k10ye2008.htm
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
______________________________________
FORM 10-K
(Mark
One)
X
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ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the fiscal year ended January 3,
2009
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OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the transition period from _______________ to
_______________
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Commission
File Number
0-24620
DARLING INTERNATIONAL
INC.
(Exact
name of registrant as specified in its charter)
Delaware
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36-2495346
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
No.)
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251 O'Connor
Ridge Blvd., Suite
300
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Irving,
Texas
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75038
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(Address of
principal executive offices)
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(Zip
Code)
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Registrant's
telephone number, including area code: (972) 717-0300
Securities
registered pursuant to Section 12(b) of the Act:
Title
of Each Class
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Name
of Exchange on Which Registered
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Common
Stock $0.01 par value per share
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New
York Stock Exchange ("NYSE")
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if
the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes
X
No
____
Indicate by check mark if
the Registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No X
Indicate by check mark
whether the Registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934
during the preceding 12 months (or for such shorter period that the Registrant
was was required to file such reports), and (2) has been
subject to such
filing requirements for the past 90 days.
Yes X
No
____
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the Registrant’s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form
10-K.
Indicate by check mark
whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer," "accelerated filer” and "smaller reporting
company" in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
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X
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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(Do
not check if a smaller reporting company)
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Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
____ No X
As of the last day of the Registrant’s
most recently completed second fiscal quarter, the aggregate market value of the
shares of common stock held by nonaffiliates of the Registrant was approximately
$1,345,157,000 based upon the closing price of the common stock as reported on
the NYSE on that day. (In determining the market value of the Registrant’s
common stock held by non-affiliates, shares of common stock beneficially owned
by directors, officers and holders of more than 10% of the Registrant’s common
stock have been excluded. This determination of affiliate status is
not necessarily a conclusive determination for other purposes.)
There were 81,767,982 shares
of common stock, $0.01 par value, outstanding at February 23, 2009.
DOCUMENTS
INCORPORATED BY REFERENCE
Selected designated portions of the
Registrant’s definitive Proxy Statement in connection with the Registrant’s 2009
Annual Meeting of stockholders are incorporated by reference into Part III of
this Annual Report.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 3, 2009
TABLE OF CONTENTS
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Page
No.
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PART
I.
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Item
1.
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BUSINESS
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4
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Item
1A.
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RISK
FACTORS
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9
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Item
1B.
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UNRESOLVED
STAFF COMMENTS
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15
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Item
2.
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PROPERTIES
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15
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Item
3.
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LEGAL
PROCEEDINGS
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17
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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17
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PART
II.
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Item
5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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18
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Item
6.
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SELECTED
FINANCIAL DATA
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21
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Item
7.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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23
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Item
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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41
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Item
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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42
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Item
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
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81
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Item
9A.
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CONTROLS
AND PROCEDURES
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81
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Item
9B.
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OTHER
INFORMATION
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82
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PART
III.
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Item
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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83
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Item
11.
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EXECUTIVE
COMPENSATION
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83
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Item
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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83
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Item
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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83
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Item
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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83
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PART
IV.
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Item
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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84
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SIGNATURES
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88
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PART
I
ITEM
1. BUSINESS
GENERAL
Founded
by the Swift meat packing interests and the
Darling family in 1882, Darling International Inc.
(“Darling”) was incorporated in Delaware in
1962 under the name “Darling-Delaware Company,
Inc.” On December 28, 1993, Darling changed its name from
“Darling-Delaware Company, Inc.” to “Darling International Inc.” The
address of Darling’s principal executive office is 251 O’Connor Ridge Boulevard,
Suite 300, Irving, Texas, 75038, and its telephone number at this address is
(972) 717-0300.
Darling is a
leading provider of rendering, recycling and recovery solutions to the nation’s
food industry. Darling collects and recycles animal by-products and
used cooking oil from food service establishments and provides grease trap
cleaning services to many of the same establishments. In fiscal 2006,
Darling, through its wholly-owned subsidiary Darling National LLC, a Delaware
limited liability company (“Darling National”), completed the acquisition of
substantially all of the assets (the “Transaction”) of National By-Products,
LLC, an Iowa limited liability company (“NBP”). Darling and its
subsidiaries, including Darling National, are collectively referred to herein as
the “Company”. The Company processes raw materials at 43 facilities
located throughout the United States into finished products such as protein
(primarily meat and bone meal, “MBM”), tallow (primarily bleachable fancy
tallow, “BFT”), yellow grease (“YG”) and hides. The Company sells
these products nationally and internationally, primarily to producers of
oleo-chemicals, bio-fuels, soaps, pet foods, leather goods and livestock feed
for use as ingredients in their products or for further
processing. The Company’s business and operations in fiscal 2008 and
2007 include a full year of contribution from the assets acquired in the
Transaction, as compared to 33 weeks of contribution from these assets in fiscal
2006.
Commencing in
1998, as part of an overall strategy to better commit financial resources, the
Company’s operations were organized into two segments. These
are: 1) Rendering, the core business of turning inedible food
by-products from meat and poultry processors into high quality feed ingredients
and fats for other industrial applications; and 2) Restaurant Services, a group
focused on growing the grease collection business and grease collection
equipment sales while expanding the line of services, which includes grease trap
servicing, and the National Service Center (“NSC”), offered to food service
establishments and food processors. The NSC schedules services such
as fat and bone and used cooking oil collection as well as trap cleaning for
contracted customers using the Company’s resources or third party
providers. For the financial results of the Company’s business
segments, see Note 18 of Notes to Consolidated Financial
Statements.
The Company’s
net external sales from continuing operations by operating segment were as
follows (in thousands):
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Fiscal
2008
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Fiscal
2007
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Fiscal
2006
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Continuing
operations:
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Rendering
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$
585,108
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72.5%
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$
464,468
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72.0%
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$
279,011
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68.6%
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Restaurant
Services
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222,384
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27.5
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180,845
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28.0
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127,979
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31.4
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Total
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$
807,492
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100.0%
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$
645,313
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100.0%
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$
406,990
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100.0%
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PROCESSING
OPERATIONS
The Company
creates finished products primarily through the drying, grinding, separating and
blending of its various raw materials. The process starts with the
collection of animal processing by-products (fat, bones, feathers and offal)
from meat packers, grocery stores, butcher shops, meat markets and food service
establishments, as well as used cooking oil from food service establishments and
grocery stores.
The animal
processing by-products are ground and heated to extract water and separate oils
from animal tissue as well as to make the material suitable as an ingredient for
animal feed. Protein is separated from the cooked material by
pressing the material, then grinding and sifting it through
screens. The separated tallow is centrifuged and/or refined for
purity. The primary finished products derived from the processing of
animal by-products are tallow and protein. Other by-products include
feather meal and blood meal. Used cooking oil from food service
establishments is processed under a separate procedure that involves heat
processing and settling, as well as refining, resulting in derived yellow
grease, feed-grade animal fat or oleo-chemical feedstocks.
PURCHASE
AND COLLECTION OF RAW MATERIALS
The Company
operates a fleet of approximately 960 trucks and tractor-trailers to collect raw
materials from approximately 116,000 food service establishments, butcher shops,
grocery stores and independent meat and poultry processors. The raw
materials collected are manufactured into the finished products sold by the
Company. The Company replaces or upgrades its vehicle fleet as needed
to maintain efficient operations.
Rendering
materials are collected in one of two manners. Certain large
suppliers, such as large meat processors and poultry processors, are furnished
with bulk trailers in which the raw material is loaded. The Company
transports these trailers directly to a processing facility. Certain
of the Company’s rendering facilities are highly dependent on one or a few
suppliers. Should any of these suppliers choose alternate methods of
disposal, cease their operations, have their operations interrupted by casualty
or otherwise cease using the Company’s collection services, these operating
facilities would be materially and adversely affected. The Company
provides the remaining suppliers, primarily grocery stores and butcher shops,
with containers in which to deposit the raw material. The containers
are picked up by or emptied into Company trucks on a periodic
basis. The type and frequency of service is determined by individual
supplier requirements, the volume of raw material generated by the supplier,
supplier location and weather, among other factors.
Used cooking
oil from food service establishments is placed in various sizes and types of
containers which are supplied by the Company. In some instances,
these containers are loaded directly onto the trucks, while in other instances
the oil is pumped through a vacuum hose into the truck. The Company
also sells a container for used cooking oil collection to food service
establishments called CleanStar®, which
is a proprietary self-contained collection system that is housed either inside
or outside the establishment, with the used cooking oil pumped directly into
collection vehicles via an outside valve. The frequency of all forms
of raw material collection is determined by the volume of oil generated by the
food service establishment.
The raw
materials collected by the Company are transported either directly to a
processing plant or to a transfer station where materials from several
collection routes are loaded into trailers and transported to a processing
plant. Collections of animal processing by-products generally are
made during the day, and materials are delivered to plants for processing within
24 hours of collection to deter spoilage. Collection of used cooking
oil can be made at any time of the day or night, depending on supplier
preference; these materials may be held for longer periods of time before
processing. Depending on market conditions, the Company charges a
collection fee to offset a portion of the expense incurred in collecting raw
material.
During the
2008 fiscal year, the Company’s largest single supplier accounted for
approximately 5% of the total raw material processed by the Company, and the 10
largest raw materials suppliers accounted for approximately 27% of the total raw
material processed by the Company. For a discussion of the Company’s
competition for raw materials, see “Competition.” Many of the
Company’s suppliers supply raw material under long-term supplier
agreements. While the Company does not anticipate problems in the
availability or supply of raw material in the future, a significant decrease in
raw material volume could materially and adversely affect the Company’s business
and results of operations.
RAW
MATERIALS PRICING
The Company
has two primary pricing arrangements with its raw materials
suppliers. Approximately 58% of the Company's annual volume of raw
materials is acquired on a "formula" basis. Under a formula
arrangement, the charge or credit for raw materials is tied to published
finished product commodity prices after deducting a fixed service
charge. The Company acquires the remaining annual volume of raw
material under "non-formula" arrangements whereby suppliers are either paid a
fixed price, are not paid, or are charged for the expense of collection,
depending on various economic and competitive factors.
The credit
received or amount charged for raw material under both formula and non-formula
arrangements is based on various factors, including the type of raw materials,
the expected value of the finished product to be produced, the anticipated
yields, the volume of material generated by the supplier and processing and
transportation costs. Competition among processors to procure raw
materials also affects the price paid for raw materials. See
"Competition."
Formula
prices are generally adjusted on a weekly, monthly or quarterly basis while
non-formula prices or charges are adjusted as needed to respond to changes in
finished product prices or related operating costs.
FINISHED
PRODUCTS
The finished
products that result from processing of animal by-products are oils, primarily
BFT and YG; MBM, a protein; and hides. Oils are used as
ingredients in the production of pet food, animal feed, soaps and as a
substitute for traditional fuels. Oleo-chemical producers use these
oils as feedstocks to produce specialty ingredients used in paint, rubber,
paper, concrete, plastics and a variety of other consumer and industrial
products. MBM is used primarily as a high protein additive in pet
food and animal feed. Hides are sold to leather distributors and
manufacturers for the production of leather goods.
Predominantly
all of the Company's finished products are commodities or are priced relative to
these commodities. While the Company's finished products are
generally sold at prices prevailing at the time of sale, the Company’s ability
to deliver large quantities of finished products from multiple locations and to
coordinate sales from a central location enables the Company to occasionally
receive a premium over the then-prevailing market price.
MARKETING,
SALES AND DISTRIBUTION OF FINISHED PRODUCTS
The Company
sells its finished products worldwide. Commodity sales are primarily
managed through the Company's commodity trading department which is
headquartered in Irving, Texas. The Company also maintains sales
offices in Des Moines, Iowa and Los Angeles, California for the sale and
distribution of selected products. This sales force is in contact
with several hundred customers daily and coordinates the sale and assists in the
distribution of most finished products produced at the Company's processing
plants. The Company sells its finished products internationally
through commodities brokers, Company agents and directly to customers, in
various countries.
The Company
has no material foreign operations, but exports a portion of its products to
customers in various foreign countries or regions including Asia, the Pacific
Rim, North Africa, Mexico and South America. Total export sales were
$132.2 million, $171.6 million and $112.7 million for the years ended
January 3, 2009, December 29, 2007 and December 30, 2006,
respectively. The level of export sales varies from year to year
depending on the relative strength of domestic versus overseas
markets. The Company obtains payment protection for most of its
foreign sales by requiring payment before shipment or by requiring bank letters
of credit or guarantees of payment from U.S. government agencies. The
Company ordinarily is paid for its products in U.S. dollars and has not
experienced any material currency translation losses or any material foreign
exchange control difficulties. See Note 18 of Notes to Consolidated
Financial Statements for a breakdown of the Company’s sales by domestic and
foreign customers.
Following
diagnosis of the first U.S. case of bovine spongiform encephalopathy (“BSE”) on
December 23, 2003, many countries banned imports of U.S.-produced
beef and beef products, including MBM and initially BFT, though this initial ban
on tallow was relaxed to permit imports of U.S.-produced tallow with less than
0.15% impurities. As of February 23, 2009, most foreign markets that
were closed to U.S. beef following the discovery of the first U.S. case of BSE
had been reopened to U.S beef, although some countries only accept boneless beef
or beef from cattle less than 30 months of age. Japan is more
restrictive and only permits imports of U.S. beef from cattle that are age
verified to be 20 months of age or younger at slaughter. Export
markets for MBM containing beef material produced in the U.S. have remained
closed with the exception of the Indonesia market.
The Company’s
management monitors market conditions and prices for its finished products on a
daily basis. If market conditions or prices were to significantly
change, the Company’s management would evaluate and implement any measures that
it may deem necessary to respond to the change in market
conditions. For larger formula-based pricing suppliers, the indexing
of finished product price to raw material cost effectively fixes the gross
margin on finished product sales at a stable level, providing some protection to
the Company from price declines.
Finished
products produced by the Company are distributed primarily by truck and rail
from the Company's plants shortly following production. While there
are some temporary inventory accumulations at various port locations for export
shipments, inventories rarely exceed three weeks’ production and, therefore, the
Company uses limited working capital to carry inventories and reduces its
exposure to fluctuations in commodity prices. Other factors that
influence competition, markets and the prices that the Company receives for its
finished products include the quality of the Company's finished products,
consumer health consciousness, worldwide credit conditions and U.S. government
foreign aid. From time to time, the Company enters into arrangements
with its suppliers of raw materials pursuant to which these suppliers buy back
the Company’s finished products.
COMPETITION
Management of
the Company believes that the most competitive aspect of the business is the
procurement of raw materials rather than the sale of finished
products. During the last ten plus years, pronounced consolidation
within the meat packing industry has resulted in bigger and more efficient
slaughtering operations, the majority of which utilize “captive” processors
(rendering operations integrated with the meat or poultry packing
operation). Simultaneously, the number of small meat packers, which
have historically been a dependable source of supply for non-captive processors,
has decreased significantly. Although the total amount of
slaughtering may be flat or only moderately increasing, the availability,
quantity and quality of raw materials available to the independent processors
from these sources have all decreased. These factors have been
offset, in part, however, by increasing environmental
consciousness. The need for food service establishments to comply
with environmental regulations concerning the proper disposal of used restaurant
cooking oil is offering a growth area for this raw material
source. The rendering and restaurant services industries are highly
fragmented and very competitive. The Company competes with other
rendering and restaurant services businesses and alternative methods of disposal
of animal processing by-products and used restaurant cooking oil provided by
trash haulers, waste management companies and bio-diesel companies, as well as
the alternative of illegal disposal. Major competitors for the
collection of raw material include: Baker Commodities in the West and
Griffin Industries in Texas and the Southeast. Each of these
businesses competes in both the Rendering and Restaurant Services
segments. Another major competitor in the restaurant services
business is Restaurant Technologies, Inc.
In marketing
its finished products domestically and abroad, the Company faces competition
from other processors and from producers of other suitable
commodities. Tallows and greases are, in certain instances,
substitutes for soybean oil and palm stearine, while MBM is a substitute for
soybean meal. Consequently, the prices of BFT, YG and MBM correlate
with these substitute commodities. The markets for finished products
are impacted mainly by the worldwide supply of and demand for fats, oils,
proteins and grains.
SEASONALITY
The amount of
raw materials made available to the Company by its suppliers is relatively
stable on a weekly basis except for those weeks which include major holidays,
during which the availability of raw materials declines because major meat and
poultry processors are not operating. Weather is also a
factor. Extremely warm weather adversely affects the ability of the
Company to make higher quality products because the raw material deteriorates
more rapidly than in cooler weather, while extremely cold weather, in certain
instances, can hinder the collection of raw materials. Weather can
vary significantly from one year to the next and may impact comparability of
operating results of the Company between periods.
INTELLECTUAL
PROPERTY
The Company
maintains valuable trademarks, service marks, copyrights, trade names, trade
secrets, proprietary technologies and similar intellectual property, and
considers its intellectual property to be of material value. The
Company has registered or applied for registration of certain of its
intellectual property, including the tricolor triangle used in the Company’s
signage and logos and the names "Darling," "Darling Restaurant Services" and
"CleanStar." The Company’s policy generally is to pursue intellectual
property protection considered necessary or advisable.
EMPLOYEES
AND LABOR RELATIONS
As of January
3, 2009, the Company employed approximately 1,870 persons
full-time. Approximately 45.9% of the total number of employees are
covered by collective bargaining agreements; however, the Company has no
national or multi-plant union contracts. Management believes that the
Company’s relations with its employees and their representatives are
good. There can be no assurance, however, that new agreements will be
reached without union action or will be on terms satisfactory to the
Company.
REGULATIONS
The Company
is subject to the rules and regulations of various federal, state and local
governmental agencies. Material rules and regulations and the
applicable agencies include:
·
|
The Food and Drug
Administration (“FDA”), which regulates food and feed
safety. Effective August 1997, the FDA promulgated a rule
prohibiting the use of mammalian proteins, with some exceptions, in feeds
for cattle, sheep and other ruminant animals (21 CFR 589.2000, referred to
herein as the “BSE Feed Rule”). The intent of this rule is to
prevent further spread of BSE, commonly referred to as “mad cow disease.”
Company management believes the Company is in compliance with the
provisions of this rule.
Interim
regulations published by the FDA in 2004 and amended in 2006
prohibit: 1) certain animal by-products known as specified risk
materials (“SRM”) from human food and 2) SRM and materials from
non-ambulatory or dead cattle from cosmetics. Edible BFT that
is either derived from SRM-free raw materials or contains less than 0.15%
insoluble impurities are permitted in human food supplements and
cosmetics. Derivatives of BFT (glycerin and fatty acids) are
exempt from these regulations.
See
Item 1A “Risk Factors – The Company’s business may be affected by the
impact of BSE and other food safety issues,” for more information
regarding certain FDA rules that affect the Company’s business, including
changes to the BSE Feed
Rule.
|
·
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The
United States Department
of Agriculture (“USDA”), which regulates collection and production
methods. Within the USDA, two agencies exercise direct
regulatory oversight of the Company’s
activities:
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–
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Animal and Plant Health
Inspection Service (“APHIS”) certifies facilities and claims made
for exported materials; establishes and enforces import requirements for
live animals and animal products, and
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–
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Food Safety Inspection
Service (“FSIS”) regulates sanitation and food safety
programs. |
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On
December 30, 2003, the Secretary of Agriculture announced new beef
slaughter/meat processing regulations to assure consumers of the safety of
the meat supply. These regulations prohibit non-ambulatory
animals from entering the food chain, require removal of SRM at slaughter
and prohibit carcasses from cattle tested for BSE from entering the food
chain until the animals are shown negative for BSE.
On
November 19, 2007, APHIS implemented revised import regulations that
allowed Canadian cattle over 30 months of age and born after March 1, 1999
and bovine products derived from such cattle to be imported into the U.S.
for any use. Imports of Canadian cattle younger than 30 months of age have
been allowed since March 2005. Imports of SRM from Canadian born cattle
slaughtered in Canada are not
permitted.
|
·
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The
Environmental Protection
Agency (“EPA”), which regulates air and water discharge
requirements, as well as local and state agencies governing air and water
discharge.
|
·
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State Departments of
Agriculture, which regulate animal by-product collection and
transportation procedures and animal feed
quality.
|
·
|
The
United States Department
of Transportation (“USDOT”), as well as local and state agencies,
which regulate the operation of the Company’s commercial
vehicles.
|
·
|
The
Securities and Exchange
Commission (“SEC”), which regulates securities and information
required in annual and quarterly reports filed by publicly traded
companies.
|
These
material rules and regulations and other rules and regulations promulgated by
other agencies may influence the Company’s operating results at one or more
facilities.
AVAILABLE
INFORMATION
Under the
Securities Exchange Act of 1934, the Company is required to file annual,
quarterly and special reports, proxy statements and other information with the
SEC, which can be read and/or copies made at the SEC’s Public Reference Room at
100 F Street N.E., Room 1580, Washington D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information about the Public Reference
Room. The SEC maintains a web site at http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The Company
files electronically with the SEC.
The Company
makes available, free of charge, through its investor relations web site, its
reports on Forms 10-K,
10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable
after they are filed with, or
furnished to, the SEC pursuant to Section 13(a) or 15(d) of the Exchange
Act.
The Company’s
website is http://www.darlingii.com
and the address for the Company’s investor relations web site is http://www.darlingii.com/investors.aspx.
ITEM
1A. RISK FACTORS
Any
investment in the Company will be subject to risks inherent to the Company’s
business. Before making an investment decision in the Company, you
should carefully consider the risks described below together with all of the
other information included in or incorporated by reference into this
report. If any of the events described in the following risk factors
actually occurs, the Company’s business, financial condition, prospects or
results of operations could be materially and adversely affected. If
any of these events occurs, the trading price of the Company’s securities could
decline and you may lose all or part of your investment.
The
Company’s results of operations and cash flow may be reduced by decreases in the
market price of its products.
The Company’s
finished products are commodities, the prices of which are quoted on established
commodity markets. Accordingly, the Company’s results of operations
will be affected by fluctuations in the prevailing market prices of these
finished products. A significant decrease in the market price of the
Company’s products would have a material adverse effect on the Company’s results
of operations and cash flow. In addition, the Company’s principal
products are not future exchange trading commodities.
The
most competitive aspect of the Company’s business is the procurement of raw
materials.
The Company’s
management believes that the most competitive aspect of the Company’s business
is the procurement of raw materials rather than the sale of finished
products. Pronounced consolidation within the meat packing industry
has resulted in bigger and more efficient slaughtering operations, the majority
of which utilize “captive” processors. Simultaneously, the number of
small meat packers, which have historically been a dependable source of supply
for non-captive processors, such as the Company, has decreased
significantly. Although the total amount of slaughtering may be flat
or only moderately increasing, the availability, quantity and quality of raw
materials available to the independent processors from these sources have all
decreased. In addition, the Company has seen an increase in the use
of restaurant grease in the production of bio-diesel. Furthermore,
the general performance of the U.S. economy, 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, such as through the forced closure of raw
material suppliers. A significant decrease in available raw materials
or a closure of a raw material supplier could materially and adversely affect
the Company’s business and results of operations including the carrying value of
the Company's assets.
The rendering
and restaurant services industry is highly fragmented and very
competitive. The Company competes with other rendering and restaurant
services businesses and alternative methods of disposal of animal processing
by-products and used restaurant cooking oil provided by trash haulers, waste
management companies and bio-diesel companies, as well as the alternative of
illegal disposal. In addition, restaurants experience theft of used
cooking oil. Depending on market conditions, the Company charges a
collection fee to offset a portion of the cost incurred in collecting raw
material. To the extent suppliers of raw materials look to alternate
methods of disposal, whether as a result of the Company’s collection fees being
deemed too expensive or otherwise, the Company’s raw material supply will
decrease and the Company’s collection fee revenues will decrease, which could
materially and adversely affect the Company’s business and results of
operations.
Certain
of the Company’s 43 operating facilities are highly dependent upon a few
suppliers.
Certain of
the Company’s rendering facilities are highly dependent on one or a few
suppliers. Should any of these suppliers choose alternate methods of
disposal, cease their operations, have their operations interrupted by casualty
or otherwise cease using the Company’s collection services, these operating
facilities may be materially and adversely affected, which could materially and
adversely affect the Company’s business, earnings, balance sheet and/or cash
flows.
The
Company may incur material costs and liabilities in complying with government
regulations.
The Company
is subject to the rules and regulations of various federal, state and local
governmental agencies. Material rules and regulations and the
applicable agencies include:
·
|
The
FDA, which regulates food and feed
safety;
|
·
|
The
USDA, including its agencies APHIS and FSIS, which regulates collection
and production methods;
|
·
|
The
EPA, which regulates air and water discharge requirements, as well as
local and state agencies governing air and water
discharge;
|
·
|
State
Departments of Agriculture, which regulate animal by-product collection
and transportation procedures and animal feed
quality;
|
·
|
The
USDOT, as well as local and state transportation agencies, which regulate
the operation of the Company’s commercial vehicles;
and
|
·
|
The
SEC, which regulates securities and information required in annual and
quarterly reports filed by publicly traded
companies.
|
The
applicable rules and regulations promulgated by these agencies may influence the
Company’s operating results at one or more facilities. Furthermore, the loss of
or failure to obtain necessary federal, state or local permits and registrations
at one or more of the Company’s facilities could halt or curtail operations at
impacted facilities, which could adversely affect the Company’s operating
results. The Company’s failure to comply with applicable rules and
regulations could subject it to: 1) administrative penalties and injunctive
relief; 2) civil remedies, including fines, injunctions and product
recalls; and 3) adverse publicity. There can be no
assurance that the Company will not incur material costs and liabilities in
connection with these rules and regulations.
The
Company is highly dependent on natural gas and diesel fuel.
The Company’s
operations are highly dependent on the use of natural gas and diesel
fuel. Energy prices for natural gas and diesel fuel are expected to
remain volatile throughout 2009. The Company consumes significant
volumes of natural gas to operate boilers in its plants to generate steam to
heat raw material. 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. 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 are expected to remain volatile in
fiscal 2009 and represent an ongoing challenge to the Company’s operating
results for future periods. A material increase in energy prices for
natural gas and diesel fuel over a sustained period of time could materially
adversely affect the Company’s business, financial condition and results of
operations. See Item 7, “Management’s Discussion and Analysis,” for a
recent history of natural gas pricing.
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. Counter party risk
on finished product sales can also impact revenue and operating profits when
customers either are unable to obtain credit or refuse to take delivery of
finished product due to market price declines. 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.
Multi-employer
defined benefit pension plans to which the Company contributes may be
under-funded.
The Company
contributes to several multi-employer defined benefit pension plans based on
obligations arising under collective bargaining agreements covering
union-represented employees. The Company does not manage these
multi-employer plans. Based upon the most currently available
information from plan administrators, some of which information is more than a
year old, the Company believes that some of these multi-employer plans are
under-funded due partially to a decline in the value of the assets supporting
these plans, a reduction in the number of actively participating members for
whom employer contributions are required and the level of benefits provided by
the plans. In addition, the Pension Protection Act, enacted in August
2006, will require under-funded pension plans to improve their funding ratios
within prescribed intervals based on the level of their under-funding beginning
as early as 2008. As a result, the Company’s required contributions
to these plans may increase in the future. Furthermore, under
current law regarding multi-employer defined benefit plans, any of a plan’s
termination, the Company’s voluntary withdrawal from any under-funded plan, or
the mass withdrawal of all contributing employers from any under-funded
multi-employer defined benefit plan, would require the Company to make payments
to the plan for the Company’s proportionate share of the multi-employer plan’s
unfunded vested liabilities. Moreover, if a multi-employer defined
benefit plan fails to satisfy certain minimum funding requirements, the Internal
Revenue Service may impose a nondeductible excise tax of 5% on the amount of the
accumulated funding deficiency for those employers contributing to the
fund. Requirements to pay increased contributions, withdrawal
liability and excise taxes could negatively impact the Company’s liquidity and
results of operations.
The
Company’s business may be affected by the impact of BSE and other food safety
issues.
Effective
August 1997, the FDA promulgated the BSE Feed Rule in an effort to prevent the
spread of BSE. Detection of the first case of BSE in the U.S. in December 2003
resulted in additional U.S. government regulations, finished product export
restrictions by foreign governments, market price fluctuations for the Company’s
finished products and reduced demand for beef and beef products by
consumers. Even though the export markets for U.S. beef have been
significantly re-opened, most of these markets remain closed to MBM derived from
U.S. beef. Continued concern about BSE in the U.S. may result in
additional regulatory and market related challenges that may affect the
Company’s operations or increase the Company’s operating costs.
The following
are recent developments and recent regulatory history with respect to BSE in the
U.S.:
·
|
On
April 25, 2008, the FDA published “Substances Prohibited From Use in
Animal Food or Feed,” (the “Final BSE Rule”), which becomes effective as a
final rule on April 27, 2009. The Final BSE Rule amended 21 CFR
589.2000 and added 21 CFR 589.2001 to prohibit 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; (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. On July 15, 2008, the FDA
released “Feed Ban Enhancement Implementation: Questions and Answers” to
address initial questions about the Final BSE Rule submitted to the FDA by
industry. On November 26, 2008 the FDA issued Draft Guidance
for Industry: Small Entities Compliance Guide for Renderers – Substances
Prohibited from use in Animal Food or Feed as a draft guidance on the
implementation of the Final BSE Rule. The final guidance is
anticipated to be released after the FDA has completed its review of
public comments submitted during the open public comment period, which
closed on January 26, 2009. The Company has made capital
expenditures and implemented new processes and procedures in order that
its operations will be compliant with the Final BSE Rule once it becomes
effective. Based on the foregoing, while the Company believes that certain
interpretive and enforcement issues remain unresolved with respect to the
Final BSE Rule that require clarification and guidance from the FDA and
that certain additional 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.
|
The
occurrence of BSE in the U.S. may result in additional finished product export
restrictions by foreign governments, market price fluctuations for the Company’s
finished products and/or reduced demand for beef and beef products by
consumers. Legislative and regulatory efforts to address BSE concerns
and preempt adulterations of feed ingredients, may result in additional U.S.
government regulations and/or increase the Company’s operating
costs.
The following
are recent developments with respect to human food, pet food and animal feed
safety:
·
|
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. As a prerequisite to new
requirements specified by the Act, the FDA was directed to establish a
Reportable Food Registry by September 20, 2008. On May 27,
2008, however, the FDA announced that the Reportable Food Registry would
not be operational until the spring of 2009. The impact of the Act on the
Company, if any, will not be clear until the FDA establishes a Reportable
Food Registry, 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 February 23, 2009, Congress has not granted
such new authorities to the FDA.
|
Restrictions
imposed by the Company’s credit agreement and future debt agreements may limit
its ability to finance future operations or capital needs or engage in other
business activities that may be in the Company’s interest.
The Company’s
credit agreement currently, and future debt agreements may, restrict its ability
to:
·
|
incur
additional indebtedness;
|
·
|
pay
dividends and make other
distributions;
|
·
|
make
restricted payments;
|
·
|
merge,
consolidate or acquire other
businesses;
|
·
|
sell
or otherwise dispose of
assets;
|
·
|
make
investments, loans and
advances;
|
·
|
guarantee
indebtedness or other
obligations;
|
·
|
enter
into operating leases or sale-leaseback, synthetic leases, or similar
transactions;
|
·
|
make
changes to its capital structure;
and
|
·
|
engage
in new lines of business unrelated to the Company’s current
businesses.
|
These terms
may negatively impact the Company’s ability to finance future operations,
implement its business strategy, fund its capital needs or engage in other
business activities that may be in its interest. In addition, the
Company’s credit agreement requires, and future indebtedness may require, the
Company to maintain compliance with specified financial
ratios. Although the Company is currently in compliance with the
financial ratios and does not plan on engaging in transactions that may cause
the Company not to be in compliance with the ratios, its ability to comply with
these ratios may be affected by events beyond its control, including the risks
described in the other risk factors and elsewhere in this report.
A breach of
any restrictive covenant or the Company’s inability to comply with any required
financial ratio could result in a default under the credit
agreement. In the event of a default under the credit agreement, the
lenders under the credit agreement may elect to declare all borrowings
outstanding, together with accrued and unpaid interest and other fees, to be
immediately due and payable.
The lenders
will also have the right in these circumstances to terminate any commitments
they have to provide further financing, including under the revolving credit
facility.
If the
Company is unable to repay these borrowings when due, whether as a result of
acceleration of the debt or otherwise, the lenders under the credit agreement
will have the right to proceed against the collateral, which consists of
substantially all of the Company’s assets, including real property and
cash. If the indebtedness under the credit agreement were
accelerated, the Company’s assets may be insufficient to repay this indebtedness
in full under those circumstances. Any future credit agreements or
other agreement relating to the Company’s indebtedness to which the Company may
become a party may include the covenants described above and other restrictive
covenants.
The
Company’s business may be negatively impacted by a significant outbreak of avian
influenza (“Bird Flu”) in the U.S.
Avian
influenza (“H5N1”), or Bird Flu, a highly contagious disease that affects
chickens and other poultry species, has spread throughout Asia and
Europe. 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 February 23, 2009, 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 U.S. 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.
The
Company’s success is dependent on the Company’s key personnel.
The Company’s
success depends to a significant extent upon a number of key employees,
including members of senior management. The loss of the services of
one or more of these key employees could have a material adverse effect on the
Company’s results of operations and prospects. The Company believes
that its future success will depend in part on its ability to attract, motivate
and retain skilled technical, managerial, marketing and sales
personnel. Competition for these types of skilled personnel is
intense and there can be no assurance that the Company will be successful in
attracting, motivating and retaining key personnel. The failure to
hire and retain these personnel could materially adversely affect the Company’s
business and results of operations.
In
certain markets the Company is highly dependent upon the continued and
uninterrupted operation of a single operating facility.
` Darling’s
facilities are subject to various federal, state and local environmental and
other permitting requirements, depending on their
locations. Periodically, these permits may be reviewed and subject to
amendment or withdrawal. Applications for an extension or renewal of
various permits may be subject to challenge by community and environmental
activists and others. In the event of a casualty, condemnation, work
stoppage, permitting withdrawal or delay or other unscheduled shutdown involving
one of the Company’s facilities, in a majority of the Company’s markets the
Company would utilize a nearby operating facility to continue to serve its
customers in the affected market. In certain markets, however, the
Company does not have alternate operating facilities. In the event of
a casualty, condemnation, work stoppage, permitting withdrawal or delay or other
unscheduled shutdown in these markets, the Company may experience an
interruption in its ability to service its customers and to procure raw
materials. This may materially and adversely affect the Company’s
business and results of operations in those markets. In addition,
after an operating facility affected by a casualty, condemnation, work stoppage,
permitting withdrawal or delay or other unscheduled shutdown is restored, there
could be no assurance that customers who in the interim choose to use
alternative disposal services would return to use the Company’s
services.
The
market price of the Company’s common stock could be volatile.
The market
price of the Company’s common stock has been subject to volatility and, in the
future, the market price of the Company’s common stock could fluctuate widely in
response to numerous factors, many of which are beyond the Company’s
control. These factors include, among other things, fluctuations in
commodities prices, actual or anticipated variations in the Company’s operating
results, earnings releases by the Company, changes in financial estimates by
securities analysts, sales of substantial amounts of the Company’s common stock,
market conditions in the industry and the general state of the securities
markets, governmental legislation or regulation, currency and exchange rate
fluctuations, as well as general economic and market conditions, such as
recessions.
The
Company’s ability to pay any dividends on its common stock may be
limited.
The Company
has not paid any dividends on its common stock since January 3,
1989. The Company’s current financing arrangements permit the Company
to pay cash dividends on its common stock within limitations defined in its
credit agreement. Any future determination to pay cash dividends on
the Company’s common stock will be at the discretion of the Company’s board of
directors and will be based upon the Company’s financial condition, operating
results, capital requirements, plans for expansion, restrictions imposed by any
financing arrangements, and any other factors that the board of directors
determines are relevant. Furthermore, the Company’s ability to pay any
cash or non-cash dividends on its common stock is subject to applicable
provisions of state law and to the terms of its credit agreement.
The
Company may issue additional common stock or preferred stock, which could dilute
shareholder interests.
The Company’s
certificate of incorporation, as amended, does not limit the issuance of
additional common stock or the issuance of preferred stock. As
of February 23, 2009, the Company has available for issuance 17,830,924
authorized but unissued shares of common stock and 1,000,000 authorized but
unissued shares of preferred stock that may be issued in series.
The
Company could incur a material weakness in its internal control over financial
reporting that requires remediation.
The Company’s
disclosure controls and procedures were deemed to be effective in fiscal
2008. However, any future failures by the Company to maintain the
effectiveness of its disclosure controls and procedures, including its internal
control over financial reporting, could subject the Company to a loss of public
confidence in its internal control over financial reporting and in the integrity
of the Company’s public filings and financial statements and could harm the
Company’s operating results or cause the Company to fail to timely meet its
regulatory reporting obligations. Consequences of a material weakness
such as those listed in the foregoing sentence could have a negative effect on
the trading price of the Company’s stock.
Terrorist
attacks or acts of war may cause damage or disruption to the Company and its
employees, facilities, information systems, security systems, suppliers and
customers, which could significantly impact the Company’s net sales, costs and
expenses and financial condition.
Terrorist
attacks, such as those that occurred on September 11, 2001, have contributed to
economic instability in the U.S., and further acts of terrorism, bioterrorism,
violence or war could affect the markets in which the Company operates, the
Company’s business operations, the Company’s expectations and other
forward-looking statements contained or incorporated in this report. The
threat of terrorist attacks in the U.S. since September 11, 2001 continues to
create many economic and political uncertainties. The potential for future
terrorist attacks, the U.S. and international responses to terrorist attacks and
other acts of war or hostility, including the ongoing war in Iraq, may cause
greater uncertainty and cause the Company’s business to suffer in ways that
cannot currently be predicted. Events such as those referred to above could
cause or contribute to a general decline in investment valuations, which in turn
could reduce the market value of shareholder investments. In addition,
terrorist attacks, particularly acts of bioterrorism, that directly impact the
Company’s facilities or those of the Company’s suppliers or customers could have
an impact on the Company’s sales, supply chain, production capability and costs
and the Company’s ability to deliver its finished products.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
The
Company’s corporate headquarters is located at 251 O’Connor Ridge Boulevard,
Suite 300, Irving, Texas, in an office facility where the Company leases
approximately 27,000 square feet.
As of January 3,
2009, the Company’s 43 operating facilities consist of 25 full service rendering
plants, seven yellow grease/trap plants, four blending plants, three trap
plants, one edible meat plant, one technical tallow plant, one hide plant and
one pet food plant. Except for five leased facilities, all of these facilities
are owned by the Company. In addition, the Company owns or leases 36
transfer stations in the U.S., some of which also process yellow grease and
trap. These transfer stations serve as collection points for routing
raw material to the processing plants set forth below. Some locations
service a single business segment while others service both business
segments. The following is a listing of the Company’s operating
facilities by business segment:
Combined
Rendering and Restaurant Services Business Segments |
|
Bellevue,
NE
|
Rendering/Yellow
Grease
|
Berlin,
WI
|
Rendering/Yellow
Grease
|
Blue
Earth, MN
|
Rendering/Yellow
Grease
|
Boise,
ID
|
Rendering/Yellow
Grease
|
Clinton,
IA
|
Rendering/Yellow
Grease
|
Coldwater,
MI
|
Rendering/Yellow
Grease
|
Collinsville,
OK
|
Rendering/Yellow
Grease
|
Dallas,
TX
|
Rendering/Yellow
Grease
|
Denver,
CO
|
Rendering/Yellow
Grease
|
Des
Moines, IA
|
Rendering/Yellow
Grease
|
Detroit,
MI
|
Rendering/Yellow
Grease/Trap
|
E.
St. Louis, IL
|
Rendering/Yellow
Grease/Trap
|
Fresno,
CA
|
Rendering/Yellow
Grease
|
Houston,
TX
|
Rendering/Yellow
Grease/Trap
|
Kansas
City, KS
|
Rendering/Yellow
Grease/Trap
|
Los
Angeles, CA
|
Rendering/Yellow
Grease/Trap
|
Mason
City, IL
|
Rendering/Yellow
Grease
|
Newark,
NJ
|
Rendering/Yellow
Grease/Trap
|
San
Francisco, CA *
|
Rendering/Yellow
Grease/Trap
|
Sioux
City, IA
|
Rendering/Yellow
Grease
|
Tacoma,
WA *
|
Rendering/Yellow
Grease/Trap
|
Turlock,
CA
|
Rendering/Yellow
Grease
|
Wahoo,
NE
|
Rendering/Yellow
Grease
|
Wichita,
KS
|
Rendering/Yellow
Grease/Trap
|
Rendering
Business Segment |
|
Denver,
CO
|
Edible
Meat and Tallow
|
Fairfax,
MO
|
Protein
Blending
|
Grand
Island, NE *
|
Pet
Food
|
Kansas
City, KS
|
Protein
Blending
|
Kansas
City, MO
|
Hides
|
Lynn
Center, IL
|
Protein
Blending
|
Omaha,
NE
|
Rendering
|
Omaha,
NE
|
Protein
Blending
|
Omaha,
NE
|
Technical
Tallow
|
Restaurant Services Business
Segment |
|
Alma,
GA
|
Trap
|
Calhoun,
GA
|
Yellow
Grease/Trap
|
Chicago,
IL
|
Yellow
Grease/Trap
|
Ft.
Lauderdale, FL
|
Yellow
Grease/Trap
|
Indianapolis,
IN
|
Yellow
Grease/Trap
|
Little
Rock, AR
|
Yellow
Grease/Trap
|
No.
Las Vegas, NV
|
Yellow
Grease/Trap
|
San
Diego, CA *
|
Trap
|
Santa
Ana, CA *
|
Trap
|
Tampa,
FL
|
Yellow
Grease/Trap
|
|
|
*
|
Property
is leased. Rent expense for these leased properties was $0.9
million in the aggregate in fiscal
2008.
|
Substantially
all assets of the Company, including real property, are either pledged or
mortgaged as collateral for borrowings under the Company’s credit
agreement.
ITEM
3. LEGAL PROCEEDINGS
The Company is a party to several
lawsuits, claims and loss contingencies arising in the ordinary course of its
business, including assertions by certain regulatory agencies related to air,
wastewater and storm water discharges from the Company’s processing
facilities.
The Company’s workers compensation,
auto and general liability policies contain significant deductibles or
self-insured retentions. The Company estimates and accrues its
expected ultimate claim costs related to accidents occurring during each fiscal
year and carries this accrual as a reserve until these claims are paid by the
Company.
As a result of the matters discussed
above, the Company has established loss reserves for insurance, environmental
and litigation matters. At January 3, 2009 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 $17.3
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 these lawsuits and
claims that may not be covered by insurance would have a material effect on the
financial statements.
The Company has been named as a third
party defendant in a lawsuit pending in the Superior Court of New Jersey, Essex
County, styled New Jersey
Department of Environmental Protection, The Commissioner of the New Jersey
Department of Environmental Protection Agency and the Administrator of the New
Jersey Spill Compensation Fund, as Plaintiffs, vs. Occidental Chemical
Corporation, Tierra Solutions, Inc., Maxus Energy Corporation, Repsol YPF, S.A.,
YPF, S.A., YPF Holdings, Inc., and CLH Holdings, as Defendants (Docket
No. L-009868-05) (the “Tierra/Maxus Litigation”). In the Tierra/Maxus
Litigation, which was filed on December 13, 2005, the plaintiffs seek to recover
from the defendants past and future cleanup and removal costs, as well as
unspecified economic damages, punitive damages, penalties and a variety of other
forms of relief, purportedly arising from the alleged discharges into the
Passaic River of a particular type of dioxin and other unspecified hazardous
substances. The damages being sought by the plaintiffs from the
defendants are likely to be substantial. On February 4, 2009, two of
the defendants, Tierra Solutions, Inc. (“Tierra”) and Maxus Energy Corporation
(“Maxus”), filed a third party complaint against over 300 entities, including
the Company, seeking to recover all or a proportionate share of cleanup and
removal costs, damages or other loss or harm, if any for which Tierra or Maxus
may be held liable in the Tierra/Maxus Litigation. Tierra and Maxus
allege that Standard Tallow Company, an entity that the Company acquired in
1996, contributed to the discharge of the hazardous substances that are the
subject of this case while operating a former plant site located in Newark, New
Jersey. The Company is investigating these allegations and intends to
defend itself vigorously. As of the date of this report, there is
nothing that leads the Company to believe that this matter will have a material
effect on the Company’s financial position or results of operation.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to a vote of
security holders during the quarter ended January 3, 2009.
PART
II
ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY
SECURITIES
Effective October 24, 2007, the Company
transferred its common stock listing to the New York Stock Exchange
(“NYSE”) from the American Stock Exchange (“AMEX”) under the symbol
“DAR”. The following table sets forth, for the quarters indicated,
the high and low closing sales prices per share for the Company’s common stock
as reported on the NYSE and AMEX, as appropriate.
|
|
Market
Price
|
|
Fiscal
Quarter
|
High
|
Low
|
|
|
|
|
|
|
|
2008:
|
|
|
|
|
First
Quarter
|
$14.29
|
$10.16
|
|
|
Second
Quarter
|
$17.29
|
$12.33
|
|
|
Third
Quarter
|
$17.15
|
$10.79
|
|
|
Fourth
Quarter
|
$11.11
|
$ 3.53
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
First
Quarter
|
$ 6.60
|
$
5.17
|
|
|
Second
Quarter
|
$ 9.47
|
$
6.28
|
|
|
Third
Quarter
|
$10.17
|
$
7.31
|
|
|
Fourth
Quarter
|
$12.10
|
$
9.34
|
|
|
|
|
|
|
On February 23, 2009, the closing sales
price of the Company’s common stock on the NYSE was $4.04. The
Company has been notified by its stock transfer agent that as of February 23,
2009, there were 123 holders of record of the common stock.
The Company has not paid any dividends
on its common stock since January 3, 1989 and does not expect to pay cash
dividends in 2009. The Company’s current financing arrangements
permit the Company to pay cash dividends on its common stock within limitations
defined in its credit agreement. Any future determination to pay cash
dividends on the Company’s common stock will be at the discretion of the
Company’s board of directors and will be based upon the Company’s financial
condition, operating results, capital requirements, plans for expansion,
restrictions imposed by any financing arrangements, and any other factors that
the board of directors determines are relevant.
Set forth
below is a line graph comparing the change in the cumulative total stockholder
return on the Company’s common stock with the cumulative total return of the
Russell 3000 Index, the Dow Jones US Waste and Disposal Service Index, and the
CSFB-Agribusiness Index for the period from January 3, 2004 to January 3, 2009,
assuming the investment of $100 on January 3, 2004 and the reinvestment of
dividends.
The stock
price performance shown on the following graph only reflects the change in the
Company’s stock price relative to the noted indices and is not necessarily
indicative of future price performance.
EQUITY
COMPENSATION PLANS
The following table sets forth certain
information as of January 3, 2009 with respect to the Company’s equity
compensation plans (including individual compensation arrangements) under which
the Company’s equity securities are authorized for issuance, aggregated by i)
all compensation plans previously approved by the Company’s security holders,
and ii) all compensation plans not previously approved by the Company’s security
holders. The table includes:
·
|
the
number of securities to be issued upon the exercise of outstanding
options;
|
·
|
the
weighted-average exercise price of the outstanding options;
and
|
·
|
the
number of securities that remain available for future issuance under the
plans.
|
Plan
Category
|
(a)
Number
of securities to be issued upon exercise of
outstanding
options,
warrants and rights
|
|
(b)
Weighted-average
exercise price of outstanding
options,
warrants
and
rights
|
|
(c)
Number
of securities remaining available
for
future issuance
under
equity
compensation
plans
(excluding
securities reflected in column (a))
|
Equity
compensation plans approved
by
security holders
|
796,205 (1)
|
|
$3.74
|
|
3,381,632
|
Equity
compensation plans not
approved
by security holders
|
–
|
|
–
|
|
–
|
Total
|
796,205
|
|
$3.74
|
|
3,381,632
|
(1)
|
Includes
shares underlying options that have been issued pursuant to the Company’s
2004 Omnibus Incentive Plan (the “2004 Plan”) as approved by the Company‘s
stockholders. See
Note 12 of Notes to Consolidated Financial Statements for information
regarding the material features of the 2004
Plan.
|
ITEM
6. SELECTED FINANCIAL DATA
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The following
table presents selected consolidated historical financial data for the periods
indicated. The selected historical consolidated financial data set
forth below should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the Consolidated
Financial Statements of the Company for the three years ended January 3, 2009,
December 29, 2007, and December 30, 2006, and the related notes
thereto.
|
Fiscal 2008
|
Fiscal 2007
|
Fiscal 2006
|
Fiscal 2005
|
Fiscal 2004
|
|
Fifty-three
Weeks
Ended
January
3,
2009
(i)
|
Fifty-two
Weeks
Ended
December
29,
2007
|
Fifty-two
Weeks
Ended
December 30,
2006 (h)
|
Fifty-two
Weeks
Ended
December
31,
2005
|
Fifty-two
Weeks
Ended
January 1,
2005
|
(dollars
in thousands, except per share data)
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$807,492
|
|
$645,313
|
|
$406,990
|
|
$308,867
|
|
$320,229
|
|
Cost
of sales and operating expenses (a)
|
614,708
|
|
483,453
|
|
321,416
|
|
241,707
|
|
237,925
|
|
Selling,
general and administrative expenses (b)
|
59,761
|
|
57,999
|
|
45,649
|
|
35,240
|
|
36,509
|
|
Depreciation
and amortization
|
24,433
|
|
23,214
|
|
20,686
|
|
15,787
|
|
15,224
|
|
Goodwill
impairment(c)
|
15,914
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
92,676
|
|
80,647
|
|
19,239
|
|
16,133
|
|
30,571
|
|
Interest
expense
|
3,018
|
|
5,045
|
|
7,184
|
|
6,157
|
|
6,759
|
|
Other
(income)/expense, net (d) (e)
|
(258)
|
|
570
|
|
4,682
|
|
(903)
|
|
299
|
|
Income
from continuing operations before income taxes
|
89,916
|
|
75,032
|
|
7,373
|
|
10,879
|
|
23,513
|
|
Income
tax expense
|
35,354
|
|
29,499
|
|
2,266
|
|
3,184
|
|
9,245
|
|
Income
from continuing operations
|
54,562
|
|
45,533
|
|
5,107
|
|
7,695
|
|
14,268
|
|
Income/(loss)
from discontinued operations, net
of tax
|
-
|
|
-
|
|
-
|
|
46
|
|
(376)
|
|
Net
Income
|
$ 54,562
|
|
$
45,533
|
|
$
5,107
|
|
$
7,741
|
|
$ 13,892
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
$ 0.67
|
|
$ 0.56
|
|
$ 0.07
|
|
$ 0.12
|
|
$ 0.22
|
|
Diluted
earnings per common share
|
$ 0.66
|
|
$ 0.56
|
|
$ 0.07
|
|
$ 0.12
|
|
$ 0.22
|
|
Weighted
average shares outstanding
|
81,387
|
|
80,772
|
|
74,310
|
|
63,929
|
|
63,840
|
|
Diluted
weighted average shares outstanding
|
82,157
|
|
81,896
|
|
75,259
|
|
64,525
|
|
64,463
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA (f)
|
$133,023
|
|
$103,861
|
|
$ 39,925
|
|
$ 31,920
|
|
$45,795
|
|
Depreciation
|
19,266
|
|
18,332
|
|
16,134
|
|
11,903
|
|
11,345
|
|
Amortization
|
5,167
|
|
4,882
|
|
4,552
|
|
3,884
|
|
3,879
|
|
Capital
expenditures (g)
|
31,006
|
|
15,552
|
|
11,800
|
|
21,406
|
|
13,312
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
$ 67,446
|
|
$ 34,385
|
|
$ 17,865
|
|
$ 40,407
|
|
$ 39,602
|
|
Total
assets
|
394,375
|
|
351,338
|
|
320,806
|
|
190,772
|
|
182,809
|
|
Current
portion of long-term debt
|
5,000
|
|
6,250
|
|
5,004
|
|
5,026
|
|
5,030
|
|
Total
long-term debt less current portion
|
32,500
|
|
37,500
|
|
78,000
|
|
44,502
|
|
49,528
|
|
Stockholders’
equity
|
236,578
|
|
200,984
|
|
151,325
|
|
73,680
|
|
67,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included
in cost of sales and operating expenses is a settlement with certain past
insurers of approximately $2.8 million recorded in fiscal 2004 as a credit
(recovery) of claims expense and previous insurance
premiums.
|
(b)
|
Included
in selling, general and administrative expenses is a loss on a legal
settlement of approximately $2.2 million offset by a gain on a separate
legal settlement of approximately $1.0 million in fiscal
2007.
|
(c)
|
Includes
a goodwill impairment charge of $15.9 million at one of the Company’s
reporting units recorded in the fourth quarter of fiscal
2008.
|
(d)
|
Included
in other (income)/expense in fiscal 2006 is a write-off of deferred loan
costs of approximately $2.6 million and early retirement fees of
approximately $1.9 million for the early retirement of senior subordinated
notes and termination of the previous senior credit
agreement.
|
(e)
|
Included
in other (income)/expense is gain on early retirement of debt of
approximately $1.3 million in fiscal 2004. Also included in
other (income)/expense is loss on redemption of preferred stock of
approximately $1.7 million in fiscal
2004.
|
(f)
|
Adjusted
EBITDA is presented here not as an alternative to net income, but rather
as a measure of the Company’s operating performance and is not intended to
be a presentation in accordance with generally accepted accounting
principles (GAAP). Since EBITDA is not calculated identically
by all companies, the presentation in this report may not be comparable to
those disclosed by other companies.
|
Adjusted
EBITDA is calculated below and represents, for any relevant period, net
income/(loss) plus depreciation and amortization, goodwill and long-lived asset
impairment, interest expense, (income)/loss from discontinued operations, net of
tax, income tax provision and other income/(expense). The Company
believes adjusted EBITDA is a useful measure for investors because it is
frequently used by securities analysts, investors and other interested parties
in the evaluation of companies in our industry. In addition,
management believes that adjusted EBITDA is useful in evaluating our operating
performance compared to that of other companies in our industry because the
calculation of adjusted EBITDA generally eliminates the effects of financing,
income taxes and certain non-cash and other items that may vary for different
companies for reasons unrelated to overall operating performance. As
a result, the Company’s management uses adjusted EBITDA as a measure to evaluate
performance and for other discretionary purposes. However, adjusted
EBITDA is not a recognized measurement under U.S. GAAP, should not be considered
as an alternative to net income as a measure of operating results or to cash
flow as a measure of liquidity, and is not intended to be a presentation in
accordance with GAAP. Also, since adjusted EBITDA is not calculated
identically by all companies, the presentation in this report may not be
comparable to those disclosed by other companies.
In
addition to the foregoing, management also uses or will use adjusted EBITDA to
measure compliance with certain financial covenants under the Company’s credit
agreement. The amounts shown below for adjusted EBITDA differ from
the amounts calculated under similarly titled definitions in the Company’s
credit agreement, as those definitions permit further adjustment to reflect
certain other non-cash charges.
Reconciliation
of Net Income to Adjusted EBITDA
(dollars
in thousands)
|
January 3,
2009
|
|
December 29,
2007
|
|
December 30,
2006
|
|
December 31,
2005
|
|
January 1,
2005
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$ 54,562
|
|
$ 45,533
|
|
$ 5,107
|
|
$ 7,741
|
|
$13,892
|
Depreciation
and amortization
|
24,433
|
|
23,214
|
|
20,686
|
|
15,787
|
|
15,224
|
Goodwill
impairment
|
15,914
|
|
-
|
|
-
|
|
-
|
|
-
|
Interest
expense
|
3,018
|
|
5,045
|
|
7,184
|
|
6,157
|
|
6,759
|
(Income)/loss
from discontinued
operations,
net of tax
|
-
|
|
-
|
|
-
|
|
(46)
|
|
376
|
Income
tax expense
|
35,354
|
|
29,499
|
|
2,266
|
|
3,184
|
|
9,245
|
Other
(income)/expense
|
(258)
|
|
570
|
|
4,682
|
|
(903)
|
|
299
|
Adjusted
EBITDA
|
$133,023
|
|
$103,861
|
|
$39,925
|
|
$31,920
|
|
$45,795
|
|
|
|
|
|
|
|
|
|
|
(g)
|
Excludes
the capital assets acquired as part of substantially all of the assets of
NBP of approximately $51.9 million in fiscal 2006 and API Recycling’s used
cooking oil collection business of $3.4 million in fiscal
2008.
|
(h)
|
Fiscal
2006 includes 33 weeks of contribution from the acquired NBP
assets.
|
(i)
|
Fiscal
2008 includes 19 weeks of contribution from API Recycling used cooking oil
collection business.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following Management’s Discussion
and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties. The
Company’s actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in Item 1A of this report under the heading “Risk Factors.”
The following discussion should be read
in conjunction with the historical consolidated financial statements and notes
thereto included in Item 8 of this report. The Company is organized
along two operating business segments, Rendering and Restaurant
Services. See Note 18 of Notes to Consolidated Financial
Statements.
Overview
The Company is a leading provider of
rendering, recycling and recovery solutions to the nation’s food industry. The
Company collects and recycles animal by-products and used cooking oil from food
service establishments and provides grease trap cleaning services to many of the
same establishments. The Company processes raw materials at 43
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. In fiscal 2006 the Company acquired substantially all of
the assets (the “Transaction”) of National By-Products, LLC
(“NBP”). The Company’s results for fiscal 2008 and 2007 include
a full year of contribution from the assets acquired in the Transaction, as
compared to 33 weeks of contribution from these assets in fiscal
2006. For additional information on the Company’s business, see Item
1, “Business,” and for additional information on the Company’s segments, see
Note 18 of Notes to Consolidated Financial Statements.
As an agricultural-based commodity
processing and service business, the Company is subject to a variety of market
factors which affect the Company’s operating results. While fiscal
2008 had record earnings performance that was fueled by tightening global grain
and oilseed supplies, record high crude oil, increasing bio-fuel demand and
strong slaughter, fiscal 2008 will undoubtedly be remembered for the global
economic downturn experienced during the fourth quarter. Improved
global crop outlooks coupled with significant demand collapse caused by global
economic uncertainty, and other factors contributed to a sharp decline in the
Company’s results during the fourth quarter. Finished product prices
declined to near historical lows during the fourth quarter while inventory
quantities increased substantially. Raw material volumes for both
segments declined continuously throughout the year. Manufacturing and
collection costs were negatively impacted as energy prices for both natural gas
and diesel fuel reached historical highs during the year. The Company
continues to face challenges relating to volatile commodity markets; however, as
of February 23, 2009 finished product prices and energy prices had returned to
more historical relationships.
Operating income increased by $12.1
million in fiscal 2008 compared to fiscal 2007. The continuing
challenges faced by the Company indicate there can be no assurance that
operating results achieved by the Company in fiscal 2008 are indicative of
future operating performance of the Company.
Summary of Critical Issues
Faced by the Company during Fiscal 2008
·
|
Higher
finished product prices through three quarters 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; however, finished product prices for commodities
declined significantly during the fourth quarter of fiscal 2008. Higher
finished product prices for BFT and YG were favorable to the Company’s
sales revenue during the first three quarters of fiscal 2008, 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.
|
·
|
Energy
prices for natural gas and diesel fuel were higher during most of the
year, but did decline significantly during the fourth quarter of fiscal
2008. 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 January 3, 2009, 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 Fiscal 2008 and
Thereafter
BSE and Other Food Safety
Issues
Effective
August 1997, the FDA promulgated the BSE Feed Rule prohibiting the use of
mammalian proteins, with some exceptions, in feeds for cattle, sheep and other
ruminant animals. The intent of this rule is to prevent the spread of BSE,
commonly referred to as “mad cow disease.” As previously noted, the
FDA has published the Final BSE Rule which amended the BSE Feed Rule and becomes
effective April 27, 2009. Management has followed this proposed amendment
throughout its history in order to assess and minimize the impact of its
implementation on the Company. See the risk factor entitled “The
Company’s business may be affected by the impact of BSE and other food safety
issues,” beginning on page 11, for more information about BSE, including the
Final BSE Rule, and other food safety issues and their potential effects on the
Company, including the effects of potential additional government regulations,
finished product export restrictions by foreign governments, market price
fluctuations for finished goods, reduced demand for beef and beef products by
consumers and increases in operating costs resulting from BSE-related
concerns.
Even
though the export markets for U.S. beef have been significantly re-opened, most
of these markets remain closed to MBM derived from U.S.
beef. Continued concern about BSE in the U.S. may result in
additional regulatory and market related challenges that may affect the
Company’s operations and/or increase the Company’s operating costs.
Other Critical Issues and
Challenges
·
|
The
meat production industry faced higher feed costs in 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, such as through the forced closure of raw material
suppliers. Maintaining raw material volume will be a challenge
in future periods due to volatility of commodity prices and raw material
supplier closures.
|
·
|
Finished
product prices for commodities declined significantly during the fourth
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 fiscal 2009 and into future
periods.
|
·
|
Energy
prices for natural gas and diesel fuel declined significantly during the
fourth 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,
volatile energy markets will represent an ongoing challenge to the
Company’s operating results in fiscal 2009 and into future
periods.
|
·
|
During
fiscal 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 fiscal 2009 and into
future periods.
|
These challenges indicate there can be
no assurance that fiscal 2008 operating results are indicative of future
operating performance of the Company.
Results
of Operations
Fifty-three
Week Fiscal Year Ended January 3, 2009 (“Fiscal 2008”) Compared to Fifty-two
Week Fiscal Year Ended December 29, 2007 (“Fiscal 2007”)
Fiscal
2008 includes an additional week of operations which occurs every five to six
years. In Fiscal 2008 the additional week increased both net sales
and costs by approximately $10 million with an immaterial effect on operating
income and net income.
Summary of Key Factors
Impacting Fiscal 2008 Results:
Principal factors that contributed to a
$12.1 million increase in operating income, which are discussed in greater
detail in the following section, were:
·
|
Higher
finished product prices.
|
These increases to operating income
were partially offset by:
·
|
Higher
raw material costs,
|
·
|
Goodwill
impairment,
|
·
|
Higher
energy costs, primarily related to natural gas and diesel fuel,
and
|
·
|
Higher
payroll and incentive-related
benefits.
|
Summary of Key Indicators of
Fiscal 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,
|
·
|
Energy
prices for natural gas quoted on the NYMEX index and diesel
fuel,
|
·
|
Collection
fees and collection operating expense, and
|
·
|
Factory
operating expenses.
|
These
indicators and their importance are discussed below in greater
detail.
Prices
for finished product commodities that the Company produces are quoted each
business day on the Jacobsen index, an established trading exchange price
publisher. These finished products are MBM, BFT and
YG. The prices quoted are for delivery of the finished product at a
specified location. These prices are relevant because they provide an
indication of a component of revenue and achievement of business plan benchmarks
on a daily basis. The Company’s actual sales prices for its finished products
may vary 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 Fiscal 2008, compared to average Jacobsen
prices for Fiscal 2007 follow:
|
Avg.
Price
Fiscal
2008
|
Avg.
Price
Fiscal
2007
|
Increase
|
%
Increase
|
MBM
(Illinois)
|
$333.17/ton
|
$233.51
/ton
|
$99.66/ton
|
42.7%
|
BFT
(Chicago)
|
$ 34.21/cwt
|
$ 27.89
/cwt
|
$ 6.32/cwt
|
22.7%
|
YG
(Illinois)
|
$ 27.75/cwt
|
$ 21.62
/cwt
|
$ 6.13/cwt
|
28.4%
|
The
increase in average prices 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 global economic environment in the
fourth quarter 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 fourth quarter of Fiscal 2008 for MBM, BFT and YG as compared to
Fiscal 2007.
|
Avg.
Price
4th
Quarter
2008
|
Avg.
Price
4th
Quarter
2007
|
Decrease
|
%
Decrease
|
MBM
(Illinois)
|
$261.56/ton
|
$270.77
/ton
|
$ (9.21/ton)
|
(3.4%)
|
BFT
(Chicago)
|
$ 17.59/cwt
|
$ 30.68
/cwt
|
$(13.09/cwt)
|
(42.7%)
|
YG
(Illinois)
|
$ 14.76/cwt
|
$ 23.45
/cwt
|
$ (8.69/cwt)
|
(37.1%)
|
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. In addition, physical inventory turn-over is impacted by
both credit availability and market demand which can lower finished product
inventory values. 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 an indication of achievement of the Company’s business
plan.
The
Company incurs factory operating expenses which are included in cost of
sales. Each month the Company monitors factory operating
expense. The importance of monitoring factory operating expense is
that it provides an indication of achievement of the Company’s business
plan.
Net Sales. The
Company collects and processes animal by-products (fat, bones and offal),
including hides, and used restaurant cooking oil to principally produce finished
products of MBM, BFT, YG and hides. Sales are significantly affected
by finished goods prices, quality and mix of raw material, and volume of raw
material. Net sales include the sales of produced finished goods,
collection fees, fees for grease trap services, and finished goods purchased for
resale.
During Fiscal 2008, net sales increased
by $162.2 million (25.1%) to $807.5 million as compared to $645.3 million during
Fiscal 2007. The increase in net sales was primarily due to the
following increases/(decreases) (in millions of dollars):
|
Renderingg
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Higher
finished goods prices
|
$ 148.4
|
|
$
39.7
|
|
$
–
|
|
$
188.1
|
|
Purchases
of finished product for resale
|
(10.4
|
)
|
1.0
|
|
–
|
|
(9.4
|
)
|
Decrease
in yield
|
(5.0
|
)
|
(2.7
|
)
|
–
|
|
(7.7
|
)
|
Decrease
in other sales
|
(3.5
|
)
|
(2.1
|
)
|
–
|
|
(5.6
|
)
|
Decrease
in raw material volume
|
(0.1
|
)
|
(3.1
|
)
|
–
|
|
(3.2
|
)
|
Product
transfers
|
(8.7
|
)
|
8.7
|
|
–
|
|
–
|
|
|
$
120.7
|
|
$
41.5
|
|
$
–
|
|
$
162.2
|
|
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 impact finished product inventory values, 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 Fiscal 2008, cost of sales and
operating expenses increased $131.2 million (27.1%) to $614.7 million as
compared to $483.5 million during 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
|
$ 81.2
|
|
$ 25.1
|
|
$ –
|
|
$
106.3
|
|
Higher
energy costs, primarily natural gas and
diesel
fuel
|
13.6
|
|
3.0
|
|
–
|
|
16.6
|
|
Payroll
and related benefits
|
6.0
|
|
2.2
|
|
–
|
|
8.2
|
|
Increase
in other expenses
|
3.6
|
|
2.1
|
|
(0.2
|
)
|
5.5
|
|
Multi-employer
pension plans mass withdrawal
termination
|
2.4
|
|
–
|
|
–
|
|
2.4
|
|
Sale
of judgment
|
1.2
|
|
–
|
|
–
|
|
1.2
|
|
Purchases
of finished product for resale
|
(10.1
|
)
|
1.1
|
|
–
|
|
(9.0
|
)
|
Product
transfers
|
(8.7
|
)
|
8.7
|
|
–
|
|
–
|
|
|
$ 89.2
|
|
$ 42.2
|
|
$
(0.2
|
)
|
$
131.2
|
|
Selling, General and Administrative
Expenses. Selling, general and
administrative expenses were $59.8 million during Fiscal 2008, a $1.8 million
increase (3.1%) from $58.0 million during Fiscal 2007. The Company
increased its provision for bad debt based on general credit conditions and
delinquent accounts receivable. The increase is selling, general and
administrative expenses is primarily due to the following (in millions of
dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Increase
in other expenses
|
$
0.1
|
|
$
0.6
|
|
$ 1.3
|
|
$ 2.0
|
|
Payroll
and related benefits expense
|
0.6
|
|
0.5
|
|
0.5
|
|
1.6
|
|
Increase
in bad debt expense
|
0.6
|
|
0.6
|
|
(0.1
|
)
|
1.1
|
|
Decrease
in legal expense
|
–
|
|
–
|
|
(1.7
|
)
|
(1.7
|
)
|
Decrease
in legal settlements
|
–
|
|
–
|
|
(1.2
|
)
|
(1.2
|
)
|
|
$
1.3
|
|
$
1.7
|
|
$
(1.2
|
)
|
$
1.8
|
|
Depreciation and
Amortization. Depreciation and
amortization charges increased $1.2 million (5.2%) to $24.4 million during
Fiscal 2008 as compared to $23.2 million during Fiscal 2007. The increase
in depreciation and amortization is primarily due to an overall increase in
capital expenditures.
Goodwill Impairment. The Company recorded a
goodwill impairment charge of $15.9 million in the fourth quarter of Fiscal 2008
as a result of its annual impairment test. This impairment charge
relates to one reporting unit that experienced the loss of large customers in
the fourth quarter of Fiscal 2008.
Interest
Expense. Interest expense was $3.0 million during Fiscal
2008 compared to $5.0 million during Fiscal 2007, a decrease of $2.0 million
(40.0%), primarily due to a decrease in outstanding balance related to the
Company’s debt.
Other
Income/Expense. Other income was $0.3 million in Fiscal 2008, a $0.9
million increase from other expense of $0.6 million in Fiscal
2007. The increase in other income 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 $35.4 million for Fiscal 2008, compared
to income tax expense of $29.5 million recorded in Fiscal 2007, an increase of
$5.9 million, primarily due to increased pre-tax earnings of the Company in
Fiscal 2008. The effective tax rate for Fiscal 2008 and Fiscal 2007
is 39.3%. The difference from the federal statutory rate of 35% in
Fiscal 2008 and Fiscal 2007 is primarily due to state taxes.
Results
of Operations
Fifty-two
Week Fiscal Year Ended December 29, 2007 (“Fiscal 2007”) Compared to Fifty-two
Week Fiscal Year Ended December 30, 2006 (“Fiscal 2006”)
Summary of Key Factors
Impacting Fiscal 2007 Results:
Principal factors that contributed to a
$61.4 million increase in operating income, which are discussed in greater
detail in the following section, were:
·
|
Higher
finished product prices,
|
·
|
The
inclusion of the operations of NBP, and
|
·
|
Increased
raw material volume.
|
These increases to operating income
were partially offset by:
·
|
Higher
raw material costs,
|
·
|
Higher
payroll and incentive-related benefits,
|
·
|
Higher
plant repair and maintenance expenses, and
|
·
|
Higher
energy costs, primarily related to natural gas and diesel
fuel.
|
Summary of Key Indicators of
Fiscal 2007 Performance:
Principal indicators that management
routinely monitors and compares to previous periods as an indicator of problems
or improvements in operating results include:
·
|
Finished
product commodity prices,
|
·
|
Raw
material volume,
|
·
|
Production
volume and related yield of finished product,
|
·
|
Energy
prices for natural gas quoted on the NYMEX index and diesel
fuel,
|
·
|
Collection
fees and collection operating expense, and
|
·
|
Factory
operating expenses.
|
These
indicators and their importance are discussed below in greater
detail.
Prices
for finished product commodities that the Company produces are quoted each
business day on the Jacobsen index, an established trading exchange price
publisher. These finished products are MBM, BFT and
YG. The prices quoted are for delivery of the finished product at a
specified location. These prices are relevant because they provide an
indication of a component of revenue and achievement of business plan benchmarks
on a daily basis. The Company’s actual sales prices for its finished products
may vary 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 Fiscal 2007, compared to average Jacobsen
prices for Fiscal 2006 follow:
|
Avg.
Price
Fiscal
2007
|
Avg.
Price
Fiscal
2006
|
Increase
|
%
Change
|
MBM
(Illinois)
|
$233.51/ton
|
$153.48
/ton
|
$80.03/ton
|
52.1%
|
MBM
(California)
|
$235.00/ton
|
$126.27
/ton
|
$108.73/ton
|
86.1%
|
BFT
(Chicago)
|
$ 27.89/cwt
|
$ 16.87
/cwt
|
$11.02/cwt
|
65.3%
|
YG
(Illinois)
|
$ 21.62/cwt
|
$ 12.64
/cwt
|
$8.98/cwt
|
71.0%
|
The
increase in average prices of the finished products the Company sells had a
favorable impact on revenue that was partially offset by a negative impact to
the Company’s raw material cost resulting from formula pricing arrangements,
which compute raw material cost based upon the price of finished
product. Additionally, some U.S. exports of MBM from the West Coast
of the U.S. resumed in the first quarter of 2007. As a result, the
MBM prices for the West Coast have increased significantly as indicated
above.
Raw material volume represents the
quantity (pounds) of raw material collected from suppliers, including beef,
pork, poultry and used cooking oils. Raw material volumes provide an
indication of future production of finished products available for sale and are
a component of potential future revenue.
Finished product production volumes are
the end result of the Company’s production processes, and directly impact goods
available for sale, and thus become an important component of sales
revenue. Yield on production is a ratio of production volume (pounds)
divided by raw material volume (pounds) and provides an indication of
effectiveness of the Company’s production process. Factors impacting
yield on production include quality of raw material and warm weather during
summer months, which rapidly degrades raw material.
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 an indication of achievement of the Company’s business
plan.
The
Company incurs factory operating expenses which are included in cost of
sales. Each month the Company monitors factory operating
expense. The importance of monitoring factory operating expense is
that it provides an indication of achievement of the Company’s business
plan.
Net Sales. The Company
collects and processes animal by-products (fat, bones and offal), including
hides, and used restaurant cooking oil to principally produce finished products
of MBM, BFT, YG and hides. Sales are significantly affected by
finished goods prices, quality and mix of raw material, and volume of raw
material. Net sales include the sales of produced finished goods,
collection fees, fees for grease trap services, and finished goods purchased for
resale.
During Fiscal 2007, net sales increased
by $238.3 million (58.6%) to $645.3 million as compared to $407.0 million during
Fiscal 2006. The increase in net sales was primarily due to the
following increases/(decreases) (in millions of dollars):
|
Rendering
g
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Higher
finished goods prices
|
$ 98.0
|
|
$
27.1
|
|
$
–
|
|
$
125.1
|
|
Net
sales due to contribution from NBP assets
|
84.8
|
|
6.7
|
|
–
|
|
91.5
|
|
Purchases
of finished product for resale
|
8.3
|
|
6.0
|
|
–
|
|
14.3
|
|
Higher
raw material volume
|
6.8
|
|
(1.7
|
)
|
–
|
|
5.1
|
|
Other
sales increases
|
1.8
|
|
0.5
|
|
–
|
|
2.3
|
|
Product
transfers
|
(12.9
|
)
|
12.9
|
|
–
|
|
–
|
|
|
$
186.8
|
|
$
51.5
|
|
$
–
|
|
$
238.3
|
|
Cost of Sales and Operating
Expenses. Cost of
sales and operating expenses include the cost of raw material, the cost of
product purchased for resale and the cost to collect 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 Fiscal 2007, cost of sales and
operating expenses increased $162.1 million (50.4%) to $483.5 million as
compared to $321.4 million during Fiscal 2006. The increase in cost
of sales and operating expenses was primarily due to the following (in millions
of dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Higher
raw material costs
|
$ 61.2
|
|
$ 9.4
|
|
$ –
|
|
$
70.6
|
|
Cost
of sales and operating expenses related
to
NBP assets
|
65.6
|
|
3.6
|
|
–
|
|
69.2
|
|
Purchases
of finished product for resale
|
8.3
|
|
6.0
|
|
–
|
|
14.3
|
|
Plant
repairs and maintenance
|
3.5
|
|
0.5
|
|
–
|
|
4.0
|
|
Higher
energy costs, primarily natural gas and
diesel
fuel
|
2.6
|
|
0.8
|
|
–
|
|
3.4
|
|
Multi-employer
pension plan mass withdrawal
termination
liability
|
1.1
|
|
–
|
|
–
|
|
1.1
|
|
Higher
raw material volume
|
1.4
|
|
(0.4
|
)
|
–
|
|
1.0
|
|
Other
expenses
|
(0.2
|
)
|
0.1
|
|
(0.2
|
)
|
(0.3
|
)
|
Sale
of judgment
|
(1.2
|
)
|
–
|
|
–
|
|
(1.2
|
)
|
Product
transfers
|
(12.9
|
)
|
12.9
|
|
–
|
|
–
|
|
|
$
129.4
|
|
$
32.9
|
|
$
(0.2
|
)
|
$
162.1
|
|
Selling, General and Administrative
Expenses. Selling, general and
administrative expenses were $58.0 million during Fiscal 2007, a $12.4 million
increase (27.2%) from $45.6 million during Fiscal 2006. The increase
is primarily due to the following (in millions of dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Payroll
and related benefits expense
|
$
(0.7
|
)
|
$
(0.7
|
)
|
$ 1.5
|
|
$ 0.1
|
|
Incentive
compensation
|
–
|
|
0.2
|
|
6.7
|
|
6.9
|
|
Selling,
general and administrative expenses
related
to NBP assets
|
1.8
|
|
0.2
|
|
0.9
|
|
2.9
|
|
Other
expenses
|
0.6
|
|
0.2
|
|
0.5
|
|
1.3
|
|
Legal
settlements
|
–
|
|
–
|
|
1.2
|
|
1.2
|
|
|
$
1.7
|
|
$
(0.1
|
)
|
$
10.8
|
|
$
12.4
|
|
Depreciation and
Amortization. Depreciation and
amortization charges increased $2.5 million (12.1%) to $23.2 million during
Fiscal 2007 as compared to $20.7 million during Fiscal 2006. The increase
is primarily due to the acquisition of capital assets from NBP in the
Transaction.
Interest
Expense. Interest expense was $5.0 million during Fiscal
2007 compared to $7.2 million during Fiscal 2006, a decrease of $2.2 million
(30.6%), primarily due to a decrease in rates and outstanding balance related to
the Company’s outstanding debt.
Other
Income/Expense. Other expense was $0.6 million in Fiscal 2007, a
$4.1 million decrease from other expense of $4.7 million in Fiscal
2006. The decrease in other expense in Fiscal 2007 is primarily due
to the following (in millions of dollars):
|
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
|
Write-off
of deferred loan costs
|
$
–
|
|
$
–
|
|
$
(2.6
|
)
|
$
(2.6
|
)
|
|
Subordinated
debt prepayment fees
|
–
|
|
–
|
|
(1.9
9
|
)
|
(1.9
|
)
|
|
Decrease
in interest income
|
–
|
|
–
|
|
0.3
|
|
0.3
|
|
|
Increase
in other expense
|
–
|
|
–
|
|
0.1
|
|
0.1
|
|
|
|
$
–
|
|
$
–
|
|
$
(4.1
|
)
|
$
(4.1
|
)
|
During
the second quarter of 2006, the Company retired its subordinated debt and
incurred charges of $1.9 million for prepayment fees and $1.1 million to write
off deferred loan costs. In addition, the Company entered into a new
revolving credit facility during the second quarter of 2006 which resulted in a
charge of $1.5 million to write off deferred loan costs related to the previous
revolving credit facility.
Income Taxes. The
Company recorded income tax expense of $29.5 million for Fiscal 2007, compared
to income tax expense of $2.3 million recorded in Fiscal 2006, an increase of
$27.2 million, primarily due to increased pre-tax earnings of the Company in
Fiscal 2007. The effective tax rate of 39.3% for 2007 differed from
the statutory rate of 35% primarily due to state taxes. The effective
tax rate of 30.7% for 2006 differed from the statutory rate of 35% primarily due
to federal and state income tax credits as well as the release of certain tax
contingencies. The impact of state income taxes for 2006 of $0.3
million was offset by certain state tax credits recorded in 2006 of $0.1
million.
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 January 3, 2009, 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; at
that point, the remaining balance of $22.5 million will be payable in
full. The Company has reduced the term loan facility by
quarterly payments totaling $12.5 million, for an aggregate of $37.5
million principal outstanding under the term loan facility at January 3,
2009.
|
·
|
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
Company’s Credit Agreement consists of the following elements at January 3, 2009
(in thousands):
|
Credit
Agreement:
|
|
|
Term
Loan
|
$ 37,500
|
|
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, a
wholly-owned subsidiary of Darling, and are secured by substantially all of the
property of the Company, including a pledge of all equity interests in Darling
National. As of January 3, 2009, the Company was in compliance with
all of the covenants contained in the Credit Agreement.
The classification of long-term debt in
the Company’s January 3, 2009 consolidated balance sheet is based on the
contractual repayment terms of the debt issued under the Credit
Agreement.
On
January 3, 2009, the Company had working capital of $67.4 million and its
working capital ratio was 1.95 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 which
offset decreases in accounts receivable with no change to inventory due to
physical inventory quantities increases. At January 3, 2009, the Company
had unrestricted cash of $50.8 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 $92.0 million and $65.7 million for the fiscal years ended
January 3, 2009 and December 29, 2007, respectively, an increase of $26.3
million, primarily due to an increase in net income of approximately $9.1
million and changes in operating assets and liabilities, which includes an
increase in accounts receivable of approximately $36.0 million, an increase in
inventory of approximately $8.5 million, a reduction for income taxes refundable
of approximately $11.2 million and a reduction in accounts payable and accrued
expenses of approximately $25.8 million. Cash used by investing
activities was $52.4 million during Fiscal 2008, compared to $15.6 million in
Fiscal 2007, an increase of $36.8 million, primarily due to $15.9 million in
cash used for the acquisition of assets of API Recycling in the third quarter of
Fiscal 2008 and increased capital expenditures, related mainly to a major
modernization project at the Turlock, California plant in Fiscal
2008. Net cash used by financing activities was $5.1 million in the
year ended January 3, 2009 a decrease of cash used of $34.0 million as compared
to $39.1 million at December 29, 2007, principally due to the repayment of
borrowings on the Company’s Credit Agreement in the year ended December 29,
2007.
Capital
expenditures of $31.0 million were made during Fiscal 2008 as compared to $15.6
million in Fiscal 2007, an increase of $15.4 million (98.7%), due primarily to a
major modernization project at the Turlock California plant that was identified
over normal maintenance and compliance capital expenditures as well as a general
overall increase in capital expenditures. Additionally, the Company in
Fiscal 2008 spent approximately $0.7 million related to the Final BSE Rule and
expects to spend approximately $2.6 million in fiscal 2009 to comply with the
Final BSE Rule. Capital expenditures related to compliance with
environmental regulations were $1.1 million in Fiscal 2008, $1.8 million in
Fiscal 2007 and $0.8 million in Fiscal 2006.
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 January 3, 2009, 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
Fiscal 2008, the Company has accrued approximately $5.1 million it expects will
become due during the next twelve months in order to meet obligations related to
the Company’s self insurance reserves and accrued insurance obligations, which
are included in current accrued expenses at January 3, 2009. The self
insurance reserve is composed of estimated liability for claims arising for
workers’ compensation and for auto liability and general liability
claims. The self insurance reserve liability is determined annually,
based upon a third party actuarial estimate. The actuarial estimate
may vary from year to year, due to changes in costs of health care, the pending
number of claims and other factors beyond the control of management of the
Company. No assurance can be given that the Company’s funding
obligations under its self insurance reserve will not increase in the
future.
Based
upon current actuarial estimates, the Company expects to make payments of less
than approximately $0.1 million in order to meet minimum pension funding
requirements during fiscal 2009. 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 required and tax deductible discretionary contributions to its
pension plans in Fiscal 2008 and Fiscal 2007 of approximately $6.5 million and
$6.2 million, respectively.
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. Based upon the
Company’s initial review and conversations with other participating employers in
this “Critical Status” plan, it appears probable that there will be a mass
withdrawal termination of this plan. As a result, the Company accrued
approximately $3.2 million based on the most recent information that is probable
and estimable for this plan. While the Company has 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 January 3, 2009, 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 is also reviewing new legislation under Section 40A of the Internal
Revenue Code for the biodiesel mixture credit the impact of which could be
material to the Company. 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 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. On February
23, 2009, the Company acquired substantially all of the assets of Boca
Industries, Inc. headquartered in Smyrna, Georgia for approximately $12.5
million. 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 2009 and thereafter. The Company cannot provide
assurance that the cash flows from operating activities generated in 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 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.
CONTRACTUAL
OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The
following table summarizes the Company’s expected material contractual payment
obligations, including both on- and off-balance sheet arrangements at January 3,
2009 (in thousands):
|
Total
|
|
Less
than
1
Year
|
|
1 –
3
Years
|
|
3 –
5
Years
|
|
More
than
5
Years
|
Contractual
obligations (a):
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations (b)
|
$ 37,500
|
|
$ 5,000
|
|
$10,000
|
|
$22,500
|
|
$ –
|
Operating
lease obligations (c)
|
48,130
|
|
10,756
|
|
16,367
|
|
8,385
|
|
12,622
|
Estimated
interest payable (d)
|
4,115
|
|
1,193
|
|
2,003
|
|
919
|
|
–
|
Purchase
commitments (e)
|
16,890
|
|
16,890
|
|
–
|
|
–
|
|
–
|
Derivative
obligations (f)
|
3,593
|
|
1,500
|
|
1,921
|
|
172
|
|
–
|
Pension
funding obligation (g)
|
45
|
|
45
|
|
–
|
|
–
|
|
–
|
Other
obligations
|
72
|
|
72
|
|
–
|
|
–
|
|
–
|
Total
|
$110,345
|
|
$35,456
|
|
$30,291
|
|
$31,976
|
|
$12,622
|
(a)
|
The
above table does not reflect uncertain tax positions of approximately $0.5
million because the timing of the cash settlement can not be reasonably
estimated.
|
(b)
|
See
Note 9 to the consolidated financial statements.
|
(c)
|
See
Note 8 to the consolidated financial statements.
|
(d)
|
Interest
payable was calculated using the current rate for term debt and current
rates on other liabilities.
|
(e)
|
Purchase
commitments were determined based on specified contracts for natural gas,
diesel fuel and finish product purchases.
|
(f)
|
Represents
liabilities for interest rate swap contracts that were valued at January
3, 2009. The ultimate settlement amounts of these swap
contracts are unknown because they are subject to continuing market risk
until the derivatives are settled.
|
(g)
|
Pension
funding requirements are determined annually based upon a third party
actuarial estimate. The Company expects to make less than $0.1
million in required contributions to its pension plan in fiscal
2009. The Company is not able to estimate pension funding
requirements beyond the next twelve months. The accrued pension benefit
liability was approximately $36.3 million at the end of Fiscal
2008. The Company knows that two of the multi-employer pension
plans that have not terminated to which it contributes and which are not
administered by the Company were under-funded as of the latest available
information, and while the Company has no ability to calculate a possible
current liability for the under-funded multi-employer plans to which the
Company contributes, the amounts could be
material.
|
The Company’s off-balance sheet
contractual obligations and commercial commitments as of January 3, 2009 relate
to operating lease obligations, letters of credit, forward purchase agreements,
and employment agreements. The Company has excluded these items from
the balance sheet in accordance with accounting principles generally accepted in
the U.S.
The following table summarizes the
Company’s other commercial commitments, including both on- and off-balance sheet
arrangements at January 3, 2009 (in thousands):
Other
commercial commitments:
|
|
Standby
letters of credit
|
$ 16,424
|
Total
other commercial commitments:
|
$
16,424
|
OFF
BALANCE SHEET OBLIGATIONS
Based
upon underlying purchase agreements, the Company has commitments to purchase
$16.9 million of finished products, natural gas and diesel fuel during fiscal
2009, which are not included in liabilities on the Company’s balance sheet at
January 3, 2009. 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 2009, in accordance with accounting principles
generally accepted in the U.S.
Based
upon underlying lease agreements, the Company expects to pay approximately $10.8
million in operating lease obligations during fiscal 2009 which are not included
in liabilities on the Company’s balance sheet at January 3, 2009. These
lease obligations are included in cost of sales or selling, general and
administrative expense on the Company’s Statement of Operations as the
underlying lease obligation comes due, in accordance with accounting principles
generally accepted in the U.S.
CRITICAL
ACCOUNTING POLICIES
The Company follows certain significant
accounting policies when preparing its consolidated financial
statements. A complete summary of these policies is included in Note
1 to the Consolidated Financial Statements.
Certain of the policies require
management to make significant and subjective estimates or assumptions that may
deviate from actual results. In particular, management makes
estimates regarding valuation of inventories, estimates of useful life of
long-lived assets related to depreciation and amortization expense, estimates
regarding fair value of the Company’s reporting units and future cash flows with
respect to assessing potential impairment of both long-lived assets and
goodwill, self-insurance, environmental and litigation reserves, pension
liability, estimates of income tax expense, and estimates of pro-forma expense
related to stock options granted. Each of these estimates is
discussed in greater detail in the following discussion.
Inventories
The
Company’s inventories are valued at the lower of cost or
market. Finished product manufacturing cost is calculated using the
first-in, first-out (FIFO) method, based upon the Company’s raw material costs,
collection and factory production operating expenses, and depreciation expense
on collection and factory assets. Market values of inventory are
estimated at each plant location, based upon either: 1) the backlog of unfilled
sales orders at the balance sheet date; or 2) unsold inventory,
calculated using regional finished product prices quoted in the Jacobsen index
at the balance sheet date. Estimates of market value, based upon the
backlog of unfilled sales orders or upon the Jacobsen index, assume that the
inventory held by the Company at the balance sheet date will be sold at the
estimated market finished product sales price, subsequent to the balance sheet
date. Actual sales prices received on future sales of inventory held
at the end of a period may vary from either the backlog unfilled sales order
price or the Jacobsen index quotation at the balance sheet
date. These variances could cause actual sales prices realized on
future sales of inventory to be different than the estimate of market value of
inventory at the end of the period. Inventories were approximately
$22.2 million and $22.5 million at January 3, 2009 and December 29, 2007,
respectively.
Long-Lived
Assets, Depreciation and Amortization Expense and Valuation
The Company’s property, plant and
equipment are recorded at cost when acquired. Depreciation expense is
computed on property, plant and equipment based upon a straight line method over
the estimated useful life of the assets, which is based upon a standard
classification of the asset group. Buildings and improvements are
depreciated over a useful life of 15 to 30 years, machinery and equipment are
depreciated over a useful life of 3 to 10 years and vehicles are depreciated
over a life of 2 to 6 years. These useful life estimates have been
developed based upon the Company’s historical experience of asset life utility,
and whether the asset is new or used when placed in service. The
actual life and utility of the asset may vary from this estimated
life. Useful lives of the assets may be modified from time to time
when the future utility or life of the asset is deemed to change from that
originally estimated when the asset was placed in
service. Depreciation expense was approximately $19.3 million, $18.3
million and $16.1 million in fiscal years ending January 3, 2009, December 29,
2007 and December 30, 2006, respectively.
The
Company’s intangible assets, including permits, routes and non-compete
agreements are recorded at fair value when acquired. Amortization
expense is computed on these intangible assets based upon a straight line method
over the estimated useful life of the assets, which is based upon a standard
classification of the asset group. Collection routes are amortized over a useful
life of 8 to 20 years; non-compete agreements are amortized over a useful life
of 3 to 10 years; and permits are amortized over a useful life of 20
years. The actual economic life and utility of the asset may vary
from this estimated life. Useful lives of the assets may be modified
from time to time when the future utility or life of the asset is deemed to
change from that originally estimated when the asset was placed in
service. Intangible asset amortization expense was approximately $5.2
million, $4.9 million and $4.6 million in fiscal years ending January 3, 2009,
December 29, 2007 and December 30, 2006, respectively.
The Company reviews the carrying value
of long-lived assets for impairment when events or changes in circumstances
indicate that the carrying amount of an asset, or related asset group, may not
be recoverable from estimated future undiscounted cash
flows. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset or asset group to estimated
undiscounted future cash flows expected to be generated by the asset or asset
group. If the carrying amount of the asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the
asset. During the fourth quarter of Fiscal 2008, due to lower
commodity markets and the loss of raw material suppliers at a single reporting
unit the Company performed testing of all its long-lived assets for impairment
based on future undiscounted cash flows and has determined during this testing
process that no impairment exists for its long-lived assets.
The net
book value of property, plant and equipment was approximately $143.3 million and
$128.7 million at January 3, 2009 and December 29, 2007,
respectively. The net book value of intangible assets was
approximately $36.0 million and $29.0 million at January 3, 2009 and December
29, 2007, respectively.
Goodwill
Valuation
The
Company reviews the carrying value of goodwill on a regular basis, including at
the end of each fiscal year, for indications of impairment at each reporting
unit that has recorded goodwill as an asset. Impairment is indicated
whenever the carrying value of a reporting unit exceeds the estimated fair value
of a reporting unit. For purposes of evaluating impairment of
goodwill, the Company estimates fair value of a reporting unit, based upon
future discounted net cash flows. In calculating these estimates,
actual historical operating results and anticipated future economic factors,
such as future business volume, future finished product prices, and future
operating costs and expenses are evaluated and estimated as a component of the
calculation of future discounted cash flows for each reporting unit with
recorded goodwill. The estimates of fair value of these reporting
units and of future discounted net cash flows from operation of these reporting
units could change if actual volumes, prices, costs or expenses vary from these
estimates.
Based on
the Company’s annual impairment testing at the end of the fourth quarter of
Fiscal 2008 it was determined that goodwill was impaired within a single
reporting unit due to lower commodity markets and the loss of raw material
suppliers in the fourth quarter of Fiscal 2008, which resulted in the Company
recording an impairment charge of approximately $15.9 million based on future
discounted net cash flows. In addition, a future reduction of
earnings in the reporting units with recorded goodwill could result in future
impairment charges because the estimate of fair value would be negatively
impacted by a reduction of earnings at those reporting
units. Goodwill was approximately $61.1 million and $71.9 million at
January 3, 2009 and December 29, 2007, respectively.
Self
Insurance, Environmental and Legal Reserves
The Company’s workers compensation,
auto and general liability policies contain significant deductibles or self
insured retentions. The Company estimates and accrues for its expected ultimate
claim costs related to accidents occurring during each fiscal year and carries
this accrual as a reserve until these claims are paid by the Company. In
developing estimates for self insured losses, the Company utilizes its staff, a
third party actuary and outside counsel as sources of information and judgment
as to the expected undiscounted future costs of the claims. The Company accrues
reserves related to environmental and litigation matters based on estimated
undiscounted future costs. With respect to the Company’s self insurance,
environmental and litigation reserves, estimates of reserve liability could
change if future events are different than those included in the estimates of
the actuary, consultants and management of the Company. The reserve for self
insurance, environmental and litigation contingencies included in accrued
expenses and other non-current liabilities for which there are no potential
insurance recoveries was approximately $17.3 million and $17.1 million at
January 3, 2009 and December 29, 2007, respectively.
Pension
Liability
The
Company provides retirement benefits to employees under separate final-pay
noncontributory pension plans for salaried and hourly employees (excluding those
employees covered by a union-sponsored plan), who meet service and age
requirements. Benefits are based principally on length of service and
earnings patterns during the five years preceding retirement. Pension
expense and pension liability recorded by the Company is based upon an annual
actuarial estimate provided by a third party administrator. Factors
included in estimates of current year pension expense and pension liability at
the balance sheet date include estimated future service period of employees,
estimated future pay of employees, estimated future retirement ages of
employees, and the projected time period of pension benefit
payments. Two of the most significant assumptions used to calculate
future pension obligations are the discount rate applied to pension liability
and the expected rate of return on pension plan assets. These
assumptions and estimates are subject to the risk of change over time, and each
factor has inherent uncertainties which neither the actuary nor the Company is
able to control or to predict with certainty. See Note 13 of Notes to
Consolidated Financial Statements for summaries of pension plans.
The
discount rate applied to the Company’s pension liability is the interest rate
used to calculate the present value of the pension benefit
obligation. The weighted average discount rate was 6.10% and 6.00% at
January 3, 2009 and October 1, 2007, respectively. The net periodic
benefit cost for fiscal 2009 would increase by approximately $0.7 million if the
discount rate was 0.5% lower at 5.60%. The net periodic benefit cost
for fiscal 2009 would decrease by approximately $0.7 million if the discount
rate was 0.5% higher at 6.60%.
The
expected rate of return on the Company’s pension plan assets is the interest
rate used to calculate future returns on investment of the plan
assets. The expected return on plan assets is a long-term assumption
whose accuracy can only be assessed over a long period of time. The
weighted average expected return on pension plan assets was 8.10% and 8.25% for
Fiscal 2008 and Fiscal 2007, respectively. During 2008, the Company’s
actual return on pension plan assets was a loss of $22.9 million or
approximately 28% of pension plan assets due to the recent decline in global
financial markets. Although, the Company’s plan returns were negative the actual
returns exceeded returns of the broader S&P 500 Index’s performance for
2008. These losses contributed to an increase in accumulated other
comprehensive loss in the Company’s consolidated statement of stockholders’
equity of $20.4 million, net of tax.
The
Company has recorded a pension liability of approximately $36.3 million and $9.2
million at January 3, 2009 and December 29, 2007, respectively. The
Company’s net pension cost was approximately $0.4 million, $3.0 million and $3.7
million for the fiscal years ending January 3, 2009, December 29, 2007 and
December 30, 2006, respectively. The projected net periodic pension
expense for fiscal 2009 is expected to increase by approximately $5.9 million as
compared to Fiscal 2008.
Income
Taxes
In
calculating net income, the Company includes estimates in the calculation of
income tax expense, the resulting tax liability and in future realization of
deferred tax assets that arise from temporary differences between financial
statement presentation and tax recognition of revenue and
expense. The Company’s deferred tax assets include a net operating
loss carry-forward which is limited to approximately $0.7 million per year in
future utilization due to the change in control resulting from the May 2002
recapitalization of the Company. Valuation allowances for deferred tax assets
are recorded when it is more likely than not that deferred tax assets will not
be realized. Based upon the Company’s evaluation of these matters, a
portion of the Company’s net operating loss carry-forwards will expire
unused. The valuation allowance established to provide a reserve
against these deferred tax assets was approximately $0.2 million and $4.8
million at January 3, 2009 and December 29, 2007, respectively. The
decrease in the Company’s valuation allowance is primarily due to the expiration
of certain net operating losses.
Stock
Option Expense
Effective January 1, 2006, the Company
adopted the provisions of Statement of Financial Accounting Standard No. 123
(revised 2004), Share-Based
Payment (“SFAS 123(R)”) and related interpretations, using the modified
prospective method. The calculation of expense of stock options
issued utilizes the Black-Scholes mathematical model which estimates the fair
value of the option award to the holder and the compensation expense to the
Company, based upon estimates of volatility, risk-free rates of return at the
date of issue and projected vesting of the option grants. The Company
recorded compensation expense related to stock options expense for the year
ended January 3, 2009, December 29, 2007 and December 30, 2006 of approximately
$0.2 million, $0.4 million and $0.5 million, respectively.
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
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51" (“SFAS
160”). SFAS 160 amends ARB 51 to establish new standards that will govern the
accounting for and reporting of (1) noncontrolling interests in partially owned
consolidated subsidiaries and (2) the loss of control of subsidiaries. The
provisions of SFAS 160 are effective as of the beginning of the Company’s 2009
fiscal year on a prospective basis. 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-K. The adoption of this staff position did not have an impact to
the consolidated financial statements of the Company.
In
December 2008, the FASB issued FASB Staff Position (FSP) FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets.” This FSP amends SFAS No. 132
(revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement
Benefits,” to provide guidance on an employer’s disclosures about plan assets of
a defined benefit pension or other postretirement plan on investment policies
and strategies, major categories of plan assets, inputs and valuation techniques
used to measure the fair value of plan assets and significant concentrations of
risk within plan assets. The disclosures about plan assets required by this FSP
shall be effective for fiscal years ending after December 15, 2009, with earlier
application permitted. Upon initial application, the provisions of this FSP are
not required for earlier periods that are presented for comparative
purposes. The Company is currently evaluating the disclosure
requirements impact of adopting this new FSP.
FORWARD
LOOKING STATEMENTS
This Annual Report on Form 10-K
includes “forward-looking” statements that involve risks and
uncertainties. The words “believe,” “anticipate,” “expect,”
“estimate,” “intend,” and similar expressions identify forward-looking
statements. All statements other than statements of historical facts
included in the Annual Report on Form 10-K, including, without limitation, the
statements under the sections entitled “Business,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Legal
Proceedings” and located elsewhere herein regarding industry prospects and the
Company’s financial position are forward-looking statements. Actual
results could differ materially from those discussed in the forward-looking
statements as a result of certain factors, including many that are beyond the
control of the Company. Although the Company believes that the
expectations reflected in these forward-looking statements are reasonable, it
can give no assurance that these expectations will prove to be
correct.
In addition to those factors discussed
under the heading “Risk Factors” in Item 1A of this report and elsewhere in this
report, and in the Company’s other public filings with the SEC, important
factors that could cause actual results to differ materially from the Company’s
expectations include: the Company’s continued ability to obtain
sources of supply for its rendering operations; general economic
conditions in the American, European and Asian markets; 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 Feed Rule; BSE
and its impact on finished product prices, export markets, energy prices and
government regulations, which are still evolving and are beyond the Company’s
control; the occurrence of Bird Flu in the U.S.; possible
product recall resulting from developments relating to the discovery of
unauthorized adulterations (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
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market
risks affecting the Company are exposures to changes in prices of the finished
products the Company sells, interest rates on debt, availability of raw material
supply and the price of natural gas and diesel fuel used in the Company’s
plants. Raw materials available to the Company are impacted by
seasonal factors, including holidays, when raw material volume
declines; warm weather, which can adversely affect the quality of raw
material processed and finished products produced; and cold weather,
which can impact the collection of raw material. Predominantly all of
the Company’s finished products are commodities that are generally sold at
prices prevailing at the time of sale.
The
Company makes limited use of derivative instruments to manage cash flow risks
related to interest and natural gas expense. The Company uses
interest rate swaps with the intent of managing overall borrowing costs by
reducing the potential impact of increases in interest rates on floating-rate
long-term debt. The interest rate swaps are subject to the
requirements of Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”). The Company’s
natural gas and diesel fuel instruments are not subject to the requirements of
SFAS 133, because the natural gas and diesel fuel instruments qualify as normal
purchases as defined in the SFAS 133. The Company does not use
derivative instruments for trading purposes.
On May
19, 2006, the Company entered into two interest rate swap agreements that are
considered cash flow hedges according to SFAS 133. Under the terms of
these swap agreements, beginning June 30, 2006, the cash flows from the
Company’s $50.0 million floating-rate term loan facility under the Credit
Agreement have been exchanged for fixed rate contracts that bear interest,
payable quarterly. The first swap agreement for $25.0 million matures
April 7, 2012 and bears interest at 5.42%, which does not include the borrowing
spread per the Credit Agreement, with amortizing payments that mirror the term
loan facility. The second swap agreement for $25.0 million matures
April 7, 2012 and bears interest at 5.415%, which does not include the borrowing
spread per the Credit Agreement, with amortizing payments that mirror the term
loan facility. The Company’s receive rate on each swap agreement is
based on three-month LIBOR. At January 3, 2009, the fair value of
these interest swap agreements was $3.6 million and is included in non-current
liabilities on the balance sheet, with an offset recorded to accumulated other
comprehensive income for the effective portion and other expense for the
ineffective portion of the interest rate swap.
As of
January 3, 2009, the Company had forward purchase agreements in place for
purchases of approximately $13.3 million of natural gas and diesel fuel in
fiscal 2009. As of January 3, 2009, the Company had forward purchase
agreements in place for purchases of approximately $3.6 million of finished
product in fiscal 2009.
Interest
Rate Sensitivity
The Company’s obligations subject to
variable interest rates include (in thousands, except interest
rates):
|
Total
|
|
Less
than
1
Year
|
|
1 –
3
Years
|
|
3 –
5
Years
|
|
More
than
5
Years
|
Long-term
debt:
|
|
|
|
|
|
|
|
|
|
Variable
rate
|
$
37,500
|
|
$ 5,000
|
|
$
10,000
|
|
$
22,500
|
|
$ –
|
Average
interest rate
|
2.50%
|
|
2.50%
|
|
2.50%
|
|
2.50%
|
|
–
|
Total
|
$
37,500
|
|
$ 5,000
|
|
$ 10,000
|
|
$
22,500
|
|
$ –
|
The Company has $37.5 million in
variable rate debt, which is made up of the Company’s term debt whose interest
risk is hedged by interest rate swaps discussed above and represents the balance
outstanding at January 3, 2009 under the Credit Agreement. The
Company estimates that if the debt was not hedged under the interest rate swap a
1% increase in interest rates would increase the Company’s interest expense by
approximately $0.4 million in fiscal 2009. At January 3, 2009, the
Company had no fixed rate debt.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
43
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control
Over
Financial
Reporting
|
44
|
|
Consolidated
Balance Sheets -
|
|
|
January
3, 2009 and December 29, 2007
|
45
|
|
Consolidated
Statements of Operations -
|
|
|
Three
years ended January 3, 2009
|
46
|
|
Consolidated
Statements of Stockholders’ Equity -
|
|
|
Three
years ended January 3, 2009
|
47
|
|
Consolidated
Statements of Cash Flows -
|
|
|
Three
years ended January 3, 2009
|
49
|
|
Notes
to Consolidated Financial Statements
|
50
|
|
|
|
|
Financial
Statement Schedule:
|
|
|
II
- Valuation and Qualifying Accounts -
|
|
|
Three
years ended January 3, 2009
|
80
|
|
|
|
All other
schedules are omitted since the required information is not present or is not
present in amounts sufficient to require submission of the schedule, or because
the information required is included in the consolidated financial statements
and notes thereto.
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Report of Independent
Registered Public Accounting Firm
The Board of Directors and
Stockholders
Darling International Inc.:
We have
audited the consolidated financial statements of Darling International Inc.
and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Darling International Inc.
and subsidiaries as of January 3, 2009 and December 29, 2007, and the results of
their operations and their cash flows for each of the years in the three-year
period ended January 3, 2009, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2006, the Company adopted Statement of Financial Accounting Standards No.
123(R), Share-Based
Payment. As discussed in Note 13 to the consolidated financial
statements, effective December 30, 2006, the Company adopted Statement of
Financial Accounting Standards No. 158, Employer’s Accounting for Defined
Benefit Pension and Other Postretirement Plans – an Amendment of FASB Statements
No. 87, 88, 106, and 132(R).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Darling International
Inc.’s internal control over financial reporting as of January 3,
2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 4, 2009, expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
(signed)
KPMG LLP
Dallas,
Texas
March 4,
2009
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Report of Independent
Registered Public Accounting Firm
The Board of Directors and
Stockholders
Darling International Inc.:
We have
audited Darling International Inc.’s internal control over financial reporting
as of January 3, 2009, based on criteria established
in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Darling International Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Darling International Inc. maintained, in all material respects,
effective internal control over financial reporting as of January 3, 2009, based
on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements of
Darling International Inc. and subsidiaries as listed in the accompanying index,
and our report dated March 4, 2009 expressed an unqualified opinion on those
consolidated financial statements.
(signed)
KPMG LLP
Dallas,
Texas
March 4,
2009
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Consolidated Balance
Sheets
January 3, 2009 and December 29,
2007
(in
thousands, except share and per share data)
ASSETS
|
|
January
3,
2009
|
|
|
December
29,
2007
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
50,814 |
|
|
$ |
16,335 |
|
Restricted cash
|
|
|
449 |
|
|
|
433 |
|
Accounts
receivable, less allowance for bad debts of $2,313
at
January 3, 2009 and $1,466 at December 29, 2007
|
|
|
40,424 |
|
|
|
59,401 |
|
Inventories
|
|
|
22,182 |
|
|
|
22,481 |
|
Income
taxes refundable
|
|
|
11,248 |
|
|
|
– |
|
Other
current assets
|
|
|
6,696 |
|
|
|
8,417 |
|
Deferred
income taxes
|
|
|
6,656 |
|
|
|
8,026 |
|
Total
current assets
|
|
|
138,469 |
|
|
|
115,093 |
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
143,291 |
|
|
|
128,685 |
|
Intangible
assets, less accumulated amortization of $47,281
|
|
|
|
|
|
|
|
|
at
January 3, 2009 and $42,481 at December 29, 2007
|
|
|
35,982 |
|
|
|
29,037 |
|
Goodwill
|
|
|
61,133 |
|
|
|
71,856 |
|
Other
assets
|
|
|
6,623 |
|
|
|
6,667 |
|
Deferred
income taxes
|
|
|
8,877 |
|
|
|
– |
|
|
|
$ |
394,375 |
|
|
$ |
351,338 |
|
LIABILITIES AND
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
5,000 |
|
|
$ |
6,250 |
|
Accounts
payable, principally trade
|
|
|
16,243 |
|
|
|
24,879 |
|
Accrued
expenses
|
|
|
49,780 |
|
|
|
49,579 |
|
Total
current liabilities
|
|
|
71,023 |
|
|
|
80,708 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
|
32,500 |
|
|
|
37,500 |
|
Other
noncurrent liabilities
|
|
|
54,274 |
|
|
|
27,225 |
|
Deferred
income taxes
|
|
|
– |
|
|
|
4,921 |
|
Total
liabilities
|
|
|
157,797 |
|
|
|
150,354 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; 100,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
82,169,076 and 81,544,466
shares issued
|
|
|
|
|
|
|
|
|
at January 3, 2009 and
December 29, 2007, respectively
|
|
|
822 |
|
|
|
815 |
|
Additional
paid-in capital
|
|
|
156,899 |
|
|
|
152,264 |
|
Treasury stock, at cost; 401,094
and 182,366 shares at
January 3, 2009 and
December 29, 2007, respectively
|
|
|
(3,848
|
) |
|
|
(1,547
|
) |
Accumulated
other comprehensive loss
|
|
|
(29,850
|
) |
|
|
(8,598
|
) |
Accumulated
earnings
|
|
|
112,555 |
|
|
|
58,050 |
|
Total
stockholders’ equity
|
|
|
236,578 |
|
|
|
200,984 |
|
|
|
$ |
394,375 |
|
|
$ |
351,338 |
|
The
accompanying notes are an integral part of these
consolidated
financial statements.
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Consolidated Statements of
Operations
Three years ended January 3, 2009
(in
thousands, except per share data)
|
|
January 3,
2009
|
|
|
December
29,
2007
|
|
|
December
30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
807,492 |
|
|
$ |
645,313 |
|
|
$ |
406,990 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and operating expenses
|
|
|
614,708 |
|
|
|
483,453 |
|
|
|
321,416 |
|
Selling,
general and administrative expenses
|
|
|
59,761 |
|
|
|
57,999 |
|
|
|
45,649 |
|
Depreciation
and amortization
|
|
|
24,433 |
|
|
|
23,214 |
|
|
|
20,686 |
|
Goodwill
impairment
|
|
|
15,914 |
|
|
|
– |
|
|
|
– |
|
Total costs and
expenses
|
|
|
714,816 |
|
|
|
564,666 |
|
|
|
387,751 |
|
Operating income
|
|
|
92,676 |
|
|
|
80,647 |
|
|
|
19,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(3,018
|
) |
|
|
(5,045
|
) |
|
|
(7,184
|
) |
Other,
net
|
|
|
258 |
|
|
|
(570
|
) |
|
|
(4,682
|
) |
Total other
income/(expense)
|
|
|
(2,760
|
) |
|
|
(5,615
|
) |
|
|
(11,866
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations before
income taxes
|
|
|
89,916 |
|
|
|
75,032 |
|
|
|
7,373 |
|
Income
taxes
|
|
|
35,354 |
|
|
|
29,499 |
|
|
|
2,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
54,562 |
|
|
$ |
45,533 |
|
|
$ |
5,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.67 |
|
|
$ |
0.56 |
|
|
$ |
0.07 |
|
Diluted
|
|
$ |
0.66 |
|
|
$ |
0.56 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
consolidated
financial statements.
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Consolidated Statements of
Stockholders' Equity
Three years ended January 3, 2009
(in
thousands, except share data)
|
Common
Stock
|
|
|
|
Number
of Outstanding
Shares
|
$.01
par Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Other Compre-hensive Loss
|
Retained
Earnings
|
Unearned
Compensation
|
Total
Stockholders’
Equity
|
|
Balances
at January 1, 2006
|
64,437,410
|
|
$ 644
|
|
$ 79,370
|
|
$ (172)
|
|
$(9,282)
|
|
$ 4,447
|
|
$ (1,327)
|
|
$ 73,680
|
|
Net
income
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
5,107
|
|
–
|
|
5,107
|
|
Minimum
pension liability
adjustment,
net of tax
|
–
|
|
–
|
|
–
|
|
–
|
|
2,415
|
|
–
|
|
–
|
|
2,415
|
|
Interest
rate swap derivative
adjustment,
net of tax
|
–
|
|
–
|
|
–
|
|
–
|
|
(408)
|
|
–
|
|
–
|
|
(408)
|
|
Total
comprehensive income
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
7,114
|
|
Adjustment
to initially apply
FASB
Statement No. 158,
net
of tax (revised)
|
–
|
|
–
|
|
–
|
|
–
|
|
(4,458)
|
|
–
|
|
–
|
|
(4,458)
|
|
Adjustment
to opening
stockholders’
equity
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
2,822
|
|
–
|
|
2,822
|
|
Adjustment
to initially apply
FASB
Statement No. 123R
|
–
|
|
–
|
|
(1,327)
|
|
–
|
|
–
|
|
–
|
|
1,327
|
|
–
|
|
Stock-based
compensation
|
–
|
|
–
|
|
1,488
|
|
–
|
|
–
|
|
–
|
|
–
|
|
1,488
|
|
Tax
benefits associated with
stock-based
compensation
|
–
|
|
–
|
|
50
|
|
–
|
|
–
|
|
–
|
|
–
|
|
50
|
|
Issuance
of common stock
|
16,417,043
|
|
165
|
|
70,464
|
|
–
|
|
–
|
|
–
|
|
–
|
|
70,629
|
|
Balances
at December 30, 2006
|
80,854,453
|
|
$ 809
|
|
$150,045
|
|
$ (172)
|
|
$(11,733)
|
|
$12,376
|
|
$ –
|
|
$151,325
|
|
Net
income
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
45,533
|
|
–
|
|
45,533
|
|
Unrecognized
net actuarial
loss
of defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability
adjustments,
net of tax
|
–
|
|
–
|
|
–
|
|
–
|
|
3,870
|
|
–
|
|
–
|
|
3,870
|
|
Interest
rate swap derivative
adjustment,
net of tax
|
–
|
|
–
|
|
–
|
|
–
|
|
(735)
|
|
–
|
|
–
|
|
(735)
|
|
Total
comprehensive income
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
48,668
|
|
Adjustment
to initially apply
FIN
48
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
141
|
|
–
|
|
141
|
|
Stock-based
compensation
|
–
|
|
–
|
|
365
|
|
–
|
|
–
|
|
–
|
|
–
|
|
365
|
|
Tax
benefits associated with
stock-based
compensation
|
–
|
|
–
|
|
1,223
|
|
–
|
|
–
|
|
–
|
|
–
|
|
1,223
|
|
Treasury
stock
|
(161,366)
|
|
–
|
|
–
|
|
(1,375)
|
|
–
|
|
–
|
|
–
|
|
(1,375)
|
|
Issuance
of common stock
|
669,013
|
|
6
|
|
631
|
|
–
|
|
–
|
|
–
|
|
–
|
|
637
|
|
Balances
at December 29, 2007
|
81,362,100
|
|
$ 815
|
|
$152,264
|
|
$(1,547)
|
|
$(8,598)
|
|
$58,050
|
|
$ –
|
|
$200,984
|
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Consolidated Statements of
Stockholders' Equity (Continued)
Three years ended January 3, 2009
(in
thousands, except share data)
|
Common
Stock
|
|
|
|
Number
of Outstanding
Shares
|
$.01
par Value
|
Additional
Paid-In
Capital
|
Treasury
Stock
|
Accumulated
Other Compre-hensive Loss
|
Retained
Earnings
|
Unearned
Compensation
|
Total
Stockholders’
Equity
|
|
Net
income
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
54,562
|
|
–
|
|
54,562
|
|
Unrecognized
net actuarial
loss
of defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
liability
adjustments,
net of tax
|
–
|
|
–
|
|
–
|
|
–
|
|
(20,386)
|
|
–
|
|
–
|
|
(20,386)
|
|
Interest
rate swap derivative
adjustment,
net of tax
|
–
|
|
–
|
|
–
|
|
–
|
|
(937)
|
|
–
|
|
–
|
|
(937)
|
|
Total
comprehensive income
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
33,239
|
|
Adjustment
effect of changing the
pension
plan measurement date
pursuant to FASB Statement
No 158, net of tax
|
–
|
|
–
|
|
–
|
|
–
|
|
71
|
|
(57)
|
|
–
|
|
14
|
|
Issuance
of non-vested stock
|
50,558 |
|
1 |
|
702 |
|
–
|
|
–
|
|
–
|
|
–
|
|
703
|
|
Stock-based
compensation
|
–
|
|
–
|
|
(127)
|
|
–
|
|
–
|
|
–
|
|
–
|
|
(127)
|
|
Tax
benefits associated with
stock-based
compensation
|
–
|
|
–
|
|
2,308
|
|
–
|
|
–
|
|
–
|
|
–
|
|
2,308
|
|
Treasury
stock
|
(218,728)
|
|
–
|
|
–
|
|
(2,301)
|
|
–
|
|
–
|
|
–
|
|
(2,301)
|
|
Issuance
of common stock
|
574,052
|
|
6
|
|
1,752
|
|
–
|
|
–
|
|
–
|
|
–
|
|
1,758
|
|
Balances
at January 3, 2009
|
81,767,982
|
|
$ 822
|
|
$156,899
|
|
$(3,848)
|
|
$(29,850)
|
|
$112,555
|
|
$ –
|
|
$236,578
|
The
accompanying notes are an integral part of these
consolidated
financial statements.
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Consolidated Statements of Cash
Flows
Three years ended January 3,
2009
(in
thousands)
|
|
January
3,
2009
|
|
|
December
29,
2007
|
|
|
December 30,
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
54,562 |
|
|
$ |
45,533 |
|
|
$ |
5,107 |
|
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
24,433 |
|
|
|
23,214 |
|
|
|
20,686 |
|
Deferred
income taxes
|
|
|
(12,428
|
) |
|
|
5,616 |
|
|
|
(3,929
|
) |
Gain
on sale of assets
|
|
|
(141
|
) |
|
|
(5
|
) |
|
|
(42
|
) |
Increase/(decrease)
in long-term pension liability
|
|
|
6,784 |
|
|
|
(5,664
|
) |
|
|
1,336 |
|
Stock-based
compensation expense
|
|
|
800 |
|
|
|
1,235 |
|
|
|
1,588 |
|
Write-off
of deferred loan costs
|
|
|
– |
|
|
|
– |
|
|
|
2,569 |
|
Goodwill
impairment
|
|
|
15,914 |
|
|
|
– |
|
|
|
– |
|
Changes
in operating assets and liabilities, net
of
effects from acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(16
|
) |
|
|
47 |
|
|
|
1,869 |
|
Accounts
receivable
|
|
|
18,977 |
|
|
|
(17,020
|
) |
|
|
(2,787
|
) |
Income
taxes refundable
|
|
|
(11,248
|
) |
|
|
– |
|
|
|
– |
|
Inventories and
prepaid expenses
|
|
|
(398
|
) |
|
|
(7,728
|
) |
|
|
867 |
|
Accounts
payable and accrued expenses
|
|
|
(6,884
|
) |
|
|
18,916 |
|
|
|
(1,336
|
) |
Other
|
|
|
1,595 |
|
|
|
1,563 |
|
|
|
2,904 |
|
Net
cash provided by operating activities
|
|
|
91,950 |
|
|
|
65,707 |
|
|
|
28,832 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(31,006
|
) |
|
|
(15,552
|
) |
|
|
(11,800
|
) |
Acquisitions
|
|
|
(15,876
|
) |
|
|
– |
|
|
|
(80,166
|
) |
Gross
proceeds from sale of property, plant and equipment
and
other assets
|
|
|
1,101 |
|
|
|
217 |
|
|
|
739 |
|
Payments
related to routes and other intangibles
|
|
|
(6,609
|
) |
|
|
(262 |
) |
|
|
– |
|
Net
cash used in investing activities
|
|
|
(52,390
|
) |
|
|
(15,597
|
) |
|
|
(91,227
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
– |
|
|
|
42,500 |
|
|
|
126,500 |
|
Payments
on long-term debt
|
|
|
(6,250
|
) |
|
|
(81,754
|
) |
|
|
(93,024
|
) |
Contract
payments
|
|
|
(176
|
) |
|
|
(167
|
) |
|
|
(245
|
) |
Deferred
loan costs
|
|
|
(67
|
) |
|
|
– |
|
|
|
(1,634
|
) |
Issuance
of common stock
|
|
|
303 |
|
|
|
517 |
|
|
|
29 |
|
Minimum
withholding taxes paid on stock awards
|
|
|
(1,199
|
) |
|
|
(1,375
|
) |
|
|
– |
|
Excess
tax benefits from stock-based compensation
|
|
|
2,308 |
|
|
|
1,223 |
|
|
|
50 |
|
Net
cash provided/(used) in financing activities
|
|
|
(5,081
|
) |
|
|
(39,056
|
) |
|
|
31,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in cash and cash equivalents
|
|
|
34,479 |
|
|
|
11,054 |
|
|
|
(30,719
|
) |
Cash
and cash equivalents at beginning of year
|
|
|
16,335 |
|
|
|
5,281 |
|
|
|
36,000 |
|
Cash
and cash equivalents at end of year
|
|
$ |
50,814 |
|
|
$ |
16,335 |
|
|
$ |
5,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
3,016 |
|
|
$ |
5,151 |
|
|
$ |
6,345 |
|
Income
taxes, net of refunds
|
|
$ |
44,246 |
|
|
$ |
26,307 |
|
|
$ |
2,684 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these
consolidated
financial statements.
DARLING INTERNATIONAL INC. AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements
NOTE
1.
|
GENERAL
|
|
|
(a)
|
NATURE
OF OPERATIONS
|
|
|
|
Darling
International Inc., a Delaware corporation (“Darling”), is a recycler of
food and animal by-products and provides grease trap services to food
service establishments. Darling collects and recycles animal
by-products and used cooking oil from food service
establishments. Darling processes raw materials at 43
facilities located throughout the United States into finished products
such as protein (primarily meat and bone meal, “MBM”), tallow (primarily
bleachable fancy tallow, “BFT”), yellow grease (“YG”) and
hides. Darling sells these products nationally and
internationally, primarily to producers of oleo-chemicals, soaps, pet
foods, leather goods, livestock feed and bio-fuels for use as
ingredients in their products or for further processing. As
further discussed in Note 2, in fiscal 2006, Darling, through its
wholly-owned subsidiary Darling National LLC, a Delaware limited liability
company (“Darling National”), completed the acquisition of substantially
all of the assets (the “Transaction”) of National By-Products, LLC, an
Iowa limited liability company (“NBP”). Darling and its
subsidiaries, including Darling National, are collectively referred to
herein as (the “Company”). The Company’s results for fiscal
2008 and 2007 include a full year of contribution from the assets acquired
in the Transaction, as compared to 33 weeks of contributions from these
assets in fiscal 2006. The Company’s operations are currently
organized into two segments: Rendering and Restaurant
Services. For additional information on the Company’s segments,
see Note 18.
|
(b)
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
|
(1)
|
Basis
of Presentation
The
consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany balances and
transactions have been eliminated in
consolidation.
|
|
(2)
|
Fiscal
Year
The
Company has a 52/53 week fiscal year ending on the Saturday nearest
December 31. Fiscal years for the consolidated financial
statements included herein are for the 53 weeks ended January 3, 2009, the
52 weeks ended December 29, 2007, and the 52 weeks ended December 30,
2006.
|
|
(3)
|
Cash
and Cash Equivalents
The
Company considers all short-term highly liquid instruments, with an
original maturity of three months or less, to be cash
equivalents.
|
|
(4)
|
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from customers’ non-payment of trade accounts receivable owed to
the Company. These trade receivables arise in the ordinary
course of business from sales of raw material, finished product or
services to the Company’s customers. The estimate of allowance
for doubtful accounts is based upon the Company’s bad debt experience,
prevailing market conditions, and aging of trade accounts receivable,
among other factors. If the financial condition of the
Company’s customers deteriorates, resulting in the customers’ inability to
pay the Company’s receivables as they come due, additional allowances for
doubtful accounts may be required.
|
|
(5)
|
Inventories
Inventories
are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO)
method.
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
|
(6)
|
Long
Lived Assets
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Depreciation is
computed by the straight-line method over the estimated useful lives of
assets: 1) Buildings and improvements, 15 to 30 years;
2)
Machinery and equipment, 3 to 10 years; and 3) Vehicles, 2 to 6
years.
Maintenance
and repairs are charged to expense as incurred and expenditures for major
renewals and improvements are capitalized.
|
|
|
Intangible
Assets
Intangible
assets subject to amortization consist of: 1) collection routes
which are made up of groups of suppliers of raw materials in similar
geographic areas from which the Company derives collection fees and a
dependable source of raw materials for processing into finished
products; 2) permits that represent licensing of operating
plants that have been acquired, giving those plants the ability to
operate; 3) non-compete agreements that represent contractual arrangements
with former competitors whose businesses were acquired; and 4)
royalty and consulting agreements. Amortization expense is
calculated using the straight-line method over the estimated useful lives
of the assets ranging from: 8-20 years for collection routes;
20 years for permits; and 3-10 years for non-compete
covenants.
|
|
(7)
|
Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed of
The
Company follows Statement of Financial Accounting Standards No. 144, Accounting for the Impairment
of Disposal of Long-Lived Assets (“SFAS 144”). The
Company reviews the carrying value of long-lived assets for impairment
when events or changes in circumstances indicate that the carrying amount
of an asset, or related asset group, may not be recoverable from estimated
future undiscounted cash flows. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset or asset group to estimated undiscounted future cash flows expected
to be generated by the asset or asset group. If the carrying
amount of the asset exceeds its estimated future cash flows, an impairment
charge is recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. During the fourth quarter of
fiscal 2008, due to lower commodity markets and the loss of raw material
suppliers at a single reporting unit the Company performed testing of all
its long-lived assets for impairment based on future undiscounted cash
flows and concluded that its long-lived assets were not
impaired.
|
|
(8)
|
Goodwill
|
|
|
Goodwill
is tested for impairment annually or more frequently if events or changes
in circumstances indicate that the asset might be
impaired. Statement of Financial Accounting Standards No. 142,
Goodwill and Other
Intangible Assets (“SFAS 142”) requires a two-step process for
testing impairment. First, the fair value of each reporting
unit is compared to its carrying value to determine whether an indication
of impairment exists. If impairment is indicated, then the fair
value of the reporting unit’s goodwill is determined by allocating the
unit’s fair value of its assets and liabilities (including any
unrecognized intangible assets) as if the reporting unit had been acquired
in a business combination. The amount of impairment for
goodwill is measured as the excess of its carrying value over its implied
fair value.
The
fair value for one of the Company’s reporting units containing goodwill
did not exceed the related carrying values; consequently, the Company
recorded an impairment of approximately $15.9 million for the year ended
January 3, 2009. Goodwill was approximately $61.1 million and $71.9
million at January 3, 2009 and December 29, 2007,
respectively. See Note 6 for further information on the
Company’s goodwill.
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
|
(9)
|
Environmental
Expenditures
Environmental
expenditures incurred to mitigate or prevent environmental impacts that
have yet to occur and that otherwise may result from future operations are
capitalized. Expenditures that relate to an existing condition
caused by past operations and that do not contribute to current or future
revenues are expensed or charged against established environmental
reserves. Reserves are established when environmental impacts
have been identified which are probable to require mitigation and/or
remediation and the costs are reasonably
estimable.
|
|
(10)
|
Income
Taxes
The
Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes
the enactment date.
Statement
of Financial Accounting Standards No. 109 – Accounting for Income
Taxes requires the Company to periodically assess whether it is
more likely than not that it will generate sufficient taxable income to
realize its deferred income tax assets. In making this
determination, the Company considers all available positive and negative
evidence and makes certain assumptions. The Company considers,
among other things, its deferred tax liabilities, the overall business
environment, its historical earnings and losses, current industry trends
and its outlook for future years. Although the Company is
unable to carryback any of its net operating losses, based upon recent
favorable operating results and future projections, certain net operating
losses can be carried forward and utilized and other deferred tax assets
will be realized.
|
|
(11)
|
Earnings
per Share
Basic
income per common share is computed by dividing net income by the weighted
average number of common shares outstanding during the
year. Diluted income per common share is computed by dividing
net income by the weighted average number of common shares outstanding
during the year increased by dilutive common equivalent shares determined
using the treasury stock method.
|
|
|
Net
Income per Common Share (in thousands)
|
|
|
|
January 3,
|
December 29,
|
December 30,
|
|
|
|
|
Shares
|
|
|
Income
|
Shares
|
Per-
Share
|
|
Income
|
Shares
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$54,562
|
81,387
|
$0.67
|
|
$45,533
|
80,772
|
$0.56
|
|
$5,107
|
74,310
|
$0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Option shares in the money and |
|
|
|
|
|
|
|
|
|
|
|
|
dilutive
effect of restricted stock
|
–
|
1,178
|
–
|
|
–
|
1,772
|
–
|
|
–
|
1,264
|
–
|
Less:
Pro-forma treasury shares
|
|
–
|
(408)
|
–
|
|
–
|
(648)
|
–
|
|
–
|
(315)
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$54,562
|
82,157
|
$0.66
|
|
$45,533
|
81,896
|
$0.56
|
|
$5,107
|
75,259
|
$0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
|
|
For
fiscal 2008, 2007 and 2006, respectively, 24,000, 5,187 and 771,950
outstanding stock options were excluded from diluted income per common
share as the effect was antidilutive. For fiscal 2008, 2007 and
2006, respectively, 88,767, 117,179 and 248,848 shares of non-vested stock
and restricted stock were excluded from diluted income per common share as
the effect was antidilutive. For fiscal 2008, 2007 and 2006,
respectively, zero, 60,713 and 99,821 shares of contingent issuable stock
were excluded from diluted income per common share as the effect was
antidilutive.
|
|
(12)
|
Stock
Based Compensation
The
Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standard No. 123 (revised 2004), Share-Based Payment
(“SFAS 123(R)”) requires all entities to recognize compensation
expense in an amount equal to the fair value of the share-based payments
(e.g., stock options and non-vested and restricted stock) granted to
employees or by incurring liabilities to an employee or other supplier (a)
in amounts based, at least in part, on the price of the entity’s shares or
other equity instruments, or (b) that require or may require settlement by
issuing the entity’s equity shares or other equity
instruments.
Effective
January 1, 2006, the Company adopted the provisions of SFAS 123(R) and
related interpretations, using the modified prospective
method. Using the modified prospective method of SFAS 123(R),
the Company began recognizing compensation expense for the remaining
unvested portions of stock-based compensation granted prior to January 1,
2006. As a result of adopting SFAS 123(R), for the year ended
December 30, 2006, the Company recorded additional stock option expense of
approximately $0.5 million, which reduced income from continuing
operations and income before income taxes by approximately $0.5 million,
reduced net income by $0.4 million, and reduced basic and diluted earnings
per share by $0.01 per share. Total stock-based compensation
recognized under SFAS 123(R) in the statements of operations for the years
ended January 3, 2009, December 29, 2007 and December 30, 2006 was
approximately $1.1 million, $1.4 million and $1.6 million, respectively,
which is included in selling, general and administrative costs, and the
related income tax benefit recognized was approximately $0.3 million, $0.4
million and $0.6 million, respectively. See Note 12 for further
information on the Company’s stock-based compensation
plans.
SFAS
123(R) requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow. For
the year ended January 3, 2009, December 29, 2007 and December 30, 2006,
the Company recognized $2.3 million, $1.2 million and $50,000,
respectively in such tax deductions, which were recorded as an increase in
financing cash flows and a reduction in operating cash
flows.
|
|
(13)
|
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those
estimates.
|
|
|
If
it is at least reasonably possible that the estimate of the effect on the
financial statements of a condition, situation, or set of circumstances
that exist at the date of the financial statements will change in the near
term due to one or more future confirming events and the effect of the
change would be material to the financial statements, the Company will
disclose the nature of the uncertainty and include an indication that it
is at least reasonably possible that a change in the estimate will occur
in the near term. If the estimate involves a loss contingency
covered by FASB Statement No. 5, the disclosure will also include an
estimate of the possible loss or range of loss or state that an estimate
cannot be made.
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
|
(14)
|
Financial
Instruments
The
carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the
short maturity of these instruments. In addition, the
carrying amount of the Company’s outstanding borrowings under the Credit
Agreement described in Note 9 approximates the fair value due to the
floating interest rates on the
borrowings.
|
|
(15)
|
Derivative
Instruments
The
Company makes limited use of derivative instruments to manage cash flow
risks related to interest expense, natural gas usage and inventory.
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. Natural gas swaps and collars are
entered into with the intent of managing the overall cost of natural gas
usage by reducing the potential impact of seasonal weather demands on
natural gas that increases natural gas prices. Inventory swaps
are entered into with the intent of managing seasonally high
concentrations of protein inventories by reducing the potential impact of
decreasing prices. The Company does not use derivative instruments for
trading purposes. At January 3, 2009, the Company had two
interest rate swaps and no natural gas swaps or collars or inventory
swaps.
Under
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), entities are
required to report all derivative instruments in the statement of
financial position at fair value. The accounting for changes in the fair
value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging
relationship and, if so, on the reason for holding the instrument. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair value, cash flows or
foreign currencies. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other comprehensive
income (outside of earnings) and is subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts
excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss are reported in earnings
immediately. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of
change.
|
|
(16)
|
Comprehensive
Income
The
Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income (“SFAS 130”). SFAS 130 establishes standards for reporting
and presentation of comprehensive income and its components. In
accordance with SFAS 130, the Company has presented the components of
comprehensive income in its consolidated statements of stockholders’
equity.
|
|
(17)
|
Revenue
Recognition
The
Company recognizes revenue on sales when products are shipped and the
customer takes ownership and assumes risk of loss. Collection
fees are recognized in the month the service is
provided.
|
|
(18)
|
Reclassification
Certain
prior year amounts have been reclassified to conform to the current year
presentation.
|
NOTE
2.
|
ACQUISITIONS
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.
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
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 deemed material to revenues and net income of the Company for
fiscal 2008. The Company paid cash of $15.9 million and recorded a
receivable of approximately $1.5 million for a net purchase price for the API
Transaction of approximately $14.4 million, which consists of property, plant
and equipment of $3.4 million, intangible assets of $5.5 million, goodwill of
$5.2 million and other of $0.3 million. The receivable was
recorded as a reduction of goodwill due to certain raw material volumes during
the 91 days following the closing date not being achieved per the asset purchase
agreement. The $1.5 million receivable is recorded as a long
term other asset on the balance sheet at January 3, 2009. 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 less, on
a pro rata basis, the long-term receivable of $1.5 million.
The $5.2
million of goodwill was assigned to the restaurant services segment and is
expected to be deductible for tax purposes. Identifiable intangibles
in the API Transaction include $5.5 million in routes with a weighted average
useful life of nine years.
On May
15, 2006, Darling, through its wholly-owned subsidiary Darling National,
completed the acquisition of substantially all of the assets of NBP (the
“Transaction”). The purchase was accounted for as an asset purchase
pursuant to the terms of the asset purchase agreement, by and among Darling,
Darling National and NBP, whereby Darling National acquired substantially all of
the assets and liabilities of NBP. The assets acquired in the
Transaction has increased Darling’s capabilities by growing revenues,
diversifying the raw material supplies and creating a larger platform to grow
Darling’s restaurant services business.
As a
result of the Transaction, effective May 15, 2006, the Company began including
the operations of NBP into the Company’s consolidated financial
statements. The following table presents selected pro forma
information, for comparative purposes, assuming the Transaction had occurred on
January 2, 2005 for the periods presented (unaudited) (in thousands, except per
share data):
The
selected unaudited pro forma information is not necessarily indicative of the
consolidated results of operations for future periods or the results of
operations that would have been realized had the Transaction actually occurred
on January 1, 2006.
|
December
30,
2006
|
Net
sales
|
$480,347
|
Income
from continuing operations
|
9,194
|
Net
income
|
9,194
|
Earnings
per share
|
|
Basic
and diluted
|
$ 0.11
|
The
Transaction was accounted for using the purchase method of accounting for
business combinations and, accordingly, the results of operations related to the
Transaction have been included in the Company’s consolidated financial
statements since the date of acquisition.
The
purchase price for the Transaction totaled $150.7 million, which included the
issuance of approximately 16.3 million shares of Darling common stock valued at
$70.5 million.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
The
following table summarizes the fair value of the assets acquired and liabilities
assumed as of May 15, 2006 (in thousands):
Accounts
receivable, net
|
$ 13,708
|
|
Inventory,
net
|
7,184
|
|
Other
current assets
|
135
|
|
Deferred
tax asset
|
425
|
|
Identifiable
intangibles
|
25,740
|
|
Property
and equipment
|
51,892
|
|
Goodwill
|
68,343
|
|
Accounts
payable
|
(7,837
|
) |
Accrued
expenses
|
(7,650
|
) |
Other
liabilities
|
(1,274
|
) |
Purchase
price
|
$ 150,666
|
|
As a
result of the acquisition of NBP, the Company reduced its valuation allowance
for pre-acquisition deferred tax assets of approximately $0.9 million, resulting
in a reduction of the $68.3 million of goodwill to $67.4 million.
The $67.4
million of goodwill was assigned to the rendering and restaurant services
segments in the amounts of $53.0 million and $14.4 million,
respectively. Of the total amount, $62.0 million is deductible for
tax purposes. Identifiable intangibles include $5.1 million in routes
with a weighted average useful life of 20 years, $20.5 million in permits with a
weighted average useful life of 20 years, and $0.1 million in non-compete
agreements with a useful life of five years. During the fourth
quarter of fiscal 2008, approximately $15.9 million of goodwill from the
Transaction was impaired due to the loss of two raw material suppliers in one of
the Company’s reporting units. See Note 6 for further information on
goodwill impairment.
A summary
of inventories follows (in thousands):
|
January 3,
2009
|
|
December
29,
2007
|
Finished
product
|
$ 19,380
|
|
$ 19,678
|
Supplies
and other
|
2,802
|
|
2,803
|
|
$ 22,182
|
|
$ 22,481
|
NOTE
4.
|
PROPERTY,
PLANT AND EQUIPMENT
|
|
|
A summary
of property, plant and equipment follows (in thousands):
|
January 3,
2009
|
|
December
29,
2007
|
Land
|
$ 17,826
|
|
$
17,501
|
Buildings
and improvements
|
48,623
|
|
45,684
|
Machinery
and equipment
|
217,450
|
|
205,376
|
Vehicles
|
54,656
|
|
54,482
|
Construction
in process
|
16,042
|
|
4,799
|
|
354,597
|
|
327,842
|
Accumulated
depreciation
|
(211,306)
|
|
(199,157)
|
|
$ 143,291
|
|
$ 128,685
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
NOTE
5.
|
INTANGIBLE
ASSETS
|
The gross
carrying amount of intangible assets subject to amortization include (in
thousands):
|
January
3,
2009
|
|
December
29,
2007
|
|
Intangible
Assets:
|
|
|
|
|
Routes
|
$ 60,009
|
|
$ 48,239
|
|
Permits
|
20,500
|
|
20,500
|
|
Non-compete
agreements
|
2,366
|
|
2,366
|
|
Royalty
and consulting agreements
|
388
|
|
413
|
|
|
83,263
|
|
71,518
|
|
Accumulated
Amortization:
|
|
|
|
|
Routes
|
(42,037
|
) |
(38,437
|
) |
Permits
|
(2,700
|
) |
(1,676
|
) |
Non-compete
agreements
|
(2,240
|
) |
(2,059
|
) |
Royalty
and consulting agreements
|
(304
|
) |
(309
|
) |
|
(47,281
|
) |
(42,481
|
) |
Intangible
assets, less
accumulated
amortization
|
$ 35,982
|
|
$ 29,037
|
|
Gross
intangible routes increased in fiscal 2008 by approximately $11.8 million
consisting of approximately $5.5 million from the API Transaction as discussed
in Note 2 and approximately $6.3 million from other asset purchases less
retirements. Amortization expense for the three years ended January
3, 2009, December 29, 2007 and December 30, 2006, was approximately $5.2
million, $4.9 million and $4.6 million, respectively. Amortization expense
for the next five fiscal years is estimated to be $3.5 million, $3.3 million,
$3.0 million, $2.9 million and $2.8 million.
Changes
in the carrying amount of goodwill (in thousands):
|
Rendering
|
|
Restaurant
Services
|
|
Combined
|
|
Total
|
|
Balance
at December 29, 2007
|
$
53,058
|
|
$
15,258
|
|
$
3,540
|
|
$
71,856
|
|
Acquisition
|
–
|
|
5,191
|
|
–
|
|
5,191
|
|
Impairment
|
(13,864)
|
|
(2,050)
|
|
–
|
|
(15,914)
|
|
Balance
at January 3, 2009
|
$ 39,194
|
|
$ 18,399
|
|
$ 3,540
|
|
$ 61,133
|
|
Based on
the Company’s annual impairment testing at the end of the fourth quarter of
fiscal 2008 it was determined that goodwill was impaired within a single
reporting unit due to lower commodity markets and the loss of raw material
suppliers in the fourth quarter of fiscal 2008, which resulted in the Company
recording an impairment charge of approximately $15.9 million based on future
discounted net cash flows.
Certain
of the Company’s rendering facilities are highly dependent on one or few
suppliers. It is reasonably possible that certain of those suppliers
could cease their operations or choose a competitor’s services which could have
a significant impact on these facilities.
The
process of evaluating goodwill for impairment involves the determination of the
fair value of the Company’s reporting units. In step one, the Company
determined based on the discounted cash flows that one of the Company’s
reporting unit’s carrying value exceeded its fair value. In step two
the Company is required to compute the implied fair value of the reporting
unit’s goodwill and compare it against the actual carrying amount of goodwill
for that reporting unit. This was determined in the same manner that
goodwill recognized in a business combination is determined. That is
the fair value of the reporting unit was allocated to all of the individual
assets and liabilities of the reporting unit including any intangible assets, as
if the reporting unit had been acquired in a business combination and the fair
value of the reporting unit determined in the first step was the price paid to
acquire the reporting unit.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
Accrued
expenses consist of the following (in thousands):
|
January 3,
2009
|
|
December
29,
2007
|
Compensation
and benefits
|
$ 18,838
|
|
$ 16,411
|
Utilities
and sewage
|
5,293
|
|
5,230
|
Accrued
income, ad valorem, and franchise taxes
|
1,120
|
|
2,277
|
Reserve
for self insurance, litigation, environmental
and
tax matters (Note 17)
|
5,513
|
|
5,750
|
Medical
claims liability
|
4,982
|
|
3,298
|
Other
accrued expense
|
14,034
|
|
16,613
|
|
$49,780
|
|
$49,579
|
The
Company leases five plants and storage locations, three office locations and a
portion of its transportation equipment under operating
leases. Leases are noncancellable and expire at various times through
the year 2028. Minimum rental commitments under noncancellable leases as of
January 3, 2009, are as follows (in thousands):
Period Ending
Fiscal
|
|
Operating Leases
|
2009
|
|
$
10,756
|
2010
|
|
8,884
|
2011
|
|
7,483
|
2012
|
|
5,271
|
2013
|
|
3,114
|
Thereafter
|
|
12,622
|
Total
|
|
$48,130
|
Rent
expense for the fiscal years ended January 3, 2009, December 29, 2007 and
December 30, 2006 was $8.6 million, $7.8 million and $6.2 million,
respectively.
NOTE
9.
|
DEBT
|
|
|
|
|
(a)
|
Credit
Agreement
|
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 January 3, 2009, the Company has
borrowed all $50.0 million under the term loan facility which provides for
quarterly scheduled amortization payments of $1.25 million over the six-year
term ending April 7, 2012; at that point, the remaining balance of $22.5 million
will be payable in full. The revolving credit facility has a
five-year term ending April 7, 2011. The proceeds of the 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.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
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
January 3, 2009 under the Credit Agreement, the interest rate for $37.5 million
of the term loan that was outstanding was based on LIBOR plus a margin of 1.0%
per annum for a total of 2.50% per annum. At January 3, 2009 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.
On April
7, 2006, the Company repaid the balance on the term facility under its former
senior credit agreement and incurred a write-off of deferred loan costs of
approximately $1.5 million.
The
Company’s Credit Agreement consisted of the following elements at January 3,
2009 and December 29, 2007, respectively (in thousands):
|
January 3,
2009
|
|
December
29,
2007
|
Credit
Agreement:
|
|
|
|
Term
Loan
|
$ 37,500
|
|
$ 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 and
are secured by substantially all of the property of the Company, including a
pledge of all equity interests in Darling National. As of January 3,
2009, the Company was in compliance with all the covenants contained in the
Credit Agreement.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
Debt
consists of the following (in thousands):
|
January
3,
2009
|
|
December 29,
2007
|
Credit
Agreement:
|
|
|
|
Revolving
Credit Facility
|
$ –
|
|
$
–
|
Term
Loan
|
37,500
|
|
43,750
|
|
37,500
|
|
43,750
|
Less
Current Maturities
|
5,000
|
|
6,250
|
|
$ 32,500
|
|
$
37,500
|
Maturities
of long-term debt at January 3, 2009 follow (in thousands):
|
|
Contractual
Debt
Payment
|
|
2009
|
$ 5,000
|
|
2010
|
5,000
|
|
2011
|
5,000
|
|
2012
|
22,500
|
|
|
$
37,500
|
As of
January 3, 2009, current maturities of debt of $5.0 million will be due during
fiscal 2009, which include scheduled principal payments of $1.25 million due
each quarter.
(b)
|
Senior Subordinated Notes
|
On
December 31, 2003, the Company issued senior subordinated notes in the principal
amount of $35.0 million. On June 1, 2006, the Company retired the
senior subordinated notes using money available under the Credit Agreement and
incurred charges of $1.925 million for prepayment fees and approximately $1.1
million to write off deferred loan costs.
NOTE
10.
|
OTHER
NONCURRENT LIABILITIES
|
|
|
|
Other
noncurrent liabilities consist of the following (in
thousands):
|
|
January 3,
2009
|
|
December
29,
2007
|
Accrued
pension liability (Note 13) |
$
36,263
|
|
$
9,164
|
Reserve
for self insurance, litigation, environmental and tax
matters (Note 17)
|
14,418
|
|
15,053
|
Other
|
3,593
|
|
3,008
|
|
$54,274
|
|
$27,225
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
In June
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 uncertain tax positions
(“UTP”). FIN 48 requires application of a more likely than not
threshold to the recognition and de-recognition of UTP. FIN 48
permits recognition of the amount of tax benefit that has a greater than 50
percent likelihood of being realized upon settlement. It further
requires that a change in judgment related to the expected ultimate resolution
of UTP be recognized in earnings in the quarter of change. Effective
December 31, 2006 the Company adopted the provisions of FIN 48 resulting in a
reduction in the Company’s existing reserves for uncertain state and federal
income tax positions of approximately $0.1 million. This reduction
was recorded as a cumulative effect adjustment to retained
earnings. At the adoption date of December 31, 2006, the Company had
$0.7 million of gross unrecognized tax benefits. If the Company
recognized such tax benefits, the net impact on the Company’s effective tax rate
would be $0.6 million, which includes the effect of the reversal of the $0.1
million deferred tax asset. At January 3, 2009 and December 29, 2007,
the Company had $0.5 million, respectively of gross unrecognized tax benefits;
if recognized, the net impact on the Company’s effective tax rate would be $0.4
million, respectively, which includes the effect of the reversal of $0.1 million
in deferred tax asset. Additionally, at December 31, 2006, the
Company had an accrual for interest and penalties of $0.1
million. The Company recognizes accrued interest and penalties, as
appropriate, related to unrecognized tax benefits as a component of income tax
expense.
The
following table shows a reconciliation of the change in the unrecognized tax
benefit balance for federal, state and foreign taxes (in
thousands).
|
January
3,
|
|
December
29,
|
|
|
2009
|
|
2007
|
|
Balance
beginning of year
|
$ 543
|
|
$ 689
|
|
Additions
for tax positions related to the current year
|
–
|
|
–
|
|
Reductions
for tax positions related to the current year
|
–
|
|
–
|
|
Additions
for tax positions related to prior years
|
35
|
|
41
|
|
Reductions
for tax positions related to prior years
|
–
|
|
(
73
|
)
|
Settlements
|
(
8
|
)
|
(
68
|
)
|
Lapses
in statutes of limitations
|
( 105
|
)
|
(
46
|
)
|
Balance
end of year
|
$
465
|
|
$
543
|
|
|
|
|
|
|
The
Company’s major taxing jurisdictions include 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 fiscal 2009.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
Income
tax expense/(benefit) attributable to income from continuing operations before
income taxes consists of the following (in thousands):
|
January 3,
2009
|
December
29,
2007
|
December 30,
2006
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
29,193
|
|
$
22,418
|
|
$ 4,294
|
|
State
|
5,152
|
|
3,301
|
|
523
|
|
Deferred:
|
|
|
|
|
|
|
Federal
and State
|
1,009
|
|
3,780
|
|
(2,5511
|
)
|
|
$ 35,354
|
|
$ 29,499
|
|
$ 2,266
|
|
Income
tax expense for the years ended January 3, 2009, December 29, 2007 and December
30, 2006, differed from the amount computed by applying the statutory U.S.
federal income tax rate to income from continuing operations before income taxes
as a result of the following (in thousands):
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
Computed
“expected” tax expense
|
$
31,471
|
|
$
26,261
|
|
$ 2,581
|
|
State
income taxes
|
3,436
|
|
2,827
|
|
273
|
|
Section
199 deduction
|
(1,257
|
)
|
(832
|
)
|
(143
|
)
|
Non-deductible
employee compensation
|
993
|
|
500
|
|
–
|
|
Tax
credits
|
(128
|
)
|
(49
|
)
|
(208
|
)
|
Reversal
of reserve for taxes
|
(19
|
)
|
(51
|
)
|
(272
|
)
|
Other,
net
|
858
|
|
843
|
|
35
|
|
|
$ 35,354
|
|
$ 29,499
|
|
$ 2,266
|
|
|
|
|
|
|
|
|
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at January 3, 2009 and December
29, 2007 are presented below (in thousands):
|
January
3,
2009
|
December
29,
2007
|
Deferred
tax assets:
|
|
|
|
|
Net operating loss
carryforwards
|
$ 2,529
|
|
$ 7,262
|
|
Loss contingency
reserves
|
7,877
|
|
6,944
|
|
Employee
benefits
|
2,484
|
|
2,843
|
|
Pension
liability
|
17,396
|
|
4,535
|
|
Intangible assets
amortization, including taxable goodwill
|
1,684
|
|
–
|
|
Other
|
3,471
|
|
2,383
|
|
Total gross deferred tax
assets
|
35,441
|
|
23,967
|
|
Less valuation
allowance
|
(220
|
)
|
(4,793
|
)
|
Net deferred tax
assets
|
35,221
|
|
19,174
|
|
Deferred
tax liabilities:
|
|
|
|
|
Intangible assets
amortization, including taxable goodwill
|
–
|
|
(3,016
|
)
|
Property, plant and equipment
depreciation
|
(15,459
|
)
|
(11,159
|
)
|
Other
|
(4,229
|
)
|
(1,894
|
)
|
Total gross deferred tax
liabilities
|
(19,688
|
)
|
(16,069
|
)
|
|
$ 15,533
|
|
$ 3,105
|
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
At
January 3, 2009, the Company had net operating loss carryforwards for federal
income tax purposes of approximately $6.1 million expiring through
2020. The availability of the net operating loss carryforwards to
reduce future taxable income is subject to various limitations. As a
result of the change in ownership which occurred pursuant to the May 2002
recapitalization, utilization of the net operating loss carryforwards is limited
to approximately $0.7 million per year for the remaining life of the net
operating losses.
The net
change in the total valuation allowance was a decrease of approximately $4.6
million for the year ended January 3, 2009 due to the expiration of net
operating loss carryforwards. The Company has assessed that it is more
likely than not that it will generate sufficient taxable income in future
periods to realize its deferred income tax assets.
NOTE
12.
|
STOCKHOLDERS’
EQUITY AND STOCK-BASED COMPENSATION
|
|
|
On May
11, 2005, the shareholders approved the 2004 Plan. The 2004 Plan
replaced both the 1994 Employee Flexible Stock Option Plan and the Non-Employee
Directors Stock Option Plan and thus broadens the array of equity alternatives
available to the Company. Under the 2004 Plan, the Company is allowed
to grant stock options, stock appreciation rights, non-vested and restricted
stock (including performance stock), restricted stock units (including
performance units), other stock-based awards, non-employee director awards,
dividend equivalents and cash-based awards. There are up to 6,074,969
common shares available under the 2004 Plan which may be granted to any
participant in any plan year as defined in the 2004 Plan. Some of
those shares are subject to outstanding awards as detailed in the tables
below. To the extent these outstanding awards are forfeited or expire
without exercise, the shares will be returned to and available for future grants
under the 2004 Plan. The 2004 Plan’s purpose is to attract, retain
and motivate employees, directors and third party service providers of the
Company and to encourage them to have a financial interest in the
Company. The 2004 Plan is administered by the Compensation Committee
(the “Committee”) of the Board of Directors. The Committee has the
authority to select plan participants, grant awards, and determine the terms and
conditions of such awards as defined in the 2004 Plan. The Company’s
stock options granted under the 2004 Plan generally terminate 10 years after
date of grant. At January 3, 2009, the number of equity awards
available for issuance under the 2004 Plan was 3,381,632.
The
following is a summary of stock-based compensation granted during the years
ended January 3, 2009, December 29, 2007 and December 30, 2006.
Nonqualified Stock
Options. On May 8, 2007, the Company granted 8,000
nonqualified stock options in the aggregate to two non-employee directors
following their initial election to the board by the
stockholders. The exercise price for the May 8, 2007 stock options
was $8.03 per share (fair market value at grant date). On February
27, 2008, the Company granted 20,000 nonqualified stock options in the aggregate
to the non-employee directors. The exercise price for February 27,
2008 stock options was $13.55 per share (fair market value at grant
date). On May 6, 2008 following a new director’s initial election to
the board by the stockholders, the Company granted 4,000 nonqualified stock
options to the most recent non-employee director. The exercise price
for the May 6, 2008 stock options was $16.20 per share (fair market value at
grant date). All of the non-employee director stock options vest 25
percent six months after the grant date and 25 percent on each of the first
three anniversary dates thereafter.
Incentive Stock
Options. For fiscal 2008, 2007 and 2006 the Company did not issue any
incentive stock options.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
A summary
of stock option activity as of January 3, 2009 and changes during the year ended
is presented below.
|
Number
of shares
|
Weighted-avg.
exercise
price
per
share
|
Weighted-avg.
remaining
contractual
life
|
|
|
|
|
Options
outstanding at December 29, 2007
|
1,320,705
|
3.06
|
|
Granted
|
24,000
|
13.99
|
|
Exercised
|
(548,500)
|
2.56
|
|
Forfeited
|
–
|
N/A
|
|
Expired
|
–
|
N/A
|
|
|
|
|
|
Options
outstanding at January 3, 2009
|
796,205
|
3.74
|
5.8
years
|
Options
exercisable at January 3, 2009
|
757,705
|
3.48
|
5.7
years
|
|
The
fair value of each stock option grant under the Company’s stock option
plan was estimated on the date of grant using the Black Scholes
option-pricing model with the following weighted average assumptions and
results for fiscal 2008 and 2007. No options were granted
during fiscal 2006.
|
Weighted
Average
|
|
2008
|
2007
|
Expected
dividend yield
|
|
0.0%
|
0.0%
|
Risk-free
interest rate
|
|
3.24%
|
4.57%
|
Expected
term
|
|
5.80
years
|
5.75
years
|
Expected
volatility
|
|
42.0%
|
52.1%
|
Fair
value of options granted
|
|
$6.23
|
$4.30
|
The
expected lives for options granted during 2008 and 2007 were computed using the
simplified method as prescribed by Staff Accounting Bulletin No.
107.
At
January 3, 2009, $1.4 million of total future equity-based compensation expense
(determined using the Black-Scholes option pricing model) related to outstanding
non-vested options and stock awards is expected to be recognized over a weighted
average period of 1.8 years.
For the
year ended January 3, 2009 and December 29, 2007, the amount of cash received
from the exercise of options was approximately $0.3 million and $0.5 million,
respectively and the related tax benefits were approximately $2.3 million and
$1.2 million, respectively. For the years ended December 30, 2006 the
amount of cash received from the exercise of options and the related tax
benefits were insignificant. The total intrinsic value of options
exercised for the years ended January 3, 2009, December 29, 2007 and December
30, 2006 was approximately $6.4 million, $2.5 million and $0.2 million,
respectively. The fair value of shares vested for the years ended
January 3, 2009, December 29, 2007 and December 30, 2006 was approximately $0.6
million, $0.6 million and $0.7 million, respectively. At January 3,
2009, the aggregate intrinsic value of options outstanding was approximately
$2.0 million and the aggregate intrinsic value of options exercisable was
approximately $1.9 million.
Non-Vested Stock
Awards. On March 3, 2008, the Company’s board of directors
granted 67,411 shares of stock under the Company’s long term incentive
awards. At the grant date 16,853 shares vested immediately and the
remaining stock awards vest over the next three anniversary dates of the grant
in equal installments.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
On
November 19, 2004, subject to the approval of the 2004 Plan, the Company issued
477,200 non-vested stock awards to the Chief Executive Officer and the Executive
Vice Presidents of Finance and Administration, Operations, and
Commodities. On May 11, 2005, upon approval of the 2004 Plan these
awards were authorized by the shareholders and made
effective. Additionally, on June 16, 2005, the Company granted 11,950
non-vested stock awards to the Executive Vice President of Sales and
Services. These non-vested stock awards contain vesting periods of
four to six years from date of issuance. The six-year awards contain
accelerated vesting provisions based upon specified increases in the Company’s
stock price. During the second quarter of 2005, the Company recorded
$1.9 million of unearned compensation for the market value of the shares on the
date of grant. The unearned compensation is being amortized to
expense over the estimated lapse in restrictions of 1.3 - 4
years. During fiscal 2007 the accelerated vesting provisions on the
six-year awards were met and those shares vested. During fiscal 2008
the vesting provisions on the four-year awards were met and those shares
vested.
A summary
of the Company’s non-vested stock awards as of January 3, 2009, and changes
during the year ended is as follows:
|
Non-Vested
Shares
|
|
Weighted
Average
Grant
Date
Fair
Value
|
Stock
awards outstanding December 29, 2007
|
250,000
|
|
|
$ 3.95
|
|
Shares
granted
|
67,411
|
|
|
13.90
|
|
Shares
vested
|
(266,853
|
)
|
|
4.58
|
|
Shares
forfeited
|
–
|
|
|
–
|
|
Stock
awards outstanding January 3, 2009
|
50,558
|
|
|
$
13.90
|
|
Restricted Stock
Awards. On March 9, 2006, the Company's Board of Directors
approved a Non-Employee Director Restricted Stock Award Plan (as subsequently
amended, the "Director Restricted Stock Plan") pursuant to and in accordance
with the 2004 Plan in order to attract and retain highly qualified persons to
serve as non-employee directors and to more closely align such directors'
interests with the interests of the stockholders of the Company by providing a
portion of their compensation in the form of Company common stock.
Under the
Director Restricted Stock Plan, $20,000 in restricted Company common stock (the
"Restricted Stock") will be awarded to each non-employee director on the fourth
business day after the Company releases its earnings for its prior completed
fiscal year (the "Date of Award"). The amount of restricted stock to
be issued will be calculated using the closing price of the Company’s common
stock on the third business day after the Company releases its
earnings. The Restricted Stock will be subject to a right of
repurchase at $0.01 per share upon termination of the holder as a member of the
Company's board of directors for cause and will not be transferable. These
restrictions will lapse with respect to 100% of the Restricted Stock upon the
earliest to occur of (i) ten years after the Date of Award, (ii) a Change of
Control (as defined in the 2004 Plan), and (iii) termination of the non-employee
director's service with the Company, other than for "cause" (as defined in the
Director Restricted Stock Plan). On March 3, 2008 and March 11, 2008,
the Company issued 7,190 and 1,509 shares of restricted stock in the aggregate
to its non-employee directors under the Director Restricted Stock
Plan. On March 20, 2007 and March 21, 2006, the Company issued 20,232
and 21,925 shares of restricted stock in the aggregate, respectively, to its
non-employee directors under the Director Restricted Stock Plan.
A summary
of the Company’s directors’ restricted stock awards as of January 3, 2009, and
changes during the year ended is as follows:
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
|
Restricted
Shares
|
|
Weighted
Average
Grant
Date
Fair
Value
|
Stock
awards outstanding December 29, 2007
|
30,015
|
|
|
$
5.33
|
|
Restricted
shares granted
|
8,699
|
|
|
13.79
|
|
Restricted
shares where the restriction lapsed
|
–
|
|
|
N/A
|
|
Restricted
shares forfeited
|
–
|
|
|
N/A
|
|
Stock
awards outstanding January 3, 2009
|
38,714
|
|
|
$
7.23
|
|
Long-Term
Incentive Opportunity Awards. The Committee has adopted a Long-Term
Incentive Plan (the “LTIP”) for the Company’s key employees, as a subplan under
the terms of the 2004 Plan. The principal purpose of the LTIP is to
encourage the Company’s executives to enhance the value of the Company and,
hence, the price of the Company’s stock and the stockholders’
return. In addition, the LTIP is designed to create retention
incentives for the individual and to provide an opportunity for increased equity
ownership by executives. The Committee awarded dollar value
performance based restricted stock opportunities under the LTIP for fiscal 2008
to certain of the Company’s officers, including the Chief Executive Officer and
the Executive Vice Presidents of Finance and Administration, Operations,
Commodities and Sales and Services (the “2008 Restricted Stock
Awards”). The restricted stock underlying the 2008 Restricted Stock
Awards is issued only if a predetermined financial objective is met by the
Company. The Company met the financial objective for fiscal
2008. Accordingly, in accordance with the terms of the 2008
Restricted Stock Awards, it is anticipated that the restricted stock will be
granted and issued to the executives on the fourth business day after the
Company releases its annual financial results for fiscal 2008. The
amount of restricted stock to be issued will be calculated using the closing
price of the Company’s common stock on the third business day after the Company
releases its annual financial results for fiscal 2008. These awards
vest in four equal installments, with the first installment vesting immediately
upon the grant date and the remaining three installments vesting on the next
three anniversary dates of the grant. The award is treated as a liability
until the grant date when the number of shares to be issued is known, and then
it becomes equity-classified. At January 3, 2009 and December 29,
2007 the Company recorded a liability of approximately $1.1 million and $0.9
million on the balance sheet for the long-term incentive
opportunities.
NOTE
13.
|
EMPLOYEE
BENEFIT PLANS
|
|
|
The
Company has retirement and pension plans covering substantially all of its
employees. As a condition to the Transaction, the Company was required to
provide the non-union employees of NBP with benefits that were comparable to
those in effect for those employees on the closing date of the
Transaction. Accordingly, the Company continued to maintain certain
of the NBP benefit plans following the closing of the Transaction, including the
Darling National LLC Retirement Savings Plan, a defined contribution plan, and
the Darling National LLC Pension Retirement Plan, a defined benefit
plan.
Under the
transition rules of Code Section 410(b), affected plans in an acquisition are
allowed to be treated separately for discrimination coverage testing purposes
until the end of the plan year following the acquisition. For the
Transaction, the transition period lasted through December 31,
2007. Therefore, following the completion of the Transaction, the
Company initiated a project to review its employee retirement benefit programs
in the context of comparable programs in the manufacturing industry
sector. As a result of this review, effective January 1, 2008, the
Company announced a series of changes to the benefits provided by its 401(k)
defined contribution plans and its defined benefit plans.
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 with no effect on
accumulated benefits. Previously, these hourly employees had been
accruing $20-$30 per year of service, depending on location of
employment.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
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 with no effect
on accumulated benefits. 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. The
Company’s matching portion to the Darling International Inc. Hourly 401(k)
Savings plan for fiscal 2008 was approximately $0.6 million.
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. The Company’s
matching portion to the Darling International Inc. Salaried 401(k) Savings Plan
for fiscal 2008 was approximately $1.4 million. The Company’s match
in fiscal 2007 for the previous Darling National plan was approximately $0.2
million.
In
September 2006, the FASB issued SFAS 158, Employers’ Accounting for Defined
Benefit Pension and Other Post-Retirement Plans – an Amendment of FASB
Statements No. 87, 88, 106 and 132(R) (“SFAS 158”), which requires that the
Company recognize the over-funded or under-funded status of the Company’s
defined benefit post-retirement plans as an asset or liability in the Company’s
balance sheet, with changes in the funded status recognized through
comprehensive income in the year in which they occur. Based on the
funded status of the Company’s pension plans as of December 30, 2006, the
adoption of SFAS 158 increased the Company’s total assets, as a result of
deferred tax assets, by approximately $2.2 million, increased total liabilities
by approximately $6.7 million and reduced total stockholder’s equity by
approximately $4.5 million, net of taxes. The adoption of the funded
status portion of SFAS 158 did not affect the Company’s results of
operations.
In
addition, SFAS 158 requires that companies using a measurement date other than
the fiscal year end change to a fiscal year end measurement date effective for
years ending after December 15, 2008. The Company adopted the
measurement date provision in 2008 the impact of which was not
material.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
The
following table sets forth the plans’ funded status and amounts recognized in
the Company’s consolidated balance sheets based on the measurement date (January
3, 2009 and October 1, 2007) (in thousands):
|
January
3,
2009
|
|
December 29,
2007
|
Change
in projected benefit obligation:
|
|
|
|
|
|
Projected
benefit obligation at beginning of period
|
$
90,742
|
|
|
$
88,719
|
|
Service
cost
|
1,328
|
|
|
2,328
|
|
Interest
cost
|
6,773
|
|
|
5,011
|
|
Actuarial
loss/(gain)
|
2,529
|
|
|
(1,822
|
)
|
Benefits
paid
|
(4,990
|
)
|
|
(3,570
|
)
|
Other
|
157
|
|
|
76
|
|
Projected
benefit obligation at end of period
|
96,539
|
|
|
90,742
|
|
|
|
|
|
|
|
Change
in plan assets:
|
|
|
|
|
|
Fair
value of plan assets at beginning of period
|
81,578
|
|
|
69,898
|
|
Post
measurement date contributions
|
–
|
|
|
123
|
|
Actual
return on plan assets
|
(22,857
|
)
|
|
8,941
|
|
Employer
contribution
|
6,545
|
|
|
6,186
|
|
Benefits
paid
|
(4,990
|
)
|
|
(3,570
|
)
|
Fair
value of plan assets at end of period
|
60,276
|
|
|
81,578
|
|
|
|
|
|
|
|
Funded
status
|
(36,263
|
)
|
|
(9,164
|
)
|
Post-measurement
date contributions
|
–
|
|
|
–
|
|
Net
amount recognized
|
$ (36,263
|
)
|
|
$ (9,164
|
)
|
Amounts
recognized in the consolidated balance
sheets
consist of:
|
|
|
|
|
|
Non-current
liability
|
$ (36,263
|
)
|
|
$ (9,164
|
)
|
Net
amount recognized
|
$ (36,263
|
)
|
|
$ (9,164
|
)
|
Amounts
recognized in accumulated other
comprehensive
loss consist of:
|
|
|
|
|
|
Net
actuarial loss
|
$
44,277
|
|
|
$
11,107
|
|
Prior
service cost
|
503
|
|
|
499
|
|
Net
amount recognized (a)
|
$ 44,780
|
|
|
$ 11,606
|
|
|
|
|
|
|
|
(a)
|
Amounts
do not include deferred taxes of $17.0 million and $4.2 million at
January 3, 2009 and December 29, 2007,
respectively.
|
The
accumulated benefit obligation for all defined benefit pension plans was $90.1
million and $84.0 million at January 3, 2009 and December 29, 2007,
respectively.
|
January
3,
2009
|
|
December
29,
2007
|
Projected
benefit obligation
|
$
96,539
|
|
$
90,742
|
Accumulated
benefit obligation
|
90,143
|
|
83,953
|
Fair
value of plan assets
|
60,276
|
|
81,578
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
Net
pension cost includes the following components (in thousands):
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
Service
cost
|
$ 1,067
|
|
$
2,328
|
|
$
2,429
|
|
Interest
cost
|
5,442
|
|
5,011
|
|
4,673
|
|
Expected
return on plan assets
|
(6,603)
|
|
(5,636)
|
|
(5,192)
|
|
Net
amortization and deferral
|
472
|
|
1,269
|
|
1,792
|
|
Net
pension cost
|
$ 378
|
|
$ 2,972
|
|
$ 3,702
|
|
|
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive income (loss) for the year ended
(in thousands):
|
2008
|
|
2007
|
Actuarial
gains recognized:
|
|
|
|
|
Reclassification adjustments
|
$ 213
|
|
$ 705
|
|
Actuarial (loss)/gain recognized during
the period
|
(20,578)
|
|
3,139
|
|
SFAS 158 measurement date adjustment
|
52
|
|
–
|
|
Prior
service (cost) credit recognized:
|
|
|
|
|
Reclassification adjustments
|
75
|
|
72
|
|
Prior service cost arising during the period
|
(96)
|
|
(46)
|
|
SFAS 158 measurement date adjustment
|
19
|
|
–
|
|
|
$ (20,315)
|
|
$ 3,870
|
|
|
|
|
|
|
The
estimated amount that will be amortized from accumulated other comprehensive
loss into net periodic pension cost in fiscal 2009 is as follows (in
thousands):
|
2009
|
Net
actuarial loss
|
$
4,178
|
|
Prior
service cost
|
143
|
|
|
$ 4,321
|
|
|
|
|
Weighted
average assumptions used to determine benefit obligations were:
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
Discount
rate
|
6.10%
|
6.00%
|
5.75%
|
Rate
of compensation increase
|
4.08%
|
4.10%
|
4.08%
|
Weighted
average assumptions used to determine net periodic benefit cost for the employee
benefit pension plans were:
|
January
3,
2009
|
December
29,
2007
|
December
30,
2006
|
Discount
rate
|
6.00%
|
5.75%
|
5.50%
|
Rate
of increase in future compensation levels
|
4.10%
|
4.08%
|
4.32%
|
Expected
long-term rate of return on assets
|
8.10%
|
8.25%
|
8.38%
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
Consideration
was made to the long-term time horizon for the plans’ benefit obligations as
well as the related asset class mix in determining the expected long-term rate
of return. Historical returns are also considered, over the long-term
time horizon, in determining the expected return. Considering the
overall asset mix of approximately 60% equity and 40% fixed income, several
years in the last ten years (except for 2008) having strong double digit returns
as well as several years of single digit losses, the Company believes it is
reasonable to expect a long-term rate of return of 8.10% for the plans’
investments as a whole.
Plan
Assets
The
Company’s pension plan weighted-average asset allocations at January 3, 2009 and
December 29, 2007, by asset category, are as follows:
|
|
Plan
Assets at
|
Asset Category
|
|
January 3,
2009
|
|
December
29,
2007
|
Equity
Securities
|
|
55.6%
|
|
60.9%
|
Debt
Securities
|
|
44.2%
|
|
39.1%
|
Other
|
|
0.2%
|
|
–%
|
Total
|
|
100.0%
|
|
100.0%
|
The
investment objectives have been established in conjunction with a comprehensive
review of the current and projected financial requirements. The
primary investment objectives are: 1) to have the ability to pay all
benefit and expense obligations when due; 2) to maximize investment returns
within reasonable and prudent levels of risk in order to minimize contributions;
and 3) to maintain flexibility in determining the future level of
contributions.
Investment
results are the most critical element in achieving funding objectives, while
reliance on contributions is a secondary element.
The
investment guidelines are based upon an investment horizon of greater than ten
years; therefore, interim fluctuations are viewed with this
perspective. The strategic asset allocation is based on this
long-term perspective. However, because the participants’ average age
is somewhat older than the typical average plan age, consideration is given to
retaining some short-term liquidity. Analysis of the cash flow
projections of the plans indicates that benefit payments will continue to exceed
contributions. The results of a thorough asset-liability study
completed during 2008 reinforced the appropriateness of the Company’s target
asset allocation ranges described herein.
Based
upon the plans’ time horizon, risk tolerances, performance expectations, asset
class constraints and asset-liability study results, target asset allocation
ranges are as follows:
|
Fixed
Income
|
35%
- 45%
|
|
Domestic
Equities
|
45%
- 55%
|
|
International
Equities
|
7%
- 13%
|
The fixed
income asset allocation may be invested in corporate and government bonds
denominated in U.S. dollars, private and publicly traded mortgages, private
placement debt, and cash equivalents. The average maturity of the
asset class will not exceed ten years. The portfolio is expected to
be well diversified.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
The
domestic equity allocation is invested in stocks traded on one of the U.S. stock
exchanges. Securities convertible into such stocks, convertible bonds
and preferred stock, may also be purchased. The majority of the
domestic equities are invested in large, mid, and small cap index accounts that
are well diversified. These index accounts utilize the Standard & Poor’s
(“S&P”) 500, S&P 400 and S&P 600, respectively. By
definition, small cap investments carry greater risk, but also are expected to
create greater returns over time. The plans target approximately 7.5%
of the total asset mix to small cap. American Depository Receipts
(“ADR’s”) may not account for more than 3% of the holdings. Small
company stocks may not exceed 15% of the plans’ assets. Small company
definitions fluctuate with market levels, but generally will be considered
companies with market capitalizations less than $1.5 billion. The
portfolio will be diversified in terms of individual company securities and
industries.
The
international equity allocation is invested in companies whose stock is traded
outside the U.S. and/or companies that conduct the major portion of their
business outside of the U.S. The portfolio may invest in
ADR’s. The emerging market portion of the international equity
investment is held below 20% due to greater volatility in the asset
class. The portfolio is expected to be diversified in terms of
companies, industries and countries.
All
investment objectives are expected to be achieved over a market cycle
anticipated to be a period of five to seven years. Reallocations are
performed at a minimum of twice a year to retain target asset allocation
ranges.
Contributions
The
Company's funding policy for employee benefit pension plans is to contribute
annually not less than the minimum amount required nor more than the maximum
amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.
Based on
current actuarial estimates, the Company expects to make payments of less than
$0.1 million to meet funding requirements for its pension plans in fiscal
2009.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
|
Year Ending
|
|
Pension Benefits
|
|
2009
|
|
$
4,000
|
|
2010
|
|
3,970
|
|
2011
|
|
4,120
|
|
2012
|
|
4,260
|
|
2013
|
|
4,440
|
|
Years
2014 – 2018
|
|
26,700
|
The
Company participates in several multi-employer pension plans which provide
defined benefits to certain employees covered by labor
contracts. These plans are not administered by the Company and
contributions are determined in accordance with provisions of negotiated labor
contracts. Current information with respect to the Company's
proportionate share of the over-and under-funded status of all actuarially
computed value of vested benefits over these pension plans’ net assets is not
available. The Company’s portion of contributions to these plans
amounted to $2.8 million, $2.6 million and $2.0 million for the years ended
January 3, 2009, December 29, 2007 and December 30, 2006,
respectively.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
In August
2006 the Pension Protection Act of 2006 (“PPA”) was signed into law 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. Should a multi-employer plan elect to terminate rather
than increase contributions, the Company will record a liability for its cost of
the plan termination when such liability becomes probable and
estimable. 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. Another
of the underfunded multi-employer plans in which the Company participates has
given notification of “Critical Status” under the PPA. Based upon the
Company’s initial review and conversations with other participating employers in
this “Critical Status” plan, it appears probable that there will be a mass
withdrawal termination of this plan. As a result, the Company accrued
approximately $3.2 million based on the most recent information that is probable
and estimable for this plan. While the Company has 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.
On May
19, 2006, the Company entered into two interest rate swap agreements that are
considered cash flow hedges according to SFAS 133. Under the terms of
these swap agreements, beginning June 30, 2006, the cash flows from the
Company’s $50.0 million floating-rate term loan facility under the Company’s
credit agreement have been exchanged for fixed-rate contracts that bear
interest, payable quarterly. The first swap agreement for $25.0
million matures April 7, 2012 and bears interest at 5.42%, which does not
include the borrowing spread per the Company’s credit agreement, with amortizing
payments that mirror the term loan facility. The second swap agreement for
$25.0 million matures April 7, 2012 and bears interest at 5.415%, which does not
include the borrowing spread per the Company’s credit agreement, with amortizing
payments that mirror the term loan facility. The Company’s receive
rate on each swap agreement is based on three-month LIBOR. At January
3, 2009, the fair value of these interest swap agreements was $3.6 million and
is included in non-current other liabilities on the consolidated balance sheet,
with the offset recorded to accumulated other comprehensive loss for the
effective portion and other expense for the ineffective portion of the interest
rate swap.
A summary
of the derivative adjustment recorded to accumulated other comprehensive income,
the net change arising from hedging transactions, and the amounts recognized in
earnings during the years ended January 3, 2009 and December 29, 2007 are
as follows (in thousands):
|
2008
|
|
2007
|
Derivative
adjustment included in accumulated other
comprehensive loss at January 3, 2009 and December
29, 2007
|
$
1,143
|
|
$
408
|
Net
change arising from current period
hedging transactions
|
1,714
|
|
781
|
Reclassifications
into earnings
|
(777)
|
|
(46)
|
Accumulated
other comprehensive loss at
January 3, 2009 and December 29, 2007 (a)
|
$
2,080
|
|
$
1,143
|
|
(a)
|
Reported
as accumulated other comprehensive loss of approximately $3.4 million and
$1.9 million recorded net of taxes of
approximately
$1.3 million and $0.7 million at January 3, 2009 and December 29,
2007, respectively.
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
|
2008
|
|
2007
|
Loss
to interest expense related to interest rate swap
settlements
|
$ 777
|
|
$
46
|
Loss
to other expenses related to net change arising from
current
interest rate swap transactions (ineffective portion)
|
195
|
|
–
|
Total
reclassification into earnings
|
$ 972
|
|
$
46
|
The
Company estimates the amount that will be reclassified from accumulated other
comprehensive loss at January 3, 2009 into earnings in fiscal 2009 will be
approximately $1.5 million.
At
January 3, 2009, the Company has forward purchase agreements in place for
purchases of approximately $13.3 million of natural gas and diesel fuel for
fiscal 2009. These forward purchase agreements have no net settlement
provisions and the Company intends to take physical delivery. Accordingly, the
forward purchase agreements are not subject to the requirements of SFAS 133
because they qualify as normal purchases as defined in the
standard.
NOTE
15.
|
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 January 3, 2009 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 January 3, 2009 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
|
$
3,593
|
|
$ —
|
|
$ 3,593
|
|
$ —
|
Total
|
$
3,593
|
|
$ —
|
|
$ 3,593
|
|
$ —
|
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.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
NOTE
16.
|
CONCENTRATION
OF CREDIT RISK
|
|
|
Concentration
of credit risk is limited due to the Company’s diversified customer base and the
fact that the Company sells commodities. No single customer accounted
for more than 10% of the Company’s net sales in fiscal years 2008, 2007 and
2006.
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 January 3,
2009 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 $17.3 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.
The
Company has been named as a third party defendant in a lawsuit pending in the
Superior Court of New Jersey, Essex County, styled New Jersey Department of
Environmental Protection, The Commissioner of the New Jersey Department of
Environmental Protection Agency and the Administrator of the New Jersey Spill
Compensation Fund, as Plaintiffs, vs. Occidental Chemical Corporation, Tierra
Solutions, Inc., Maxus Energy Corporation, Repsol YPF, S.A., YPF, S.A., YPF
Holdings, Inc., and CLH Holdings, as Defendants (Docket No. L-009868-05)
(the “Tierra/Maxus Litigation”). In the Tierra/Maxus Litigation,
which was filed on December 13, 2005, the plaintiffs seek to recover from the
defendants past and future cleanup and removal costs, as well as unspecified
economic damages, punitive damages, penalties and a variety of other forms of
relief, purportedly arising from the alleged discharges into the Passaic River
of a particular type of dioxin and other unspecified hazardous
substances. The damages being sought by the plaintiffs from the
defendants are likely to be substantial. On February 4, 2009, two of
the defendants, Tierra Solutions, Inc. (“Tierra”) and Maxus Energy Corporation
(“Maxus”), filed a third party complaint against over 300 entities, including
the Company, seeking to recover all or a proportionate share of cleanup and
removal costs, damages or other loss or harm, if any for which Tierra or Maxus
may be held liable in the Tierra/Maxus Litigation. Tierra and Maxus
allege that Standard Tallow Company, an entity that the Company acquired in
1996, contributed to the discharge of the hazardous substances that are the
subject of this case while operating a former plant site located in Newark, New
Jersey. The Company is investigating these allegations and intends to
defend itself vigorously. As of the date of this report, there is
nothing that leads the Company to believe that this matter will have a material
effect on the Company’s financial position or results of operation.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
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 $2.2 million for the
attorneys’ fees and costs in the fourth quarter of 2007, which is included in
selling, general and administrative expenses.
In June
2006, the Company was awarded damages of approximately $7.4 million as a result
of a service provider’s failure to provide steam under a service agreement to
one of the Company’s plants. At the time the damages were awarded,
collectibility of such damages was uncertain; however on October 12, 2006, the
Company entered into an agreement to sell its rights to such damages to a third
party for $2.2 million in cash. The agreement was made subject to
certain conditions which were satisfied on March 1, 2007. On March 8,
2007, the Company received $2.2 million 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.
NOTE
18.
|
BUSINESS
SEGMENTS
|
|
|
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 acquisition of substantially all of the assets of NBP are
reflected primarily in the Rendering segment.
Rendering
Rendering
consists of the collection and processing of animal by-products, including
hides, from butcher shops, grocery stores, food service industry and meat and
poultry processors, converting these principally into useable oils and proteins
utilized by the agricultural, leather and oleo-chemical industries.
Restaurant
Services
Restaurant
Services consists of the collection of used cooking oils from food service
establishments and recycling them into similar products such as high-energy
animal feed ingredients and industrial oils. Restaurant Services also
provides grease trap servicing. Included in restaurant services is
the National Service Center (“NSC”). The NSC schedules services such
as fat and bone and used cooking oil collection as well as trap cleaning for
contracted customers using the Company’s resources or third party
providers.
Included in
corporate activities are general corporate expenses and the amortization of
intangibles related to “Fresh Start Reporting.”
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
Business Segment Net
Revenues (in thousands):
|
January
3,
2009
|
December 29,
2007
|
December 30,
2006
|
Rendering:
|
|
|
|
|
|
|
Trade
|
$585,108
|
|
$464,468
|
|
$279,011
|
|
Intersegment
|
50,832
|
|
42,095
|
|
29,194
|
|
|
635,940
|
|
506,563
|
|
308,205
|
|
Restaurant
Services:
|
|
|
|
|
|
|
Trade
|
222,384
|
|
180,845
|
|
127,979
|
|
Intersegment
|
10,118
|
|
5,311
|
|
3,111
|
|
|
232,502
|
|
186,156
|
|
131,090
|
|
|
|
|
|
|
|
|
Eliminations
|
(60,950
|
)
|
(47,406)
|
|
(32,305)
|
|
Total
|
$807,492
|
|
$645,313
|
|
$406,990
|
|
Business Segment
Profit/(Loss) (in
thousands):
|
Year
Ended
|
|
January
3,
2009
|
December 29,
2007
|
December 30,
2006
|
Rendering
|
$101,439
|
|
$
85,654
|
|
$
33,177
|
|
Restaurant
services
|
29,896
|
|
34,953
|
|
14,789
|
|
Corporate
activities
|
(73,755
|
) |
(70,029
|
) |
(35,675
|
) |
Interest
expense
|
(3,018
|
) |
(5,045
|
) |
(7,184
|
) |
Net
income
|
$
54,562
|
|
$ 45,533
|
|
$ 5,107
|
|
Certain
assets are not attributable to a single operating segment but instead relate to
multiple operating segments operating out of individual
locations. These assets are utilized by both the Rendering and
Restaurant Services business segments and are identified in the category
Combined Rendering/Restaurant Services. Depreciation of Combined
Rendering/Restaurant Services assets is allocated based upon an estimate of the
percentage of corresponding activity attributed to each
segment. Additionally, although intangible assets are allocated to
operating segments, the amortization related to the adoption of “Fresh Start
Reporting” in 1993 is not considered in the measure of operating segment
profit/(loss) and is included in Corporate Activities.
As
discussed in Note 17, 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
Assets (in thousands):
|
January
3,
2009
|
December 29,
2007
|
Rendering
|
$
155,318
|
|
$
162,091
|
|
Restaurant
Services
|
46,718
|
|
40,518
|
|
Combined
Rendering/Restaurant Services
|
99,857
|
|
106,958
|
|
Corporate
Activities
|
92,482
|
|
41,771
|
|
Total
|
$ 394,375
|
|
$ 351,338
|
|
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
Business
Segment Property, Plant and Equipment (in thousands):
|
January
3,
2009
|
|
December 29,
2007
|
|
December
30,
2006
|
Depreciation and
amortization:
|
|
|
|
|
|
Rendering
|
$
14,270
|
|
$
13,509
|
|
$
11,388
|
Restaurant
Services
|
4,310
|
|
3,881
|
|
3,844
|
Corporate
Activities
|
5,853
|
|
5,824
|
|
5,454
|
Total
|
$ 24,433
|
|
$ 23,214
|
|
$ 20,686
|
Capital
expenditures:
|
|
|
|
|
|
Rendering
|
$
11,723
|
|
$ 2,880
|
|
$ 1,421
|
Restaurant
Services
|
610
|
|
538
|
|
254
|
Combined Rendering/Restaurant
Services
|
15,776
|
|
10,609
|
|
8,644
|
Corporate
Activities
|
2,897
|
|
1,525
|
|
1,481
|
Total
(a)
|
$ 31,006
|
|
$ 15,552
|
|
$ 11,800
|
(a)
|
Excludes
the capital assets acquired as part of the acquisition of substantially
all of the assets of API Recycling and NBP of
approximately
$3.4 million and $51.9 million in fiscal 2008 and fiscal 2006,
respectively.
|
The
Company has no material foreign operations, but exports a portion of its
products to customers in various foreign countries.
Geographic Area Net Trade
Revenues (in thousands):
|
January
3,
2009
|
|
December 29,
2007
|
|
December
30,
2006
|
|
|
|
|
|
|
Domestic
|
$
675,257
|
|
$
473,694
|
|
$
294,301
|
Foreign
|
132,235
|
|
171,619
|
|
112,689
|
Total
|
$ 807,492
|
|
$ 645,313
|
|
$ 406,990
|
|
|
|
|
|
|
The
Company attributes revenues from external customers to individual foreign
countries based on the destination of the Company’s shipments. For
fiscal 2008, 2007 and 2006, no individual foreign country comprised more than 5%
of the Company’s consolidated revenue.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
NOTE
19.
|
QUARTERLY
FINANCIAL DATA (UNAUDITED AND IN THOUSANDS EXCEPT PER SHARE
AMOUNTS):
|
|
|
|
Year
Ended January 3, 2009
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter (a)
|
Net
sales
|
$
201,956
|
|
$
220,858
|
|
$
236,227
|
|
$
148,451
|
Operating
income/(loss)
|
35,167
|
|
39,735
|
|
37,312
|
|
(19,538)
|
Income/(loss)
from operations
before
income taxes
|
34,489
|
|
39,093
|
|
36,695
|
|
(20,361)
|
Net
income/(loss)
|
21,461
|
|
24,079
|
|
22,994
|
|
(13,972)
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
0.26
|
|
0.30
|
|
0.28
|
|
(0.17)
|
Diluted
earnings per share
|
0.26
|
|
0.29
|
|
0.28
|
|
(0.17)
|
|
|
|
|
|
|
|
|
|
Year
Ended December 29, 2007
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
Net
sales
|
$
138,612
|
|
$
159,425
|
|
$
171,831
|
|
$
175,445
|
Operating
income
|
17,043
|
|
17,410
|
|
21,010
|
|
25,184
|
Income
from operations
before
income taxes
|
14,981
|
|
15,982
|
|
19,739
|
|
24,330
|
Net
income
|
9,580
|
|
9,482
|
|
12,100
|
|
14,371
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
0.12
|
|
0.12
|
|
0.15
|
|
0.18
|
Diluted
earnings per share
|
0.12
|
|
0.12
|
|
0.15
|
|
0.18
|
|
|
|
|
|
|
|
|
(a)
|
Included
in operating loss in the fourth quarter of fiscal 2008 is a charge for
goodwill impairment of approximately $15.9 million and an estimated
accrued liability of approximately $3.2 million related to a
multi-employer pension plan where the Company is seeking a mass withdrawal
termination. In addition, the fourth quarter of fiscal 2008
includes an additional week of operations that did not have a material
impact on results.
|
NOTE
20.
|
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.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
In
December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB 51"
(“SFAS 160”). SFAS 160 amends ARB 51 to establish new standards
that will govern the accounting for and reporting of (1) noncontrolling
interests in partially owned consolidated subsidiaries and (2) the loss of
control of subsidiaries. The provisions of SFAS 160 are effective as of the
beginning of the Company’s 2009 fiscal year on a prospective
basis. 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-K. The adoption of this staff position did not have an impact to
the consolidated financial statements of the Company.
In
December 2008, the FASB issued FASB Staff Position (FSP) FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets.” This FSP amends SFAS No.
132 (revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits,” to provide guidance on an employer’s disclosures about
plan assets of a defined benefit pension or other postretirement plan on
investment policies and strategies, major categories of plan assets, inputs and
valuation techniques used to measure the fair value of plan assets and
significant concentrations of risk within plan assets. The disclosures about
plan assets required by this FSP shall be effective for fiscal years ending
after December 15, 2009, with earlier application permitted. Upon initial
application, the provisions of this FSP are not required for earlier periods
that are presented for comparative purposes. The Company is currently
evaluating the disclosure requirements impact of adopting this new
FSP.
NOTE
21.
|
SUBSEQUENT
EVENT
|
On
February 23, 2009, the Company acquired substantially all of the assets of Boca
Industries, Inc. headquartered in Smyrna, Georgia for approximately $12.5
million.
DARLING INTERNATIONAL INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (continued)
SCHEDULE
II
Valuation
and Qualifying Accounts
(In
thousands)
|
Balance
at
|
Additions
Charged to:
|
|
Balance
at
|
Description
|
Beginning
of Period
|
Costs
and Expenses
|
Other
(a)
|
Deductions
(b)
|
End
of Period
|
Reserve
for bad debts:
|
|
|
|
|
|
|
|
|
|
Year
ended January 3, 2009
|
$ 1,466
|
|
$ 1,506
|
|
$ –
|
|
$ 659
|
|
$ 2,313
|
Year
ended December 29, 2007
|
$ 1,639
|
|
$ 407
|
|
$ –
|
|
$ 580
|
|
$ 1,466
|
Year
ended December 30, 2006
|
$ 728
|
|
$ 874
|
|
$ 596
|
|
$ 559
|
|
$ 1,639
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax valuation allowance:
|
|
|
|
|
|
|
|
|
|
Year
ended January 3, 2009
|
$ 4,793
|
|
$ –
|
|
$ –
|
|
$ 4,573
|
|
$ 220
|
Year
ended December 29, 2007
|
$ 9,416
|
|
$ –
|
|
$ –
|
|
$ 4,623
|
|
$ 4,793
|
Year
ended December 30, 2006
|
$ 19,086
|
|
$ –
|
|
$ –
|
|
$ 9,670
|
|
$ 9,416
|
(a)
|
Includes
amounts acquired as part of the NBP
acquisition.
|
|
(b)
|
Deductions
consist of write-offs of uncollectible accounts receivable and reductions
of the deferred tax valuation allowance. In 2006, the
reductions
in
the deferred tax valuation allowance were offset against deferred tax
assets and/or goodwill, resulting in no deferred tax
benefit.
|
PART
II
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING
|
None.
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures.
As required by Exchange Act Rule
13a-15(b), the Company’s management, including the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation, as of the end of the period
covered by this report, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures. As defined in Exchange
Act Rules 13a-15(e) and 15d-15(e) under the Exchange Act, disclosure controls
and procedures are controls and other procedures of the Company that are
designed to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports it files or submits under the
Exchange Act is accumulated and communicated to the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
Based on management’s evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of the end of the period
covered by this report.
Internal
Control over Financial Reporting.
(a) Management’s Annual
Report
on Internal Control over
Financial Reporting. Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
promulgated under the Exchange Act. Those rules define internal
control over financial reporting as a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures
that:
·
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and
|
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of January 3, 2009. In making this
assessment, the Company’s management used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
Based on their assessment, management
has concluded that the Company’s internal control over financial reporting was
effective as of January 3, 2009.
KPMG LLP,
the registered public accounting firm that audited the Company’s financial
statements, has issued an audit report on management’s assessment of the
Company’s internal control over financial reporting, which report is included
herein.
(b) Attestation Report of the Registered
Public Accounting Firm. The attestation report called for by
Item 308(b) of Regulation S-K is incorporated herein by reference to Report of
Independent Registered Public Accounting Firm on Internal Control Over Financial
Reporting, included in Part II, Item 8, “Financial Statements and
Supplementary Data” of this report.
(c) Changes in Internal Control over
Financial Reporting. As required by Exchange Act Rule
13a-15(d), the Company’s management, including the Chief Executive Officer and
Chief Financial Officer, also conducted an evaluation of the Company’s internal
control over financial reporting to determine whether any change occurred during
the last fiscal quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting. Based on that evaluation, there has
been no change in the Company’s internal control over financial reporting during
the last fiscal quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART
III
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The information required by this
Item with respect to Items 401, 405 and 407 of Regulation S-K will appear in the
sections entitled “Election of Directors,” “Executive Officers and Directors,”
“Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate
Governance-Committees of the Board-Audit Committee” included in the Company’s
definitive Proxy Statement relating to the 2009 Annual Meeting of Stockholders,
which information is incorporated herein by reference.
The Company has adopted the
Darling International Inc. Code of Business Conduct (“Code of Business
Conduct”), which is applicable to all of the Company’s employees, including its
senior financial officers, the Chief Executive Officer, Chief Financial Officer,
Controller, Treasurer and General Counsel. The Company has not
granted any waivers to the Code of Business Conduct to date. A copy
of the Company’s Code of Business Conduct has been posted on the “Investor”
portion of our web site, at www.darlingii.com. Shareholders
may request a free copy of our Code of Business Conduct from:
Brad
Phillips
Darling
International Inc.
251
O’Connor Ridge Blvd, Suite 300
Irving,
Texas 75038
Phone: 972-717-0300
Fax: 972-717-1588
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by this
Item will appear in the sections entitled “Executive Compensation” and
“Corporate Governance-Compensation Committee Interlocks and Insider
Participation” included in the Company’s definitive Proxy Statement relating to
the 2009 Annual Meeting of Stockholders, which information is incorporated
herein by reference.
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
|
|
RELATED
STOCKHOLDER MATTERS
|
The information required by this
Item with respect to Item 201(d) of Regulation S-K appears in Item 5 of this
report.
The information required by this
Item with respect to Item 403 of Regulation S-K will appear in the section
entitled “Security Ownership of Certain Beneficial Owners and Management”
included in the Company’s definitive Proxy Statement relating to the 2009 Annual
Meeting of Stockholders, which information is incorporated herein by
reference.
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR
|
The information required by this
Item will appear in the sections entitled “Transactions with Related Persons,
Promoters and Certain Control Persons” and “Corporate Goverance-Independent
Directors” included in the Company’s definitive Proxy Statement relating to the
2009 Annual Meeting of Stockholders, which information is incorporated herein by
reference.
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information required by this
Item will appear in the section entitled “Independent Auditors” included in the
Company’s definitive Proxy Statement relating to the 2009 Annual Meeting of
Stockholders, which information is incorporated herein by
reference.
PART
IV
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
|
Page
|
(a)
|
Documents
filed as part of this report:
|
|
|
|
|
|
|
(1)
|
The
following consolidated financial statements are included in Item
8.
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm on Consolidated
Financial
Statements
|
43
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control
Over
Financial
Reporting
|
44
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
January
3, 2009 and December 29, 2007
|
45
|
|
|
|
|
|
|
Consolidated
Statements of Operations-
|
|
|
|
Three
years ended January 3, 2009
|
46
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity -
|
|
|
|
Three
years ended January 3, 2009
|
47
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows -
|
|
|
|
Three
years ended January 3, 2009
|
49
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
50
|
|
|
|
|
|
|
|
|
|
(2)
|
The
following financial statement schedule is included in Item
8.
|
|
|
|
|
|
|
|
Schedule II
– Valuation and Qualifying Accounts
|
|
|
|
Three
years ended January 3, 2009
|
80
|
All other
schedules are omitted since the required information is not present or is not
present in amounts sufficient to require submission of the schedule, or because
the information required is included in the consolidated financial statements
and notes thereto.
|
|
3.1
|
Restated
Certificate of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company’s Registration Statement on Form S-1 filed May 23, 2002
and incorporated herein by reference).
|
|
|
3.2
|
Amended
and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed December 12, 2008 and incorporated herein
by reference).
|
|
|
4.1
|
Specimen
Common Stock Certificate (filed as Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 filed May 27, 1994 and incorporated
herein by reference).
|
|
|
4.2
|
Certificate
of Designation, Preference and Rights of Series A Preferred Stock (filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
May 23, 2002 and incorporated herein by reference).
|
|
|
10.1
|
Recapitalization
Agreement, dated as of March 15, 2002, among Darling International Inc.,
each of the banks or other lending institutions which is a signatory
thereto or any successor or assignee thereof, and Credit Lyonnais New York
Branch, individually as a bank and as agent (filed as Annex C to the
Company’s Definitive Proxy Statement filed on April 29, 2002, and
incorporated herein by reference).
|
|
|
10.2
|
First
Amendment to Recapitalization Agreement, dated as of April 1, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Annex D to the Company’s
Definitive Proxy Statement filed on April 29, 2002, and incorporated
herein by reference).
|
|
|
10.3
|
Second
Amendment to Recapitalization Agreement, dated as of April 29, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
|
10.4
|
Registration
Rights Agreement, dated as of December 29, 1993, between Darling
International Inc., and the signatory holders identified therein (filed as
Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on
May 27, 1994, and incorporated herein by reference).
|
|
|
10.5
|
Registration
Rights Agreement, dated as of May 10, 2002, between Darling International
Inc., and the holders identified therein (filed as Exhibit 10.6 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
|
10.6
*
|
Form
of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s
Registration Statement on Form S-1 filed on May 27, 1994, and incorporated
herein by reference).
|
|
|
10.7
|
Credit
Agreement, dated as of April 7, 2006, among Darling International Inc.,
various lending institutions party thereto and JPMorgan Chase Bank, N.A.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
|
10.8
|
Second
Amendment to Credit Agreement dated as of October 8, 2008, by and among
Darling International Inc., as borrower, various lending institutions
party thereto and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed October 10, 2008 and
incorporated herein by reference).
|
|
|
10.9
|
First
Amendment to Note Purchase Agreement, dated as of April 7, 2006, among
Darling International Inc. and the securities purchasers party thereto
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by
reference).
|
|
|
10.10
|
Leases,
dated July 1, 1996, between the Company and the City and County of San
Francisco (filed pursuant to temporary hardship exemption under cover of
Form SE).
|
|
|
10.11
|
Lease,
dated November 24, 2003, between Darling International Inc. and the Port
of Tacoma (filed as Exhibit 10.3 to the Company’s Annual Report on Form
10-K filed March 29, 2004, and incorporated herein by
reference).
|
|
|
10.12
*
|
1994
Employee Flexible Stock Option Plan (filed as Exhibit 2 to the Company’s
Revised Definitive Proxy Statement filed on April 20, 2001, and
incorporated herein by reference).
|
|
|
10.13
*
|
Non-Employee
Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s
Registration Statement on Form S-1/A filed on June 5, 2002, and
incorporated herein by reference).
|
|
|
10.14
*
|
Darling
International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed May 11, 2005, and
incorporated herein by reference).
|
|
|
10.15*
|
Amendment
to Darling International Inc. 2004 Omnibus Incentive Plan (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22,
2007 and incorporated herein by reference).
|
|
|
10.16
*
|
Darling
International Inc. Compensation Committee Long-Term Incentive Program
Policy Statement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed June 22, 2005, and incorporated herein by
reference).
|
|
|
10.17
*
|
Darling
International Inc. Compensation Committee Executive Compensation Program
Policy Statement adopted January 15, 2009 (filed as Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed January 21, 2009 and
incorporated herein by reference).
|
|
|
10.18*
|
Integration
Success Incentive Award Plan (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated herein by
reference).
|
|
|
10.19*
|
Non-Employee
Director Restricted Stock Award Plan (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed March 15, 2006 and incorporated
herein by reference).
|
|
|
10.20*
|
Amendment
No. 1 to Non-Employee Director Restricted Stock Award Plan, effective as
of January 15, 2009 (filed as Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed January 21, 2009 and incorporated herein by
reference).
|
|
|
10.21*
|
Notice
of Amendment to Grants and Awards, dated as of October 10, 2006 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 10,
2006 and incorporated herein by reference).
|
|
|
10.22
*
|
Amended
and Restated Employment Agreement, dated as of January 1, 2009, between
Darling International Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed January 21, 2009, and
incorporated herein by reference).
|
|
|
10.23 *
|
Form
of Senior Executive Termination Benefits Agreement (filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed November 29, 2007 and
incorporated herein by reference).
|
|
|
10.24
*
|
Form
of Addendum to Senior Executive Termination Benefits Agreement (filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December
12, 2008 and incorporated herein by
reference).
|
|
|
|
|
10.25
*
|
Amended
and Restated Senior Executive Termination Benefits Agreement dated, as of
January 15, 2009, between Darling International Inc. and John O.
Muse(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed January 21, 2009 and incorporated herein by
reference).
|
|
|
10.26*
|
Form
of Indemnification Agreement between Darling International Inc. and its
directors and executive officers (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed February 25, 2008, and incorporated
herein by reference).
|
|
|
14
|
Darling
International Inc. Code of Business Conduct applicable to all employees,
including senior executive officers (filed as Exhibit 14 to the Company’s
Current Report on Form 8-K filed February 25, 2008, and incorporated
herein by reference).
|
|
|
21
|
Subsidiaries
of the Registrant (filed as Exhibit 21.1 to the Company’s Registration
Statement on Form S-4 filed on February 2, 2006, and incorporated herein
by reference).
|
|
|
23
|
Consent
of KPMG LLP (filed herewith).
|
|
|
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company (filed herewith).
|
|
|
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the Company
(filed herewith).
|
|
|
32
|
Written
Statement of Chief Executive Officer and Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
|
|
|
|
|
|
The
Exhibits are available upon request from the Company.
|
*
|
Management
contract or compensatory plan or
arrangement.
|
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DARLING INTERNATIONAL
INC.
|
|
By: |
/s/
Randall C. Stuewe |
|
|
|
Randall
C. Stuewe |
|
|
|
Chairman of the
Board and |
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
Date: |
March 4,
2009 |
|
|
|
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
SIGNATURE |
|
TITLE |
DATE |
|
|
|
|
|
|
|
|
|
|
/ s /
|
Randall C.
Stuewe |
|
Chairman of
the Board and |
March 4,
2009 |
|
Randall C.
Stuewe |
|
Chief Executive Officer
|
|
|
|
|
(Principal Executive
Officer) |
|
|
|
|
|
|
/ s /
|
John O.
Muse |
|
Executive Vice
President - |
March 4,
2009 |
|
John O.
Muse |
|
Finance
and Administration
|
|
|
|
|
(Principal Financial
and Accounting Officer) |
|
|
|
|
|
|
/ s /
|
O. Thomas
Albrecht |
|
Director |
March 4,
2009 |
|
O. Thomas
Albrecht |
|
|
|
|
|
|
|
|
|
|
|
|
|
/ s /
|
C. Dean Carlson |
|
Director |
March 4,
2009 |
|
C, Dean
Carlson |
|
|
|
|
|
|
|
|
|
/ s /
|
Marlyn
Jorgensen |
|
Director |
March 4,
2009 |
|
Marlyn
Jorgensen |
|
|
|
|
|
|
|
|
|
/ s /
|
Charles
Macaluso |
|
Director |
March 4,
2009 |
|
Charles
Macaluso |
|
|
|
|
|
|
|
|
|
/ s /
|
John D.
March |
|
Director |
March 4,
2009 |
|
John D.
March |
|
|
|
|
|
|
|
|
|
/ s /
|
Michael
Urbut |
|
Director |
March 4,
2009 |
|
Michael
Urbut |
|
|
|
|
INDEX
TO EXHIBITS
3.1
|
|
Restated
Certificate of Incorporation of the Company, as amended (filed as Exhibit
3.1 to the Company’s Registration Statement on Form S-1 filed May 23, 2002
and incorporated herein by reference).
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company’s
Current Report on Form 8-K filed December 12, 2008 and incorporated herein
by reference).
|
|
|
|
4.1
|
|
Specimen
Common Stock Certificate (filed as Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 filed May 27, 1994 and incorporated
herein by reference).
|
|
|
|
4.2
|
|
Certificate
of Designation, Preference and Rights of Series A Preferred Stock (filed
as Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
May 23, 2002 and incorporated herein by reference).
|
|
|
|
10.1
|
|
Recapitalization
Agreement, dated as of March 15, 2002, among Darling International Inc.,
each of the banks or other lending institutions which is a signatory
thereto or any successor or assignee thereof, and Credit Lyonnais New York
Branch, individually as a bank and as agent (filed as Annex C to the
Company’s Definitive Proxy Statement filed on April 29, 2002, and
incorporated herein by reference).
|
|
|
|
10.2
|
|
First
Amendment to Recapitalization Agreement, dated as of April 1, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Annex D to the Company’s
Definitive Proxy Statement filed on April 29, 2002, and incorporated
herein by reference).
|
|
|
|
10.3
|
|
Second
Amendment to Recapitalization Agreement, dated as of April 29, 2002, among
Darling International Inc., each of the banks party to the
Recapitalization Agreement, and Credit Lyonnais New York Branch,
individually as a bank and as agent (filed as Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
|
|
10.4
|
|
Registration
Rights Agreement, dated as of December 29, 1993, between Darling
International Inc., and the signatory holders identified therein (filed as
Exhibit 10.3 to the Company’s Registration Statement on Form S-1 filed on
May 27, 1994, and incorporated herein by reference).
|
|
|
|
10.5
|
|
Registration
Rights Agreement, dated as of May 10, 2002, between Darling International
Inc., and the holders identified therein (filed as Exhibit 10.6 to the
Company’s Registration Statement on Form S-1 filed on May 23, 2002, and
incorporated herein by reference).
|
|
|
|
10.6
|
*
|
Form
of Indemnification Agreement (filed as Exhibit 10.7 to the Company’s
Registration Statement on Form S-1 filed on May 27, 1994, and incorporated
herein by reference).
|
|
|
|
10.7
|
|
Credit
Agreement, dated as of April 7, 2006, among Darling International Inc.,
various lending institutions party thereto and JPMorgan Chase Bank, N.A.
(filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
|
|
|
|
10.8
|
|
Second
Amendment to Credit Agreement dated as of October 8, 2008, by and among
Darling International Inc., as borrower, various lending institutions
party thereto and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed October 10, 2008 and
incorporated herein by reference).
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10.9
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First
Amendment to Note Purchase Agreement, dated as of April 7, 2006, among
Darling International Inc. and the securities purchasers party thereto
(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
April 13, 2006 and incorporated herein by reference).
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10.10
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Leases,
dated July 1, 1996, between the Company and the City and County of San
Francisco (filed pursuant to temporary hardship exemption under cover of
Form SE).
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10.11
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Lease,
dated November 24, 2003, between Darling International Inc. and the Port
of Tacoma (filed as Exhibit 10.3 to the Company’s Annual Report on Form
10-K filed March 29, 2004, and incorporated herein by
reference).
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10.12
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*
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1994
Employee Flexible Stock Option Plan (filed as Exhibit 2 to the Company’s
Revised Definitive Proxy Statement filed on April 20, 2001, and
incorporated herein by reference).
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10.13
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*
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Non-Employee
Directors Stock Option Plan (filed as Exhibit 10.13 to the Company’s
Registration Statement on Form S-1/A filed on June 5, 2002, and
incorporated herein by reference).
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10.14
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*
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Darling
International Inc. 2004 Omnibus Incentive Plan (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed May 11, 2005, and
incorporated herein by reference).
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10.15
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*
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Amendment
to Darling International Inc. 2004 Omnibus Incentive Plan (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 22,
2007 and incorporated herein by reference).
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10.16
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*
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Darling
International Inc. Compensation Committee Long-Term Incentive Program
Policy Statement (filed as Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed June 22, 2005, and incorporated herein by
reference).
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10.17
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*
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Darling
International Inc. Compensation Committee Executive Compensation Program
Policy Statement adopted January 15, 2009 (filed as Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed January 21, 2009 and
incorporated herein by reference).
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10.18
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*
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Integration
Success Incentive Award Plan (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed March 15, 2006 and incorporated herein by
reference).
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10.19
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*
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Non-Employee
Director Restricted Stock Award Plan (filed as Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed March 15, 2006 and incorporated
herein by reference).
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10.20
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*
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Amendment
No. 1 to Non-Employee Director Restricted Stock Award Plan, effective as
of January 15, 2009 (filed as Exhibit 10.4 to the Company’s Current Report
on Form 8-K filed January 21, 2009 and incorporated herein by
reference).
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10.21
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*
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Notice
of Amendment to Grants and Awards, dated as of October 10, 2006 (filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 10,
2006 and incorporated herein by reference).
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10.22
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*
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Amended
and Restated Employment Agreement, dated as of January 1, 2009, between
Darling International Inc. and Randall C. Stuewe (filed as Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed January 21, 2009, and
incorporated herein by reference).
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10.23
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*
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Form
of Senior Executive Termination Benefits Agreement (filed as Exhibit 10.1
to the Company’s Current Report on Form 8-K filed November 29, 2007 and
incorporated herein by reference).
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10.24
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*
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Form
of Addendum to Senior Executive Termination Benefits Agreement (filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December
12, 2008 and incorporated herein by reference).
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10.25
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*
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Amended
and Restated Senior Executive Termination Benefits Agreement dated, as of
January 15, 2009, between Darling International Inc. and John O.
Muse(filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed January 21, 2009 and incorporated herein by
reference).
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10.26
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* |
Form
of Indemnification Agreement between Darling International Inc. and its
directors and executive officers (filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed February 25, 2008, and incorporated
herein by reference). |
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14
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Darling
International Inc. Code of Business Conduct applicable to all employees,
including senior executive officers (filed as Exhibit 14 to the Company’s
Current Report on Form 8-K filed February 25, 2008, and incorporated
herein by reference).
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21
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Subsidiaries
of the Registrant (filed as Exhibit 21.1 to the Company’s Registration
Statement on Form S-4 filed on February 2, 2006, and incorporated herein
by reference).
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23
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Consent
of KPMG LLP (filed herewith).
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31.1
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Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company (filed herewith).
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31.2
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Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the Company
(filed herewith).
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32
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Written
Statement of Chief Executive Officer and Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350) (filed herewith).
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*
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Management
contract or compensatory plan or
arrangement.
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