2,279
|
|
|
1,102
|
|
Total
gross deferred tax assets
|
|
|
31,432
|
|
|
35,941
|
|
Less
valuation allowance
|
|
|
(9,416
|
)
|
|
(19,086
|
)
|
Net
deferred tax assets
|
|
|
22,016
|
|
|
16,855
|
|
Deferred
tax
liabilities:
|
|
|
|
|
|
|
|
Intangible
assets
|
|
|
(2,035
|
)
|
|
(1,750
|
)
|
Property,
plant
and equipment
|
|
|
(10,115
|
)
|
|
(9,915
|
)
|
Other
|
|
|
(1,145
|
)
|
|
(1,738
|
)
|
Total
gross deferred tax liabilities
|
|
|
(13,295
|
)
|
|
(13,403
|
)
|
|
|
$
|
8,721
|
|
$
|
3,452
|
|
At
December 30, 2006, the Company had net operating loss carryforwards
for federal
income tax purposes of approximately $25,810,000 expiring through
2020. The
availability of the net operating loss carryforwards to reduce
future taxable
income is subject to various limitations. As a result
of
the change in ownership which occurred pursuant to the May 2002
recapitalization
(see Note 2), utilization of its net operating loss carryforwards
is limited to
approximately $687,000 per year for the remaining life of the net
operating
losses.
The
net
change in the total valuation allowance was a decrease of $9,670,000
for the
year ended December 30, 2006 due to the expiration of $8,693,000
NOL
carryforwards and $916,000 attributable to the acquisition of NBP,
recorded as
an increase in goodwill. The Company believes that it is more likely
than not
that the additional taxable income attributable to NBP will result
in the
realization of $916,000 in net operating loss carryforwards.
NOTE
12.
|
STOCKHOLDERS’
EQUITY
|
|
|
On
May
11, 2005, the shareholders approved the Company’s Omnibus Incentive 2004 Plan
(the “2004 Plan”). The 2004 Plan replaced both the 1994 Employee Flexible Stock
Option Plan and the Non-Employee Directors Stock Option Plan and
thus broadens
the array of equity alternatives available to the Company. Under
the 2004 Plan,
the Company is allowed to grant stock options, stock appreciation
rights,
non-vested and restricted stock (including performance stock),
restricted stock
units (including performance units), other stock-based awards,
non-employee
director awards, dividend equivalents and cash-based awards. There
are up to
6,074,969 common shares available under the 2004 Plan which may
be granted to
any participant in any plan year as defined in the 2004 Plan. Some
of those
shares are subject to outstanding awards as detailed in the tables
below. To the
extent these outstanding awards are forfeited or expire without
exercise, the
shares will be returned to and available for future grants under
the 2004 Plan.
The 2004 Plan’s purpose is to attract, retain and motivate employees, directors
and third party service providers of the Company and to encourage
them to have a
financial interest in the Company. The 2004 Plan is administered
by the
Compensation Committee (the “Committee”) of the Board of Directors. The
Committee has the authority to select plan participants, grant
awards, and
determine the terms and conditions of such awards as defined in
the 2004 Plan.
The Company’s stock options granted under the 2004 Plan generally terminate
10
years after date of grant. At December 31, 2006, the number of
equity awards
available for issuance under the 2004 Plan was 3,797,475.
The
following is a summary of stock-based compensation granted during
the years
ended December 30, 2006, December 31, 2005 and January 1, 2005.
Nonqualified
Stock Options.
On
March 26, 2004 and May 18, 2004, under the previous Non-Employee
Director Stock
Option Plan, the Company granted 16,000 and 4,000 nonqualified
options to four
directors and one director, respectively. The exercise price for
these options
was $2.86 and $3.65 per share (fair market value at grant date).
On March 17,
2005, under the previous Non-Employee Director Stock Option Plan,
the Company
granted 20,000 nonqualified non-employee director stock options,
in the
aggregate, to five directors. The exercise price for these options
was $4.04 per
share (fair market value at grant date). Under the 2004 Plan, on
May 11, 2005,
the Company granted 4,000 nonqualified stock options to the non-employee
director newly elected to the board by the stockholders. The exercise
price for
the May 11, 2005 stock options was $3.95 per share (fair market
value at grant
date). These options vest 25 percent six months after the grant
date and 25
percent on each anniversary date thereafter.
On
November 19, 2004, subject to the approval of the 2004 Plan, the
Company issued
276,600 nonqualified stock options to four of the executive officers
of the
Company, that is the Chief Executive Officer and the Executive
Vice Presidents
of Finance and Administration, Operations, and Commodities, (collectively
with
the Executive Vice President of Sales and Services these officers
are are
referred to in this note as “Named Executive Officers”). The nonqualified stock
options at November 19, 2004 were issued at an exercise price of
$4.16. This
exercise price represents a 10% premium to the fair market value
of the
Company’s common stock at the issue date. On May 11, 2005, these issued
stock
options were authorized by the shareholders and made effective
as a result of
the approval of the 2004 Plan. Additionally, on June 16, 2005,
the Company
granted an aggregate 194,350 nonqualified stock options under the
2004 Plan to
the Named Executive Officers at an exercise price of $3.94, which
represented a
10% premium to the fair market value of the Company’s common stock at the grant
date. The nonqualified stock options vest over a three-year period
at 33-1/3
percent per year.
Incentive
Stock Options.
On
August 13, 2004, under the previous Employee Flexible Stock Option
Plan the
Company granted 180,000 options. The exercise price for these options
was $4.02
per share (fair market value at grant date). On June 16, 2005,
the Company
granted 82,500 incentive stock options to various additional employees.
The
exercise price was equal to the fair market value at the grant
date of $3.58 per
share. These incentive stock options vest 20 percent at grant date
and 20
percent on each anniversary date thereafter.
A
summary
of stock option activity as of December 30, 2006 and changes during
the year
ended is presented below.
|
|
|
Number
of
Shares
|
|
|
Weighted-avg.
exercise
price
per
share
|
|
|
Weighted-avg.
remaining
contractual
life
|
|
Options
outstanding at December 31, 2005
|
|
|
1,751,005
|
|
|
2.70
|
|
|
|
|
Granted
|
|
|
-
|
|
|
N/A
|
|
|
|
|
Exercised
|
|
|
(54,020
|
)
|
|
0.50
|
|
|
|
|
Forfeited
|
|
|
(4,000
|
)
|
|
3.85
|
|
|
|
|
Expired
|
|
|
(19,000
|
)
|
|
7.95
|
|
|
|
|
Options
outstanding at December 30, 2006
|
|
|
1,673,985
|
|
|
2.71
|
|
|
6.6
years
|
|
Options
exercisable at December 30, 2006
|
|
|
1,322,717
|
|
|
2.38
|
|
|
6.2
years
|
|
For
the
years ended December 30, 2006 and December 31, 2005, the amount
of cash received
from the exercise of options and the related tax benefits was insignificant.
The
amount of cash received from the exercise of options and the related
tax
benefits for the year ended January 1, 2005 was approximately $0.2
million and
$0.1 million, respectively. The total intrinsic value of options
exercised for
the years ended December 30, 2006, December 31, 2005 and January
1, 2005 was
approximately $0.2 million, $0.1 million and $0.7 million, respectively.
The
fair value of shares vested for the years ended December 30, 2006,
December 31,
2005 and January 1, 2005 was approximately $0.7 million, $0.6 million
and none,
respectively. At December 30, 2006, the aggregate intrinsic value
of options
outstanding was approximately $4.8 million and the aggregate intrinsic
value of
options exercisable was approximately $4.3 million.
Non-Vested
Stock Awards.
On
November 19, 2004, subject to the approval of the 2004 Plan, the
Company issued
477,200 non-vested stock awards to the Chief Executive Officer
and the Executive
Vice Presidents of Finance and Administration, Operations, and
Commodities. On
May 11, 2005, upon approval of the 2004 Plan these awards were
authorized by the
shareholders and made effective. Additionally, on June 16, 2005,
the Company
granted 11,950 non-vested stock awards to the Executive Vice President
of Sales
and Services. These non-vested stock awards contain vesting periods
of four to
six years from date of issuance. The six-year awards contain accelerated
vesting
provisions based upon specified increases in the Company’s stock price. During
the second quarter of 2005, the Company recorded $1.9 million of
unearned
compensation for the market value of the shares on the date of
grant. The
unearned compensation is being amortized to expense over the estimated
lapse in
restrictions of 1.3 - 4 years.
On
March
9, 2006, the Company’s board of directors approved the contingent issuance of
296,500 shares of common stock to certain members of management
upon completion
of the NBP acquisition. These contingent shares had a fair value
of
approximately $0.6 million at date of grant. These shares will
be issued only if
the Company’s average stock price for the 90-day period ending on the last
day
of the thirteenth full consecutive month following the NBP acquisition
equals or
exceeds $4.31 per share.
A
summary
of the Company’s non-vested stock awards as of December 30, 2006, and changes
during the year ended is as follows:
|
|
|
Non-Vested
Shares
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Stock
awards outstanding December 31, 2005
|
|
|
489,150
|
|
|
$
3.94
|
|
Shares
granted
|
|
|
296,500
|
|
|
2.01
|
|
Shares
vested
|
|
|
(5,975
|
)
|
|
3.58
|
|
Shares forfeited
|
|
|
—
|
|
|
—
|
|
Stock
awards outstanding December 30, 2006
|
|
|
779,675
|
|
|
$
3.48
|
|
Restricted
Stock Awards.
On March
9, 2006, the Company's Board of Directors approved a Non-Employee
Director
Restricted Stock Award Plan (the "Director Restricted Stock Plan")
pursuant to
and in accordance with the 2004 Plan in order to attract and retain
highly
qualified persons to serve as non-employee directors and to more
closely align
such directors' interests with the interests of the stockholders
of the Company
by providing a portion of their compensation in the form of Company
common
stock.
Under
the
Director Restricted Stock Plan, $20,000 in restricted Company common
stock (the
"Restricted Stock") will be awarded to each non-employee director
on the third
business day after the Company releases its earnings for its prior
completed
fiscal year, beginning with the earnings release for fiscal 2005
(the "Date of
Award"). The Restricted Stock will be subject to a right of repurchase
at $0.01
per share upon termination of the holder as a member of the Company's
board of
directors for cause and will not be transferable. These restrictions
will lapse
with respect to 100% of the Restricted Stock upon the earliest
to occur of (i)
ten years after the Date of Award, (ii) a Change of Control (as
defined in the
2004 Plan), and (iii) termination of the non-employee director's
service with
the Company, other than for "cause" (as defined in the Director
Restricted Stock
Plan). On March 21, 2006, the Company issued 21,925 shares of restricted
stock
to the non-employee directors under the Director Restricted Stock
Plan.
A
summary
of the Company’s directors’ restricted stock awards as of December 30, 2006, and
changes during the year ended is as follows:
|
|
|
Restricted
Shares
|
|
|
Weighted
Average
Grant
Date
Fair
Value
|
|
Stock
awards outstanding December 31, 2005
|
|
|
|
|
|
$ —
|
|
Restricted
shares granted
|
|
|
21,925
|
|
|
4.56
|
|
Restricted
shares where the restriction lapsed
|
|
|
(4,385
|
)
|
|
4.56
|
|
Restricted
shares forfeited
|
|
|
—
|
|
|
—
|
|
Stock
awards outstanding December 30, 2006
|
|
|
17,540
|
|
|
$
4.56
|
|
NOTE
13.
|
EMPLOYEE
BENEFIT PLANS
|
|
|
The
Company has retirement and pension plans covering substantially
all of its
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.
Defined
benefits are based principally on length of service and earnings
patterns during
the five years preceding retirement.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
158, Employers’
Accounting for Defined Benefit Pension and Other Post-Retirement
Plans - an
Amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS
158”),
which
requires that the Company recognize the over-funded or under-funded
status of
the Company’s defined benefit post-retirement plans as an asset or liability
in
the Company’s 2006 year-end balance sheet, with changes in the funded status
recognized through comprehensive income in the year in which they
occur. Based
on the funded status of the Company’s pension plans as of December 30, 2006, the
adoption of SFAS 158 increased the Company’s total assets, as a result of
deferred tax assets, by approximately $2.2 million, increased total
liabilities
by approximately $6.7 million and reduced total stockholder’s equity by
approximately $4.5 million, net of taxes. The adoption of the funded
status
portion of SFAS 158 did not affect the Company’s results of
operations.
The
following table sets forth the plans’ funded status and amounts recognized in
the Company’s consolidated balance sheets based on the measurement date (October
1, 2006 and 2005) (in thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
Change
in projected benefit obligation:
|
|
|
|
|
|
|
|
Projected
benefit obligation at beginning of period
|
|
$
|
82,650
|
|
$
|
71,638
|
|
Acquisition
|
|
|
6,305
|
|
|
-
|
|
Service
cost
|
|
|
2,429
|
|
|
1,998
|
|
Interest
cost
|
|
|
4,673
|
|
|
4,206
|
|
Actuarial
(gain)/loss
|
|
|
(4,160
|
)
|
|
7,813
|
|
Benefits
paid
|
|
|
(3,178
|
)
|
|
(3,005
|
)
|
Projected
benefit obligation at end of period
|
|
|
88,719
|
|
|
82,650
|
|
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of period
|
|
|
60,083
|
|
|
50,656
|
|
Acquisition
|
|
|
5,141
|
|
|
-
|
|
Actual
return on plan assets
|
|
|
5,158
|
|
|
6,297
|
|
Employer
contribution
|
|
|
2,694
|
|
|
6,135
|
|
Benefits
paid
|
|
|
(3,178
|
)
|
|
(3,005
|
)
|
Fair
value of plan assets at end of period
|
|
|
69,898
|
|
|
60,083
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
|
(18,821
|
)
|
|
(22,567
|
)
|
Unrecognized
actuarial loss
|
|
|
*
|
|
|
23,096
|
|
Unrecognized
prior service cost
|
|
|
*
|
|
|
681
|
|
Post-measurement
date contributions
|
|
|
123
|
|
|
-
|
|
Net
amount recognized
|
|
$
|
(18,698
|
)
|
$
|
1,210
|
|
Amounts
recognized in the consolidated balance sheets
consist of:
|
|
|
|
|
|
|
|
Non-current
liability
|
|
$
|
(18,698
|
)
|
$
|
(14,590
|
)
|
Prepaid
asset
|
|
|
*
|
|
|
1,210
|
|
Accumulated
other comprehensive income (a)
|
|
|
*
|
|
|
14,590
|
|
Net
amount recognized
|
|
$
|
(18,698
|
)
|
$
|
1,210
|
|
Amounts
recognized in accumulated other comprehensive
loss consist of:
|
|
|
|
|
|
|
|
Net
actuarial loss
|
|
$
|
17,385
|
|
$
|
*
|
|
Prior
service cost
|
|
|
541
|
|
|
*
|
|
Net
amount recognized (a)
|
|
$
|
17,926
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
(a) |
Amounts
do not include deferred
taxes of $6.6 million and $5.3 million at December 30,
2006 and December
31, 2005.
|
* Not
applicable due to change in accounting standard.
The
accumulated benefit obligation for all defined benefit pension
plans was $82.0
million and $74.7 million at December 30, 2006 and December 31,
2005,
respectively.
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
Projected
benefit obligation
|
|
$
|
88,719
|
|
$
|
82,650
|
|
Accumulated
benefit obligation
|
|
|
82,025
|
|
|
74,673
|
|
Fair
value of plan assets
|
|
|
69,898
|
|
|
60,083
|
|
Net
pension cost includes the following components (in thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
|
January
1,
2005
|
|
Service
cost
|
|
$
|
2,429
|
|
$
|
1,998
|
|
$
|
1,752
|
|
Interest
cost
|
|
|
4,673
|
|
|
4,206
|
|
|
3,985
|
|
Expected
return
on plan assets
|
|
|
(5,192
|
)
|
|
(4,379
|
)
|
|
(4,038
|
)
|
Net
amortization and deferral
|
|
|
1,792
|
|
|
1,406
|
|
|
1,007
|
|
Net
pension
cost
|
|
$
|
3,702
|
|
$
|
3,231
|
|
$
|
2,706
|
|
|
|
|
|
|
|
|
|
|
|
|
The
estimated amount that will be amortized from accumulated other
comprehensive
loss into net periodic pension cost in fiscal 2007 is as follows
(in
thousands):
|
|
2007
|
|
Net
actuarial loss
|
|
|
$
1,152
|
|
Prior
service cost
|
|
|
117
|
|
|
|
|
$
1,269
|
|
|
|
|
|
|
Weighted
average assumptions used to determine benefit obligations were:
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
|
January
1,
2005
|
|
Discount
rate
|
|
|
5.75%
|
|
|
5.50%
|
|
|
6.00%
|
|
Rate
of
compensation increase
|
|
|
4.08%
|
|
|
4.32%
|
|
|
4.66%
|
|
Weighted
average assumptions used to determine net periodic benefit cost
for the employee
benefit pension plans were:
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
|
January
1,
2005
|
|
Discount
rate
|
|
|
5.50%
|
|
|
6.00%
|
|
|
6.50%
|
|
Rate
of
increase in future compensation levels
|
|
|
4.32%
|
|
|
4.66%
|
|
|
4.62%
|
|
Expected
long-term rate of return on assets
|
|
|
8.38%
|
|
|
8.75%
|
|
|
8.75%
|
|
Consideration
was made to the long-term time horizon for the plans’ benefit obligations as
well as the related asset class mix in determining the expected
long-term rate
of return. Historical returns are also considered, over the long-term
time
horizon, in determining the expected return. Considering the overall
asset mix
of approximately 60% equity and 40% fixed income, several years
in the last ten
years having strong double digit returns along with several years
of single
digit losses, the Company believes it is reasonable to expect a
long-term rate
of return of 8.38% for the plans’ investments as a whole.
Plan
Assets
The
Company’s pension plan weighted-average asset allocations at December
30, 2006 and December 31, 2005, by asset category, are as follows:
|
|
Plan
Assets at
|
Asset
Category
|
|
|
December
30,
2006
|
|
|
December
31,
2005
|
|
Equity
Securities
|
|
|
65.2%
|
|
|
62.3%
|
|
Debt
Securities
|
|
|
34.8%
|
|
|
37.7%
|
|
Total
|
|
|
100.0%
|
|
|
100.0%
|
|
The
investment objectives have been established in conjunction with
a comprehensive
review of the current and projected financial requirements. The primary
investment objectives are: 1) to have the ability to pay all benefit
and expense
obligations when due; 2) to maximize investment returns within
reasonable and
prudent levels of risk in order to minimize contributions; and
3) to maintain
flexibility in determining the future level of contributions.
Investment
results are the most critical element in achieving funding objectives,
while
reliance on contributions is a secondary element.
The
investment guidelines are based upon an investment horizon of greater
than ten
years; therefore, interim fluctuations are viewed with this perspective.
The
strategic asset allocation is based on this long-term perspective.
However,
because the participants’ average age is somewhat older than the typical average
plan age, consideration is given to retaining some short-term liquidity.
Analysis of the cash flow projections of the plans indicates that
benefit
payments will continue to exceed contributions.
Based
upon the plans’ time horizon, risk tolerances, performance expectations and
asset class constraints, target asset allocation ranges are as
follows:
|
Fixed
Income
|
35%
- 45%
|
|
Domestic
Equities
|
45%
- 55%
|
|
International
Equities
|
7% - 13%
|
The
fixed
income asset allocation may be invested in corporate and government
bonds
denominated in U.S. dollars, private and publicly traded mortgages,
private
placement debt, and cash equivalents. The average maturity of the
asset class
will not exceed ten years. The portfolio is expected to be well
diversified.
The
domestic equity allocation is invested in stocks traded on one
of the U.S. stock
exchanges. Securities convertible into such stocks, convertible
bonds and
preferred stock, may also be purchased. The majority of the domestic
equities
are invested in large, mid, and small cap index accounts that are
well
diversified. By definition, small cap investments carry greater
risk, but also
are expected to create greater returns over time. The plans target
approximately
7.5% of the total asset mix to small cap. American Depository Receipts
(“ADR’s”)
may not account for more than 3% of the holdings. Small company
stocks may not
exceed 15% of the plans’ assets. Small company definitions fluctuate with market
levels, but generally will be considered companies with market
capitalizations
less than $500 million. The portfolio will be diversified in terms
of individual
company securities and industries.
The
international equity allocation is invested in companies whose
stock is traded
outside the U.S. and/or companies that conduct the major portion
of their
business outside of the U.S. The portfolio may invest in ADR’s. The emerging
market portion of the international equity investment is held below
20% due to
greater volatility in the asset class. The portfolio is expected
to be
diversified in terms of companies, industries and countries.
All
investment objectives are expected to be achieved over a market
cycle
anticipated to be a period of five years. Reallocations are performed
at a
minimum of twice a year to retain target asset allocation ranges.
Contributions
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 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
current actuarial estimates, the Company expects to contribute
$0.5 million to
its pension plans in fiscal 2007 in order to meet funding
requirements.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service,
as
appropriate, are expected to be paid (in thousands):
|
Year
Ending
|
Pension
Benefits
|
|
2007
|
$3,705
|
|
2008
|
4,006
|
|
2009
|
4,145
|
|
2010
|
4,524
|
|
2011
|
4,990
|
|
Years
2012 - 2016
|
32,333
|
The
Company participates in several multi-employer 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. Current
information
with respect to the Company's proportionate share of the over and
under-funded
status of all actuarially computed value of vested benefits over
these pension
plans’ net assets is not available. In
addition, in August 2006 the Pension Protection Act of 2006 (“PPA”) was signed
into law and goes into effect in January 2008. The stated goal
of the PPA is to
improve the funding of pension plans. Plans in an under-funded
status will be
required to increase employer contributions to improve the funding
level within
PPA timelines. Should a multi-employer plan elect to terminate
rather than
increase contributions, the Company will record a liability for
its cost of the
plan termination when such liability becomes probable and estimable.
The
Company’s portion of contributions to these plans amounted to $2.0 million,
$1.8
million and $1.8 million for the years ended December 30, 2006,
December 31,
2005 and January 1, 2005, respectively.
NOTE
14.
|
CONCENTRATION
OF CREDIT RISK
|
|
|
Concentration
of credit risk is limited due to the Company’s diversified customer base and the
fact that the Company sells commodities. No single customer accounted
for more
than 10% of the Company’s net sales in fiscal years 2006, 2005 and
2004.
NOTE
15.
|
CONTINGENCIES
|
|
|
|
LITIGATION
|
The
Company is a party to several lawsuits, claims and loss contingencies
arising in
the ordinary course of its business, including assertions by certain
regulatory
agencies related to air, wastewater, and storm water discharges
from the
Company’s processing facilities.
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 and carries this accrual as a reserve until such
claims are
paid by the Company.
As
a
result of the matters discussed above, the Company has established
loss reserves
for insurance, environmental and litigation matters. At December
30, 2006 and
December 31, 2005, the reserves for insurance, environmental and
litigation
contingencies reflected on the balance sheet in accrued expenses
and other
non-current liabilities were approximately $21.5 million and $15.0
million,
respectively. Management of the Company 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 matters will
not exceed
current estimates. The Company believes that the likelihood is
remote that any
additional liability from such lawsuits and claims that may not
be covered by
insurance would have a material effect on the financial statements.
In
June
2006, the Company was awarded damages of approximately $7.4 million
as a result
of a service provider’s failure to provide steam under a service agreement to
one of the Company’s plants. At the time the damages were awarded,
collectibility of such damages was uncertain; however on October
12, 2006, the
Company entered into an agreement to sell its rights to such damages
to a third
party for $2.2 million in cash. The agreement was made subject
to certain
conditions which were satisfied on March 1, 2007. On March 8, 2007,
the Company
received $2.2 million, completing the transaction. The Company
has recorded a
gain with the receipt of the $2.2 million in proceeds in the first
quarter of
2007.
During
the third quarter of fiscal 2004, the Company concluded a settlement
with
certain past insurers on certain policies of insurance issued primarily
before
1972, whereby the Company received a cash payment of approximately
$2.8
million in return for an executed Settlement Agreement and Release
in which the
Company released the participating insurers from all actual and
potential claims
and liability under the subject insurance policies. The Company
recorded receipt
of the payment as a credit (recovery) of claims expense and previous
insurance
premiums included in cost of sales, within the Corporate segment.
NOTE
16.
|
BUSINESS
SEGMENTS
|
|
|
The
Company operates on a worldwide basis within two industry segments:
Rendering
and Restaurant Services. The measure of segment profit (loss) includes
all
revenues, operating expenses (excluding certain amortization of
intangibles),
and selling, general and administrative expenses incurred at all
operating
locations and excludes general corporate expenses.
Included
in corporate activities are general corporate expenses and the
amortization of
intangibles. Assets of corporate activities include cash, unallocated
prepaid
expenses, deferred tax assets, prepaid pension, and miscellaneous
other assets.
The acquisition of substantially
all of the assets of NBP
will
be reflected primarily in the Rendering segment.
Rendering
Rendering
consists of the collection and processing of animal by-products,
including
hides, from butcher shops, grocery stores, food service industry
and meat and
poultry processors, converting these principally into useable oils
and proteins
utilized by the agricultural, leather and oleo-chemical industries.
Restaurant
Services
Restaurant
Services consists of the collection of used cooking oils from food
service
establishments and recycling them into similar products such as
high-energy
animal feed ingredients and industrial oils. Restaurant Services
also provides
grease trap servicing. Included in restaurant services is the National
Service
Center (“NSC”). The NSC schedules services such as fat and bone and used cooking
oil collection as well as trap cleaning for contracted customers
using the
Company’s resources or third party providers.
Included
in corporate activities are general corporate expenses and the
amortization of
intangibles related to “Fresh Start Reporting.”
Business Segment Net Revenues
(in
thousands):
|
|
|
|
|
|
Year
Ended
|
|
|
|
|
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
|
January 1,
2005
|
|
Rendering |
|
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
279,011
|
|
$
|
192,340
|
|
$
|
201,138
|
|
Intersegment |
|
|
54,509 |
|
|
20,757 |
|
|
26,082 |
|
|
|
|
333,520 |
|
|
213,097 |
|
|
227,220 |
|
Restaurant
Services: |
|
|
|
|
|
|
|
|
|
|
Trade |
|
|
127,979 |
|
|
116,527 |
|
|
119,091 |
|
Intersegment
|
|
|
10,565
|
|
|
13,014
|
|
|
11,300
|
|
|
|
|
138,544 |
|
|
129,541 |
|
|
130,391 |
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
(65,074
|
)
|
|
(33,771
|
)
|
|
(37,382
|
)
|
Total
|
|
$
|
406,990
|
|
$
|
308,867
|
|
$
|
320,229
|
|
Business Segment Profit/(Loss)
(in
thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
|
January 1,
2005
|
|
Rendering
|
|
$
|
33,177
|
|
$
|
21,668
|
|
$
|
30,982
|
|
Restaurant
Services
|
|
|
14,789
|
|
|
15,385
|
|
|
20,723
|
|
Corporate
Activities
|
|
|
(35,675
|
)
|
|
(23,201
|
)
|
|
(30,678
|
)
|
Interest
expense
|
|
|
(7,184
|
)
|
|
(6,157
|
)
|
|
(6,759
|
)
|
Income
from continuing operations
|
|
$
|
5,107
|
|
$
|
7,695
|
|
$
|
14,268
|
|
Certain
assets are not attributable to a single operating segment but instead
relate to
multiple operating segments operating out of individual locations.
These assets
are utilized by both the Rendering and Restaurant Services business
segments and
are identified in the category Combined Rendering/Restaurant Services.
Depreciation of Combined Rendering/Restaurant Services assets is
allocated based
upon an estimate of the percentage of corresponding activity attributed
to each
segment. Additionally, although intangible assets are allocated
to operating
segments, the amortization related to the adoption of “Fresh Start Reporting” in
1993 is not considered in the measure of operating segment profit/(loss)
and is
included in Corporate Activities.
During
the first quarter of fiscal 2005, the Company increased the allocation
of plant
selling, general and administrative expense to the Restaurant Services
segment,
which resulted in additional expense of approximately $1.7 million
of expense
allocated to this segment during fiscal 2005.
During
the third quarter of fiscal 2004, the Company concluded a settlement
with
certain past insurers on certain policies of insurance issued primarily
before
1972, whereby the Company received a cash payment of approximately
$2.8 million
in return for an executed Settlement Agreement and Release in which
the Company
released the participating insurers from all actual and potential
claims and
liability under the subject insurance policies. The Company recorded
receipt of
the payment as a credit (recovery) of claims expense and previous
insurance
premiums included in cost of sales, within the Corporate segment.
Business Segment Assets
(in
thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
Rendering
|
|
$
|
153,798
|
|
$
|
55,574
|
|
Restaurant
Services
|
|
|
36,359
|
|
|
17,828
|
|
Combined
Rendering/Restaurant Services
|
|
|
105,402
|
|
|
57,866
|
|
Corporate
Activities
|
|
|
25,247
|
|
|
59,504
|
|
Total
|
|
$
|
320,806
|
|
$
|
190,772
|
|
Business Segment Property, Plant and Equipment
(in
thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
|
January
1,
2005
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
Rendering
|
|
$
|
11,388
|
|
$
|
7,928
|
|
$
|
7,459
|
|
Restaurant
Services
|
|
|
3,844
|
|
|
3,289
|
|
|
2,990
|
|
Corporate
Activities
|
|
|
5,454
|
|
|
4,570
|
|
|
4,775
|
|
Continuing
operations
|
|
|
20,686
|
|
|
15,787
|
|
|
15,224
|
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
6
|
|
Total
|
|
$
|
20,686
|
|
$
|
15,787
|
|
$
|
15,230
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
Rendering
|
|
$
|
1,421
|
|
$
|
4,746
|
|
$
|
1,045
|
|
Restaurant
Services
|
|
|
254
|
|
|
2,208
|
|
|
213
|
|
Combined
Rendering/Restaurant Services
|
|
|
8,644
|
|
|
12,622
|
|
|
10,675
|
|
Corporate
Activities
|
|
|
1,481
|
|
|
1,830
|
|
|
1,379
|
|
Continuing
operations
|
|
|
11,800
|
|
|
21,406
|
|
|
13,312
|
|
Discontinued
operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
(a)
|
|
$
|
11,800
|
|
$
|
21,406
|
|
$
|
13,312
|
|
(a) |
Excludes
the capital assets acquired as part of the acquisition
of substantially
all of the assets of NBP of
approximately
$51.9 million in fiscal 2006.
|
The Company has no material foreign operations, but exports a portion
of its
products to customers in various foreign countries.
Geographic Area Net Trade Revenues
(in
thousands):
|
|
|
December
30, 2006
|
|
|
December
31,
2005
|
|
January
1, 2005
|
United
States
|
|
$
|
294,301
|
|
$
|
231,282
|
|
$241,635
|
South
Korea
|
|
|
15,466
|
|
|
2,900
|
|
2,702
|
Mexico
|
|
|
15,255
|
|
|
17,476
|
|
35,223
|
China
|
|
|
12,202
|
|
|
4,616
|
|
11,335
|
Other/brokered
|
|
|
69,766
|
|
|
52,593
|
|
29,334
|
Total
|
|
$
|
406,990
|
|
$
|
308,867
|
|
$320,229
|
Other/brokered trade revenues consist primarily of finished product
sales for
which the ultimate destination is not monitored and
cannot be determined with certainty.
NOTE
17.
|
QUARTERLY
FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER
SHARE
AMOUNTS):
|
|
|
|
|
Year
Ended December 30, 2006
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter(a)
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Net
sales
|
|
$
|
76,400
|
|
$
|
87,231
|
|
$
|
115,229
|
|
$
|
128,130
|
|
Operating
income
|
|
|
1,899
|
|
|
1,534
|
|
|
4,362
|
|
|
11,444
|
|
Income/(loss)
from continuing operations
|
|
|
366
|
|
|
(3,149
|
)
|
|
1,801
|
|
|
6,089
|
|
Income/(loss)
from discontinued operations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
income/(loss)
|
|
|
366
|
|
|
(3,149
|
)
|
|
1,801
|
|
|
6,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings/(loss) per share
|
|
|
0.01
|
|
|
(0.04
|
)
|
|
0.02
|
|
|
0.08
|
|
Diluted
earnings/(loss) per share
|
|
|
0.01
|
|
|
(0.04
|
)
|
|
0.02
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2005
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
Net
sales
|
|
$
|
71,353
|
|
$
|
81,274
|
|
$
|
79,332
|
|
$
|
76,908
|
|
Operating
income
|
|
|
2,773
|
|
|
5,419
|
|
|
4,205
|
|
|
3,736
|
|
Income
from continuing operations
|
|
|
916
|
|
|
2,742
|
|
|
1,921
|
|
|
2,116
|
|
Income/(loss)
from discontinued operations
|
|
|
6
|
|
|
6
|
|
|
69
|
|
|
(35
|
)
|
Net
income
|
|
|
922
|
|
|
2,748
|
|
|
1,990
|
|
|
2,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
0.01
|
|
|
0.04
|
|
|
0.03
|
|
|
0.03
|
|
Diluted
earnings per share
|
|
|
0.01
|
|
|
0.04
|
|
|
0.03
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Included
in net income/(loss) and income/(loss) from continuing
operations in the
second quarter of fiscal 2006 is a
write-off
of deferred loan cost of approximately $2.6 million and
fees of
approximately $1.9 for the early retirement
of
senior subordinated notes and termination of the previous
senior credit
agreement.
|
NOTE
18.
|
NEW
ACCOUNTING PRONOUNCEMENTS
|
In
July
2006, the 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. The provisions of FIN 48
are effective
as of the beginning of the Company’s 2007 fiscal year, with the cumulative
effect of the change in accounting principle recorded as an adjustment
to
opening retained earnings. The Company is currently evaluating
the impact of
adopting FIN 48 on the consolidated financial statements.
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
(“SAB
108”), to address diversity in practice in quantifying financial statement
misstatements. SAB 108 requires that registrants quantify uncorrected
misstatements using both the “rollover” and “iron curtain” methods, with
adjustment required if either method results in a misstatement
that is material.
The Company has identified a $2.8 million overstatement of income
tax
liabilities. The Company has not been able to determine how such
excess
liabilities arose; however, the Company has determined that such
liabilities
were recorded prior to 2002. The Company had previously concluded
that the $2.8
million misstatement was immaterial using the rollover method for
evaluating
misstatements. As a result of adopting SAB 108, the Company has
corrected the
misstatement by recording a cumulative effect adjustment to retained
earnings at
the beginning of fiscal 2006.
In
September 2006, the FASB issued Statement of Financial Accounting
Standards No.
157,
Fair
Value Measurements
(“SFAS
157”),
which
defines fair value, establishes a framework for measuring fair
value, and
expands disclosures about fair value measurements. The provisions
of SFAS 157
are effective as of the beginning of fiscal year 2008. The Company
is currently
evaluating the impact of adopting SFAS 157 on the consolidated
financial
statements.
SCHEDULE
II
DARLING
INTERNATIONAL INC.
Notes
to Consolidated Financial Statements
(continued)
Valuation
and Qualifying Accounts
(In
thousands)
|
Balance
at
|
Additions
Charged to:
|
|
Balance
at
|
Description
|
Beginning
of Period
|
Costs
and
Expenses
|
Other
(a)
|
Deductions
(b)
|
End
of
Period
|
Accumulated
amortization of
intangible assets:
|
|
|
|
|
|
Year ended December 30, 2006
|
$
33,047
|
$
4,552
|
$
-
|
$
-
|
$
37,599
|
Year ended December 31, 2005
|
$
29,163
|
$
3,884
|
$
-
|
$
-
|
$
33,047
|
Year ended January 1, 2005
|
$
28,118
|
$
3,879
|
$
-
|
$
2,834
|
$
29,163
|
Reserve
for bad debts:
|
|
|
|
|
|
Year ended December 30, 2006
|
$
728
|
$
874
|
$
596
|
$
559
|
$
1,639
|
Year ended December 31, 2005
|
$
757
|
$
484
|
$
-
|
$
513
|
$
728
|
Year ended January 1, 2005
|
$
626
|
$
426
|
$
-
|
$
295
|
$
757
|
Deferred
tax valuation allowance:
|
|
|
|
|
|
Year ended December 30, 2006
|
$
19,086
|
$
-
|
$
-
|
$
9,670
|
$
9,416
|
Year ended December 31, 2005
|
$
20,257
|
$
-
|
$
-
|
$
1,171
|
$
19,086
|
Year ended January 1, 2005
|
$
20,591
|
$
-
|
$
-
|
$
334
|
$
20,257
|
(a) |
Includes
amounts acquired as part of the NBP
acquisition.
|
|
(b)
|
Deductions
consist of retirements of accumulated amortization (and
the related
intangible asset), write-offs of uncollectible accounts
receivable and
reductions of the deferred tax valuation allowance. In
2006 and 2005, the
reductions in the deferred tax valuation allowance were
offset against
deferred tax assets and/or goodwill, resulting in no
deferred tax
benefit.
|
PART
II
ITEM
9. |
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
|
None.
ITEM
9A.
CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures.
As
required by Exchange Act Rule 13a-15(b), the Company’s management, including the
Chief Executive Officer and Chief Financial Officer, conducted
an evaluation, as
of the end of the period covered by this report, of the effectiveness
of the
design and operation of the Company’s disclosure controls and procedures. As
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the
Exchange Act,
disclosure controls and procedures are controls and other procedures
of the
Company that are designed to ensure that information required to
be disclosed by
the Company in the reports it files or submits under the Exchange
Act is
recorded, processed, summarized and reported, within the time periods
specified
in the SEC’s rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure
that information
required to be disclosed by the Company in the reports it files
or submits under
the Exchange Act is accumulated and communicated to the Company’s management,
including the Chief Executive Officer and Chief Financial Officer,
as
appropriate to allow timely decisions regarding required
disclosure.
Based
on
management’s evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of the end of the period covered by this report.
Internal
Control over Financial Reporting.
(a)
Management’s
Annual Report on Internal Control over Financial Reporting. Management
of the Company is responsible for establishing and maintaining
adequate internal
control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f)
promulgated under the Exchange Act. Those rules define internal
control over
financial reporting as a process designed to provide reasonable
assurance
regarding the reliability of financial reporting and the preparation
of
financial statements for external purposes in accordance with generally
accepted
accounting principles and includes those policies and procedures
that:
•
Pertain
to the maintenance of records that, in reasonable detail, accurately
and fairly
reflect the transactions and dispositions of the assets of the
Company;
•
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
Company are
being made only in accordance with authorizations of management
and directors of
the Company; and
•
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized
acquisition, use or disposition of the Company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting
may not
prevent or detect misstatements. Projections of any evaluation
of effectiveness
to future periods are subject to the risk that controls may become
inadequate
because of changes in conditions, or that the degree of compliance
with the
policies or procedures may deteriorate.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December
30, 2006. In
making
this assessment, the Company’s management used the criteria established in
Internal Control-Integrated Framework issued by the Committee of
Sponsoring
Organizations of the Treadway Commission (COSO).
Based
on
their assessment, management has concluded that the Company’s internal control
over financial reporting was effective as of December 30, 2006.
KPMG
LLP,
the registered public accounting firm that audited the Company’s financial
statements, has issued an audit report on management’s assessment of the
Company’s internal control over financial reporting, which report is included
herein.
(b)
Attestation
Report of the Registered Public Accounting Firm.
The
attestation report called for by Item 308(b) of Regulation S-K
is incorporated
herein by reference to Report of Independent Registered Public
Accounting Firm
on Internal Control Over Financial Reporting, included in Part
II, Item 8,
“Financial Statements and Supplementary Data” of this report.
(c)
Changes
in Internal Control over Financial Reporting.
As
required by Exchange Act Rule 13a-15(d), the Company’s management, including the
Chief Executive Officer and Chief Financial Officer, also conducted
an
evaluation of the Company’s internal control over financial reporting to
determine whether any change occurred during the last fiscal quarter
of the
period covered by this report that has materially affected, or
is reasonably
likely to materially affect, the Company’s internal control over financial
reporting. Based on that evaluation, there has been no change in
the Company’s
internal control over financial reporting during the last fiscal
quarter of the
period covered by this report that has materially affected, or
is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
On
May
15, 2006, the Company completed the acquisition of substantially
all of the
assets of NBP (the "Transaction"). The Company is currently in
the process of
integrating these acquired assets pursuant to the Sarbanes-Oxley
Act of 2002.
The impact of the acquisition of these acquired assets has not
materially
affected and is not likely to materially affect the Company's internal
control
over financial reporting. However, as a result of the Company's
integration
activities, controls will be periodically changed. The Company
believes,
however, it will be able to maintain sufficient controls over the
substantive
results of its financial reporting throughout this integration
process. In
addition, the scope of management’s assessment of the Company’s internal control
over financial reporting as of December 30, 2006 excluded the operations
pertinent to the assets acquired in the Transaction, as permitted
under
Frequently Asked Question No. 3 (October 6, 2004) regarding Release
No.
34-47986, “Management’s
Report on Internal Control Over Financial Reporting and Certification
of
Disclosure in Exchange Act Periodic Reports”
(June
5, 2003). The assets acquired in the Transaction attributed to
approximately 29
percent of the Company’s consolidated net operating revenues for the year ended
December 30, 2006 and represented approximately 50 percent of the
Company’s
consolidated total assets as of December 30, 2006.
ITEM
9B.
OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The
information required by this Item with respect to Items 401 and
405 of
Regulation S-K will appear in the sections entitled “Election of Directors,”
“Executive Officers” and “Compliance with Section 16(a) of the Exchange Act”
included in the Company’s definitive Proxy Statement relating to the 2007 Annual
Meeting of Stockholders, which information is incorporated herein
by reference.
The
Company has adopted the Darling International Inc. Code of Conduct
(“Code of
Conduct”), which is applicable to all of the Company’s employees, including its
senior financial officers, the Chief Executive Officer, Chief Financial
Officer,
Controller, Treasurer and General Counsel. The Company has not
granted any
waivers to the Code of Conduct to date. A copy of the Company’s Code of Conduct
has been posted on the “Investor” portion of our web site, at www.darlingii.com.
Shareholders may request a free copy of our Code of Conduct from:
Brad
Phillips
Darling
International Inc.
251
O’Connor Ridge Blvd, Suite 300
Irving,
Texas 75038
Phone:
972-717-0300
Fax:
972-717-1588
ITEM
11. EXECUTIVE COMPENSATION
The
information required by this Item will appear in the section entitled
“Executive
Compensation” included in the Company’s definitive Proxy Statement relating to
the 2007 Annual Meeting of Stockholders, which information is incorporated
herein by reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
The
information required by this Item with respect to Item 201(d) of
Regulation S-K
appears in Item 5 of this report.
The
information required by this Item with respect to Item 403 of Regulation
S-K
will appear in the section entitled “Security Ownership of Certain Beneficial
Owners and Management” included in the Company’s definitive Proxy Statement
relating to the 2007 Annual Meeting of Stockholders, which information
is
incorporated herein by reference.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The
information required by this Item will appear in the section entitled
“Certain
Relationships and Related Transactions” included in the Company’s definitive
Proxy Statement relating to the 2007 Annual Meeting of Stockholders,
which
information is incorporated herein by reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
information required by this Item will appear in the section entitled
“Independent Public Accountants” included in the Company’s definitive Proxy
Statement relating to the 2007 Annual Meeting of Stockholders,
which information
is incorporated herein by reference.
PART
IV
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
|
|
Page
|
(a)
|
Documents
filed as part of this report:
|
|
|
(1)
|
The
following consolidated financial statements are included
in Item
8.
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
43
|
|
|
Report
of Independent Registered Public Accounting Firm on Internal
Control Over
Financial
Reporting
|
44
|
|
|
Consolidated
Balance Sheets
|
|
|
|
December
30,
2006 and December 31, 2005
|
46
|
|
|
Consolidated
Statements of Operations-
|
|
|
|
Three
years ended December 30, 2006
|
47
|
|
|
Consolidated
Statements of Stockholders’ Equity -
|
|
|
|
Three
years ended December 30, 2006
|
48
|
|
|
Consolidated
Statements of Cash Flows -
|
|
|
|
Three
years ended December 30, 2006
|
49
|
|
|
Notes
to Consolidated Financial Statements
|
50
|
|
|
|
|
|
|
|
|
|
(2)
|
The
following financial statement schedule is included in
Item
8.
|
|
|
|
|
|
|
|
Schedule
II - Valuation and Qualifying Accounts
|
|
|
|
Three
years ended December 30, 2006
|
76
|
All
other
schedules are omitted since the required information is not present
or is not
present in amounts sufficient to require submission of the schedule,
or because
the information required is included in the consolidated financial
statements
and notes thereto.
2.1
|
Asset
Purchase Agreement, dated as of December 19, 2005, among
Darling
International Inc., Darling National LLC, and National
By-Products LLC
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
December 19, 2005 and incorporated herein by
reference).
|
|
|
2.2
|
Claim
Purchase Agreement, dated as of October 12, 2006, by
and between Darling
International Inc. and Trust Company of the West as trustee
of the trust
established pursuant to an Individual Trust Agreement
between the
Boilermaker-Blacksmith National Pension Trust and itself
(filed as Exhibit
2.1 to the Company’s Current Report on Form 8-K filed October 18, 2006 and
incorporated herein by reference).
|
|
|
2.3
|
Amendment
No. 1 to Claim Purchase Agreement, dated as of December
31, 2006, by and
between Darling International Inc. and Trust Company
of the West as
trustee of the trust established pursuant to an Individual
Trust Agreement
between the Boilermaker-Blacksmith National Pension Trust
and itself
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
January 3, 2007 and incorporated herein by reference).
|
|
|
3.1
|
Restated
Certificate of Incorporation of the Company, as amended
(filed as Exhibit
3.1 to the Company’s Registration Statement on Form S-1 filed May 23, 2002
and incorporated herein by reference).
|
|
|
3.2
|
Amended
and Restated Bylaws of the Company (filed as Exhibit
3.1 to the Company’s
Current Report on Form 8-K filed January 22 2007 and
incorporated herein
by reference).
|
|
|
4.1
|
Specimen
Common Stock Certificate (filed as Exhibit 4.1 to the
Company’s
Registration Statement on Form S-1 filed May 27, 1994
and incorporated
herein by reference).
|
|
|
4.2
|
Certificate
of Designation, Preference and Rights of Series A Preferred
Stock (filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
May 23, 2002 and incorporated herein by reference).
|
|
|
10.1
|
Recapitalization
Agreement, dated as of March 15, 2002, among Darling
International Inc.,
each of the banks or other lending institutions which
is a signatory
thereto or any successor or assignee thereof, and Credit
Lyonnais New York
Branch, individually as a bank and as agent (filed as
Annex C to the
Company’s Definitive Proxy Statement filed on April 29, 2002,
and
incorporated herein by reference).
|
|
|
10.2
|
First
Amendment to Recapitalization Agreement, dated as of
April 1, 2002, among
Darling International Inc., each of the banks party to
the
Recapitalization Agreement, and Credit Lyonnais New York
Branch,
individually as a bank and as agent (filed as Annex D
to the Company’s
Definitive Proxy Statement filed on April 29, 2002, and
incorporated
herein by reference).
|
|
|
10.3
|
Second
Amendment to Recapitalization Agreement, dated as of
April 29, 2002, among
Darling International Inc., each of the banks party to
the
Recapitalization Agreement, and Credit Lyonnais New York
Branch,
individually as a bank and as agent (filed as Exhibit
10.3 to the
Company’s Registration Statement on Form S-1 filed on May 23,
2002, and
incorporated herein by reference).
|
|
|
10.5
|
Registration
Rights Agreement, dated as of December 29, 1993, between
Darling
International Inc., and the signatory holders identified
therein (filed as
Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on
May 27, 1994, and incorporated herein by reference).
|
|
|
10.6
|
Registration
Rights Agreement, dated as of May 10, 2002, between Darling
International
Inc., and the holders identified therein (filed as Exhibit
10.6 to the
Company’s Registration Statement on Form S-1 filed on May 23,
2002, and
incorporated herein by reference).
|
|
|
10.7
*
|
Form
of Indemnification Agreement (filed as Exhibit 10.7 to
the Company’s
Registration Statement on Form S-1 filed on May 27, 1994,
and incorporated
herein by reference).
|
|
|
10.8
*
|
Form
of Executive Severance Agreement (filed as Exhibit 10.6
to the Company’s
Registration Statement on Form S-1 filed on May 27, 1994,
and incorporated
herein by reference).
|
|
|
10.9
|
Leases,
dated July 1, 1996, between the Company and the City
and County of San
Francisco (filed pursuant to temporary hardship exemption
under cover of
Form SE).
|
|
|
10.10
*
|
1993
Flexible Stock Option Plan (filed as Exhibit 10.2 to
the Company’s
Registration Statement on Form S-1 filed on May 27, 1994,
and incorporated
herein by reference).
|
|
|
10.11
*
|
1994
Employee Flexible Stock Option Plan (filed as Exhibit
2 to the Company’s
Revised Definitive Proxy Statement filed on April 20,
2001, and
incorporated herein by reference).
|
|
|
10.12
*
|
Non-Employee
Directors Stock Option Plan (filed as Exhibit 10.13 to
the Company’s
Registration Statement on Form S-1/A filed on June 5,
2002, and
incorporated herein by reference).
|
|
|
10.13
|
Master
Lease Agreement between Navistar Leasing Company and
Darling International
Inc. dated as of August 4, 1999 (filed as Exhibit 10.18
to the Company’s
Annual Report on Form 10-K filed March 31, 2000 and incorporated
herein by
reference).
|
|
|
10.14
*
|
Employment
Agreement, dated as of February 3, 2003, between Darling
International
Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to
the Company’s Current
Report on Form 8-K filed February 3, 2003, and incorporated
herein by
reference).
|
|
|
10.15
*
|
Amendment
No. 1 to Employment Agreement, dated as of July 1, 2003,
between Darling
International Inc. and Randall C. Stuewe (filed as Exhibit
10.5 to the
Company’s Quarterly Report on Form 10-Q filed August 12, 2003,
and incorporated herein by reference).
|
|
|
10.16
|
Master
Lease Agreement, dated July 2, 2003, between Darling
International Inc.,
as Lessee, and Merrill Lynch Capital, a division of Merrill
Lynch Business
Financial Services, Inc., as Lessor (filed as Exhibit
10.6 to the
Company’s Quarterly Report on Form 10-Q filed August 12, 2003,
and incorporated herein by reference).
|
|
|
10.17
|
Lease,
dated November 24, 2003, between Darling International
Inc. and the Port
of Tacoma
(filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed
March 29, 2004,
and incorporated herein by reference).
|
|
|
10.18
*
|
Darling
International Inc. 2004 Omnibus Incentive Plan (filed
as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed May 11, 2005, and
incorporated herein by reference).
|
|
|
10.19
*
|
Darling
International Inc. Compensation Committee Long-Term Incentive
Program
Policy Statement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed June 22, 2005, and incorporated herein
by
reference).
|
|
|
10.20*
|
Integration
Success Incentive Award Plan (filed as Exhibit 10.1 to
the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated
herein by
reference).
|
|
|
10.21*
|
Non-Employee
Director Restricted Stock Award Plan (filed as Exhibit
10.2 to the
Company’s Current Report on Form 8-K filed March 15, 2006 and
incorporated
herein by reference).
|
|
|
10.22
|
Credit
Agreement, dated as of April 7, 2006, among Darling International
Inc.,
various lending institutions party thereto and JPMorgan
Chase Bank, N.A.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
|
10.23
|
First
Amendment to Note Purchase Agreement, dated as of April
7, 2006, among
Darling International Inc. and the securities purchasers
party thereto
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
|
10.24*
|
Amended
and Restated Employment Agreement, dated as of February
28, 2006, by and
among Darling International Inc., Darling National LLC
and Mark A. Myers
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
May 17, 2006 and incorporated herein by reference).
|
|
|
10.25*
|
Notice
of Amendment to Grants and Awards, dated as of October
10, 2006 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 10,
2006 and incorporated herein by reference).
|
|
|
10.26*
|
Amendment
No. 2 to Employment Agreement, dated as of October 13,
2006, by and
between Darling International Inc. and Randall C. Stuewe
(filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed October 18, 2006
and incorporated herein by reference).
|
|
|
10.27*
|
Form
of Senior Executive Termination Benefits Agreement (filed
as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed December 13, 2006
and
incorporated herein by reference).
|
|
|
10.28*
|
Form
of Addendum to Senior Executive Termination Benefits
Agreement (filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December
13, 2006 and incorporated herein by reference).
|
|
|
10.29*
|
Amendment
to Darling International Inc. 2004 Omnibus Incentive
Plan (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22,
2007 and incorporated herein by reference).
|
|
|
14
|
Darling
International Inc. Code of Conduct applicable to all
employees, including
senior executive officers (filed as Exhibit 99 to the
Company’s Annual
Report on Form 10-K filed March 26, 2004).
|
|
|
21
|
Subsidiaries
of the Registrant (filed as Exhibit 21.1 to the Company’s Registration
Statement on Form S-4 filed on February 2, 2006, and
incorporated herein
by reference).
|
|
|
23
|
Consent
of KPMG LLP (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 (filed herewith).
|
|
|
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
(filed herewith).
|
|
|
32
|
Written
Statement of Chief Executive Officer and Chief Financial
Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C.
Section 1350) (filed herewith).
|
|
|
|
|
|
The
Exhibits are available upon request from the
Company.
|
*
|
Management
contract or compensatory plan or
arrangement.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the
undersigned, thereunto duly authorized.
DARLING
INTERNATIONAL INC.
By:
/s/
Randall C. Stuewe
Randall
C. Stuewe
Chairman
of the Board and
Chief
Executive Officer
Date:
March
15,
2007
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been
signed below by the following persons on behalf of the registrant
and in the
capacities and on the dates indicated.
Signature Title Date
/s/
Randall
C. Stuewe Chairman
of the Board
and
March
15,
2007
Randall
C. Stuewe Chief
Executive
Officer
(Principal
Executive Officer)
/s/
John
O. Muse Executive
Vice President
-
March
15,
2007
John O. Muse
Finance and Administration
(Principal Financial and Accounting Officer)
/s/
O.
Thomas Albrecht Director March
15,
2007
O.
Thomas
Albrecht
/s/
C.
Dean Carlson
Director
March
15,
2007
C.
Dean
Carlson
/s/
Marlyn
Jorgensen
Director
March
15,
2007
Marlyn
Jorgensen
/s/
Fredric
J.
Klink Director
March
15,
2007
Fredric
J. Klink
/s/
Charles
Macaluso
Director
March
15,
2007
Charles
Macaluso
/s/
Michael
Urbut
Director
March
15,
2007
Michael
Urbut
INDEX
TO EXHIBITS
2.1
|
|
Asset
Purchase Agreement, dated as of December 19, 2005, among
Darling
International Inc., Darling National LLC, and National
By-Products LLC
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
December 19, 2005 and incorporated herein by
reference).
|
|
|
|
2.2
|
|
Claim
Purchase Agreement, dated as of October 12, 2006, by
and between Darling
International Inc. and Trust Company of the West as trustee
of the trust
established pursuant to an Individual Trust Agreement
between the
Boilermaker-Blacksmith National Pension Trust and itself
(filed as Exhibit
2.1 to the Company’s Current Report on Form 8-K filed October 18, 2006 and
incorporated herein by reference).
|
|
|
|
2.3
|
|
Amendment
No. 1 to Claim Purchase Agreement, dated as of December
31, 2006, by and
between Darling International Inc. and Trust Company
of the West as
trustee of the trust established pursuant to an Individual
Trust Agreement
between the Boilermaker-Blacksmith National Pension Trust
and itself
(filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
January 3, 2007 and incorporated herein by reference).
|
|
|
|
3.1
|
|
Restated
Certificate of Incorporation of the Company, as amended
(filed as Exhibit
3.1 to the Company’s Registration Statement on Form S-1 filed May 23, 2002
and incorporated herein by reference).
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of the Company (filed as Exhibit
3.1 to the Company’s
Current Report on Form 8-K filed January 22, 2007 and
incorporated herein
by reference).
|
|
|
|
4.1
|
|
Specimen
Common Stock Certificate (filed as Exhibit 4.1 to the
Company’s
Registration Statement on Form S-1 filed May 27, 1994
and incorporated
herein by reference).
|
|
|
|
4.2
|
|
Certificate
of Designation, Preference and Rights of Series A Preferred
Stock (filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
May 23, 2002 and incorporated herein by reference).
|
|
|
|
10.1
|
|
Recapitalization
Agreement, dated as of March 15, 2002, among Darling
International Inc.,
each of the banks or other lending institutions which
is a signatory
thereto or any successor or assignee thereof, and Credit
Lyonnais New York
Branch, individually as a bank and as agent (filed as
Annex C to the
Company’s Definitive Proxy Statement filed on April 29, 2002,
and
incorporated herein by reference).
|
|
|
|
10.2
|
|
First
Amendment to Recapitalization Agreement, dated as of
April 1, 2002, among
Darling International Inc., each of the banks party to
the
Recapitalization Agreement, and Credit Lyonnais New York
Branch,
individually as a bank and as agent (filed as Annex D
to the Company’s
Definitive Proxy Statement filed on April 29, 2002, and
incorporated
herein by reference).
|
|
|
|
10.3
|
|
Second
Amendment to Recapitalization Agreement, dated as of
April 29, 2002, among
Darling International Inc., each of the banks party to
the
Recapitalization Agreement, and Credit Lyonnais New York
Branch,
individually as a bank and as agent (filed as Exhibit
10.3 to the
Company’s Registration Statement on Form S-1 filed on May 23,
2002, and
incorporated herein by reference).
|
|
|
|
10.5
|
|
Registration
Rights Agreement, dated as of December 29, 1993, between
Darling
International Inc., and the signatory holders identified
therein (filed as
Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on
May 27, 1994, and incorporated herein by reference).
|
|
|
|
10.6
|
|
Registration
Rights Agreement, dated as of May 10, 2002, between Darling
International
Inc., and the holders identified therein (filed as Exhibit
10.6 to the
Company’s Registration Statement on Form S-1 filed on May 23,
2002, and
incorporated herein by reference).
|
|
|
|
10.7
|
*
|
Form
of Indemnification Agreement (filed as Exhibit 10.7 to
the Company’s
Registration Statement on Form S-1 filed on May 27, 1994,
and incorporated
herein by reference).
|
|
|
|
10.8
|
*
|
Form
of Executive Severance Agreement (filed as Exhibit 10.6
to the Company’s
Registration Statement on Form S-1 filed on May 27, 1994,
and incorporated
herein by reference).
|
10.9
|
|
Leases,
dated July 1, 1996, between the Company and the City
and County of San
Francisco (filed pursuant to temporary hardship exemption
under cover of
Form SE).
|
10.10
|
*
|
1993
Flexible Stock Option Plan (filed as Exhibit 10.2 to
the Company’s
Registration Statement on Form S-1 filed on May 27, 1994,
and incorporated
herein by reference).
|
|
|
|
10.11
|
*
|
1994
Employee Flexible Stock Option Plan (filed as Exhibit
2 to the Company’s
Revised Definitive Proxy Statement filed on April 20,
2001, and
incorporated herein by reference).
|
|
|
|
10.12
|
*
|
Non-Employee
Directors Stock Option Plan (filed as Exhibit 10.13 to
the Company’s
Registration Statement on Form S-1/A filed on June 5,
2002, and
incorporated herein by reference).
|
|
|
|
10.13
|
|
Master
Lease Agreement between Navistar Leasing Company and
Darling International
Inc. dated as of August 4, 1999 (filed as Exhibit 10.18
to the Company’s
Annual Report on Form 10-K filed March 31, 2000 and incorporated
herein by
reference).
|
|
|
|
10.14
|
*
|
Employment
Agreement, dated as of February 3, 2003, between Darling
International
Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to
the Company’s Current
Report on Form 8-K filed February 3, 2003, and incorporated
herein by
reference).
|
|
|
|
10.15
|
*
|
Amendment
No. 1 to Employment Agreement, dated as of July 1, 2003,
between Darling
International Inc. and Randall C. Stuewe (filed as Exhibit
10.5 to the
Company’s Quarterly Report on Form 10-Q filed August 12, 2003,
and incorporated herein by reference).
|
|
|
|
10.16
|
|
Master
Lease Agreement, dated July 2, 2003, between Darling
International Inc.,
as Lessee, and Merrill Lynch Capital, a division of Merrill
Lynch Business
Financial Services, Inc., as Lessor (filed as Exhibit
10.6 to the
Company’s Quarterly Report on Form 10-Q filed August 12, 2003,
and incorporated herein by reference).
|
|
|
|
10.17
|
|
Lease,
dated November 24, 2003, between Darling International
Inc. and the Port
of Tacoma
(filed as Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed
March 29, 2004,
and incorporated herein by reference).
|
|
|
|
10.18 |
* |
Darling
International Inc. 2004 Omnibus Incentive Plan (filed as
Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed May 11, 2005, and
incorporated herein by reference). |
|
|
|
10.19 |
* |
Darling
International Inc. Compensation Committee Long-Term Incentive
Program
Policy Statement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed June 22, 2005, and incorporated herein by
reference). |
10.20
|
*
|
Integration
Success Incentive Award Plan (filed as Exhibit 10.1 to
the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated
herein by
reference).
|
|
|
|
10.21
|
*
|
Non-Employee
Director Restricted Stock Award Plan (filed as Exhibit
10.2 to the
Company’s Current Report on Form 8-K filed March 15, 2006 and
incorporated
herein by reference).
|
|
|
|
10.22
|
|
Credit
Agreement, dated as of April 7, 2006, among Darling International
Inc.,
various lending institutions party thereto and JPMorgan
Chase Bank, N.A.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
|
|
10.23
|
|
First
Amendment to Note Purchase Agreement, dated as of April
7, 2006, among
Darling International Inc. and the securities purchasers
party thereto
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
|
|
10.24
|
*
|
Amended
and Restated Employment Agreement, dated as of February
28, 2006, by and
among Darling International Inc., Darling National LLC
and Mark A. Myers
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
May 17, 2006 and incorporated herein by reference).
|
|
|
|
10.25
|
*
|
Notice
of Amendment to Grants and Awards, dated as of October
10, 2006 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 10,
2006 and incorporated herein by reference).
|
|
|
|
10.26
|
*
|
Amendment
No. 2 to Employment Agreement, dated as of October 13,
2006, by and
between Darling International Inc. and Randall C. Stuewe
(filed as Exhibit
10.1 to the Company’s Current Report on Form 8-K filed October 18, 2006
and incorporated herein by reference).
|
|
|
|
10.27
|
*
|
Form
of Senior Executive Termination Benefits Agreement (filed
as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed December 13, 2006
and
incorporated herein by reference).
|
|
|
|
10.28
|
*
|
Form
of Addendum to Senior Executive Termination Benefits
Agreement (filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December
13, 2006 and incorporated herein by reference).
|
|
|
|
10.29
|
*
|
Amendment
to Darling International Inc. 2004 Omnibus Incentive
Plan (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22,
2007 and incorporated herein by reference).
|
14
|
|
Darling
International Inc. Code of Conduct applicable to all
employees, including
senior executive officers (filed as Exhibit 99 to the
Company’s Annual
Report on Form 10-K filed March 26, 2004).
|
|
|
|
21
|
|
Subsidiaries
of the Registrant (filed as Exhibit 21.1 to the Company’s Registration
Statement on Form S-4 filed on February 2, 2006, and
incorporated herein
by reference).
|
|
|
|
23
|
|
Consent
of KPMG LLP (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 (filed herewith).
|
|
|
|
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
(filed herewith).
|
|
|
|
32
|
|
Written
Statement of Chief Executive Officer and Chief Financial
Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C.
Section 1350) (filed herewith).
|
|
|
|
|
|
|
|
*
|
Management
contract or compensatory plan or
arrangement.
|
Page
87