DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
September
27, 2008 and December 29, 2007
(in
thousands, except shares)
|
September
27,
2008
|
|
|
December
29,
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
43,214
|
|
|
$
|
16,335
|
|
Restricted
cash
|
|
322
|
|
|
|
433
|
|
Accounts
receivable, net
|
|
72,142
|
|
|
|
59,401
|
|
Inventories
|
|
29,623
|
|
|
|
22,481
|
|
Other
current assets
|
|
6,796
|
|
|
|
8,417
|
|
Deferred
income taxes
|
|
5,098
|
|
|
|
8,026
|
|
Total
current assets
|
|
157,195
|
|
|
|
115,093
|
|
Property,
plant and equipment, less accumulated depreciation
of
$207,865 at September 27, 2008 and $199,157 at December 29,
2007
|
|
138,993
|
|
|
|
128,685
|
|
Intangible
assets, less accumulated amortization of
$46,175
at September 27, 2008 and $42,481 at December 29, 2007
|
|
30,846
|
|
|
|
29,037
|
|
Goodwill
|
|
80,063
|
|
|
|
71,856
|
|
Other
assets
|
|
6,177
|
|
|
|
6,667
|
|
|
$
|
413,274
|
|
|
$
|
351,338
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
$
|
5,000
|
|
|
$
|
6,250
|
|
Accounts
payable, principally trade
|
|
31,735
|
|
|
|
24,879
|
|
Accrued
expenses
|
|
45,221
|
|
|
|
49,579
|
|
Total
current liabilities
|
|
81,956
|
|
|
|
80,708
|
|
Long-term
debt, net
|
|
35,000
|
|
|
|
37,500
|
|
Other
non-current liabilities
|
|
19,390
|
|
|
|
27,225
|
|
Deferred
income taxes
|
|
4,372
|
|
|
|
4,921
|
|
Total
liabilities
|
|
140,718
|
|
|
|
150,354
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value; 100,000,000 shares authorized;
82,169,076 and
81,544,466 shares issued and outstanding
at September 27, 2008 and at December 29, 2007,
respectively
|
|
822
|
|
|
|
815
|
|
Additional
paid-in capital
|
|
156,973
|
|
|
|
152,264
|
|
Treasury
stock, at cost; 309,969 and 182,366 shares at
September
27, 2008 and December 29, 2007, respectively
|
|
(3,520
|
)
|
|
|
(1,547
|
)
|
Accumulated
other comprehensive loss
|
|
(8,303
|
)
|
|
|
(8,598
|
)
|
Retained
earnings
|
|
126,584
|
|
|
|
58,050
|
|
Total
stockholders’ equity
|
|
272,556
|
|
|
|
200,984
|
|
|
$
|
413,274
|
|
|
$
|
351,338
|
|
The accompanying notes are an integral
part of these consolidated financial statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Three
months and nine months ended September 27, 2008 and September 29,
2007
(in
thousands, except per share data)
(unaudited)
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
September
27,
2008
|
|
September
29,
2007
|
|
September
27,
2008
|
|
September
29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
|
236,227
|
|
|
$
|
171,831
|
|
|
$
|
659,041
|
|
|
$
|
469,868
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and operating expenses
|
|
177,745
|
|
|
|
130,889
|
|
|
|
485,339
|
|
|
|
356,058
|
|
Selling,
general and administrative
expenses
|
|
15,371
|
|
|
|
14,285
|
|
|
|
44,052
|
|
|
|
41,161
|
|
Depreciation
and amortization
|
|
5,799
|
|
|
|
5,647
|
|
|
|
17,436
|
|
|
|
17,186
|
|
Total
costs and expenses
|
|
198,915
|
|
|
|
150,821
|
|
|
|
546,827
|
|
|
|
414,405
|
|
Operating
income
|
|
37,312
|
|
|
|
21,010
|
|
|
|
112,214
|
|
|
|
55,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
(714
|
)
|
|
|
(1,166
|
)
|
|
|
(2,334
|
)
|
|
|
(4,125
|
)
|
Other,
net
|
|
97
|
|
|
|
(105
|
)
|
|
|
397
|
|
|
|
(636
|
)
|
Total
other income/(expense)
|
|
(617
|
)
|
|
|
(1,271
|
)
|
|
|
(1,937
|
)
|
|
|
(4,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations before income
taxes
|
|
36,695
|
|
|
|
19,739
|
|
|
|
110,277
|
|
|
|
50,702
|
|
Income
taxes expense
|
|
13,701
|
|
|
|
7,639
|
|
|
|
41,743
|
|
|
|
19,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
|
22,994
|
|
|
$
|
12,100
|
|
|
$
|
68,534
|
|
|
$
|
31,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share:
|
$
|
0.28
|
|
|
$
|
0.15
|
|
|
$
|
0.84
|
|
|
$
|
0.39
|
|
Diluted
income per share:
|
$
|
0.28
|
|
|
$
|
0.15
|
|
|
$
|
0.83
|
|
|
$
|
0.38
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Nine
months ended September 27, 2008 and September 29, 2007
(in
thousands)
(unaudited)
|
September
27,
2008
|
|
|
September
29,
2007
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
$
|
68,534
|
|
|
$
|
31,162
|
|
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
17,436
|
|
|
|
17,186
|
|
Loss
(gain) on disposal of property, plant, equipment and other
assets
|
|
(74
|
)
|
|
|
46
|
|
Deferred
taxes
|
|
2,379
|
|
|
|
2,018
|
|
Stock-based
compensation expense
|
|
672
|
|
|
|
1,115
|
|
Changes
in operating assets and liabilities, net of effect of
acquisition:
|
|
|
|
|
|
|
|
Restricted
cash
|
|
111
|
|
|
|
40
|
|
Accounts
receivable
|
|
(12,741
|
)
|
|
|
(12,201
|
)
|
Inventories
and prepaid expenses
|
|
(8,683
|
)
|
|
|
(9,195
|
)
|
Accounts
payable and accrued expenses
|
|
4,863
|
|
|
|
11,618
|
|
Other
|
|
(5,883
|
)
|
|
|
(2,355
|
)
|
Net
cash provided by operating activities
|
|
66,614
|
|
|
|
39,434
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(21,032
|
)
|
|
|
(10,208
|
)
|
Acquisition
|
|
(17,440
|
)
|
|
|
–
|
|
Gross
proceeds from disposal of property, plant and equipment
and other assets
|
|
881
|
|
|
|
131
|
|
Payments
related to routes and other intangibles
|
|
–
|
|
|
|
(239
|
)
|
Net
cash used by investing activities
|
|
(37,591
|
)
|
|
|
(10,316
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Proceeds
from debt
|
|
–
|
|
|
|
40,000
|
|
Payments
on debt
|
|
(3,750
|
)
|
|
|
(68,254
|
)
|
Deferred
loan costs
|
|
–
|
|
|
|
(20
|
)
|
Contract
payments
|
|
(134
|
)
|
|
|
(121
|
)
|
Issuance
of common stock
|
|
303
|
|
|
|
495
|
|
Minimum
withholding taxes paid on stock awards
|
|
(871
|
)
|
|
|
(1,375
|
)
|
Excess
tax benefits from stock-based compensation
|
|
2,308
|
|
|
|
749
|
|
Net
cash used by financing activities
|
|
(2,144
|
)
|
|
|
(28,526
|
)
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
26,879
|
|
|
|
592
|
|
Cash
and cash equivalents at beginning of period
|
|
16,335
|
|
|
|
5,281
|
|
Cash
and cash equivalents at end of period
|
$
|
43,214
|
|
|
$
|
5,873
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
$
|
1,657
|
|
|
$
|
4,153
|
|
Income
taxes, net of refunds
|
$
|
38,901
|
|
|
$
|
22,332
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
September
27, 2008
(unaudited)
|
The
accompanying consolidated financial statements for the three and nine
month periods ended September 27, 2008 and September 29, 2007 have been
prepared in accordance with generally accepted accounting principles in
the United States by Darling International Inc. (“Darling”) and its
subsidiaries (Darling and its subsidiaries are collectively referred to
herein as the “Company”) without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission
(“SEC”). The information furnished herein reflects all
adjustments (consisting only of normal recurring accruals) that are, in
the opinion of management, necessary to present a fair statement of the
financial position and operating results of the Company as of and for the
respective periods. However, these operating results are not necessarily
indicative of the results expected for a full fiscal year. Certain
information and footnote disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and
regulations. However, management of the Company believes, to
the best of its knowledge, that the disclosures herein are adequate to
make the information presented not misleading. The accompanying
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements contained in the Company’s Form
10-K for the fiscal year ended December 29,
2007.
|
(2)
|
Summary of Significant
Accounting Policies
|
|
(a) Basis of
Presentation
|
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 September 27, 2008, and include the 13 weeks and
39 weeks ended September 27, 2008, and the 13 weeks and 39 weeks ended
September 29, 2007.
|
|
Basic
income per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the
period. Diluted income per common share is computed by dividing
net income by the weighted average number of common shares outstanding
during the period increased by dilutive common equivalent shares
determined using the treasury stock
method.
|
|
Net
Income per Common Share (in thousands, except per share data)
|
|
Three
Months Ended
|
|
|
September
27,
|
|
|
|
September
29,
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
Income
|
|
Shares
|
|
Per
Share
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
$
22,994
|
|
81,516
|
|
$ 0.28
|
|
$
12,100
|
|
80,983
|
|
$
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Option shares in the money
|
|
|
995
|
|
|
|
|
|
1,599
|
|
|
Less:
Pro forma treasury shares
|
|
|
(326
|
)
|
|
|
|
|
(606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
22,994
|
|
82,185
|
|
$ 0.28
|
|
$
12,100
|
|
81,976
|
|
$
0.15
|
|
Nine
Months Ended
|
|
|
September
27,
|
|
|
|
September
29,
|
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
Income
|
|
Shares
|
|
Per
Share
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
$
68,534
|
|
81,313
|
|
$ 0.84
|
|
$
31,162
|
|
80,675
|
|
$ 0.39
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Option shares in the money
|
|
|
1,261
|
|
|
|
|
|
1,865
|
|
|
Less:
Pro forma treasury shares
|
|
|
(405
|
)
|
|
|
|
|
(690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
68,534
|
|
82,169
|
|
$ 0.83
|
|
$
31,162
|
|
81,850
|
|
$ 0.38
|
For the
three months ended September 27, 2008 and September 29, 2007, respectively,
20,000 and 8,000 outstanding stock options were excluded from diluted income per
common share as the effect was antidilutive. For the three months
ended September 27, 2008 and September 29, 2007, respectively, 119,903 and
92,923 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 September 27, 2008 and September 29, 2007, respectively,
zero and 11,852 shares of contingent issuable stock were excluded from diluted
income per common share as the effect was antidilutive.
For the
nine months ended September 27, 2008 and September 29, 2007, respectively,
15,678 and 8,000 outstanding stock options were excluded from diluted income per
common share as the effect was antidilutive. For the nine months
ended September 27, 2008 and September 29, 2007, respectively, 103,374 and
123,604 shares of non-vested stock and restricted stock were excluded from
diluted income per common share as the effect was antidilutive. For
the nine months ended September 27, 2008 and September 29, 2007, respectively,
zero and 75,134 shares of contingent issuable stock were excluded from
diluted income per common share as the effect was antidilutive.
On August
25, 2008, Darling completed the acquisition of substantially all of the assets
of API Recycling’s used cooking oil collection business (the “API
Transaction”). API Recycling is a division of American Proteins,
Inc. The purchase was accounted for as an asset purchase pursuant to the
terms of the asset purchase agreement between the Company and American Proteins,
Inc. The assets acquired in the API Transaction will increase the Company’s
capabilities to grow revenues and continue the Company’s strategy of
broadening its restaurant services segment.
Effective
August 25, 2008, the Company began including the operations of the API
Transaction into the Company’s consolidated financial statements. Pro
forma results of operations have not been presented because the effect of the
acquisition is not material. The Company paid approximately $17.4
million, which consists of property, plant and equipment of $3.4 million,
intangible assets of $5.5 million, goodwill of $8.2 million and other of $0.3
million on the closing date. This amount will be adjusted downward if
certain raw material volumes are not achieved during the 91 days following the
closing date. In addition, the Company could be required to pay
additional consideration, which the Company does not expect to be material, if
certain average market prices are achieved over the next three anniversaries of
the closing of the API Transaction.
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 September 27,
2008 and December 29, 2007, the reserves for insurance, environmental and
litigation contingencies reflected on the balance sheet in accrued expenses and
other non-current liabilities for which there are no potential insurance
recoveries were approximately $17.7 million and $17.1 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 July
2007, a judgment was entered in a litigation matter involving a contract dispute
in which the Company was a party. The judgment required the Company
to convey an unused parcel of property recorded on the books for approximately
$500,000 to the counterparty for that amount. In December 2007, a
judgment was entered in the matter awarding the counterparty approximately $2.6
million in attorneys’ fees and costs. The Company filed appeals of
both judgments. The Company settled this matter during the first
quarter of fiscal 2008. Pursuant to the terms of the settlement, the
Company transferred the property to the counterparty for a purchase price of
$500,000, paid the counterparty approximately $2.2 million towards attorneys’
fees and costs and agreed to dismiss its pending appeals with
prejudice. In addition, the parties exchanged mutual
releases. The Company recorded a charge of approximately $2.2 million
in the fourth quarter of 2007.
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 recorded a gain with the receipt of the $2.2
million in proceeds in the first quarter of 2007.
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 API Transaction are reflected in the
Restaurant Services 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 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.
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
|
|
Nine
Months Ended
|
|
September
27,
2008
|
|
September
29,
2007
|
|
September
27,
2008
|
|
September
29,
2007
|
Rendering:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
$
168,233
|
|
|
$
122,229
|
|
|
$
472,883
|
|
|
$
335,829
|
|
Intersegment
|
14,939
|
|
|
12,728
|
|
|
45,471
|
|
|
31,106
|
|
|
183,172
|
|
|
134,957
|
|
|
518,354
|
|
|
366,935
|
|
Restaurant
Services:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
67,994
|
|
|
49,602
|
|
|
186,158
|
|
|
134,039
|
|
Intersegment
|
3,696
|
|
|
1,351
|
|
|
7,822
|
|
|
3,631
|
|
|
71,690
|
|
|
50,953
|
|
|
193,980
|
|
|
137,670
|
|
Eliminations
|
(18,635
|
)
|
|
(14,079
|
)
|
|
(53,293
|
)
|
|
(34,737
|
)
|
Total
|
$
236,227
|
|
|
$
171,831
|
|
|
$
659,041
|
|
|
$
469,868
|
|
Business
Segment Profit (in thousands):
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
September
27,
2008
|
|
September
29,
2007
|
|
September
27,
2008
|
|
September
29,
2007
|
Rendering
|
$ 35,667
|
|
|
$ 21,072
|
|
|
$ 106,181
|
|
|
$ 56,435
|
|
Restaurant
Services
|
10,678
|
|
|
9,395
|
|
|
34,217
|
|
|
26,810
|
|
Corporate
|
(22,637
|
)
|
|
(17,201
|
)
|
|
(69,530
|
)
|
|
(47,958
|
)
|
Interest
expense
|
(714
|
)
|
|
(1,166
|
)
|
|
(2,334
|
)
|
|
(4,125
|
)
|
Income
from
continuing
operations
|
$ 22,994
|
|
|
$ 12,100
|
|
|
$ 68,534
|
|
|
$ 31,162
|
|
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):
|
September
27,
2008
|
|
December
29,
2007
|
Rendering
|
$
178,477
|
|
$
162,091
|
Restaurant
Services
|
55,114
|
|
40,518
|
Combined
Rendering/Restaurant Services
|
114,249
|
|
106,958
|
Corporate
|
65,434
|
|
41,771
|
Total
|
$
413,274
|
|
$
351,338
|
|
The
Company has provided income taxes for the three-month and nine-month
period ended September 27, 2008 and September 29, 2007, based on its
estimate of the effective tax rate for the entire 2008 and 2007 fiscal
years.
|
|
In
determining whether its deferred tax assets are more likely than not to be
recoverable, the Company considers all positive and negative evidence
currently available to support projections of future taxable
income. The Company is unable to carry back any of its net
operating losses and recent favorable operating results do provide
sufficient historical evidence at this time of sustained future
profitability sufficient to result in taxable income against which certain
net operating losses can be carried forward and
utilized.
|
|
In
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109 (“FIN
48”), which prescribes accounting for and disclosure of uncertainty in tax
positions. This interpretation defines the criteria that must be met for
the benefits of a tax position to be recognized in the financial
statements and the measurement of tax benefits
recognized. Effective December 31, 2006 the Company adopted the
provisions of FIN 48 resulting in a reduction in the Company’s existing
reserves for uncertain state and federal income tax positions of
approximately $0.1 million. This reduction was recorded as a
cumulative effect adjustment to retained earnings. The Company recognizes
interest and penalties related to uncertain tax positions in income tax
expense.
|
|
The
Company’s major taxing jurisdiction is the U.S. (federal and
state). The Company is no longer subject to federal
examinations on years prior to fiscal 2005. The number of years
open for state tax audits varies, depending on the tax jurisdiction, but
is generally from three to five years. Currently, several state
examinations are in progress. The Company does not anticipate
that any state or federal audits will have a significant impact on the
Company’s results of operations or financial position. In
addition, the Company does not reasonably expect any significant changes
to the estimated amount of liability associated with the Company’s
unrecognized tax positions in the next twelve
months.
|
The
Company entered into a $175 million credit agreement (the “Credit Agreement”)
effective April 7, 2006. 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 September 27, 2008, 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
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
September 27, 2008 under the Credit Agreement, the interest rate for $40.0
million of the term loan that remained outstanding was based on LIBOR plus a
margin of 1.0% per annum for a total of 3.8125% per annum. At
September 27, 2008 there were no outstanding borrowings under the Company’s
revolving facility.
On
October 8, 2008, the Company entered into an amendment (the “Amendment”) with
its lenders under its Credit Agreement. The Amendment increases the
Company’s flexibility to make investments in third parties. Pursuant
to the Amendment, the Company can make investments in third parties provided
that (i) no default under the Credit Agreement exists or would result at the
time such investment is committed to be made, (ii) certain specified defaults do
not exist or would result at the time such investment is actually made, and
(iii) after giving pro forma effect to such investment, the leverage ratio (as
determined in accordance with the terms of the Credit Agreement) is less than
2.00 to 1.00 for the most recent four fiscal quarter period then
ended. In addition, the Amendment increases the amount of
intercompany investments permitted among the Company and any of its subsidiaries
that are not parties to the Credit Agreement from $2.0 million to $10.0
million.
The
Credit Agreement contains 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 September 27, 2008 and
December 29, 2007, respectively (in thousands):
|
|
September
27,
2008
|
|
December
29,
2007
|
Term
Loan
|
|
$
|
40,000
|
|
$
|
43,750
|
Revolving
Credit Facility:
|
|
|
|
|
|
|
Maximum
availability
|
|
$
|
125,000
|
|
$
|
125,000
|
Borrowings
outstanding
|
|
|
–
|
|
|
–
|
Letters
of credit issued
|
|
|
16,424
|
|
|
18,881
|
Availability
|
|
$
|
108,576
|
|
$
|
106,119
|
The
obligations under the Credit Agreement are guaranteed by Darling National LLC, a
Delaware limited liability company that is a wholly-owned subsidiary of Darling
(“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 September 27, 2008, the Company was in compliance
with all the covenants contained in the Credit Agreement. At
September 27, 2008, the Company had unrestricted cash of $43.2 million, compared
to unrestricted cash of $16.3 million at December 29, 2007 and $5.9 million at
September 29, 2007.
(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 September 27, 2008, the fair value of
these interest swap agreements was $1.7 million and is included in non-current
other liabilities on the balance sheet, with the offset recorded to accumulated
other comprehensive loss.
A summary
of the derivative adjustments recorded to accumulated other comprehensive loss,
the net change arising from hedging transactions, and the amounts recognized in
earnings during the three and nine months ended September 27, 2008 and September
29, 2007 are as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
27,
|
|
|
September
29,
|
|
|
September
27,
|
|
|
September
29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Derivative
adjustment included in
accumulated
other comprehensive
loss
at beginning of period
|
|
$ |
1,051 |
|
|
$ |
66 |
|
|
$ |
1,143 |
|
|
$ |
408 |
|
Net
change arising from current period
hedging
transactions
|
|
|
281 |
|
|
|
547 |
|
|
|
536 |
|
|
|
219 |
|
Reclassifications
into earnings
|
|
|
(267 |
) |
|
|
(7 |
) |
|
|
(614 |
) |
|
|
(21 |
) |
Accumulated
other comprehensive loss (a)
|
|
$ |
1,065 |
|
|
$ |
606 |
|
|
$ |
1,065 |
|
|
$ |
606 |
|
(a)
|
Reported
as other comprehensive loss of approximately $1.7 million and $1.0 million
recorded net of taxes of approximately $0.6 million and $0.4 million for
the three and nine months ended September 27, 2008 and September 29,
2007, respectively.
|
At
September 27, 2008, the Company has forward purchase agreements in place for
purchases of approximately $14.8 million of natural gas. These forward purchase
agreements have no net settlement provisions and the Company intends to take
physical delivery. Accordingly, the forward purchase agreements are not
derivatives because they qualify as normal purchases, as defined in SFAS
133.
For the
three months ended September 27, 2008 and September 29, 2007, total
comprehensive income was $23.1 million and $11.8 million, respectively.
For the nine months ended September 27, 2008, and September 29, 2007,
total comprehensive income was $68.8 million and $31.5 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.
Effective
January 1, 2008, the Darling National LLC Pension Retirement Plan was merged
into the Darling International Inc. Hourly Employees’ Retirement Plan, which
plan was then amended and restated. Employees from both plans are
entitled to their accrued benefit as of December 31, 2007 under their prior plan
design, plus benefit accruals after January 1, 2008 using the new benefit of $20
for each year of service with no cap on service years. Previously,
these hourly employees had been accruing $20-$30 per year of service, depending
on location of employment.
Also
effective January 1, 2008, the Darling International Inc. Salaried Employees’
Retirement Plan, a defined benefit plan, was amended. Effective
January 1, 2008, all of the Company’s eligible salaried employees participate in
this plan, including all former Darling National salaried employees who did not
have a defined benefit plan prior to January 1, 2008. All eligible
salaried employees are entitled to their accrued benefit as of December 31,
2007, which accrued benefit is an amount equal to 1.8% times years of service
(up to 25 years) times final average pay plus 0.5% for each additional service
year beyond 25 years, with a total service year cap of 40
years. Effective January 1, 2008, for service years earned going
forward, the benefit accrual will be 0.25% times years of service times final
average pay.
Also
effective January 1, 2008, the Darling National LLC Retirement Savings Plan was
amended and restated to, among other things, update the plan for the Economic
Growth and Tax Relief Reconciliation Act and change the name of the plan to the
Darling International Inc. Hourly 401(k) Savings Plan. Effective
January 1, 2008, all of the Company’s hourly employees are eligible to
participate in this plan, which allows for elective deferrals, an employer match
equal to 100% of the first $10 per pay period deferred by a participant, with a
maximum of $520 per year, and an employer contribution equal to $520 per
year. Previously, certain of the Company’s hourly employees were only
given the opportunity to make deferrals. The $520 employer
contribution will be a new contribution for all participating hourly
employees. This plan accepted the transfer of assets and liabilities
of the hourly employees that had account balances in the Darling International
Inc. 401(k) Savings Plan which existed prior to January 1, 2008.
Effective
January 1, 2008, the Darling International Inc. 401(k) Savings Plan, a defined
contribution plan, was amended and restated and became the Darling International
Inc. Salaried 401(k) Savings Plan and now includes all eligible salaried
employees. This plan received the assets and liabilities of
participating salaried employees under the Darling National LLC Retirement
Savings Plan. Effective January 1, 2008, the Darling International
Inc. Salaried 401(k) Savings Plan includes an employer contribution based on age
(ranging from 2-5% of compensation per year), and will continue to allow for
employee deferrals. Previously, only the Darling National employees
received an employer match, which was equal to 100% of the first $10 per pay
period deferred by a participant, with a maximum of $520 per year.
Net
pension cost for the three and nine months ended September 27, 2008 and
September 29, 2007 includes the following components (in
thousands):
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
September
27,
2008
|
|
September
29, 2007
|
|
September
27,
2008
|
|
|
September
29, 2007
|
|
Service
cost
|
$ 266
|
|
$ 582
|
|
|
$ 800
|
|
|
$ 1,746
|
|
Interest
cost
|
1,361
|
|
1,252
|
|
|
4,081
|
|
|
3,758
|
|
Expected
return on plan assets
|
(1,650
|
)
|
(1,409
|
)
|
|
(4,951
|
)
|
|
(4,227
|
)
|
Amortization
of prior service cost
|
30
|
|
30
|
|
|
92
|
|
|
88
|
|
Amortization
of net loss
|
87
|
|
288
|
|
|
261
|
|
|
864
|
|
Net
pension cost
|
$ 94
|
|
$ 743
|
|
|
$
283
|
|
|
$ 2,229
|
|
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 September 27, 2007, the Company
expects to make contributions of approximately $0.2 million to meet funding
requirements for its pension plans during the next twelve months. Additionally,
the Company has made tax deductible discretionary contributions to its pension
plans for the nine months ended September 27, 2008 of approximately
$6.5 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. In April 2008 the Company made a lump sum settlement payment to
the one multi-employer plan that terminated for approximately $1.4 million,
which included a release for any future liability. Therefore, at September 27,
2008 the Company has no recorded liability related to this
termination.
(12)
|
Fair Value
Measurement
|
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. In February 2008, the FASB
issued FASB Staff Position (“FSP”) No. 157-2, which deferred the effective date
for certain portions of SFAS 157 related to nonrecurring measurements of
nonfinancial assets and liabilities. That provision of SFAS 157 will be
effective for the Company’s fiscal year 2009. The adoption of SFAS
157 did not have a material impact on the Company’s fair value
measurements.
The
following table presents the Company’s financial instruments that are measured
at fair value on a recurring basis as of September 27, 2008 and are categorized
using the fair value hierarchy under SFAS 157. The fair value
hierarchy has three levels based on the reliability of the inputs used to
determine the fair value.
|
|
|
Fair
Value Measurements at September 27, 2008 Using
|
|
|
|
Quoted
Prices in
|
|
Significant
Other
|
|
Significant
|
|
|
|
Active
Markets for
|
|
Observable
|
|
Unobservable
|
|
|
|
Identical
Assets
|
|
Inputs
|
|
Inputs
|
(In
thousands of dollars)
|
Total
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
Derivative
liabilities
|
$
(1,739)
|
|
$ —
|
|
$ (1,739)
|
|
$ —
|
Total
|
$
(1,739)
|
|
$ —
|
|
$ (1,739)
|
|
$ —
|
Derivative
liabilities consist of the Company’s interest rate swap contracts, which
represent the present value of yield curves observable at commonly quoted
intervals for similar assets and liabilities in active markets considering the
instrument’s term, notional amount, discount rate and credit risk.
(13)
|
New Accounting
Pronouncements
|
In
February 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) 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 has adopted SFAS 159 and has elected
not to account for any additional financial instruments and other items at fair
value.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which
is a revision of SFAS 141, “Business
Combinations.” SFAS 141(R) applies to all transactions and
other events in which one entity obtains control over one or more other
businesses. SFAS 141(R) requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities and
any non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and
measured at fair value on the date of acquisition rather than at a later date
when the amount of that consideration may be determinable beyond a reasonable
doubt. This fair value approach replaces the cost-allocation process
required under SFAS 141 whereby the cost of an acquisition was allocated to the
individual assets acquired and liabilities assumed based on their estimated fair
value. SFAS 141(R) requires acquirers to expense acquisition related
costs as incurred rather than allocating these costs to assets acquired and
liabilities assumed, as was done under SFAS 141. The provisions of
SFAS 141(R) are effective for fiscal years beginning after December 15,
2008. Early adoption is not permitted. The Company is
currently evaluating the impact of adopting this accounting
standard.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No.
133” (“SFAS 161”). This statement is intended to improve
transparency in financial reporting by requiring enhanced disclosures of an
entity’s derivative instruments and hedging activities and their effects on the
entity’s financial position, financial performance, and cash
flows. SFAS 161 applies to all derivative instruments within the
scope of SFAS 133 as well as related hedged items, bifurcated derivatives, and
nonderivative instruments that are designated and qualify as hedging
instruments. The fair value of derivative instruments and their gains
and losses will need to be presented in tabular format in order to present a
more complete picture of the effects of using derivative
instruments. SFAS 161 is effective for financial statements issued
for fiscal years beginning after November 15, 2008, with early application
permitted. The Company is currently evaluating the impact of adopting
this accounting standard.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS 162). The purpose of
the new standard is to provide a consistent framework for determining what
accounting principles should be used when preparing U.S. generally accepted
accounting principle financial statements. Previous guidance did not properly
rank the accounting literature. The new standard is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The adoption of SFAS 162 is not expected to have a
material effect on the Company’s financial statements.
In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active.” This staff position clarifies the application of SFAS
157 in determining the fair values of assets or liabilities in a market that is
not active. This staff position became effective upon issuance, including
prior periods for which financial statements have not been
issued. The Company has adopted this staff position for the
consolidated financial statements contained within this Form
10-Q. The adoption of this staff position did not have an impact to
the consolidated financial statements of the Company.
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 29, 2007, 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. The Company processes raw materials at 40 facilities
located throughout the U.S. into finished products such as protein (primarily
meat and bone meal, “MBM”), tallow (primarily bleachable fancy tallow, “BFT”),
yellow grease (“YG”) and hides. The Company sells these products
nationally and internationally, primarily to producers of oleo-chemicals,
bio-fuels, soaps, pet foods, leather goods and livestock feed for use as
ingredients in their products or for further processing. The
accompanying consolidated financial statements should be read in conjunction
with the audited consolidated financial statements contained in the Company’s
Form 10-K for the fiscal year ended December 29, 2007.
Earnings for the third quarter of
fiscal 2008 continued to reflect the strong commodity prices the Company has
enjoyed throughout the nine months of fiscal 2008. Finished product
prices remained historically strong during the third quarter of fiscal 2008, but
began declining in the latter part of the third quarter. Raw material
volumes declined slightly as financial turmoil and negative business conditions
forced the closure of several raw material suppliers which more than offset
seasonal dead stock volume gains. For the nine months ended September
27, 2008 compared to the nine months ended September 29, 2007, the Company’s
volume declined slightly. Operating costs increased significantly as
energy prices during third quarter of fiscal 2008 peaked for both natural gas
and diesel fuel. Overall, the Company’s balance sheet remains strong
and the Company was able to complete the acquisition of a multi-location grease
recycling business in Georgia.
Operating income increased by $16.3
million in the third quarter of fiscal 2008 compared to the third quarter
of fiscal 2007. The challenges faced by the Company indicate there can be no
assurance that operating results achieved by the Company in the third quarter of
fiscal 2008 are indicative of future operating performance of the
Company.
Summary of Critical Issues
Faced by the Company During the Third Quarter of 2008
·
|
Higher
finished product prices during the third quarter of fiscal 2008 were
indicative of tightening grain and oilseed supplies driven by a
combination of new demand for bio-fuels, growing consumption in China and
India and back-to-back droughts in various grain and oilseed producing
regions of the world. Higher finished product prices for BFT
and YG were favorable to the Company’s sales revenue, but this favorable
result was partially offset by the negative impact on raw material cost,
due to the Company’s formula pricing arrangements with raw material
suppliers, which index raw material cost to the prices of finished product
derived from the raw material. The financial impact of finished
goods prices on sales revenue and raw material cost is summarized below in
Results of Operations. Comparative sales price information from
the Jacobsen index, an established trading exchange publisher used by
management, is listed below in Summary of Key
Indicators.
|
·
|
The
Company has the ability to burn alternative fuels, including its fats and
greases, at a majority of its plants as a way to help manage the Company’s
exposure to high natural gas prices. Beginning October 1, 2006,
the federal government effected a program which provides federal tax
credits under certain circumstances for commercial use of alternative
fuels in lieu of fossil-based fuels. Beginning in the fourth
quarter of 2006, the Company filed documentation with the Internal Revenue
Service (“IRS”) to recover these Alternative Fuel Mixture Credits as a
result of its use of fats and greases to fuel boilers at its
plants. The Company has received approval from the IRS to apply
for these credits. However, the federal regulations relating to
the Alternative Fuel Mixture Credits are complex and further clarification
is needed by the Company prior to recognition of certain tax credits
received. As of September 27, 2008, the Company has $0.7
million of received credits included in current liabilities on the balance
sheet as deferred income while the Company pursues further
clarification. The Company will continue to evaluate the option
of burning alternative fuels at its plants in future periods depending on
the price relationship between alternative fuels and natural
gas.
|
Summary of Critical Issues
and Known Trends Faced by the Company in 2008 and Thereafter
BSE and Other Food Safety
Issues
·
|
On
April 25, 2008, the Food and Drug Administration (“FDA”) published
“Substances Prohibited From Use in Animal Food or Feed,” a Final Rule (the
“Final BSE Rule”), which becomes effective on April 27, 2009 and finalizes
changes to 21 CFR 589.2000. Promulgated August 1997 to mitigate
the potential risk of spreading bovine spongiform encephalopathy (“BSE”)
in the U.S., 21 CFR 589.2000 prohibits the use of mammalian proteins, with
some exceptions, in feed for cattle, sheep and other ruminant
animals. The Final BSE Rule amends 21 CFR 589.2000 by
prohibiting the use of certain cattle materials in all feed and food for
animals. Such prohibited cattle materials include: (1) the
entire carcass of cattle positive for BSE; (2) brain and spinal cord from
cattle aged 30 months and older; and (3) the entire carcass of cattle aged
30 months and older that were not inspected and passed for human
consumption and from which the brain and spinal cord were not
“effectively” removed; and (4) tallow derived from the listed prohibited
cattle materials unless such tallow contains no more than 0.15% insoluble
impurities. The Final BSE Rule also prohibits the use of tallow derived
from any cattle materials in feed for cattle and other ruminant animals,
if such tallow contains more than 0.15% insoluble
impurities. Except for these new restrictions on tallow,
materials derived from cattle younger than 30 months of age and not
positive for BSE are not affected by the Final BSE Rule and may still be
used in feed and food for animals pursuant to 21 CFR
589.2000. The insoluble impurity restrictions for tallow,
however, do not affect its use in feed for poultry, pigs and other
non-ruminant animals, unless such tallow was derived from the cattle
materials prohibited by the Final BSE Rule. In connection with
its release of the Final BSE Rule, the FDA has stated that it will issue
further guidance on the implementation of certain aspects of the Final BSE
Rule. Affirmation that such guidance is forthcoming was
provided by the FDA on July 15, 2008, when it released “Feed Ban
Enhancement Implementation: Questions and Answers” to address initial
questions about the Final BSE Rule submitted to the FDA by industry;
however, such guidance had not been issued as of October 30,
2008. The Company will be unable to fully determine the
potential impact of the Final BSE Rule on the Company’s operations until
the guidance has been issued. However, the Company has followed this
rulemaking process throughout its history in order to assess and minimize
the impact of its implementation on the Company. Based on the
foregoing, while the Company believes that there are interpretive and
enforcement issues with respect to the Final BSE Rule that require
clarification and guidance from the FDA and that certain capital
expenditures will be required for compliance, the Company does not
currently anticipate that the Final BSE Rule will have a significant
impact on its operations or financial
performance. Notwithstanding the foregoing, the Company can
provide no assurance that unanticipated costs and/or reductions in raw
material volumes related to the Company’s implementation of and compliance
with the Final BSE Rule will not negatively impact the Company’s
operations and financial
performance.
|
·
|
Avian
influenza (“H5N1”), or Bird Flu, a highly contagious disease that affects
chickens and other poultry species, has spread throughout Asia and
Europe. The H5N1 strain is highly pathogenic, which has caused
concern that a pandemic could occur if the disease migrates from birds to
humans. This highly pathogenic strain has not been detected in
North or South America as of October 24, 2008, but low pathogenic strains
that are not a threat to human health were reported in the U.S. and Canada
in recent years, with the most recent incidence confirmed in an Arkansas
poultry flock in June 2008. The U.S. Department of Agriculture
(“USDA”) has developed safeguards to protect the U.S. poultry industry
from H5N1. These safeguards are based on import restrictions, disease
surveillance and a response plan for isolating and depopulating infected
flocks if the disease is detected. Notwithstanding these safeguards, any
significant outbreak of Bird Flu in the U.S. could have a negative impact
on the Company’s business by reducing demand for
MBM.
|
·
|
On
May 13, 2008, the FDA held a public meeting to present the agency’s
rulemaking intentions regarding the Food and Drug Administration
Amendments Act of 2007 (“the Act”) and to receive public comments on such
intended actions. The Act was signed into law on September 27, 2007 as a
result of Congressional concern for pet and livestock food safety,
following the discovery of adulterated imported pet and livestock food in
March 2007. The Act directs the Secretary of Health and Human
Services (“HHS”) and the FDA to promulgate significant new requirements
for the pet food and animal feed industries. The impact of the Act on the
Company, if any, will not be clear until the FDA completes the rulemaking
process and publishes written guidance or new
regulations.
|
·
|
On
November 7, 2007, the FDA released its Food Protection Plan (the “2007
Plan”), which describes prevention, intervention and response strategies
the FDA proposes to use for improving food and animal feed safety for
imported and domestically produced ingredients and products. The 2007 Plan
also lists additional resources and authorities that, in the FDA’s
opinion, are needed to implement the 2007 Plan. Legislation
will be necessary for the FDA to obtain these additional
authorities. As of October 30, 2008, Congress has not granted
such new authorities to the FDA.
|
Other Critical Issues and
Challenges:
·
|
Finished
product prices for commodities have declined significantly subsequent to
the third quarter of fiscal 2008. No assurance can be given
that this significant decline in commodity prices for BFT, YG and MBM will
not continue in the future. These declines, coupled with the
current decline of the general performance of the U.S. economy and the
inability of consumers and companies to obtain credit due to the current
lack of liquidity in the financial markets, could have a significant
impact on the Company’s earnings in the fourth quarter of fiscal 2008 and
into future periods.
|
·
|
Energy
prices for natural gas and diesel fuel have declined significantly
subsequent to the third quarter of fiscal 2008. No assurance
can be given that prices for natural gas and diesel fuel will continue to
decline or remain low in the future. The Company consumes
significant volumes of natural gas to operate boilers in its plants, which
generate steam to heat raw material. High natural gas prices
represent a significant cost of factory operation included in cost of
sales. The Company also consumes significant volumes of diesel
fuel to operate its fleet of tractors and trucks used to collect raw
material. High diesel fuel prices represent a significant
component of cost of collection expenses included in cost of
sales. Though the Company will continue to manage these costs
and attempt to minimize these expenses, prices remained relatively high in
the third quarter of 2008; however, energy prices have declined in the
fourth quarter of fiscal 2008. Volatile energy markets will
represent an ongoing challenge to the Company’s operating results for
future periods.
|
·
|
The
meat production industry has faced higher feed costs in the third quarter
of fiscal 2008. These higher costs, coupled with the general performance
of the U.S. economy and declining U.S. consumer confidence and the
inability of consumers and companies to obtain credit due to the current
lack of liquidity in the financial markets, could have a negative impact
on the Company’s raw material volume. Raw material volume will
be a challenge in future periods due to volatility of commodity
prices.
|
·
|
During
the third quarter of 2008, the Company incurred bad debts that were beyond
its historical trends due to delinquent accounts receivable and the lack
of liquidity in the financial markets. Volatile financial
markets will represent an ongoing challenge to the Company and no
assurance can be given that bad debt expense will not increase in the
future.
|
Results
of Operations
Three
Months Ended September 27, 2008 Compared to Three Months Ended September 29,
2007
Summary of Key Factors
Impacting Third Quarter 2008
Results:
Principal factors that contributed to a
$16.3 million increase in operating income, which are discussed in greater
detail in the following section, were:
·
|
Higher
finished product prices.
|
|
|
|
These
increases were partially offset by:
|
·
|
Higher
raw material costs,
|
·
|
Higher
energy costs, primarily related to natural gas and diesel fuel,
and
|
·
|
Higher
bad debt expense.
|
Summary of Key Indicators of
2008
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,
|
·
|
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 produced by the Company 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 third
quarter of fiscal 2008 compared to average Jacobsen prices for the
third quarter of fiscal 2007 follow:
|
Avg.
Price
3rd
Quarter
2008
|
Avg.
Price
3rd
Quarter 2007
|
Increase
|
%
Increase
|
MBM
(Illinois)
|
$388.36
/ton
|
$242.27
/ton
|
$146.09
/ton
|
60.3%
|
BFT
(Chicago)
|
$
41.35 /cwt
|
$
30.08 /cwt
|
$ 11.27
/cwt
|
37.5%
|
YG
(Illinois)
|
$
34.64 /cwt
|
$
21.25 /cwt
|
$ 13.39
/cwt
|
63.0%
|
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.
The current economic environment has
caused the Company’s finished product commodity prices to decline significantly
subsequent to the third quarter of fiscal 2008 as commodity prices remained
volatile. The following table shows the average Jacobsen index for
the month of October 2008 for MBM, BFT and YG as compared to October
2007.
|
Avg.
Price
Month
of
October
2008
|
Avg.
Price
Month
of October 2007
|
Increase/
(Decrease)
|
%
Increase/
(Decrease)
|
MBM
(Illinois)
|
$278.70/ton
|
$257.07
/ton
|
$21.63/ton
|
8.4%
|
BFT
(Chicago)
|
$ 24.50/cwt
|
$ 31.29
/cwt
|
($ 6.79/cwt)
|
(21.7%)
|
YG
(Illinois)
|
$ 19.84/cwt
|
$
23.76 /cwt
|
($ 3.92/cwt)
|
(16.5%)
|
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.
Natural gas and heating oil commodity
prices are quoted each day on the NYMEX exchange for future months of delivery
of natural gas and diesel fuel. The prices are important to the
Company because natural gas and diesel fuel are major components of factory
operating and collection costs and natural gas and diesel fuel prices are an
indicator of achievement of the Company’s business plan.
The Company charges collection fees,
which are included in net sales in order to offset a portion of the expense
incurred in collecting raw material. Each month the Company monitors
both the collection fee charged to suppliers, which is included in net sales,
and collection expense, which is included in cost of sales. The
importance of monitoring collection fees and collection expense is that they
provide management an indication of achievement of the Company’s business
plan.
Net Sales. The Company collects
and processes animal by-products (fat, bones and offal), including hides, and
used restaurant cooking oil to 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 third quarter of fiscal
2008, net sales increased by $64.4 million (37.5%) to $236.2 million as compared
to $171.8 million during the third quarter of fiscal 2007. The increase in net
sales was primarily due to the following (in millions of dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Higher
finished goods prices
|
|
$
58.6
|
|
|
$
19.0
|
|
|
$
—
|
|
|
$
77.6
|
|
Other
sales decreases
|
|
(0.2
|
)
|
|
(0.4
|
)
|
|
—
|
|
|
(0.6
|
)
|
Decrease
in yield
|
|
(2.0
|
)
|
|
(1.1
|
)
|
|
—
|
|
|
(3.1
|
)
|
Purchase
of finished product for resale
|
|
(3.6
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
(3.7
|
)
|
Decrease
in raw material volume
|
|
(4.6
|
)
|
|
(1.2
|
)
|
|
—
|
|
|
(5.8
|
)
|
Product
transfers
|
|
(2.2
|
)
|
|
2.2
|
|
|
—
|
|
|
—
|
|
|
|
$
46.0
|
|
|
$ 18.4
|
|
|
$
—
|
|
|
$
64.4
|
|
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 third quarter of fiscal 2008, cost of sales and operating expenses
increased $46.8 million (35.8%) to $177.7 million as compared to $130.9 million during the third quarter of fiscal 2007. The increase in cost of sales and operating
expenses was primarily due to the following (in millions of
dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Higher
raw material costs
|
|
$ 31.2
|
|
|
$ 11.5
|
|
|
$
—
|
|
|
$
42.7
|
|
Higher
energy costs, primarily natural gas
and
diesel fuel
|
|
5.3
|
|
|
1.1
|
|
|
0.5
|
|
|
6.9
|
|
Other
expenses
|
|
0.9
|
|
|
1.9
|
|
|
(0.6
|
)
|
|
2.2
|
|
Decreased
raw material volume
|
|
(1.4
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
(1.7
|
)
|
Purchases
of finished product for resale
|
|
(3.3
|
)
|
|
—
|
|
|
—
|
|
|
(3.3
|
)
|
Product
transfers
|
|
(2.2
|
)
|
|
2.2
|
|
|
—
|
|
|
—
|
|
|
|
$ 30.5
|
|
|
$
16.4
|
|
|
$ (0.1
|
)
|
|
$
46.8
|
|
Selling, General and Administrative
Expenses. Selling, general and
administrative expenses were $15.4 million during the third quarter of fiscal
2008, a $1.1 million increase (7.7%) from $14.3 million during the third
quarter of fiscal 2007. The Company increased its provision for bad
debt based on general credit conditions and delinquent accounts
receivable. The increase in selling, general and administrative
expenses is primarily due to the following (in millions of
dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Bad
debt expense
|
|
$
0.6
|
|
|
$
0.4
|
|
|
$
—
|
|
|
$
1.0
|
|
Other
expense
|
|
0.3
|
|
|
0.3
|
|
|
(0.5
|
)
|
|
0.1
|
|
|
|
$
0.9
|
|
|
$
0.7
|
|
|
$ (0.5
|
)
|
|
$
1.1
|
|
Depreciation and
Amortization.
Depreciation and
amortization charges were $5.8 million during the third quarter of fiscal 2008,
an increase of $0.2 million from $5.6 million during the third quarter of fiscal
2007. The increase in depreciation and amortization is primarily due to an
overall increase in capital expenditures.
Interest Expense. Interest expense was
$0.7 million during the third quarter of fiscal 2008 compared to $1.2 million
during the third quarter of fiscal 2007, a decrease of $0.5 million, primarily
due to a decrease in outstanding balance related to the Company’s
debt.
Other Income/Expense. Other income was
$0.1 million in the third quarter of fiscal 2008, an increase of $0.2 million as
compared to other expense of $0.1 million in the third quarter of fiscal 2007.
The decrease in other expense in the third quarter of fiscal 2008 is primarily
due to increased interest income as a result of more cash included in interest
bearing accounts.
Income Taxes. The Company recorded
income tax expense of $13.7 million for the third quarter of fiscal 2008,
compared to $7.6 million recorded in the third quarter of fiscal 2007, an
increase of $6.1 million, primarily due to increased pre-tax earnings of the
Company in fiscal 2008. The effective tax rate for the third quarter of
fiscal 2008 is 37.3% compared to 38.7% for the third quarter of fiscal
2007. The difference from the statutory rate of 35% in the third
quarter of fiscal 2008 and the third quarter of fiscal 2007 is primarily due to
state taxes.
Nine
Months Ended September 27, 2008 Compared to Nine Months Ended September 29,
2007
Summary of Key Factors
Impacting the First Nine Months of Fiscal
2008
Results:
Principal factors that contributed to a
$56.7 million increase in operating income, which are discussed in greater
detail in the following section, were:
·
|
Higher
finished product prices.
|
These increases were partially offset
by:
·
|
Higher
raw material costs,
|
·
|
Higher
energy costs, primarily related to natural gas and diesel
fuel,
|
·
|
Higher
payroll and related benefits, and
|
·
|
Higher
bad debt expense.
|
Summary of Key Indicators of
2008
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,
|
·
|
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
first nine months of fiscal 2008 compared to average Jacobsen prices for the
first nine months of fiscal 2007 follow:
|
Avg.
Price
Nine
Months
2008
|
Avg.
Price
Nine
Months
2007
|
Increase
|
%
Increase
|
MBM
(Illinois)
|
$357.04
/ton
|
$221.09
/ton
|
$135.95
/ton
|
61.5%
|
BFT
(Chicago)
|
$
39.75 /cwt
|
$
26.96 /cwt
|
$ 12.79
/cwt
|
47.4%
|
YG
(Illinois)
|
$
32.08 /cwt
|
$
21.01 /cwt
|
$ 11.07
/cwt
|
52.7%
|
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.
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.
Natural gas and heating oil commodity
prices are quoted each day on the NYMEX exchange for future months of delivery
of natural gas and diesel fuel. The prices are important to the
Company because natural gas and diesel fuel are major components of factory
operating and collection costs and natural gas and diesel fuel prices are an
indicator of achievement of the Company’s business plan.
The Company charges collection fees
which are included in net sales in order to offset a portion of the expense
incurred in collecting raw material. Each month the Company monitors
both the collection fee charged to suppliers, which is included in net sales,
and collection expense, which is included in cost of sales. The
importance of monitoring of collection fees and collection expense is they
provide management an indication of achievement of the Company’s business
plan.
Net Sales. The Company collects
and processes animal by-products (fat, bones and offal), including hides, and
used restaurant cooking oil to 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 nine months of fiscal
2008, net sales increased by $189.1 million (40.2%) to $659.0 million as
compared to $469.9 million during the first nine months of fiscal
2007. The increase in net sales was primarily due to the following
(in millions of dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Higher
finished goods prices
|
|
$ 163.2
|
|
|
$ 44.0
|
|
|
$
—
|
|
|
$ 207.2
|
|
Other
sales decreases
|
|
(1.4
|
)
|
|
(2.0
|
)
|
|
—
|
|
|
(3.4
|
)
|
Decreased
raw material volume
|
|
(0.5
|
)
|
|
(3.3
|
)
|
|
—
|
|
|
(3.8
|
)
|
Decrease
in yield
|
|
(3.1
|
)
|
|
(1.8
|
)
|
|
—
|
|
|
(4.9
|
)
|
Purchase
of finished product for resale
|
|
(7.0
|
)
|
|
1.0
|
|
|
—
|
|
|
(6.0
|
)
|
Product
transfers
|
|
(14.4
|
)
|
|
14.4
|
|
|
—
|
|
|
—
|
|
|
|
$
136.8
|
|
|
$ 52.3
|
|
|
$
—
|
|
|
$
189.1
|
|
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 nine months of fiscal
2008, cost of sales and operating expenses increased $129.2 million (36.3%) to
$485.3 million as compared to $356.1 million during the first nine months of
fiscal 2007. The increase in cost of sales and operating expenses was
primarily due to the following (in millions of dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Higher
raw material costs
|
|
$
89.8
|
|
|
$ 22.9
|
|
|
$
—
|
|
|
$
112.7
|
|
Higher
energy costs, primarily natural gas
and
diesel fuel
|
|
11.6
|
|
|
3.2
|
|
|
—
|
|
|
14.8
|
|
Payroll
and related benefits
|
|
2.2
|
|
|
0.8
|
|
|
—
|
|
|
3.0
|
|
Other
expenses
|
|
1.4
|
|
|
1.0
|
|
|
(0.3
|
)
|
|
2.1
|
|
Sale
of judgment
|
|
1.2
|
|
|
—
|
|
|
—
|
|
|
1.2
|
|
Purchases
of finished product for resale
|
|
(5.9
|
)
|
|
1.3
|
|
|
—
|
|
|
(4.6
|
)
|
Product
transfers
|
|
(14.4
|
)
|
|
14.4
|
|
|
—
|
|
|
—
|
|
|
|
$
85.9
|
|
|
$ 43.6
|
|
|
$
(0.3
|
)
|
|
$
129.2
|
|
Selling, General and Administrative
Expenses. Selling, general and
administrative expenses were $44.1 million during the first nine months of
fiscal 2008, a $2.9 million increase (7.0%) from $41.2 million during the first
nine months of fiscal 2007. The Company increased its provision for
bad debt based on general credit conditions and delinquent accounts
receivable. The increase was primarily due to the following (in
millions of dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Bad
debt expense
|
|
$
0.7
|
|
|
$
0.5
|
|
|
$
0.1
|
|
|
$
1.3
|
|
Payroll
and related benefits
|
|
0.4
|
|
|
0.1
|
|
|
0.6
|
|
|
1.1
|
|
Other expense
increases
|
|
0.2
|
|
|
0.5
|
|
|
0.4
|
|
|
1.1
|
|
Sale
of judgment
|
|
—
|
|
|
—
|
|
|
1.0
|
|
|
1.0
|
|
Lower
legal expense
|
|
—
|
|
|
—
|
|
|
(1.6
|
)
|
|
(1.6
|
)
|
|
|
$
1.3
|
|
|
$
1.1
|
|
|
$
0.5
|
|
|
$
2.9
|
|
Depreciation and
Amortization. Depreciation and
amortization charges increased $0.2 million (1.2%) to $17.4 million during the
first nine months of fiscal 2008 as compared to $17.2 million during the first
nine months of fiscal 2007. The increase in depreciation and
amortization is primarily due to an overall increase in capital
expenditures.
Interest Expense. Interest expense
was $2.3 million during the first nine months of fiscal 2008 compared to $4.1
million during the first nine months of fiscal 2007, a decrease of $1.8 million,
primarily due to a decrease in outstanding balance related to the Company’s
debt.
Other Income/Expense. Other income was $0.4
million in the first nine months of fiscal 2008, a $1.0 million increase in
other income as compared to other expense of $0.6 million in the first
nine months of fiscal 2007. The decrease in other expense is primarily due
to more cash included in interest bearing accounts and decreases in other
non-operating expenses.
Income Taxes. The Company recorded income
tax expense of $41.7 million for the first nine months of fiscal 2008,
compared to income tax expense of $19.5 million recorded in the first nine
months of fiscal 2007, an increase of $22.2 million, primarily due to an
increase in pre-tax earnings of the Company in fiscal 2008. The
effective tax rate for fiscal 2008 is 37.9% compared to 38.5% for fiscal
2007. The difference from the statutory rate of 35% in fiscal 2008
and fiscal 2007 is primarily due to state taxes.
FINANCING,
LIQUIDITY AND CAPITAL RESOURCES
The
Company entered into a $175 million credit agreement (the “Credit Agreement”)
effective April 7, 2006. 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 September 27, 2008, the Company has borrowed all $50.0 million under
the term loan facility, which provides for scheduled quarterly
amortization payments of $1.25 million over a six-year term ending April
7, 2012. The Company has reduced the term loan facility by
quarterly payments totaling $10.0 million, for an aggregate of $40.0
million principal outstanding under the term loan facility at September
27, 2008.
|
·
|
Alternative
base rate loans under the Credit Agreement bear interest at a rate per
annum based on the greater of (a) the prime rate and (b) the federal funds
effective rate (as defined in the Credit Agreement) plus ½ of 1%, plus, in
each case, a margin determined by reference to a pricing grid and adjusted
according to the Company’s adjusted leverage ratio. Eurodollar
loans bear interest at a rate per annum based on the then-applicable LIBOR
multiplied by the statutory reserve rate plus a margin determined by
reference to a pricing grid and adjusted according to the Company’s
adjusted leverage ratio.
|
·
|
On
October 8, 2008, the Company entered into an amendment (the “Amendment”)
with its lenders under its Credit Agreement. The Amendment
increases the Company’s flexibility to make investments in third
parties. Pursuant to the Amendment, the Company can make
investments in third parties provided that (i) no default under the Credit
Agreement exists or would result at the time such investment is committed
to be made, (ii) certain specified defaults do not exist or would result
at the time such investment is actually made, and (iii) after giving pro
forma effect to such investment, the leverage ratio (as determined in
accordance with the terms of the Credit Agreement) is less than 2.00 to
1.00 for the most recent four fiscal quarter period then
ended. In addition, the Amendment increases the amount of
intercompany investments permitted among the Company and any of its
subsidiaries that are not parties to the Credit Agreement from $2.0
million to $10.0 million.
|
·
|
The
Credit Agreement contains restrictive covenants that are customary for
similar credit arrangements and requires the maintenance of certain
minimum financial ratios. The Credit Agreement also requires
the Company to make certain mandatory prepayments of outstanding
indebtedness using the net cash proceeds received from certain
dispositions of property, casualty or condemnation, any sale or issuance
of equity interests in a public offering or in a private placement,
unpermitted additional indebtedness incurred by the Company and excess
cash flow under certain
circumstances.
|
The
Credit Agreement consisted of the following elements at September 27, 2008 (in
thousands):
Credit
Agreement:
|
|
|
Term
Loan
|
|
$
40,000
|
Revolving
Credit Facility:
|
|
|
Maximum
availability
|
|
$ 125,000
|
Borrowings
outstanding
|
|
–
|
Letters
of credit issued
|
|
16,424
|
Availability
|
|
$ 108,576
|
The
obligations under the Credit Agreement are guaranteed by Darling National LLC, a
Delaware limited liability company that is a wholly-owned subsidiary of Darling
(“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 September 27, 2008, the Company was in compliance
with all of the covenants contained in the Credit Agreement.
The
classification of long-term debt in the accompanying September 27, 2008
consolidated balance sheet is based on the contractual repayment terms of the
debt issued under the Credit Agreement.
On September 27, 2008, the Company
had working capital of $75.2 million and its working capital ratio was
1.92 to 1 compared to working capital of $34.4 million and a working
capital ratio of 1.43 to 1 on December 29, 2007. The increase in working
capital is primarily due to the increase in cash and commodity
prices. At September 27, 2008, the Company had unrestricted cash of
$43.2 million and funds available under the revolving credit facility of
$108.6 million, compared to unrestricted cash of $16.3 million and funds
available under the revolving credit facility of $106.1 million at December 29,
2007. The Company diversifies its cash investments by limiting the amounts
located at any one financial institution and invests primarily in
government-backed securities.
Net cash
provided by operating activities was $66.6 million and $39.4 million for
the nine months ended September 27, 2008 and September 29, 2007,
respectively, an increase of $27.2 million, primarily due to an increase in
net income of approximately $37.3 million and changes in operating assets
and liabilities, which includes a reduction in accounts payable and accrued
expenses of $6.7 million. Cash used by investing activities was $37.6
million for the nine months ended September 27, 2008 compared to $10.3 million
for the nine months ended September 29, 2007, an increase of $27.3 million,
due primarily to $17.4 million in cash used for the acquisition of assets of API
Recycling in the third quarter of fiscal 2008 and increased capital expenditures
related to the modernization project at the Turlock, California plant in fiscal
2008. Net cash used by financing activities was $2.1 million for the nine
months ended September 27, 2008, compared to net cash used by financing
activities of $28.5 million for the nine months ended September 29, 2007, a
decrease of cash used of $26.4 million, principally due to repayment of
borrowings on the Company’s Credit Agreement in the nine months ended
September 29, 2007.
The
Company made capital expenditures of $21.0 million during the first nine months
of fiscal 2008, compared to capital expenditures of $10.2 million in the first
nine months of fiscal 2008 for a net increase of $10.8 million, due to a major
modernization project at the Turlock, California plant that was identified over
normal maintenance and compliance capital expenditures and an overall increase
in capital expenditures. Capital expenditures related to compliance with
environmental regulations were $0.7 million and $1.4 million for the nine months
ended September 27, 2008 and September 29, 2007, respectively.
Based
upon the underlying terms of the Credit Agreement, approximately $5.0 million in
current debt, which is included in current liabilities on the Company’s balance
sheet at September 27, 2008, will be due during the next twelve months, which
includes scheduled quarterly installment payments of $1.25 million.
Based
upon the annual actuarial estimate, current accruals and claims paid during the
first nine months of fiscal 2008, the Company has accrued approximately $5.9
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 September 27, 2008.
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 approximately $0.2
million in payments in order to meet minimum pension funding requirements during
the next twelve months. 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 has made tax deductible discretionary
contributions to its pension plans for the nine months ended September 27, 2008
of approximately $6.5 million.
The
Pension Protection Act of 2006 (“PPA”) was signed into law in August 2006 and
went 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 impact of recent declines in the world
equity and other financial markets could have a material negative impact on
pension plan assets and the status of required funding under the
PPA. 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 as the Company relies on third parties outside its control to provide
such information. The Company knows that four 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 of the under-funded
multi-employer plans in which the Company participates has given notification of
a mass withdrawal termination for the plan year ended June 30,
2007. In April 2008 the Company made a lump sum settlement payment to
the one multi-employer plan that terminated for approximately $1.4 million,
which included a release for any future liability. Another of the
underfunded multi-employer plans in which the Company participates has given
notification of “Critical Status” under the PPA. 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 provides federal tax credits
under certain circumstances for commercial use of alternative fuels in lieu of
fossil-based fuels. Beginning in the fourth quarter of 2006, the
Company filed documentation with the IRS to recover these Alternative Fuel
Mixture Credits as a result of its use of fats and greases to fuel boilers at
its plants. The Company has received approval from the IRS to apply
for these credits. However, the federal regulations relating to the
Alternative Fuel Mixture Credits are complex and further clarification is needed
by the Company prior to recognition of certain tax credits
received. As of September 27, 2008, the Company has $0.7 million of
received credits included in current liabilities on the balance sheet as
deferred income while the Company pursues further clarification. The
Company will continue to evaluate the option of burning alternative fuels at its
plants in future periods depending on the price relationship between alternative
fuels and natural gas.
The
Company’s management believes that cash flows from operating activities
consistent with the level generated in the first nine months of fiscal 2008,
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, scheduled debt and interest payments,
income tax obligations and other contemplated needs 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
production industry as a result of higher feed costs or other factors,
reduced volume from food service establishments, reduced demand for animal feed,
or otherwise; unanticipated costs and/or reductions in raw material
volumes related to the Company’s implementation of and compliance with the Final
BSE Rule, including capital expenditures to comply with the Final BSE Rule;
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; bad debt write-offs; loss
of or failure to obtain necessary permits and registrations; and/or
unfavorable export markets. These factors, coupled with volatile
prices for natural gas and diesel fuel, general performance of the U.S.
economy and declining consumer confidence including the inability of
consumers and companies to obtain credit due to the current lack of liquidity in
the financial markets, among others, could negatively impact the Company’s
results of operations in fiscal 2008 and thereafter. The Company
cannot provide assurance that the cash flows from operating activities generated
in the first nine months of fiscal 2008 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 the Company’s developing a
comprehensive renewable energy strategy, including, without limitation,
potential investments in renewable diesel and/or biodiesel
projects; investments in response to governmental regulations
relating to BSE or other regulations; unexpected funding resulting
from the PPA requirements; 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
raw materials, 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 further 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 further 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
$20.5 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
September 27, 2008. 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 2008, in accordance with accounting principles generally accepted in the
U.S.
Based
upon the underlying lease agreements, the Company expects to pay approximately
$10.3 million in operating lease obligations during the next twelve months,
which are not included in liabilities on the Company’s balance sheet at
September 27, 2008. These lease obligations are included in cost of
sales or selling, general and administrative expense as the underlying lease
obligation comes due, in accordance with accounting principles generally
accepted in the U.S.
NEW
ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued
Statement of Financial Accounting Standards (SFAS) 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 has adopted SFAS 159 and has elected
not to account for any additional financial instruments and other items at fair
value.
In December 2007, the FASB issued SFAS
No. 141(R), “Business
Combinations” (“SFAS 141(R)”), which
is a revision of SFAS 141, “Business
Combinations.” SFAS 141(R) applies to all transactions and
other events in which one entity obtains control over one or more other
businesses. SFAS 141(R) requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities and
any non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and
measured at fair value on the date of acquisition rather than at a later date
when the amount of that consideration may be determinable beyond a reasonable
doubt. This fair value approach replaces the cost-allocation process
required under SFAS 141 whereby the cost of an acquisition was allocated to the
individual assets acquired and liabilities assumed based on their estimated fair
value. SFAS 141(R) requires acquirers to expense acquisition related
costs as incurred rather than allocating these costs to assets acquired and
liabilities assumed, as was done under SFAS 141. The provisions of
SFAS 141(R) are effective for fiscal years beginning after December 15,
2008. Early adoption is not permitted. The Company is
currently evaluating the impact of adopting this accounting
standard.
In March 2008, the FASB issued SFAS No.
161, “Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement
No. 133” (“SFAS 161”). This statement is intended to improve
transparency in financial reporting by requiring enhanced disclosures of an
entity’s derivative instruments and hedging activities and their effects on the
entity’s financial position, financial performance, and cash
flows. SFAS 161 applies to all derivative instruments within the
scope of SFAS 133 as well as related hedged items, bifurcated derivatives, and
nonderivative instruments that are designated and qualify as hedging
instruments. The fair value of derivative instruments and their gains
and losses will need to be presented in tabular format in order to present a
more complete picture of the effects of using derivative
instruments. SFAS 161 is effective for financial statements issued
for fiscal years beginning after November 15, 2008, with early application
permitted. The Company is currently evaluating the impact of adopting
this accounting standard.
In May 2008, the FASB issued SFAS No.
162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). The
purpose of the new standard is to provide a consistent framework for determining
what accounting principles should be used when preparing U.S. generally accepted
accounting principle financial statements. Previous guidance did not properly
rank the accounting literature. The new standard is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning
of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The adoption of SFAS 162 is not expected to have a
material effect on the Company’s financial statements.
In October 2008, the FASB issued FASB
Staff Position No. FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not
Active.” This staff position clarifies the application of SFAS
157 in determining the fair values of assets or liabilities in a market that is
not active. This staff position became effective upon issuance,
including prior periods for which financial statements have not been
issued. The Company has adopted this staff position for the
consolidated financial statements contained within this Form
10-Q. The adoption of this staff position did not have an impact to
the consolidated financial statements of the Company.
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 “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and “Legal Proceedings” and
located elsewhere herein regarding industry prospects and the Company’s
financial position are forward-looking statements. Actual results
could differ materially from those discussed in the forward-looking statements
as a result of certain factors, including many that are beyond the control of
the Company. Although the Company believes that the expectations
reflected in 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 29, 2007, 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; a decline in consumer
confidence; prices in the competing commodity markets, which are
volatile and are beyond the Company’s control; energy prices; the
implementation of the Final BSE Rule; BSE and its impact on finished
product prices, export markets 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 (such as melamine) 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 diesel fuel 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; general performance of the U.S. economy; 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. 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 September 27, 2008, the fair value of
these interest swap agreements was $1.7 million and is included in non-current
liabilities on the balance sheet, with an offset recorded to accumulated other
comprehensive income.
As of
September 27, 2008, the Company had forward purchase agreements in place for
purchases of approximately $14.8 million of natural gas. As of
September 27, 2008, the Company had forward purchase agreements in place for
purchases of approximately $5.7 million of finished product.
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.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 27, 2008
|
PART
II: Other Information
|
Item
1A. RISK FACTORS
The
following is an update to the risk factors reported in Item 1A of Part I of the
Company’s Form 10-K for the fiscal year ended December 29, 2007, filed with the
SEC on February 27, 2008 (the “Company 10-K”). The risk factors
included in the Company 10-K remain important and should be reviewed by the
reader before making any investment decision. If any of the events
described in the risk factors in Item 1A of the Company 10-K or discussed below
actually occurs, the Company’s business, financial condition, prospects or
results of operations could be materially and adversely affected. If
any of these events occurs, the trading price of the Company’s securities could
decline and you may lose all or part of your investment. The Company
cautions readers that the Company undertakes no obligation to update the risk
factors, whether as a result of changes in circumstances, new events or
otherwise.
The
Company is and may continue to be adversely affected by the ongoing world
financial crisis.
The
unprecedented turmoil existing in world financial, credit, commodities and stock
markets may have a significant negative effect on the Company's
business. The Company’s forward view into the possible effects of
this turmoil is limited. Among other things, the Company may be
adversely impacted because its domestic and international customers and
suppliers may not be able to access sufficient capital to continue to operate
their businesses, or to operate them at prior levels. A decline in consumer
confidence or changing patterns in the availability and use of disposable income
by consumers can negatively affect both the Company's suppliers and customers.
Declining discretionary consumer spending or the loss or impairment of a
meaningful number of the Company's suppliers or customers could lead to a
dislocation in either raw material availability or customer
demand. Tightened credit supply could negatively affect the Company's
customers’ ability to pay for the Company’s products on a timely basis or at
all, and could result in a requirement for additional bad debt
reserves. Although many of the Company's customer contracts are
formula-based, continued volatility in the commodities markets could negatively
impact the Company's revenues and overall profits. If the existing
financial and credit crisis negatively impacts a lender in the Company's credit
facility, the ability of that lender to fund its portion of the commitment could
be impaired. The inability of a lender to fund its committed portion
of the facility does not excuse other lenders from funding their portions of the
commitment.
Item
6. EXHIBITS
|
The
following exhibits are filed herewith:
|
|
|
|
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company.
|
|
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the
Company.
|
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, of Randall C. Stuewe, the Chief Executive
Officer of the Company, and of John O. Muse, the Chief Financial Officer
of the Company.
|
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: November
6, 2008
|
|
By:
|
/s/ Randall
C. Stuewe
|
|
|
|
Randall
C. Stuewe
|
|
|
|
Chairman
and
|
|
|
|
Chief
Executive Officer
|
|
|
|
Date: November
6, 2008
|
|
By:
|
/s/ John
O. Muse
|
|
|
|
John
O. Muse
|
|
|
|
Executive
Vice President
|
|
|
|
Administration
and Finance
|
|
|
|
(Principal
Financial Officer)
|