UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark One)
/
X
/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE
ACT OF 1934
For
the quarterly period ended June 30, 2007
OR
/
/ TRANSITION REPORT PURSUANT TO SECTION 13 or
15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the
transition period from _______ to _______
Commission
File Number 0-24620
DARLING
INTERNATIONAL INC.
(Exact
name of registrant as specified in its charter)
|
Delaware |
36-2495346.
|
|
(State
or other jurisdiction |
( I.R.S.
Employer |
|
of
incorporation or organization) |
Identification
Number) |
|
|
|
|
|
|
|
251
O’Connor Ridge Blvd., Suite 300 |
|
|
Irving,
Texas |
75038 |
|
(Address
of principal executive offices) |
(Zip
Code) |
|
|
|
Registrant’s
telephone number, including area code:
(972) 717-0300
Indicate
by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or
15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports),
and
(2) has been subject to such filing requirements for the past 90
days. Yes
X No
____
Indicate
by check mark whether the
Registrant 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
There
were 81,275,850 shares of common stock, par value $0.01 per share, outstanding
at August 2, 2007.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
FORM
10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2007
TABLE
OF CONTENTS
|
|
Page
No.
|
|
PART
I: FINANCIAL INFORMATION
|
|
|
|
|
|
|
|
Item
1.
|
FINANCIAL
STATEMENTS
|
|
|
|
|
|
Consolidated
Balance Sheets
|
3
|
|
June
30, 2007 (unaudited) and December 30, 2006
|
|
|
|
|
|
Consolidated
Statements of Operations (unaudited)
|
4
|
|
Three
and Six Months Ended June 30, 2007 and July 1, 2006
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (unaudited)
|
5
|
|
Six
Months Ended June 30, 2007 and July 1, 2006
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
6
|
|
|
|
|
|
|
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
|
|
|
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
16
|
|
|
|
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
|
33
|
|
|
|
Item
4.
|
CONTROLS
AND PROCEDURES
|
34
|
|
|
|
|
|
|
|
|
|
|
PART
II: OTHER INFORMATION
|
|
|
|
|
|
|
|
Item
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
36
|
|
|
|
Item
6.
|
EXHIBITS
|
37
|
|
|
|
|
Signatures
|
38
|
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
June
30,
2007 and December 30, 2006
(in
thousands, except shares and per share data)
|
June
30,
2007
|
|
|
December
30,
2006
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
6,161
|
|
|
$
|
5,281
|
|
Restricted
cash
|
|
448
|
|
|
|
480
|
|
Accounts
receivable, net
|
|
49,323
|
|
|
|
42,381
|
|
Inventories
|
|
19,552
|
|
|
|
14,562
|
|
Other
current assets
|
|
5,859
|
|
|
|
5,036
|
|
Deferred
income taxes
|
|
8,464
|
|
|
|
6,921
|
|
Total
current assets
|
|
89,807
|
|
|
|
74,661
|
|
Property,
plant and equipment, less accumulated depreciation
of
$191,248 at June 30, 2007 and $184,061 at December 30,
2006
|
|
128,724
|
|
|
|
132,149
|
|
Intangible
assets, less accumulated amortization of
$40,033
at June 30, 2007 and $37,599 at December 30, 2006
|
|
31,223
|
|
|
|
33,657
|
|
Goodwill
|
|
71,856
|
|
|
|
71,856
|
|
Other
assets
|
|
6,642
|
|
|
|
6,683
|
|
Deferred
income taxes
|
|
1,251
|
|
|
|
1,800
|
|
|
$
|
329,503
|
|
|
$
|
320,806
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
$
|
5,000
|
|
|
$
|
5,004
|
|
Accounts
payable, principally trade
|
|
21,739
|
|
|
|
17,473
|
|
Accrued
expenses
|
|
35,998
|
|
|
|
34,319
|
|
Total
current liabilities
|
|
62,737
|
|
|
|
56,796
|
|
Long-term
debt, net
|
|
58,500
|
|
|
|
78,000
|
|
Other
non-current liabilities
|
|
36,171
|
|
|
|
34,685
|
|
Total
liabilities
|
|
157,408
|
|
|
|
169,481
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value; 100,000,000 shares authorized;
81,131,565
and 80,875,453 shares issued and outstanding
at June 30, 2007 and at December 30, 2006,
respectively
|
|
811
|
|
|
|
809
|
|
Additional
paid-in capital
|
|
151,337
|
|
|
|
150,045
|
|
Treasury
stock, at cost; 90,483 and 21,000 shares at
June 30, 2007 and December 30, 2006, respectively
|
|
(629
|
)
|
|
|
(172
|
)
|
Accumulated
other comprehensive loss
|
|
(11,002
|
)
|
|
|
(11,733
|
)
|
Retained
earnings
|
|
31,578
|
|
|
|
12,376
|
|
Total
stockholders’ equity
|
|
172,095
|
|
|
|
151,325
|
|
|
$
|
329,503
|
|
|
$
|
320,806
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral
part of these consolidated financial statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Three
months and six months ended June 30, 2007 and July 1, 2006
(in
thousands, except per share data)
(unaudited)
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
|
|
June
30,
2007
|
|
|
July
1,
2006
|
|
Net
sales
|
$
|
159,425
|
|
$
|
87,231
|
|
|
$
|
298,037
|
|
$
|
163,631
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and operating expenses
|
|
121,925
|
|
|
68,831
|
|
|
|
225,169
|
|
|
129,512
|
|
Selling,
general and administrative expenses
|
|
14,295
|
|
|
11,817
|
|
|
|
26,876
|
|
|
21,504
|
|
Depreciation
and amortization
|
|
5,795
|
|
|
5,049
|
|
|
|
11,539
|
|
|
9,182
|
|
Total
costs and expenses
|
|
142,015
|
|
|
85,697
|
|
|
|
263,584
|
|
|
160,198
|
|
Operating
income
|
|
17,410
|
|
|
1,534
|
|
|
|
34,453
|
|
|
3,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(1,326
|
)
|
|
(1,760
|
)
|
|
|
(2,959
|
)
|
|
(3,302
|
)
|
Other,
net
|
|
(102
|
)
|
|
(4,760
|
)
|
|
|
(531
|
)
|
|
(4,529
|
)
|
Total
other income/(expense)
|
|
(1,428
|
)
|
|
(6,520
|
)
|
|
|
(3,490
|
)
|
|
(7,831
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss)
from operations before income
taxes
|
|
15,982
|
|
|
(4,986
|
)
|
|
|
30,963
|
|
|
(4,398
|
)
|
Income
taxes expense/(benefit)
|
|
6,500
|
|
|
(1,837
|
)
|
|
|
11,901
|
|
|
(1,615
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
$
|
9,482
|
|
$
|
(3,149
|
)
|
|
$
|
19,062
|
|
$
|
(2,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income/(loss) per share:
|
$
|
0.12
|
|
$
|
(0.04
|
)
|
|
$
|
0.24
|
|
$
|
(0.04
|
)
|
Diluted
income/(loss) per share:
|
$
|
0.12
|
|
$
|
(0.04
|
)
|
|
$
|
0.23
|
|
$
|
(0.04
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Six
months ended June 30, 2007 and July 1, 2006
(in
thousands)
(unaudited)
|
June
30,
2007
|
|
July
1,
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income/(loss)
|
$
|
19,062
|
|
$
|
(2,783
|
)
|
Adjustments
to reconcile net income/(loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
11,539
|
|
|
9,182
|
|
Gain
on disposal of property, plant, equipment and other assets
|
|
(16
|
)
|
|
(120
|
)
|
Write-off
deferred loan costs
|
|
–
|
|
|
2,569
|
|
Deferred
taxes
|
|
(994
|
)
|
|
(1,754
|
)
|
Stock-based
compensation expense
|
|
1,005
|
|
|
818
|
|
Changes
in operating assets and liabilities, net of effect of
acquisition:
|
|
|
|
|
|
|
Restricted
cash
|
|
32
|
|
|
1,858
|
|
Accounts
receivable
|
|
(6,942
|
)
|
|
3,967
|
|
Inventories
and prepaid expenses
|
|
(5,757
|
)
|
|
(1,750
|
)
|
Accounts
payable and accrued expenses
|
|
5,634
|
|
|
(6,403
|
)
|
Other
|
|
2,419
|
|
|
1,543
|
|
Net
cash provided by operating activities
|
|
25,982
|
|
|
7,127
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
Capital
expenditures
|
|
(5,742
|
)
|
|
(5,596
|
)
|
Acquisition
of NBP, net of cash acquired
|
|
–
|
|
|
(79,924
|
)
|
Gross
proceeds from disposal of property, plant and equipment
and other assets
|
|
103
|
|
|
219
|
|
Net
cash used by investing activities
|
|
(5,639
|
)
|
|
(85,301
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
Proceeds
from debt
|
|
19,000
|
|
|
111,000
|
|
Payments
on debt
|
|
(38,504
|
)
|
|
(61,513
|
)
|
Deferred
loan costs
|
|
(18
|
)
|
|
(1,558
|
)
|
Contract
payments
|
|
(84
|
)
|
|
(77
|
)
|
Issuance
of common stock
|
|
242
|
|
|
21
|
|
Minimum
withholding taxes paid on stock awards
|
|
(457
|
)
|
|
–
|
|
Excess
tax benefits from stock-based compensation
|
|
358
|
|
|
32
|
|
Net
cash provided/(used) by financing activities
|
|
(19,463
|
)
|
|
47,905
|
|
Net
increase/(decrease) in cash and cash equivalents
|
|
880
|
|
|
(30,269
|
)
|
Cash
and cash equivalents at beginning of period
|
|
5,281
|
|
|
36,000
|
|
Cash
and cash equivalents at end of period
|
$
|
6,161
|
|
$
|
5,731
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest
|
$
|
3,181
|
|
$
|
2,682
|
|
Income
taxes, net of refunds
|
$
|
15,157
|
|
$
|
2,182
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
June 30,
2007
(unaudited)
|
The
accompanying consolidated financial statements for the three and
six month
periods ended June 30, 2007 and July 1, 2006 have been prepared in
accordance with generally accepted accounting principles in the United
States by Darling International Inc. (“Darling”) and its subsidiaries
(Darling and its subsidiaries are collectively referred to herein
as the
“Company”) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). The information
furnished herein reflects all adjustments (consisting only of normal
recurring accruals) that are, in the opinion of management, necessary
to
present a fair statement of the financial position and operating
results
of the Company as of and for the respective periods. However, these
operating results are not necessarily indicative of the results expected
for a full fiscal year. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant
to such rules and regulations. However, management of the
Company believes, to the best of their knowledge, that the disclosures
herein are adequate to make the information presented not misleading.
The
accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements contained
in the Company’s Form 10-K for the fiscal year ended December 30,
2006.
|
(2)
|
Summary
of Significant Accounting
Policies
|
(a)
|
Basis
of Presentation
|
|
The
consolidated financial statements include the accounts of Darling
and its
subsidiaries. All significant intercompany balances and transactions
have
been eliminated in
consolidation.
|
|
The
Company has a 52/53 week fiscal year ending on the Saturday nearest
December 31. Fiscal periods for the consolidated financial statements
included herein are as of June 30, 2007, and include the 13 weeks
and 26
weeks ended June 30, 2007, and the 13 weeks and 26 weeks ended July
1, 2006.
|
|
Basic
income per common share is computed by dividing net income/(loss)
by the
weighted average number of common shares outstanding during the
period. Diluted income/(loss) per common share is computed by
dividing net income/(loss) by the weighted average number of common
shares
outstanding during the period increased by dilutive common equivalent
shares determined using the treasury stock
method.
|
|
Net
Income/(Loss) per Common Share (in thousands, except per share
data)
|
|
Three
Months Ended
|
|
|
June
30,
|
|
|
|
July
1,
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
Income
/(loss)
|
|
Shares
|
|
Per
Share
|
|
|
|
Shares
|
|
Per
Share
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income/(loss)
|
$
9,482
|
|
80,610
|
|
$ 0.12
|
|
$
(3,149)
|
|
72,603
|
|
$
(0.04)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Option shares in the money
|
|
|
1,941
|
|
|
|
|
|
–
|
|
|
Less:
Pro forma treasury shares
|
|
|
(655
|
)
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
$
9,482
|
|
81,896
|
|
$ 0.12
|
|
$
(3,149)
|
|
72,603
|
|
$
(0.04)
|
|
Six
Months Ended
|
|
|
June
30,
|
|
|
|
July
1,
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
Income
/(loss)
|
|
Shares
|
|
Per
Share
|
|
|
|
Shares
|
|
Per
Share
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income/(loss)
|
$
19,062
|
|
80,519
|
|
$ 0.24
|
|
$ (2,783)
|
|
68,278
|
|
$
(0.04)
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Option shares in the money
|
|
|
2,002
|
|
|
|
|
|
–
|
|
|
Less:
Pro forma treasury shares
|
|
|
(723
|
)
|
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income/(loss)
|
$
19,062
|
|
81,798
|
|
$ 0.23
|
|
$ (2,783)
|
|
68,278
|
|
$
(0.04)
|
For
the
three months ended June 30, 2007 and July 1, 2006, respectively, 19,747 and
1,714,885 outstanding stock options were excluded from diluted income per common
share as the effect was antidilutive. For the three months ended June
30, 2007 and July 1, 2006, respectively, 114,590 and 507,991 shares of
non-vested stock and restricted stock were excluded from diluted income per
common share as the effect was antidilutive. For the three months
ended June 30, 2007 and July 1, 2006, respectively, 92,209 and 156,396 shares
of
contingent issuable stock were excluded from diluted income per common share
as
the effect was antidilutive.
For
the
six months ended June 30, 2007 and July 1, 2006, respectively, 38,000 and
1,729,009 outstanding stock options were excluded from diluted income per common
share as the effect was antidilutive. For the six months ended June
30, 2007 and July 1, 2006, respectively, 131,905 and 499,992 shares of
non-vested stock and restricted stock were excluded from diluted income per
common share as the effect was antidilutive. For the six months ended
June 30, 2007 and July 1, 2006, respectively, 98,273 and 78,198 shares of
contingent issuable stock were excluded from diluted income per common share
as
the effect was antidilutive.
(3)
|
Acquisition
of National By-Products, LLC
|
On
May
15, 2006, Darling, through its wholly-owned subsidiary Darling National LLC
(“Darling National”), a Delaware limited liability company, completed the
acquisition of substantially all of the assets (the “Transaction”) of National
By-Products, LLC (“NBP”), an Iowa limited liability company. The
following table presents selected pro forma information, for comparative
purposes, assuming the Transaction had occurred on January 1, 2006 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 1, 2006.
|
Three
Months Ended
|
|
Six
Months Ended
|
|
July
1, 2006
|
|
July
1, 2006
|
Net
sales
|
$
109,864
|
|
$
236,988
|
Income/(loss)
from continuing operations
|
(2,272)
|
|
1,304
|
Net
income/(loss)
|
(2,272)
|
|
1,304
|
Earnings
per
share
|
|
|
|
Basic and diluted
|
$
(0.03)
|
|
$ 0.02
|
The
purchase price for the Transaction totaled $150.7 million, which included 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”) could have been
issuable to NBP based on Darling’s stock price for an average of 90 days ending
on June 30, 2007 (the “True-up Market Price”). At June 30, 2007, the
Company’s share price for an average of 90 days ending June 30, 2007 exceeded
the True-up Market Price and no additional shares were issued.
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 June 30, 2007
and December 30, 2006, the reserves for insurance, environmental and litigation
contingencies reflected on the balance sheet in accrued expenses and other
non-current liabilities were approximately $23.5 million and $21.5 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 that were satisfied on March 1, 2007. On March 8,
2007, the Company received $2.2 million and transferred its damage award to
the
third party. The Company has recorded a gain with the receipt of the
$2.2 million in proceeds in the first quarter of 2007.
The
Company is a party to a litigation matter involving a contract
dispute. In July 2007, a judgment was entered in the matter, which
ruled against the Company on certain points and in favor of the Company on
certain points. The judgment requires the Company to convey an unused
parcel of property held on the books for approximately $500,000 to the
counterparty for that amount. The Company prevailed on certain issues
regarding a request for ongoing indemnity. The Company is considering
an appeal of the judgment. The counterparty has filed a motion with
the court seeking approximately $2.6 million in attorneys’ fees and
costs. The Company intends to vigorously oppose the counterparty’s
motion for attorneys’ fees and costs.
The
Company sells its products domestically and internationally and operates 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 assets from the Transaction are 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 establishments and
meat
and poultry processors, and converting these into useable oils and proteins
principally utilized by the agricultural, leather and oleo-chemical industries
and in the production of bio-diesel.
Restaurant
Services
Restaurant
Services consists of the collection of used cooking oils from food service
establishments and recycling them into similar products used as high-energy
animal feed ingredients, industrial oils and in the production of
bio-diesel. Restaurant Services also provides grease trap
servicing. The National Service Center (“NSC”) is included in
Restaurant Services. The NSC contracts for and
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.
As
discussed above, the Company received proceeds of $2.2 million during the first
quarter of fiscal 2007 as a result of a service provider’s failure to provide
steam under a service agreement to one of the Company’s plants. The
Company recorded approximately $1.2 million of the proceeds as a reduction
of
cost of sales in the Company’s rendering segment and approximately $1.0 million
as a reduction of selling and general and administrative costs in the corporate
segment.
Business
Segment Net Sales (in thousands):
|
Three
Months Ended
|
|
Six
Months Ended
|
|
June
30,
2007
|
|
July
1,
2006
|
|
June
30,
2007
|
|
July
1,
2006
|
Rendering:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
$
112,185
|
|
|
$
60,413
|
|
|
$
213,850
|
|
|
$
105,915
|
|
Intersegment
|
9,547
|
|
|
7,004
|
|
|
18,378
|
|
|
14,256
|
|
|
121,732
|
|
|
67,417
|
|
|
232,228
|
|
|
120,171
|
|
Restaurant
Services:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
47,240
|
|
|
26,818
|
|
|
84,187
|
|
|
57,716
|
|
Intersegment
|
1,220
|
|
|
663
|
|
|
2,280
|
|
|
1,700
|
|
|
48,460
|
|
|
27,481
|
|
|
86,467
|
|
|
59,416
|
|
Eliminations
|
(10,767
|
)
|
|
(7,667
|
)
|
|
(20,658
|
)
|
|
(15,956
|
)
|
Total
|
$
159,425
|
|
|
$
87,231
|
|
|
$
298,037
|
|
|
$
163,631
|
|
Business
Segment Profit/(Loss) (in thousands):
|
Three
Months Ended
|
|
Six
Months Ended
|
|
June
30,
2007
|
|
July
1,
2006
|
|
June
30,
2007
|
|
July
1,
2006
|
Rendering
|
$ 17,661
|
|
|
$ 6,235
|
|
|
$ 35,569
|
|
|
$
10,623
|
|
Restaurant
Services
|
9,846
|
|
|
2,920
|
|
|
17,209
|
|
|
6,018
|
|
Corporate
|
(16,699
|
)
|
|
(10,544
|
)
|
|
(30,757
|
)
|
|
(16,122
|
)
|
Interest
expense
|
(1,326
|
)
|
|
(1,760
|
)
|
|
(2,959
|
)
|
|
(3,302
|
)
|
Income/(loss)
from
continuing
operations
|
$
9,482
|
|
|
$ (3,149
|
)
|
|
$ 19,062
|
|
|
$ (2,783
|
)
|
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 called
Combined Rendering/Restaurant Services. Depreciation of Combined
Rendering/Restaurant Services assets is allocated based upon management’s
estimate of the percentage of corresponding activity attributed to each
segment.
Business
Segment Assets (in thousands):
|
June
30,
2007
|
|
December
30,
2006
|
Rendering
|
$
157,695
|
|
$
153,798
|
Restaurant
Services
|
39,285
|
|
36,359
|
Combined
Rendering/Restaurant Services
|
102,866
|
|
105,402
|
Corporate
|
29,657
|
|
25,247
|
Total
|
$
329,503
|
|
$
320,806
|
The
Company has provided income taxes for the three-month and six-month periods
ended June 30, 2007 and July 1, 2006, based on its estimate of the effective
tax
rate for the entire 2007 and 2006 fiscal years.
In
determining whether its deferred tax assets are more likely than not to be
recoverable, the Company considers all positive and negative evidence
currently available to support projections of future taxable income. The
Company is unable to carryback any of its net operating losses and recent
favorable operating results do provide sufficient historical evidence at this
time of sustained future profitability sufficient to result in taxable income
against which certain net operating losses can be carried forward and
utilized.
In
2006,
the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB
Statement No. 109 (“FIN 48”), which prescribes accounting for and
disclosure of uncertainty in tax positions. This interpretation defines the
criteria that must be met for the benefits of a tax position to be recognized
in
the financial statements and the measurement of tax benefits
recognized. Effective December 31, 2006 the Company adopted the
provisions of FIN 48 resulting in a reduction in the Company’s existing reserves
for uncertain state and federal income tax positions of approximately $0.1
million. This reduction was recorded as a cumulative effect
adjustment to retained earnings. At the adoption date of December 31,
2006, the Company had $0.6 million of unrecognized tax benefits and a related
deferred tax asset of $0.1 million. If the Company recognized such
tax benefits, the net impact on the Company’s effective tax rate would be $0.5
million, which includes the effect of the reversal of the $0.1 million deferred
tax asset. Additionally, at December 31, 2006, the Company had an
accrual for interest and penalties of $0.1 million. The Company
recognizes interest and penalties related to uncertain tax positions in income
tax expense.
Federal
examinations for years 2002 and 2004 have been completed. For federal
income tax purposes, open tax years include 2003 and some subsequent
years. The statute for most state returns filed for the year 2003
will expire in the third quarter of 2007. Statute of limitations are
generally three to four years from the due date of the return, including
extensions, depending upon the jurisdiction. The Company’s state tax
returns for 2003, 2004 and 2005 are still open. Additionally, it is expected
that the amount of unrecognized tax benefits will change over the next 12
months, but the Company does not expect the change to have a significant impact
on its results of operations or financial position.
The
Company entered into a new $175 million credit agreement (the “Credit
Agreement”) with new lenders on April 7, 2006 that replaced 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 June
30, 2007, 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 a 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 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 (iii) other general corporate purposes. The
proceeds of the term loan facility and a portion of the revolving credit
facility were used to pay a portion of the consideration for the
Transaction. See Note 3 for further discussion regarding the
Transaction.
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 (as defined in the Credit Agreement) 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
June 30, 2007 under the Credit Agreement, the interest rate for the $45.0
million term loan that was outstanding was based on LIBOR plus a margin of
1.25%
per annum for a total of 6.625% per annum. The interest rate for
$10.0 million of the revolving loan amount outstanding was based on LIBOR plus
a
margin of 1.25% per annum for a total of 6.625% and the remaining $8.5 million
under the revolving loan amount was based on prime plus a margin of 0.25% per
annum for a total of 8.50% per annum.
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.
The
Credit Agreement consisted of the following elements at June 30, 2007 and
December 30, 2006, respectively (in thousands):
|
June
30,
2007
|
|
December
30,
2006
|
Term
Loan
|
$
|
45,000
|
|
$
|
47,500
|
Revolving
Credit Facility:
|
|
|
|
|
|
Maximum
availability
|
$
|
125,000
|
|
$
|
125,000
|
Borrowings
outstanding
|
|
18,500
|
|
|
35,500
|
Letters
of credit issued
|
|
18,891
|
|
|
18,391
|
Availability
|
$
|
87,609
|
|
$
|
71,109
|
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 June 30,
2007, the Company was in compliance with all the covenants contained in the
Credit Agreement. At June 30, 2007, the Company had unrestricted cash
of $6.2 million, compared to unrestricted cash of $5.3 million at December
30,
2006 and $5.7 million at July 1, 2006.
(8)
|
Derivative
Instruments
|
The
Company makes limited use of derivative instruments to manage cash flow risks
related to interest and natural gas 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
Statement of 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 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 June 30, 2007, the fair value of these
interest swap agreements was $0.1 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 adjustments recorded to accumulated other comprehensive loss,
the net change arising from hedging transactions, and the amounts recognized
in
earnings during the three and six months ended June 30, 2007 and July 1, 2006
are as follows (in thousands):
|
Three
Months Ended
|
|
Six
Months Ended
|
|
June 30,
|
|
July
1,
|
|
June 30,
|
|
July
1,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Derivative
adjustment included in accumulated
other comprehensive loss at beginning of period
|
$ 505
|
|
$ –
|
|
$ 408
|
|
$ –
|
Net
change arising from current period hedging
transactions (a)
|
(431
|
) |
(130
|
) |
(328
|
)
|
(130)
|
Reclassifications
into earnings
|
(8
|
)
|
–
|
|
(14
|
) |
–
|
Accumulated
other comprehensive loss/(gain)
|
$ 66
|
|
$ (130
|
) |
$ 66
|
|
$ (130)
|
(a)
|
Reported
as other comprehensive gain of approximately $0.7 million and $0.6
million
recorded net of taxes of approximately $0.3 million for the three
and six
months ended June 30, 2007,
respectively.
|
A
summary
of the gains and losses recognized in earnings during the three and six months
ended June 30, 2007 and July 1, 2006 are as follows (in thousands):
|
Three
Months Ended
|
|
Six
Months Ended
|
|
June
30,
|
|
July
1,
|
|
June
30,
|
|
July
1,
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Loss to interest expense related to interest rate swap
agreements
(effective portion)
|
$ 8
|
|
$ –
|
|
$ 14
|
|
$ –
|
Loss/(gain)
to other expenses related to net
change
arising from current period hedging transactions
|
–
|
|
–
|
|
–
|
|
–
|
Total reclassifications into earnings
|
$ 8
|
|
$ –
|
|
$ 14
|
|
$ –
|
Gains
and
losses reported in accumulated other comprehensive income/(loss) are
reclassified into earnings upon the occurrence of the hedged
transactions.
(9)
|
Comprehensive
Income/(Loss)
|
The
Company follows the provisions of Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (“SFAS 130”). SFAS 130
establishes standards for reporting and presentation of comprehensive income
or
loss and its components. For the three months ended June 30, 2007 and July
1,
2006, total comprehensive income/(loss) was $10.1 million and $(3.0) million,
respectively. For the six months ended June 30, 2007, and July 1,
2006, total comprehensive income/(loss) was $19.8 million and $(2.7) million,
respectively.
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 service is provided.
(11)
|
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.
Net
pension cost for the three and six months ended June 30, 2007 and July 1, 2006
includes the following components (in thousands):
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June
30, 2007
|
|
|
|
July
1, 2006
|
|
|
|
June
30, 2007
|
|
|
|
July
1, 2006
|
|
Service
cost
|
$
|
582
|
|
|
$
|
601
|
|
|
$
|
1,164
|
|
|
$
|
1,165
|
|
Interest
cost
|
|
1,253
|
|
|
|
1,161
|
|
|
|
2,506
|
|
|
|
2,275
|
|
Expected
return
on plan assets
|
|
(1,409
|
)
|
|
|
(1,289
|
)
|
|
|
(2,818
|
)
|
|
|
(2,531
|
)
|
Amortization
of
prior service cost
|
|
29
|
|
|
|
35
|
|
|
|
58
|
|
|
|
70
|
|
Amortization
of
net loss
|
|
288
|
|
|
|
413
|
|
|
|
576
|
|
|
|
826
|
|
Net
pension cost
|
$
|
743
|
|
|
$
|
921
|
|
|
$
|
1,486
|
|
|
$
|
1,805
|
|
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 actuarial
estimates at June 30, 2007, the Company expects to make contributions of $0.7
million to meet funding requirements for its pension plans during the next
twelve months. Additionally, the Company expects to make tax deductible
discretionary contributions to its pension plans in the third quarter of fiscal
2007 of approximately $5.9 million.
The
Company participates in several multi-employer pension plans which provide
defined benefits to certain employees covered by labor
contracts. One
multi-employer plan in which the Company participates has given notification
of
a mass withdrawal termination for the plan year ended June 30,
2007. Therefore, at June 30, 2007, the Company recorded a liability
of approximately $1.2 million related to the termination, which represents
management’s best estimate of the net present value of the
liability. The amount of the liability may be adjusted over the
coming months when the final contribution requirements are determined by the
plan.
(12)
|
New
Accounting
Pronouncements
|
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
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS 159”), which allows
entities to choose to measure financial instruments and certain other items
at
fair value. This statement is effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the
impact of adopting SFAS 159 on the consolidated financial
statements.
Item
2. 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 below under the heading “Forward Looking Statements” and elsewhere in this
report, and under the heading “Risk Factors” in the Company’s Annual Report on
Form 10-K for the year ended December 30, 2006, and in the Company’s other
public filings with the SEC.
The
following discussion should be read
in conjunction with the historical consolidated financial statements and notes
thereto.
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 “Transaction”), the Company now processes 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
livestock feed, oleo-chemicals, soaps, leather goods, bio-fuels and pet foods,
for use as ingredients in their products or for further
processing As a result of the Transaction, the Company’s first
half of 2007 results include 26 weeks of contribution of assets acquired in
the
Transaction, as compared to seven weeks contribution from these assets in the
first half of 2006. The accompanying consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements contained in the Company’s Form 10-K for the fiscal year ended
December 30, 2006.
During
the second quarter of fiscal
2007 the Company benefited from significantly higher finished product prices
and
stronger raw material volumes. Higher finished product prices are
reflective of the underlying anticipated global commodity demand for grains
and
oilseeds for the production of bio-fuels. Second quarter results also
reflect the substantially completed integration and resulting synergies of
the
Transaction completed on May 15, 2006. The Company continues to face
challenges relating to volatile commodity markets, historically high diesel
and
natural gas prices and unsettled trade issues in relation to beef production
and
exports of its finished products.
Operating
income increased by $15.9
million in the second quarter of fiscal 2007 compared to the second quarter
of
fiscal 2006. The challenges faced by the Company indicate there can be no
assurance that operating results achieved by the Company in the second quarter
of fiscal 2007 are indicative of future operating performance of the
Company.
Summary
of Critical Issues Faced by the Company During the Second Quarter of
2007
·
|
Higher
finished product commodity prices were experienced in the second
quarter
of fiscal 2007 as a result of a continuing global tightening of feed
grains and oils from a growing global demand for
bio-fuels. Higher finished product prices were favorable to the
Company’s sales revenue, but this favorable result was partially offset by
the negative impact on raw material cost due to the Company’s formula
pricing arrangements with raw material suppliers, which index raw
material
cost to the prices of finished product derived from the raw
material. The financial impact of finished goods prices on
sales revenue and raw material cost is summarized below in “Results of
Operations.” Comparative sales price information from the
Jacobsen index, an established trading exchange publisher used by
management, is listed below in “Summary of Key
Indicators.”
|
·
|
The
Company has the ability to burn alternative fuels, including its
fats and
greases, at a majority of its plants as a way to help manage the
Company’s
exposure to high natural gas prices. Beginning October 1, 2006,
the federal government effected a program which will provide Federal
tax
credits under certain circumstances for commercial use of alternative
fuels in lieu of fossil-based fuels. Beginning in the fourth
quarter of 2006, the Company filed documentation with the Internal
Revenue
Service (“IRS”) to recover these Alternative Fuel Mixture Credits as a
result of its use of fats and greases to fuel boilers at its
plants. The Company has received approval from the IRS to apply
for these credits. However, the federal regulations relating to
the Alternative Fuel Mixture Credits are complex and further clarification
is needed by the Company prior to recognition of any tax credits
received. The Company has not recorded these credits as income
due to pending clarification of the federal regulations. The
Company is in the process of pursuing clarification and eligibility
to
receive the Alternative Fuel Mixture Credits. As of June
30, 2007, the Company has applied for approximately $1.4 million
in
Alternative Fuel Mixture Credits and has received approximately $1.0
million from the IRS relating to these credits, which are included
in
current liabilities on the balance sheet as deferred
income. The Company expects to continue to burn alternative
fuels at its plants in future periods as long as the price of natural
gas
remains high.
|
Summary
of Critical Issues and Known Trends Faced by the Company in 2007 and
Thereafter
·
|
Energy
prices for natural gas and diesel fuel are expected to remain volatile
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 volatile in the first six months 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. The H5N1 strain is highly pathogenic, which has caused
concern that a pandemic could occur if the disease migrates from
birds to
humans. This highly pathogenic strain has not been detected in
North or South America as of July 27, 2007, but low pathogenic strains
that are not a threat to human health have been reported in the
U.S. The USDA has developed safeguards to protect the U.S.
poultry industry from H5N1. These safeguards are based on
import restrictions, disease surveillance and a response plan for
isolating and depopulating infected flocks if the disease is
detected. Notwithstanding these safeguards, any significant
outbreak of Bird Flu in the U.S. could have a negative impact on
the
Company’s business by reducing demand for
MBM.
|
·
|
Expenses
related to compliance with requirements of Section 404 of the
Sarbanes-Oxley Act of 2002 (the “Sarbanes Act”) 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 Sarbanes
Act. Additionally, the Company expects to incur higher costs
related to the Sarbanes Act in fiscal 2007 over the previous year
due to
the inclusion of NBP for the first time in the internal control
documentation and testing process.
|
Recent
Developments Regarding Federal Regulations:
·
|
Canada
banned specified risk materials (“SRM”) from all animal feed, pet food and
fertilizers on July 12, 2007. Banned materials include the
skull, brain, trigeminal ganglia, eyes, tonsils, spinal cord and
dorsal
root ganglia of cattle aged 30 months or older and the distal ileum
of
cattle of all ages.
|
·
|
The
World Organization for Animal Health (“OIE”) formally classified the U.S.
as a “controlled risk” country for bovine spongiform encephalopathy
(“BSE”) in a report released May 22, 2007. In the same report,
the OIE recommended tightening feed rules in the U.S. and eliminating
SRM
from the feed chain as Canada has done. The OIE advised that
proper implementation of an SRM ban in the U.S. will be a key factor
in
its maintaining the controlled risk status for
BSE.
|
·
|
In
March 2007, U.S. federal and state regulatory authorities put increased
emphasis on pet and livestock food safety as a result of the discovery
of
adulterated imported pet and livestock food additives. It is
unclear whether, or to what extent, any increased regulatory attention
on
animal food safety will impact the
Company.
|
·
|
As
a result of the first case of BSE, 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 (the “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. 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 July 27, 2007, the FDA has not
finalized the Proposed Rule and no new regulations affecting animal
feed
or modifying the Proposed Rule have been issued, despite a prohibition
on
SRM from all animal feed in Canada and recommendations by the OIE
that a
similar ban be instituted in the U.S. The Company’s management
will continue to monitor this and other regulatory
issues.
|
Results
of Operations
Three
Months Ended June 30, 2007 Compared to Three Months Ended July 1,
2006
Summary
of Key Factors Impacting Second Quarter 2007
Results:
Principal
factors that contributed to a $15.9 million increase in operating income, which
are discussed in greater detail in the following section, were:
·
|
The inclusion of the operations of NBP, and
|
·
|
Higher finished product prices.
|
These
increases were partially offset by:
·
|
Higher raw material prices,
|
·
|
Higher
energy costs, primarily related to natural gas and diesel fuel,
and |
·
|
A multi-employer pension plan mass withdrawal termination
liability.
|
Summary
of Key Indicators of 2007 Performance:
Principal
indicators which 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,
and
|
·
|
Collection fees and collection operating
expense.
|
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 significantly 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 the second
quarter of fiscal 2007 compared to average Jacobsen prices for the second
quarter of fiscal 2006 follow:
|
|
Avg.
Price
2nd
Quarter
2007
|
Avg.
Price
2nd
Quarter
2006
|
Increase
|
%
Increase
|
|
MBM
(Illinois)
|
$217.27
/ton
|
$146.86
/ton
|
$70.41
/ton
|
47.9%
|
|
MBM
(California)
|
$222.72
/ton
|
$124.17
/ton
|
$98.55
/ton
|
79.4%
|
|
BFT
(Chicago)
|
$
29.28 /cwt
|
$ 14.57
/cwt
|
$14.71
/cwt
|
101.0%
|
|
YG
(Illinois)
|
$
23.13 /cwt
|
$ 10.77
/cwt
|
$12.36
/cwt
|
114.8%
|
The
increases in average price of the finished products the Company sells had a
favorable impact on revenue that was partially offset by a negative impact
to
the Company’s raw material cost resulting from formula pricing arrangements,
which compute raw material cost based upon the price of finished
product. Additionally, some U.S. exports of MBM from the West Coast
of the U.S. resumed in the first quarter of 2007. As a result, the
MBM prices for the West Coast have increased significantly as indicated
above.
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.
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 suppliers, which is included in net sales, and
collection expense, which is included in cost of sales. The monitoring of
collection fees and collection expense provides management an indication of
the
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 produce finished products
of
MBM, BFT and 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
the second quarter
of fiscal
2007,
net sales increased
by $72.2
million (82.8%)
to $159.4
million as compared to $87.2
million during the second quarter
of fiscal
2006.
The increase
in net sales was primarily due to the
following (in millions of dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Net
sales due to
contribution from NBP assets
|
|
$ 32.0
|
|
|
$ 3.6
|
|
|
$ —
|
|
|
$ 35.6
|
|
Higher
finished
goods prices
|
|
20.6
|
|
|
12.1
|
|
|
—
|
|
|
32.7
|
|
Purchase
of
finished product for resale
|
|
0.9
|
|
|
1.6
|
|
|
—
|
|
|
2.5
|
|
Other
sales
increases
|
|
1.2
|
|
|
0.2
|
|
|
—
|
|
|
1.4
|
|
Product
transfers
|
|
(2.5
|
)
|
|
2.5
|
|
|
—
|
|
|
—
|
|
|
|
$ 52.2
|
|
|
$ 20.0
|
|
|
$ —
|
|
|
$ 72.2
|
|
Cost
of Sales and Operating
Expenses. Cost of sales and operating expenses include cost of raw
material, the cost of product purchased for resale, and the cost to collect
raw
material, 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 a
majority of its plants to help manage the Company’s price exposure to volatile
energy markets.
During
the
second quarter
of fiscal
2007,
cost of sales and operating expenses
increased
$53.1
million (77.2%)
to $121.9 million
as compared to $68.8
million during the second quarter
of fiscal
2006.
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 expense related to NBP
assets
|
|
$ 24.8
|
|
|
$ 2.1
|
|
|
$ –
|
|
|
$
26.9
|
|
Higher
raw material prices
|
|
11.5
|
|
|
7.1
|
|
|
–
|
|
|
18.6
|
|
Other
expenses
|
|
2.2
|
|
|
0.2
|
|
|
0.2
|
|
|
2.6
|
|
Purchases
of finished product for resale
|
|
0.9
|
|
|
1.6
|
|
|
–
|
|
|
2.5
|
|
Higher
energy costs, primarily natural gas and
diesel fuel
|
|
1.2
|
|
|
0.1
|
|
|
–
|
|
|
1.3
|
|
Multi-employer pension plan mass withdrawal termination
liability
|
|
1.2 |
|
|
– |
|
|
– |
|
|
1.2 |
|
Product
transfers
|
|
(2.5
|
)
|
|
2.5
|
|
|
–
|
|
|
–
|
|
|
|
$ 39.3
|
|
|
$ 13.6
|
|
|
$ 0.2
|
|
|
$
53.1
|
|
Selling,
General and Administrative
Expenses. Selling, general and administrative expenses were
$14.3 million during the second quarter of fiscal 2007, a $2.5 million increase
(21.2%) from $11.8 million during the second quarter of fiscal
2006. The increase in selling, general and administrative expenses is
primarily due to the following (in millions of dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Payroll
and related
benefits
|
|
$ (0.1
|
)
|
|
$ (0.1
|
)
|
|
$ 1.2
|
|
|
$ 1.0
|
|
Selling,
general and
administrative expense related
to NBP
assets
|
|
0.5
|
|
|
0.1
|
|
|
0.1
|
|
|
0.7
|
|
Other
expense
increases
|
|
–
|
|
|
(0.1
|
)
|
|
0.6
|
|
|
0.5
|
|
Higher
legal
expense
|
|
–
|
|
|
–
|
|
|
0.3
|
|
|
0.3
|
|
|
|
$ 0.4
|
|
|
$ (0.1
|
)
|
|
$ 2.2
|
|
|
$ 2.5
|
|
Depreciation
and Amortization.
Depreciation and amortization charges were $5.8 million
during the second quarter of fiscal 2007, an increase of $0.8 million from
$5.0
million during the second quarter of fiscal 2006. The increase is primarily
due to the acquisition of assets from NBP in fiscal 2006.
Interest
Expense. Interest
expense was $1.3 million during the second quarter of fiscal 2007 compared
to
$1.8 million during the second quarter of fiscal 2006, a decrease of $0.5
million, primarily due to a decrease in rates and outstanding balance related
to
the Company’s outstanding debt.
Other
Income/Expense. Other
expense was $0.1 million in the second quarter of fiscal 2007, a decrease of
$4.7 million as compared to $4.8 million in the second quarter of fiscal 2006.
The decrease in other expense in the second quarter of fiscal 2007 is primarily
due to the following (in millions of dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Write
off deferred
loan costs
|
|
$ —
|
|
|
$ —
|
|
|
$ (2.6
|
)
|
|
$ (2.6
|
)
|
Subordinated
debt
prepayment fees
|
|
—
|
|
|
—
|
|
|
(1.9
|
)
|
|
(1.9
|
)
|
Decrease
in other
expense
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
|
$ —
|
|
|
$ —
|
|
|
$ (4.7
|
)
|
|
$ (4.7
|
)
|
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 $6.5 million for the
second quarter of fiscal 2007, compared to income tax benefit of $1.8 million
recorded in the second quarter of fiscal 2006, an increase of $8.3 million,
primarily due to increased pre-tax earnings of the Company in fiscal
2007. The effective tax rate for the second quarter of fiscal 2007 is
40.7% compared to 36.8% for the second quarter of fiscal 2006. The
difference from the statutory rate of 35% in fiscal 2007 is primarily due to
state taxes and nondeductible expense limitations for income tax
purposes. The difference from the statutory rate in fiscal 2006 is
primarily due to state taxes.
Six
Months Ended June 30, 2007 Compared to Six Months Ended July 1,
2006
Summary
of Key Factors Impacting the First Six Months of Fiscal 2007
Results:
Principal
factors that contributed to a
$31.0 million increase in operating income, which are discussed in greater
detail in the following section, were:
·
|
The inclusion of the operations of NBP,
|
·
|
Higher finished product prices, and
|
·
|
$2.2 million received for sale of
judgment.
|
These
increases were partially offset
by:
·
|
Higher raw material prices,
|
·
|
Higher payroll and related benefits,
|
·
|
Multi-employer pension plan mass withdrawal termination liability,
and |
·
|
Higher energy costs, primarily related to natural gas and diesel
fuel.
|
Summary
of Key Indicators of 2007 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,
and
|
·
|
Collection fees and collection operating
expense.
|
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. 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 significantly 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 the first six months of fiscal 2007 compared
to
average Jacobsen prices for the first six months of fiscal 2006
follow:
|
|
Avg.
Price
Six
Months
2007
|
Avg.
Price
Six
Months
2006
|
Increase
|
%
Increase
|
|
MBM
(Illinois)
|
$210.50
/ton
|
$158.13
/ton
|
$52.37
/ton
|
33.1%
|
|
MBM
(California)
|
$212.10
/ton
|
$119.45
/ton
|
$92.65
/ton
|
77.6%
|
|
BFT
(Chicago)
|
$
25.40 /cwt
|
$
15.50 /cwt
|
$
9.90 /cwt
|
63.9%
|
|
YG
(Illinois)
|
$
20.89 /cwt
|
$
11.74 /cwt
|
$
9.15 /cwt
|
77.9%
|
The
increases in average price of the finished products the Company sells had a
favorable impact on revenue that was partially offset by a negative impact
to
the Company’s raw material cost resulting from formula pricing arrangements,
which compute raw material cost based upon the price of finished
product. Additionally, some U.S. exports of MBM from the West Coast
of the U.S. resumed in the first quarter of 2007. As a result, the
MBM prices for the West Coast have increased significantly as indicated
above.
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, thus becoming an important component of sales revenue.
Yield
on production is a ratio of production volume (pounds) divided by raw material
volume (pounds), providing an indication of the effectiveness of the Company’s
production process. Factors impacting yield on production include the
quality of raw material and the warm weather during summer months, which rapidly
degrades raw material.
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 monitoring of
collection fees and collection expense provides management an indication of
the
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
produce finished products of MBM, BFT and 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
the first six months of fiscal
2007, net sales increased by $134.4 million (82.2%) to $298.0 million as
compared to $163.6 million during the first six months of fiscal 2006. The
increase in net sales was primarily due to the following (in millions of
dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Net
sales due to
contribution from NBP assets
|
|
$ 84.8
|
|
|
$ 6.7
|
|
|
$ —
|
|
|
$ 91.5
|
|
Higher
finished goods
prices
|
|
27.4
|
|
|
14.8
|
|
|
—
|
|
|
42.2
|
|
Other
sales
increases
|
|
2.8
|
|
|
(0.7
|
)
|
|
—
|
|
|
2.1
|
|
Purchase
of finished
product for resale
|
|
(1.8
|
)
|
|
0.4
|
|
|
—
|
|
|
(1.4
|
)
|
Product
transfers
|
|
(4.1
|
)
|
|
4.1
|
|
|
—
|
|
|
—
|
|
|
|
$
109.1
|
|
|
$ 25.3
|
|
|
$ —
|
|
|
$
134.4
|
|
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 raw material, 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 a
majority of its plants to help manage the Company’s price exposure to volatile
energy markets.
During
the first six months of fiscal
2007, cost of sales and operating expenses increased $95.7 million (73.9%)
to
$225.2 million as compared to $129.5 million during the first six months of
fiscal 2006. 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 expense related to
NBP assets
|
|
$ 65.6
|
|
|
$
3.6
|
|
|
$
–
|
|
|
$ 69.2
|
|
Higher
raw
material prices
|
|
15.6
|
|
|
7.5
|
|
|
–
|
|
|
23.1
|
|
Other
expenses
|
|
3.3
|
|
|
–
|
|
|
0.7
|
|
|
4.0
|
|
Multi-employer pension plan mass withdrawal termination
liability |
|
1.2 |
|
|
– |
|
|
– |
|
|
1.2 |
|
Higher
energy
costs, primarily natural gas and
diesel fuel
|
|
1.0
|
|
|
(0.2
|
)
|
|
–
|
|
|
0.8
|
|
Sale
of
judgment
|
|
(1.2
|
)
|
|
–
|
|
|
–
|
|
|
(1.2
|
)
|
Purchases
of
finished product for resale
|
|
(1.8
|
)
|
|
0.4
|
|
|
–
|
|
|
(1.4
|
)
|
Product
transfers
|
|
(4.1
|
)
|
|
4.1
|
|
|
–
|
|
|
–
|
|
|
|
$ 79.6
|
|
|
$ 15.4
|
|
|
$ 0.7
|
|
|
$ 95.7
|
|
Selling,
General and Administrative
Expenses. Selling, general and administrative expenses were
$26.9 million during the first six months of fiscal 2007, a $5.4 million
increase (25.1%) from $21.5 million during the first six months of fiscal
2006. The increase was primarily due to the following (in millions of
dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Selling,
general and administrative expense related
to NBP assets
|
|
$ 1.8
|
|
|
$ 0.2
|
|
|
$ 0.9
|
|
|
$ 2.9
|
|
Payroll
and related
benefits
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
2.9
|
|
|
2.6
|
|
Other expense
increases
|
|
–
|
|
|
(0.2
|
)
|
|
1.1
|
|
|
0.9
|
|
Sale
of
judgment
|
|
–
|
|
|
–
|
|
|
(1.0
|
)
|
|
(1.0
|
)
|
|
|
$ 1.6
|
|
|
$ (0.1
|
)
|
|
$ 3.9
|
|
|
$ 5.4
|
|
Depreciation
and Amortization.
Depreciation and amortization charges increased $2.3
million (25.0%) to $11.5 million during the first six months of fiscal 2007
as compared to $9.2 million during the first six months of fiscal 2006.
The increase is primarily due to the acquisition of assets from NBP in fiscal
2006.
Interest
Expense. Interest
expense was $3.0 million during the first six months of fiscal 2007 compared
to
$3.3 million during the first six months of fiscal 2006, a decrease of $0.3
million, primarily due to a decrease in rates and outstanding balance related
to
the Company’s outstanding debt.
Other
Income/Expense. Other expense was $0.5 million in the first six months of
fiscal 2007, a $4.0 million decrease in expense as compared to
other expense of $4.5 million in the first six months of fiscal 2006.
The decrease in other expense in the first six months of fiscal 2007 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
interest income
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
0.4
|
|
Increase
in other
expense
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
|
$ —
|
|
|
$ —
|
|
|
$ (4.0
|
) |
|
$ (4.0
|
) |
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 $11.9 million for the first six months
of
fiscal 2007, compared to income tax benefit of $1.6 million recorded in the
first six months of fiscal 2006, an increase of $13.5 million, primarily due
to
an increase in pre-tax earnings of the Company in fiscal 2007. The
effective tax rate for fiscal 2007 is 38.4% compared to 36.7% for fiscal 2006,
which is different from the statutory rate primarily due to state
taxes.
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 revolving credit facility, which includes a $35.0 million
letter of credit sub-facility.
|
·
|
The
$125.0 million revolving credit facility has a term of five years
and
matures on April 7, 2011.
|
·
|
As
of June 30, 2007, the Company has borrowed all $50.0 million under
the
term loan facility, which provides for scheduled quarterly amortization
payments of $1.25 million over a six-year term ending April 7,
2012. The Company has reduced the term loan facility by
quarterly payments totaling $5.0 million, for an aggregate of $45.0
million principal outstanding under the term loan facility at June
30,
2007.
|
·
|
Alternative
base rate loans under the Credit Agreement bear interest at a rate
per
annum based on the greater of (a) the prime rate and (b) the federal
funds
effective rate (as defined in the Credit Agreement) plus ½ of 1%, plus, in
each case, a margin determined by reference to a pricing grid and
adjusted
according to the Company’s adjusted leverage ratio. Eurodollar
loans bear interest at a rate per annum based on the then-applicable
LIBOR
multiplied by the statutory reserve rate plus a margin determined
by
reference to a pricing grid and adjusted according to the Company’s
adjusted leverage ratio.
|
·
|
The
Credit Agreement provided sufficient liquidity to complete the Transaction
and to retire the Company’s senior subordinated notes in the aggregate
amount of $37.6 million in principal, accrued interest and fees on
June 1,
2006. 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.
|
The
Credit Agreement consisted of the following elements at June 30, 2007 (in
thousands):
Credit
Agreement:
|
|
|
Term
Loan
|
|
$ 45,000
|
Revolving
Credit Facility:
|
|
|
Maximum
availability
|
|
$ 125,000
|
Borrowings
outstanding
|
|
18,500
|
Letters
of credit issued
|
|
18,891
|
Availability
|
|
$ 87,609
|
The
obligations under the Credit Agreement are guaranteed by Darling National LLC
(“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 June 30, 2007, the Company was in compliance with all
of the covenants contained in the Credit Agreement.
The
classification of long-term debt in
the accompanying June 30, 2007 consolidated balance sheet is based on the
contractual repayment terms of the debt issued under the Credit
Agreement.
On
June 30, 2007, the Company had
working capital of $27.1 million and its working capital ratio was 1.43 to
1
compared to working capital of $17.9 million and a working capital ratio of
1.31
to 1 on December 30, 2006. At June 30, 2007, the Company had unrestricted
cash of $6.2 million and funds available under the revolving credit facility
of
$87.6 million, compared to unrestricted cash of $5.3 million and funds available
under the revolving credit facility of $71.1 million at December 30,
2006.
Net
cash
provided by operating activities was $26.0 million and $7.1 million for the
six
months ended June 30, 2007 and July 1, 2006, respectively, an increase of $18.9
million, primarily due to an increase in net income of approximately $21.8
million and changes in operating assets and liabilities, which includes a
reduction in accounts receivable of $10.9 million, a reduction of inventory
of
approximately $2.3 million, a reduction of prepaid expenses of $1.7 million
and
an increase in accounts payable and accrued expenses of $12.0
million. The decrease in cash flows from accounts receivable and
inventory is due to increased finished product prices. Cash used by
investing activities was $5.6 million for the first six months of fiscal 2007
compared to $85.3 million for the first six months of fiscal 2006, a decrease
of
$79.7 million, due primarily to $79.9 million in cash used in the second quarter
of fiscal 2006 for the Transaction. Net cash used by financing
activities was $19.5 million for the six months ended June 30, 2007, compared
to
net cash provided by financing activities of $47.9 million for the six months
ended July 1, 2006, a decrease of cash provided of $67.4 million, principally
due to borrowing related to the Transaction in the second quarter of fiscal
2006.
The
Company made capital expenditures of $5.7 million and $5.6 million during the
first six months of fiscal 2007 and fiscal 2006,
respectively. Capital expenditures related to compliance with
environmental regulations were $1.0 million and $0.2 million for the six months
ended June 30, 2007 and July 1, 2006, respectively.
Based
upon the annual actuarial estimate, current accruals and claims paid during
the
first six months of fiscal 2007, the Company has accrued approximately $7.4
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, which are included in current accrued expenses at June 30,
2007. 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 cost of health care,
the
pending number of claims or 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 $0.7 million
in
payments in order to meet minimum pension funding requirements during the next
twelve months, which will reduce current accrued compensation and benefit
expenses. 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. Additionally, the Company expects to make tax deductible
discretionary contributions to its pension plans in the third quarter of fiscal
2007 of approximately $5.9 million.
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 that 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. One
multi-employer plan in which the Company participates has given notification
of
a mass withdrawal termination for the plan year ended June 30,
2007. Therefore, at June 30, 2007, the Company recorded a liability
of approximately $1.2 million related to the termination, which represents
management’s best estimate of the net present value of the
liability. The amount of the liability may be adjusted over the
coming months when the final contribution requirements are determined by the
plan. While we have no ability to calculate a possible current
liability for under-funded multi-employer plans that could terminate or could
require additional funding under the PPA, the amounts could be
material.
The
Company has the ability to burn alternative fuels, including its fats and
greases, at a majority of its plants as a way to help manage the Company’s
exposure to high natural gas prices. Beginning October 1, 2006, the
federal government effected a program which will provide federal tax credits
under certain circumstances for commercial use of alternative fuels in lieu
of
fossil-based fuels. Beginning in the fourth quarter of 2006, the
Company filed documentation with the Internal Revenue Service (“IRS”) to recover
these Alternative Fuel Mixture Credits as a result of its use of fats and
greases to fuel boilers at its plants. The Company has received
approval from the IRS to apply for these credits. However, the
federal regulations relating to the Alternative Fuel Mixture Credits are complex
and further clarification is needed by the Company prior to recognition of
any
tax credits received. The Company has not recorded these credits as
income due to pending clarification of the federal regulations. The
Company is in the process of pursuing clarification and eligibility to receive
the Alternative Fuel Mixture Credits. As of June 30, 2007, the
Company has applied for approximately $1.4 million in Alternative Fuel Mixture
Credits and has received approximately $1.0 million from the IRS relating to
these credits, which are included in current liabilities on the balance sheet
as
deferred income. The Company expects to continue to burn alternative
fuels at its plants in future periods as long as the price of natural gas
remains high. Depending on the natural gas prices and market price of
fats, the amount of Alternative Fuel Mixture Credits the Company applies for
and
receives could be material.
The
Company
is a party to a litigation matter involving a contract dispute. In
July 2007, a judgment was entered in the matter, which ruled against the Company
on certain points and in favor of the Company on certain points. The
judgment requires the Company to convey an unused parcel of property held on
the
books for approximately $500,000 to the counterparty for that
amount. The Company prevailed on certain issues regarding a request
for ongoing indemnity. The Company is considering an appeal of the
judgment. The counterparty has filed a motion with the court seeking
approximately $2.6 million in attorneys’ fees and costs. The Company
intends to vigorously oppose the counterparty’s motion for attorneys’ fees and
costs.
The
Company’s management believes that cash flows from operating activities
consistent with the level generated in the first six months of fiscal 2007,
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: a reduction
in finished product prices; possible product recall resulting from
developments relating to the discovery of unauthorized adulterations to food
additives; the occurrence of Bird Flu in the U.S.; any
additional occurrence of BSE in the U.S. or elsewhere; 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 animal
feed, Bird Flu or BSE 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
fiscal 2007 and thereafter. The Company cannot provide assurance that
the cash flows from operating activities generated in the first six months
of
fiscal 2007 are indicative of the future cash flows from operating activities
that 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 relating to growing interest in
bio-diesel; investments in response to governmental regulations
relating to BSE or other regulations; cash requirements necessary to
address unforeseen problems relating to the integration of NBP, including
increased expenses related to the Sarbanes Act; 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 a further disruption in
international sales, a decline in commodities prices, further increases in
energy prices resulting from increased world demand and the impact of the PPA
has the potential to adversely impact the Company’s liquidity. A
decline in commodities prices, a rise in energy prices, a slowdown in the U.S.
or international economy, or other factors, could cause the Company to fail
to
meet management’s expectations or could cause liquidity concerns.
OFF
BALANCE SHEET OBLIGATIONS
Based
upon the underlying purchase agreements, the Company has commitments to purchase
$13.1 million of finished products and natural gas during the next twelve
months, which are not included in liabilities on the Company’s balance sheet at
June 30, 2007. 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 United
States.
Based
upon the underlying lease agreements, the Company expects to pay approximately
$8.5 million in operating lease obligations during the next twelve months,
which
are not included in liabilities on the Company’s balance sheet at June 30,
2007. This amount includes amounts related to 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
United States.
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 the Company’s Form 10-K
for fiscal year ended December 30, 2006.
Certain
of the policies require
management to make significant and subjective estimates or assumptions that
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, calculated
based 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
$19.6 million and $14.6 million at June 30, 2007 and December 30, 2006,
respectively.
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 $9.1 million and $7.1
million for the six months ended June 30, 2007 and July 1, 2006,
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 $2.4 million and $2.1 million for the six months ended June
30, 2007 and July 1, 2006, 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 $128.7 million
and
$132.1 million at June 30, 2007 and December 30, 2006,
respectively. The net book value of intangible assets was
approximately $31.2 million and $33.7 million at June 30, 2007 and December
30,
2006, respectively.
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 a reporting unit exceeds the estimated fair
value
of a reporting unit. For purposes of evaluating impairment of
goodwill, the Company estimates fair value of each reporting unit based upon
future discounted net cash flows from the reporting units. 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 the
reporting units and of future discounted net cash flows from operation 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 at June 30,
2007 and December 30, 2006.
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 $23.5 million and $21.5 million at June 30, 2007 and December
30,
2006, respectively.
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% in fiscal
2006. 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% for fiscal
2006.
The
Company has recorded a pension liability of approximately $19.4 million and
$18.7 million at June 30, 2007 and December 30, 2006,
respectively. The Company’s net pension cost was approximately $1.5
million and $1.8 million for the six months ended June 30, 2007 and July 1,
2006, 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 at June 30, 2007 and December 30, 2006.
Stock
Option Expense
Effective
January 1, 2006, the Company
adopted the provisions of 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 of $0.3 million
for the six months ended June 30, 2007 and July 1, 2006,
respectively.
NEW
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued
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
February 2007, the FASB issued SFAS
159, which allows entities to choose to measure financial instruments
and certain other items at fair value. This statement is effective
for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of adopting SFAS 159 on the consolidated
financial statements.
FORWARD
LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q
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 Quarterly Report on Form 10-Q, 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. Although the Company
believes that the expectations reflected in such forward-looking statements
are
reasonable, it can give no assurance that such expectations will prove to be
correct.
In
addition to those factors discussed
in this report and under the heading “Risk Factors” in Item 1A of Part I of the
Company’s annual report on Form 10-K for the year ended December 30, 2006, 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; BSE and its impact on finished product prices, export
markets, energy prices and government regulations, which are still evolving
and
are beyond the Company’s control; the occurrence of Bird Flu in the
U.S.; possible product recall resulting from developments relating to
the discovery of unauthorized adulterations to food additives; and
increased contributions to the Company’s multi-employer defined benefit pension
plans as required by the PPA. Among other things, future
profitability may be affected by the Company’s ability to grow its business,
which faces competition from companies that may have substantially greater
resources than the Company. The Company cautions readers that all
forward-looking statements speak only as of the date made, and the Company
undertakes no obligation to update any forward-looking statements, whether
as a
result of changes in circumstances, new events or otherwise.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
Market
risks affecting the Company 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 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 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 June 30, 2007, the fair value of these
interest swap agreements was $0.1 million and is included in non-current
liabilities on the balance sheet, with an offset recorded to accumulated other
comprehensive income.
As
of
June 30, 2007, the Company had forward purchase agreements in place for
purchases of approximately $8.8 million of natural gas for the months of July
through October 2007. As of June 30, 2007, the Company had forward
purchase agreements in place for purchases of approximately $4.3 million of
finished product for the month of July 2007.
Item
4. 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. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Based
on management’s evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of the end of the period
covered by this report.
Changes
in Internal Control over Financial Reporting. As required by
Exchange Act Rule 13a-15(d), the Company’s management, including the Chief
Executive Officer and Chief Financial Officer, also conducted an evaluation
of
the Company’s internal control over financial reporting to determine whether any
change occurred during the quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting. Based on that evaluation, there has
been no change in the Company’s internal control over financial reporting during
the quarter 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 Company is currently in the process of integrating
these acquired assets pursuant to the Sarbanes Act. Under the
Sarbanes Act, the Company is not required to include NBP assets in its
assessment of its internal control over financial reporting for SEC reports
until the period ended December 29, 2007. 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, and possible further changes to the Company’s operations and
systems, 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.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
FORM
10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2007
|
PART
II: Other
Information
|
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
matters voted upon at the annual
meeting of stockholders held on May 8, 2007 were as follows:
The
election of seven directors to serve until the next annual meeting of
stockholders or until their successors have been elected and qualified. The
number of votes cast for and against the election of each nominee, as well
as
the number of abstentions and broker non-votes with respect to the election
of
each nominee, were as follows:
Randall
C.
Stuewe
|
|
|
|
For:
|
71,858,121
|
Against/Withheld:
|
3,146,425
|
|
|
|
|
O.
Thomas Albrecht
|
|
|
|
For:
|
71,854,668
|
Against/Withheld:
|
3,149,878
|
|
|
|
|
C.
Dean Carlson
|
|
|
|
For:
|
66,305,275
|
Against/Withheld:
|
8,699,271
|
|
|
|
|
Marlyn
Jorgensen
|
|
|
|
For:
|
73,897,344
|
Against/Withheld:
|
1,107,202
|
|
|
|
|
Fredric
J.
Klink
|
|
|
|
For:
|
68,819,080
|
Against/Withheld:
|
6,185,466
|
|
|
|
|
Charles
Macaluso
|
|
|
|
For:
|
71,737,962
|
Against/Withheld:
|
3,266,584
|
|
|
|
|
Michael
Urbut
|
|
|
|
For:
|
70,758,924
|
Against/Withheld:
|
4,245,622
|
|
|
|
|
Item
6. EXHIBITS
(a)
|
Exhibits
|
|
|
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of
the
Company.
|
|
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the
Company.
|
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002, of Randall C. Stuewe, the Chief Executive
Officer of the Company, and of John O. Muse, the Chief Financial
Officer
of the Company.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
DARLING
INTERNATIONAL INC.
|
|
|
|
|
|
|
Date: August
9, 2007
|
|
By:
|
/s/ Randall
C. Stuewe
|
|
|
|
Randall
C. Stuewe
|
|
|
|
Chairman
and
|
|
|
|
Chief
Executive Officer
|
|
|
|
Date: August
9, 2007
|
|
By:
|
/s/ John
O. Muse
|
|
|
|
John
O. Muse
|
|
|
|
Executive
Vice President
|
|
|
|
Administration
and Finance
|
|
|
|
(Principal
Financial Officer)
|