q09first.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
One)
/X/ QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended April 4, 2009
OR
/ / TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from _______ to _______
Commission
File Number 0-24620
DARLING
INTERNATIONAL INC.
(Exact
name of registrant as specified in its charter)
Delaware |
|
36-2495346 |
(State
or other
jurisdiction |
|
(I.R.S.
Employer |
of
incorporation or organization) |
|
Identification
Number) |
|
|
|
251
O'Connor Ridge Blvd., Suite 300 |
|
|
Irving,
Texas |
|
75038 |
(Address of
principal executive offices) |
|
(Zip
Code) |
Registrant's
telephone number, including area code: (972)
717-0300
Indicate by check
mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
____
Indicate by
check mark whether the Registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the Registrant
was required to submit and post such
files). Yes
No ___
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
|
X
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|
Accelerated
filer
|
|
|
Non-accelerated
filer
|
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|
Smaller
reporting company
|
|
|
|
|
|
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(Do
not check if a smaller reporting company)
|
|
|
Indicate by check mark
whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
No X
There were
82,216,690 shares of common stock, $0.01 par value, outstanding at May 7,
2009.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE THREE MONTHS ENDED APRIL 4, 2009
TABLE OF CONTENTS
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Page No.
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PART
I: FINANCIAL INFORMATION
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Item
1.
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FINANCIAL
STATEMENTS
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Consolidated
Balance Sheets
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3
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April
4, 2009 (unaudited) and January 3, 2009
|
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|
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Consolidated
Statements of Operations (unaudited)
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4
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Three
months ended April 4, 2009 and March 29, 2008
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Consolidated
Statements of Cash Flows (unaudited)
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5
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Three
months ended April 4, 2009 and March 29, 2008
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Notes
to Consolidated Financial Statements (unaudited)
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6
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Item
2.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
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FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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18
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Item
3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES
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ABOUT
MARKET RISK
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30
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Item
4.
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CONTROLS
AND PROCEDURES
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31
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PART
II: OTHER INFORMATION
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Item
6.
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EXHIBITS
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32
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Signatures
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33
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DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
April 4,
2009 and January 3, 2009
(in
thousands, except shares)
|
|
April 4,
2009
|
|
|
January
3,
2009
|
|
ASSETS
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|
(unaudited)
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Current
assets:
|
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|
|
|
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Cash
and cash equivalents
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|
$ |
38,178 |
|
|
$ |
50,814 |
|
Restricted
cash
|
|
|
430 |
|
|
|
449 |
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Accounts
receivable
|
|
|
41,337 |
|
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40,424 |
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Inventories
|
|
|
18,142 |
|
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22,182 |
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Income
taxes refundable
|
|
|
11,098 |
|
|
|
11,248 |
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Other
current assets
|
|
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6,926 |
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|
|
6,696 |
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Deferred
income taxes
|
|
|
6,430 |
|
|
|
6,656 |
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Total
current assets
|
|
|
122,541 |
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138,469 |
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Property,
plant and equipment, less accumulated depreciation of
$214,289
at April 4, 2009 and $211,306 at January 3, 2009
|
|
|
147,692 |
|
|
|
143,291 |
|
Intangible
assets, less accumulated amortization of
$48,209
at April 4, 2009 and $47,281 at January 3, 2009
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38,372 |
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35,982 |
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Goodwill
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66,958 |
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61,133 |
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Other
assets
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6,840 |
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6,623 |
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Deferred
income taxes
|
|
|
5,876 |
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8,877 |
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$ |
388,279 |
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$ |
394,375 |
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Current
portion of long-term debt
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$ |
5,000 |
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$ |
5,000 |
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Accounts
payable, principally trade
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17,175 |
|
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16,243 |
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Accrued
expenses
|
|
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37,321 |
|
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49,780 |
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Total
current liabilities
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59,496 |
|
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71,023 |
|
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|
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Long-term
debt, net of current portion
|
|
|
31,250 |
|
|
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32,500 |
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Other
non-current liabilities
|
|
|
54,278 |
|
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54,274 |
|
Total
liabilities
|
|
|
145,024 |
|
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157,797 |
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Commitments
and contingencies
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Stockholders’
equity:
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Common
stock, $0.01 par value; 100,000,000 shares authorized;
82,619,970
and 82,169,076 shares issued at April 4, 2009
and
at January 3, 2009, respectively
|
|
|
826 |
|
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|
822 |
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Additional
paid-in capital
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157,961 |
|
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156,899 |
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Treasury
stock, at cost; 403,280 and 401,094 shares at
April
4, 2009 and January 3, 2009, respectively
|
|
|
(3,855
|
) |
|
|
(3,848
|
) |
Accumulated
other comprehensive loss
|
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(29,042
|
) |
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(29,850
|
) |
Retained
earnings
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117,365 |
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112,555 |
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Total
stockholders’ equity
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243,255 |
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236,578 |
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$ |
388,279 |
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$ |
394,375 |
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The accompanying notes are an integral
part of these consolidated financial statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Three
months ended April 4, 2009 and March 29, 2008
(in
thousands, except per share data)
(unaudited)
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April 4,
2009
|
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March
29,
2008
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Net
sales
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$ |
133,000 |
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$ |
201,956 |
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Costs
and expenses:
|
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|
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|
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Cost of sales and operating
expenses
|
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103,543 |
|
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146,296 |
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Selling, general and
administrative expenses
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14,757 |
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14,701 |
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Depreciation and
amortization
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5,937 |
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5,792 |
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Total costs and
expenses
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124,237 |
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166,789 |
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Operating income
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8,763 |
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35,167 |
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Other
income/(expense):
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Interest
expense
|
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|
(658
|
) |
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(845
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) |
Other, net
|
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|
(237
|
) |
|
|
167 |
|
Total other
income/(expense)
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(895
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) |
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(678
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) |
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Income
from operations before income taxes
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7,868 |
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|
34,489 |
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Income
taxes
|
|
|
3,058 |
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|
13,028 |
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Net
income
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|
$ |
4,810 |
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$ |
21,461 |
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Basic
income per share
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$ |
0.06 |
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$ |
0.26 |
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Diluted
income per share
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|
$ |
0.06 |
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|
$ |
0.26 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Three
months ended April 4, 2009 and March 29, 2008
(in
thousands)
(unaudited)
|
|
April 4,
2009
|
|
|
March
29,
2008
|
|
Cash
flows from operating activities:
|
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|
|
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Net income
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|
$ |
4,810 |
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$ |
21,461 |
|
Adjustments to reconcile net
income to net cash provided by
operating
activities:
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Depreciation and
amortization
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5,937 |
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5,792 |
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Loss (Gain) on disposal of
property, plant, equipment and
other
assets
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104 |
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(33
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) |
Deferred taxes
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3,227 |
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|
(702
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) |
Stock-based compensation
expense
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304 |
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342 |
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Changes in operating assets and
liabilities, net of effects
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|
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from
acquisitions:
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Restricted cash
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19 |
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24 |
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Accounts
receivable
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(913
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) |
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883 |
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Income taxes
refundable
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|
150 |
|
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|
– |
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Inventories and prepaid
expenses
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3,666 |
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(6,479
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) |
Accounts payable and accrued
expenses
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(11,679
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) |
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4,048 |
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Other
|
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|
1,752 |
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|
2,405 |
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Net cash provided by operating
activities
|
|
|
7,377 |
|
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|
27,741 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
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Capital
expenditures
|
|
|
(6,149
|
) |
|
|
(4,708
|
) |
Acquisitions
|
|
|
(12,500
|
) |
|
|
– |
|
Gross proceeds from disposal of
property, plant and equipment
and other
assets
|
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|
76 |
|
|
|
634 |
|
Net cash used by investing
activities
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|
(18,573
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) |
|
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(4,074
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) |
Cash
flows from financing activities:
|
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|
|
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|
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Payments on debt
|
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|
(1,250
|
) |
|
|
(1,250
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) |
Contract payments
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|
(19
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) |
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(46
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) |
Issuance of common
stock
|
|
|
– |
|
|
|
128 |
|
Minimum withholding taxes paid on
stock awards
|
|
|
(108
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) |
|
|
(67
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) |
Excess tax benefits from
stock-based compensation
|
|
|
(63
|
) |
|
|
114 |
|
Net cash used by financing
activities
|
|
|
(1,440
|
) |
|
|
(1,121
|
) |
Net
increase/(decrease) in cash and cash equivalents
|
|
|
(12,636
|
) |
|
|
22,546 |
|
Cash
and cash equivalents at beginning of period
|
|
|
50,814 |
|
|
|
16,335 |
|
Cash
and cash equivalents at end of period
|
|
$ |
38,178 |
|
|
$ |
38,881 |
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period
for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
667 |
|
|
$ |
766 |
|
Income taxes, net of
refunds
|
|
$ |
248 |
|
|
$ |
1,329 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
April 4,
2009
(unaudited)
|
The
accompanying consolidated financial statements for the three month periods
ended April 4, 2009 and March 29, 2008 have been prepared in accordance
with generally accepted accounting principles in the United States of
America by Darling International Inc. (“Darling”) and its subsidiaries
(Darling and its subsidiaries are collectively referred to herein as the
“Company”) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). The information
furnished herein reflects all adjustments (consisting only of normal
recurring accruals) that are, in the opinion of management, necessary to
present a fair statement of the financial position and operating results
of the Company as of and for the respective periods. However, these
operating results are not necessarily indicative of the results expected
for a full fiscal year. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant
to such rules and regulations. However, management of the
Company believes, to the best of their knowledge, that the disclosures
herein are adequate to make the information presented not misleading. The
accompanying consolidated financial statements should be read in
conjunction with the audited consolidated financial statements contained
in the Company’s Form 10-K for the fiscal year ended January 3,
2009.
|
(2)
|
Summary of Significant
Accounting Policies
|
|
(a)
|
Basis of
Presentation
|
|
The
consolidated financial statements include the accounts of Darling and its
subsidiaries. All significant intercompany balances and transactions have
been eliminated in
consolidation.
|
|
The
Company has a 52/53 week fiscal year ending on the Saturday nearest
December 31. Fiscal periods for the consolidated financial
statements included herein are as of April 4, 2009, and include the 13
weeks ended April 4, 2009, and the 13 weeks ended March 29,
2008.
|
|
On
January 4, 2009, the Company adopted Financial Accounting Standard Board
(“FASB”) Staff Position No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1
addresses determinations as to whether instruments granted in share-based
payment transactions are participating securities prior to vesting and,
therefore, need to be included in the earnings allocation in computing
earnings per share under the two-class method described in paragraphs 60
and 61 of Statement of Financial Accounting Standards No. 128, Earnings Per
Share. Non-vested and restricted share awards granted to
the Company’s employees and non-employee directors contain non-forfeitable
dividend rights and, therefore, are considered participating securities in
accordance with FSP EITF 03-6-1. The Company has prepared the
current period earnings per share computations and retrospectively revised
the Company’s comparative prior period computations to include in basic
and diluted earnings per share non-vested and restricted share awards
considered participating securities. The adoption of FSP EITF 03-6-1
increased the number of common shares included in basic and diluted
earnings per share, but had no impact on reported earnings per
share.
|
|
Basic
income per common share is computed by dividing net income by the weighted
average number of common shares including non-vested and restricted shares
outstanding during the period. Diluted income per common share
is computed by dividing net income by the weighted average number of
common shares outstanding during the period increased by dilutive common
equivalent shares determined using the treasury stock
method.
|
|
Net
Income per Common Share (in thousands, except per share
data)
|
|
|
Three
Months Ended
|
|
|
|
|
April
4,
|
|
|
|
|
|
March
29,
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$4,810
|
|
81,896
|
|
$
0.06
|
|
$21,461
|
|
81,394
|
|
$
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Option
shares in the money
|
—
|
|
764
|
|
—
|
|
—
|
|
1,309
|
|
—
|
|
Less:
Pro forma treasury shares
|
—
|
|
(578
|
)
|
—
|
|
—
|
|
(504
|
)
|
—
|
|
Net
income
|
$4,810
|
|
82,082
|
|
$
0.06
|
|
$21,461
|
|
82,199
|
|
$
0.26
|
|
For the
three months ended April 4, 2009 and March 29, 2008, respectively, 56,000 and
20,000 outstanding stock options were excluded from diluted income per common
share as the effect was antidilutive.
On
February 23, 2009, the Company acquired substantially all of the assets of Boca
Industries, Inc., a grease trap services business headquartered in Smyrna,
Georgia (the “Boca Transaction”) for approximately $12.5 million. The
purchase was accounted for as an asset purchase pursuant to the terms of the
asset purchase agreement between the Company and Boca Transport, Inc. and Donald
E. Lenci. The assets acquired in the Boca Transaction will increase the
Company’s capabilities to grow revenues and continue the Company’s strategy of
broadening its restaurant services segment.
Effective
February 23, 2009, the Company began including the operations of the Boca
Transaction into the Company’s consolidated financial statements. Pro
forma results of operations have not been presented because the effect of the
acquisition is not material. The Company paid approximately $12.5
million in cash for assets consisting of property, plant and equipment of $3.3
million, intangible assets of $3.3 million, goodwill of $5.8 million and other
of $0.1 million on the closing date. The goodwill was assigned to the
restaurant services segment and is expected to be deductible for tax purposes
and the identifiable intangibles have a weighted average life of nine
years.
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. 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 is a party to several lawsuits, claims and loss contingencies arising in
the ordinary course of its business, including assertions by certain regulatory
and governmental agencies related to permitting requirements and 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 April 4, 2009
and January 3, 2009, 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 insurance recoveries were
approximately $17.5 million and $17.3 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 Company’s 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.
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.
Rendering
Rendering
consists of the collection and processing of animal by-products, including
hides, from butcher shops, grocery stores, food service establishments and meat
and poultry processors, and converting these into useable oils and proteins
principally utilized by the agricultural, leather and oleo-chemical
industries.
Restaurant
Services
Restaurant
Services consists of the collection of used cooking oils from food service
establishments and recycling them into similar products used as high-energy
animal feed ingredients and industrial oils. Restaurant Services also
provides grease trap servicing. The National Service Center (“NSC”)
is included in Restaurant Services. The NSC contracts for and
schedules services such as fat and bone and used cooking oil
collection as well as trap cleaning for contracted customers using the Company’s
resources or third party providers.
|
Business
Segment Net Sales (in thousands):
|
|
|
Three
Months Ended
|
|
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Rendering:
|
|
|
|
|
|
|
Trade
|
|
$
|
103,541 |
|
|
$ |
147,576 |
|
Intersegment
|
|
|
3,629 |
|
|
|
13,483 |
|
|
|
|
107,170 |
|
|
|
161,059 |
|
Restaurant
Services:
|
|
|
|
|
|
|
|
|
Trade
|
|
|
29,459 |
|
|
|
54,380 |
|
Intersegment
|
|
|
2,163 |
|
|
|
1,824 |
|
|
|
|
31,622 |
|
|
|
56,204 |
|
Eliminations
|
|
|
(5,792 |
) |
|
|
(15,307 |
) |
Total
|
|
$ |
133,000 |
|
|
$ |
201,956 |
|
|
Business Segment
Profit/(Loss) (in
thousands):
|
|
|
Three
Months Ended
|
|
|
|
April
4,
2009
|
|
|
March
29,
2008
|
|
Rendering
|
|
$ |
17,518 |
|
|
$ |
35,061 |
|
Restaurant
Services
|
|
|
301 |
|
|
|
10,053 |
|
Corporate
|
|
|
(12,351 |
) |
|
|
(22,808 |
) |
Interest
expense
|
|
|
(658 |
) |
|
|
(845 |
) |
Net
Income
|
|
$ |
4,810 |
|
|
$ |
21,461 |
|
Certain
assets are not attributable to a single operating segment but instead relate to
multiple operating segments operating out of individual
locations. These assets are utilized by both the Rendering and
Restaurant Services business segments and are identified in the category called
Combined Rendering/Restaurant Services. Depreciation of Combined
Rendering/Restaurant Services assets is allocated based upon management’s
estimate of the percentage of corresponding activity attributed to each
segment.
|
Business Segment
Assets (in
thousands):
|
|
|
April 4,
2009
|
|
|
January 3,
2009
|
|
Rendering
|
|
$ |
152,158 |
|
|
$ |
155,318 |
|
Restaurant
Services
|
|
|
60,218 |
|
|
|
46,718 |
|
Combined
Rendering/Restaurant Services
|
|
|
101,008 |
|
|
|
99,857 |
|
Corporate
|
|
|
74,895 |
|
|
|
92,482 |
|
Total
|
|
$ |
388,279 |
|
|
$ |
394,375 |
|
The
Company has provided income taxes for the three-month periods ended April 4,
2009 and March 29, 2008, based on its estimate of the effective tax rate for the
entire 2009 and 2008 fiscal years.
In
determining whether its deferred tax assets are more likely than not to be
recoverable, the Company considers all positive and negative evidence currently
available to support projections of future taxable income. The
Company is unable to carryback any of its net operating losses and recent
favorable operating results do provide sufficient historical evidence at this
time of sustained future profitability sufficient to result in taxable income
against which certain net operating losses can be carried forward and
utilized.
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 are generally from three
to five years. Currently, several state examinations are in
progress. The Company does not anticipate that any state or federal
audits will have a significant impact on the Company’s results of operations or
financial position. In addition, the Company does not reasonably
expect any significant changes to the estimated amount of liability associated
with the Company’s unrecognized tax positions in the next twelve
months.
Credit
Agreement
The
Company has 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 April 4, 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 a six-year term
ending April 7, 2012; at that point, the remaining balance of $22.5 million will
be payable in full. The revolving credit facility has a five-year
term ending April 7, 2011. The proceeds of the revolving credit
facility may be used for: (i) the payment of fees and expenses
payable in connection with the Credit Agreement, acquisitions and the repayment
of indebtedness; (ii) financing the working capital needs of the
Company; and (iii) other general corporate purposes.
The
Credit Agreement allows for borrowings at per annum rates based on the following
loan types. Alternate base rate loans under the Credit Agreement will bear
interest at a rate per annum based on the greater of (a) the prime rate and (b)
the federal funds effective rate (as defined in the Credit Agreement) plus 1/2
of 1% plus, in each case, a margin determined by reference to a pricing grid and
adjusted according to the Company’s adjusted leverage
ratio. Eurodollar loans will bear interest at a rate per annum based
on the then applicable London Inter-Bank Offer Rate ("LIBOR") multiplied by the
statutory reserve rate plus a margin determined by reference to a pricing grid
and adjusted according to the Company’s adjusted leverage ratio. At
April 4, 2009 under the Credit Agreement, the interest rate for $36.25
million of the term loan that was outstanding was based on LIBOR plus a margin
of 1.0% per annum for a total of 2.25% per annum. At April 4, 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.
The
Credit Agreement consisted of the following elements at April 4, 2009 and
January 3, 2009, respectively (in thousands):
|
|
April
4,
2009
|
|
|
January 3,
2009
|
|
Term
Loan
|
|
$ |
36,250 |
|
|
$ |
37,500 |
|
Revolving
Credit Facility:
|
|
|
|
|
|
|
|
|
Maximum
availability
|
|
$ |
125,000 |
|
|
$ |
125,000 |
|
Borrowings
outstanding
|
|
|
– |
|
|
|
– |
|
Letters
of credit issued
|
|
|
16,253 |
|
|
|
16,424 |
|
Availability
|
|
$ |
108,747 |
|
|
$ |
108,576 |
|
The
obligations under the Credit Agreement are guaranteed by Darling National LLC, a
Delaware limited liability company that is a wholly-owned subsidiary of Darling
(“Darling National”), and are secured by substantially all of the property of
the Company, including a pledge of all equity interests in Darling
National. As of April 4, 2009, the Company was in compliance with all
the covenants contained in the Credit Agreement. At April 4, 2009,
the Company had unrestricted cash of $38.2 million, compared to unrestricted
cash of $50.8 million at January 3, 2009 and $38.9 million at March 29,
2008.
The
Company’s operations are exposed to market risks relating to commodity prices
that affect the Company’s cost of raw materials, finished product prices and
energy costs and the risk of changes in interest rates.
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 of decreasing
prices. The Company does not use derivative instruments for trading
purposes. At April 4, 2009, the Company had two interest rate swaps
and no natural gas swaps or collars or inventory swaps.
Under
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), entities are required to
report all derivative instruments in the statement of financial position at fair
value. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reason for
holding the instrument. If certain conditions are met, entities may
elect to designate a derivative instrument as a hedge of exposures to changes in
fair value, cash flows or foreign currencies. If the hedged exposure
is a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside of earnings) and is subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss are reported in earnings
immediately. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of
change.
On May
19, 2006, the Company entered into two interest rate swap agreements that are
considered cash flow hedges according to SFAS 133. Under the terms of
these swap agreements, beginning June 30, 2006, the cash flows from the
Company’s $50.0 million floating-rate term loan facility under the Credit
Agreement have been exchanged for fixed-rate contracts that bear interest,
payable quarterly. The first swap agreement for $25.0 million matures
April 7, 2012 and bears interest at 5.42%, which does not include the borrowing
spread per the Credit Agreement, with amortizing payments that mirror the term
loan facility. The second swap agreement for $25.0 million matures
April 7, 2012 and bears interest at 5.415%, which does not include the borrowing
spread per the Credit Agreement, with amortizing payments that mirror the term
loan facility. The Company’s receive rate on each swap agreement is
based on three-month LIBOR.
The
Company estimates the amount that will be reclassified from accumulated other
comprehensive loss at April 4, 2009 into earnings over the next 12 months will
be approximately $1.5 million. No cash flow hedges were discontinued
during the first quarter 2009.
The
following table presents the fair value of the Company’s derivatives designated
as hedging instruments under SFAS 133 as of April 4, 2009 and January 3, 2009
(in thousands):
Derivatives
Designated
|
|
Balance
Sheet
|
|
Liability
Derivatives Fair Value
|
as
Hedges
|
|
Location
|
|
April
4, 2009
|
|
January
3, 2009
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
Other
noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
Total
derivatives not designated
as hedges
|
|
–
|
|
–
|
|
|
|
|
|
|
|
Total
liability derivatives
|
|
|
|
|
|
|
The
effect of the Company’s derivative instruments on the consolidated statement of
operations for the three months ended April 4, 2009 and March 29, 2008 are as
follows (in thousands):
|
|
Amount
of Loss Recognized
|
|
|
in
OCI on Derivatives
|
Derivative
in SFAS 133 Cash Flow
|
|
(Effective
Portion)
|
Hedging
Relationships
|
|
April
4, 2009
|
|
March
29, 2008
|
|
|
|
|
|
Interest
rate swaps (a)
|
|
$ 3,158
|
|
$ 3,112
|
(a)
|
Amount
recognized in other comprehensive income (effective portion) is reported
as accumulated other comprehensive loss of $3.2 million and $3.1 million
recorded net of taxes of approximately $1.2 million and $1.2 million for
the three months ended April 4, 2009 and March 29, 2008,
respectively.
|
|
|
|
Amount
of Loss Reclassified from
|
Location
of Loss Reclassified from
|
|
Accumulated
OCI into Income
|
Accumulated
OCI into Income
|
|
(Effective
Portion)
|
(Effective
Portion)
|
|
April
4, 2009
|
|
March
29, 2008
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
Amount
of Loss Recognized
|
|
|
Income
on Derivative (Ineffective
|
Location
of Loss Recognized in Income
|
|
Portion
and Amount Excluded
|
On
Derivative (Ineffective Portion and Amount
|
|
from
Effectiveness Testing)
|
Excluded
from Effectiveness Testing)
|
|
April
4, 2009
|
|
March
29, 2008
|
|
|
|
|
|
Other,
net
|
|
|
|
$
–
|
|
At April 4, 2009, the
Company has forward purchase agreements in place for purchases of
approximately $10.7 million of natural gas and diesel
fuel. 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.
|
(9)
|
Comprehensive
Income
|
|
|
|
The
Company follows the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive
Income (“SFAS 130”). SFAS 130 establishes standards for reporting
and presentation of comprehensive income or loss and its components. For
the three months ended April 4, 2009 and March 29, 2008, total
comprehensive income was $5.6 million and $20.8 million, respectively.
|
(10)
|
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.
|
(11)
|
Employee Benefit
Plans
|
|
|
|
The
Company has retirement and pension plans covering substantially all of its
employees. Most retirement benefits are provided by the Company
under separate final-pay noncontributory and contributory defined benefit
and defined contribution plans for all salaried and hourly employees
(excluding those covered by union-sponsored plans) who meet service and
age requirements. Defined benefits are based principally on length of
service and earnings patterns during the five years preceding
retirement.
|
|
|
|
Net
pension cost for the three months ended April 4, 2009 and March 29,
2008 includes the following components (in
thousands): |
|
April
4,
2009
|
|
March
29,
2008
|
|
Service
cost
|
$ 246
|
|
$ 267
|
|
Interest
cost
|
1,442
|
|
1,360
|
|
Expected
return on plan assets
|
(1,203)
|
|
(1,651)
|
|
Amortization
of prior service cost
|
36
|
|
31
|
|
Amortization
of net loss
|
1,044
|
|
87
|
|
Net pension
cost
|
$ 1,565
|
|
$ 94
|
|
The
Company's funding policy for employee benefit pension plans is to contribute
annually not less than the minimum amount required nor more than the maximum
amount that can be deducted for federal income tax
purposes. Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future. Based on actuarial estimates at April 4, 2009, the Company expects to
contribute approximately $1.4 million to its pension plans to meet funding
requirements during the next twelve months.
The
Company participates in several multi-employer pension plans which provide
defined benefits to certain employees covered by labor contracts. One
multi-employer plan in which the Company participates gave 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. Two of the underfunded
multi-employer plans in which the Company participates have given notification
of “Critical Status” under the federal Pension Protection Act (the
“PPA”). Based upon the Company’s initial review and conversations
with other participating employers in one of these “Critical Status” plans, it
appears probable that there will be a mass withdrawal termination of this
plan. As a result, the Company accrued approximately $3.2 million as
of January 3, 2009 based on the most recent information that is probable and
estimable for this plan. As of April 4, 2009, the Company has not received any
further information regarding the Critical Status plans. 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.
(12)
|
Fair
Value Measurements
|
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. The Company adopted SFAS 157-2 on
January 4, 2009. The adoption of SFAS 157 and FSP No. 157-2 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 April 4, 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 April 4, 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)
|
Liabilities:
|
|
|
|
|
|
|
|
Derivative
liabilities
|
$ 3,368
|
|
$ —
|
|
$ 3,368
|
|
$ —
|
Total
|
$ 3,368
|
|
$ —
|
|
$ 3,368
|
|
$ —
|
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.
The
following table presents the Company’s nonfinancial assets that are measured at
fair value on a nonrecurring basis as of April 4, 2009 and are categorized using
the fair value hierarchy under SFAS 157.
|
|
|
Fair
Value Measurements at April 4, 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)
|
Assets:
|
|
|
|
|
|
|
|
Identifiable
Intangibles
|
$ 3,275
|
|
$ —
|
|
$ —
|
|
$ 3,275
|
Goodwill
|
5,847
|
|
—
|
|
$ —
|
|
5,847
|
|
$ 9,122
|
|
$ —
|
|
$ —
|
|
$ 9,122
|
Identifiable
intangible assets and goodwill represent the fair value of amounts recognized as
a result of the Boca Transaction as discussed in Note 2
Acquisitions. Significant unobservable inputs were used to determine
the fair value of the identifiable intangible assets based on the income
approach valuation model whereby the present worth and anticipated future
benefits of the identifiable intangible assets were discounted back to their net
present value. Goodwill represents the difference between the
enterprise value/cash paid less the fair value of all recognized asset fair
values including the identifiable intangible asset values.
(13) New Accounting
Pronouncements
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) were adopted by the
Company on January 4, 2009. The effect of this standard depends on
acquisition activity and its relative size to the Company. During the
first quarter of fiscal 2009 the Company did acquire an entity as discussed in
Note 2 Acquisitions. The adoption of this accounting standard did not
have a material impact on the determination or reporting of the Company’s
financial results for the period ended April 4, 2009.
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 were adopted by the Company on January 4, 2009 on a
prospective basis. The adoption of this accounting standard did not
have an impact to the consolidated financial statements of the
Company.
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 was adopted on January 4, 2009. The
adoption of this accounting standard did not have a material effect to the
consolidated financial statements of the Company.
In April
2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. FSP FAS 142-3 was adopted on January 4,
2009. The adoption of this staff position did not have a material
effect to the consolidated financial statements of the Company.
In
December 2008, the FASB issued 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 are 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.
In April
2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies. FSP No. FAS 141(R)-1 amends and clarifies SFAS
141(R) to address application on initial recognition and measurement, subsequent
measurement and accounting and disclosure of assets and liabilities arising from
contingencies in a business combination. The Company’s adoption of
this staff position did not have a material impact on the determination or
reporting of the Company’s financial results for the period ended April 4,
2009.
Item
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|
|
AND
RESULTS OF OPERATIONS |
The following Management’s Discussion
and Analysis of Financial Condition and Results of Operations contains
forward-looking statements that involve risks and uncertainties. The
Company’s actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth below under the heading “Forward Looking Statements” and elsewhere in this
report, and under the heading “Risk Factors” in the Company’s Annual Report on
Form 10-K for the year ended January 3, 2009, and in the Company’s other public
filings with the SEC.
The following discussion should be read
in conjunction with the historical consolidated financial statements and notes
thereto.
Overview
The Company is a leading provider of
rendering, recycling and recovery solutions to the nation’s food
industry. The Company collects and recycles animal by-products and
used cooking oil from food service establishments and provides grease trap
cleaning services to many of the same establishments. The Company’s
operations are organized into two segments: Rendering and Restaurant
Services. The Company processes raw materials at 44 facilities
located throughout the U.S. into finished products such as protein (primarily
meat and bone meal, “MBM”), tallow (primarily bleachable fancy tallow, “BFT”),
yellow grease (“YG”) and hides. The Company sells these products
nationally and internationally, primarily to producers of livestock feed,
oleo-chemicals, soaps, leather goods and pet foods, for use as ingredients in
their products or for further processing. The accompanying
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements contained in the Company’s Form 10-K for the
fiscal year ended January 3, 2009.
During
the first quarter of fiscal 2009 the Company’s operating performance improved
relative to the fourth quarter of fiscal 2008. Raw material volumes
declined materially as general economic conditions continue to influence
consumer spending habits both in the U.S. and foreign
markets. Finished product prices remained highly volatile during the
first quarter of 2009, and although prices were down compared to the first
quarter of fiscal 2008, prices were improved over the fourth quarter of fiscal
2008. Improvement in energy costs continued to translate into lower
operating costs for the Company and trade flows and exports showed some signs of
improvement during the first quarter of 2009.
The restaurant services business
segment experienced several regionally-isolated challenges during the first
quarter of fiscal 2009. Forward export sales made during the fourth
quarter of fiscal 2008 for inventory management purposes at low market prices
was the primary driver of restaurant services operating results in the first
quarter of fiscal 2009. Additionally, the Company experienced
reductions in raw material volumes related to seasonality and general economic
deterioration. The Company is adjusting its pricing and collection
fees where appropriate to compensate for these challenges.
Operating income decreased by $26.4
million in the first quarter of fiscal 2009 compared to the first quarter of
fiscal 2008. The challenges faced by the Company indicate there can be no
assurance that operating results achieved by the Company in the first quarter of
fiscal 2009 are indicative of future operating performance of the
Company.
Summary of Critical Issues
Faced by the Company During the First Quarter of 2009
·
|
Lower
finished product prices as compared to the first quarter of fiscal 2008
are a result of the decline of the U.S. economy and world
economy. Lower finished product prices were unfavorable to the
Company’s sales revenue, but this unfavorable result was partially offset
by the positive 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.
|
·
|
Lower
raw material volumes were collected from suppliers during the first
quarter of 2009 as compared to fiscal 2008. Management believes
the decline in the general performance of the U.S. economy and weaker
overall slaughter margins in the meat processing industry contributed to a
decline in raw material volumes collected by the Company during the
quarter. The financial impact of lower raw material volumes is
summarized below in Results of
Operations.
|
·
|
Energy
prices for natural gas and diesel fuel declined during the first quarter
of fiscal 2009 as compared to the first quarter of fiscal 2008 a
continuation of overall lower energy costs resulting from a decline of the
general performance of the U.S. economy. Lower energy prices were
favorable to the Company’s cost of sales. The financial impact
of lower energy costs is summarized below in Results of
Operations.
|
Summary of Critical Issues
and Known Trends Faced by the Company in 2009 and Thereafter
Critical Issues and
Challenges:
·
|
The
decline of the general performance of the U.S. economy has forced the
Company’s raw material suppliers to reduce their slaughters in the first
quarter of 2009. If this slaughter reduction continues or
accelerates, there could be a negative impact on the Company’s ability to
obtain raw materials for the Company’s
operations.
|
·
|
The
Company consumes significant volumes of natural gas to operate boilers in
its plants, which 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. Although prices continued to remain low in the first
quarter of fiscal 2009 as compared to the most recent history, it is
unclear that prices have stabilized at these lower costs. The
Company will continue to manage these costs and attempt to minimize these
expenses which represent an ongoing challenge to the Company’s
operating results for future
periods.
|
·
|
Finished
product prices for commodities have increased during the first quarter of
fiscal 2009 as compared to the fourth quarter of fiscal
2008. No assurance can be given that this increase in commodity
prices for BFT, YG and MBM will continue in the future. A
future decrease in commodity prices, 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 continuing lack of liquidity in
the financial markets, could have a significant impact on the Company’s
earnings for the remainder of fiscal 2009 and into future
periods.
|
BSE and Other Food Safety
Issues
·
|
On
April 25, 2008, the FDA published “Substances Prohibited From
Use in Animal Food or Feed,” (the “Final BSE Rule”), which was to
be effective as a final rule on April 27, 2009 (“Effective
Date”). 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 or cannot be “effectively” removed (“Decomposing Cattle
Carcasses”); 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”, which was
updated by the FDA on March 10, 2009, to address 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. However, in response to
issues raised by cattle producers, meat processors, state agencies and
other affected stakeholders over the disposal of material prohibited by
the Final BSE Rule that would not be rendered, the FDA proposed on April
9, 2009 to delay the Effective Date of the Final BSE Rule by 60 days and
accepted public comments on the proposed delay until April 16, 2009. On
April 24, 2009, the FDA affirmed that the Effective Date would not change,
but delayed enforcement of its Final BSE Rule until October 26, 2009
(“Compliance Date”) to allow affected stakeholders more time to address
the disposal issues created by the Final BSE Rule. The FDA also
stated its intent to publish its Final Guidance for Industry on compliance
with the Final BSE Rule prior to the Compliance Date. The
Company has made capital expenditures and implemented new processes and
procedures and was prepared to be compliant with the Final BSE Rule at all
of its operations on the Effective Date. The Company is
continuing to operate in compliance with the Final BSE Rule at many of its
operations; however, as the FDA intended when it delayed enforcement of
the Final BSE Rule and extended the Compliance Date, some of the Company’s
facilities have temporarily resumed accepting Decomposing Cattle Carcasses
to assist raw material suppliers and state agencies while alternative
disposal options are developed and permitted. 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.
|
·
|
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 May 5, 2009, but low pathogenic strains that
are not a threat to human health were reported in the U.S. and Canada in
recent years. 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
recent spread of 2009 H1N1 flu (initially know as “Swine Flu”) was
initially linked to hogs even though hogs have not been determined to be
the source of the outbreak in humans. Management does not believe
that the 2009 H1N1 flu will have a material impact on the operations of
the Company; however, a resurgence of the 2009 H1N1 flu or the occurrence
of any other disease that is correctly or incorrectly linked to animals
and which has a negative impact on meat consumption or animal production
could have a negative impact on the volume of raw materials available to
the Company or the demand for the Company’s finished
products.
|
·
|
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. As of May 5, 2009, the FDA
has not made such an announcement. 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. While food and feed safety issues continue to be
debated by Congress, it has not granted such new authorities to the FDA as
of May 5, 2009.
|
Results
of Operations
Three
Months Ended April 4, 2009 Compared to Three Months Ended March 29,
2008
Summary of Key Factors
Impacting First Quarter 2009 Results:
Principal factors which contributed to
a $26.4 million decrease in operating income, which are discussed in greater
detail in the following section, were:
|
·
|
Lower
finished product prices,
|
|
·
|
Lower
raw material volume, and
|
|
·
|
Lower
yield.
|
These decreases were partially offset
by:
|
·
|
Lower
raw material costs, and
|
|
·
|
Lower
energy costs, primarily related to natural gas and diesel
fuel.
|
Summary of Key Indicators of
2009 Performance:
Principal
indicators which management routinely monitors and compares to previous periods
as an indicator of problems or improvements in operating results
include:
|
·
|
Finished
product commodity prices,
|
|
·
|
Raw
material volume,
|
|
·
|
Production
volume and related yield of finished product,
|
|
·
|
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 the first quarter of fiscal 2009 compared to average
Jacobsen prices for the first quarter of fiscal 2008 follow:
|
|
Avg.
Price
1st
Quarter
2009
|
Avg.
Price
1st
Quarter
2008
|
Decrease
|
%
Decrease
|
|
MBM
(Illinois)
|
$288.61
/ton
|
$367.54
/ton
|
$(78.93)
/ton
|
(21.5)%
|
|
BFT
(Chicago)
|
$ 19.54
/cwt
|
$ 36.11
/cwt
|
$(16.57)
/cwt
|
(45.9)%
|
|
YG
(Illinois)
|
$ 16.36
/cwt
|
$ 28.11
/cwt
|
$(11.75)
/cwt
|
(41.8)%
|
The decreases
in average price of the finished products the Company sells had an unfavorable
impact on revenue that was partially offset by a positive impact to the
Company’s raw material cost resulting from formula pricing arrangements, which
compute raw material cost based upon the price of finished product.
Raw material
volume represents the quantity (pounds) of raw material collected from
suppliers, including beef, pork, poultry and used cooking oils. Raw
material volumes provide an indication of future production of finished products
available for sale and are a component of potential future revenue.
Finished
product production volumes are the end result of the Company’s production
processes, and directly impact goods available for sale and thus become an
important component of sales revenue. In addition, physical inventory
turnover is impacted by both the availability of credit to the Company’s
customers and suppliers and reduced 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 and YG and hides. Sales are significantly affected by
finished goods prices, quality and mix of raw material, and volume of raw
material. Net sales include the sales of produced finished goods,
collection fees, fees for grease trap services and finished goods purchased for
resale.
During the
first quarter of fiscal 2009, net sales decreased by $69.0 million (34.2%) to
$133.0 million as compared to $202.0 million during the first quarter of fiscal
2008. The decrease in net sales was primarily due to the following
(in millions of dollars):
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Lower
finished goods prices
|
|
$ |
(30.5
|
) |
|
$ |
(12.9
|
) |
|
$ |
– |
|
|
$ |
(43.4
|
) |
Lower
raw material volume
|
|
|
(14.2
|
) |
|
|
(1.8
|
) |
|
|
– |
|
|
|
(16.0
|
) |
Other
sales decrease
|
|
|
(6.9
|
) |
|
|
0.9 |
|
|
|
– |
|
|
|
(6.0
|
) |
Lower
yield
|
|
|
(1.6
|
) |
|
|
(0.9
|
) |
|
|
– |
|
|
|
(2.5
|
) |
Purchase
of finished product for resale
|
|
|
(0.7
|
) |
|
|
(0.4
|
) |
|
|
– |
|
|
|
(1.1
|
) |
Product
transfers
|
|
|
9.9 |
|
|
|
(9.9
|
) |
|
|
– |
|
|
|
– |
|
|
|
$ |
(44.0
|
) |
|
$ |
(25.0
|
) |
|
$ |
– |
|
|
$ |
(69.0
|
) |
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 the
first quarter of fiscal 2009, cost of sales and operating expenses decreased
$42.8 million (29.3%) to $103.5 million as compared to $146.3 million during the
first quarter of fiscal 2008. The decrease in cost of sales and
operating expenses was primarily due to the following (in millions of
dollars):
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Lower
raw material costs
|
|
$ |
(21.1
|
) |
|
$ |
(6.5
|
) |
|
$ |
– |
|
|
$ |
(27.6
|
) |
Lower
raw material volume
|
|
|
(4.5
|
) |
|
|
(0.5
|
) |
|
|
– |
|
|
|
(5.0
|
) |
Lower
energy costs, primarily natural gas and diesel
fuel
|
|
|
(3.7
|
) |
|
|
(0.8
|
) |
|
|
– |
|
|
|
(4.5
|
) |
Other
expenses
|
|
|
(6.4
|
) |
|
|
1.9 |
|
|
|
– |
|
|
|
(4.5
|
) |
Purchases
of finished product for resale
|
|
|
(1.2
|
) |
|
|
– |
|
|
|
– |
|
|
|
(1.2
|
) |
Product
transfers
|
|
|
9.9 |
|
|
|
(9.9
|
) |
|
|
– |
|
|
|
– |
|
|
|
$ |
(27.0
|
) |
|
$ |
(15.8
|
) |
|
$ |
– |
|
|
$ |
(42.8
|
) |
Selling, General and
Administrative Expenses. Selling, general and
administrative expenses were $14.8 million during the first quarter of fiscal
2009, a $0.1 million increase (0.7%) from $14.7 million during the first quarter
of fiscal 2008. The increase was primarily due to the following (in
millions of dollars):
|
|
Rendering
|
|
|
Restaurant
Services
|
|
|
Corporate
|
|
|
Total
|
|
Payroll
and related expense
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
|
$ |
(0.7
|
) |
|
$ |
(0.2
|
) |
Other
expense increase
|
|
|
(0.2
|
) |
|
|
– |
|
|
|
0.5 |
|
|
|
0.3 |
|
|
|
$ |
– |
|
|
$ |
0.3 |
|
|
$ |
(0.2
|
) |
|
$ |
0.1 |
|
Depreciation and
Amortization. Depreciation and
amortization charges increased $0.1 million (1.7%) to $5.9 million during
the first quarter of fiscal 2009 as compared to $5.8 million during the first
quarter of fiscal 2008. The increase in depreciation and amortization
is primarily due to an overall increase in capital
expenditures.
Interest
Expense. Interest expense was $0.7 million during the
first quarter of fiscal 2009 compared to $0.8 million during the first quarter
of fiscal 2008, a decrease of $0.1 million, primarily due to a decrease in
outstanding balance related to the Company’s debt.
Other
Income/Expense. Other expense was $0.2 million in the first quarter
of fiscal 2009, compared to other income of $0.2 million during the first
quarter of fiscal 2008. The increase in other expense is primarily
due to decreased interest income as a result of lower interest rates on cash
included in interest bearing accounts and increases in other non-operating
expenses.
Income
Taxes. The Company recorded income tax expense of $3.1 million for
the first quarter of fiscal 2009, compared to income tax expense of $13.0
million recorded in the first quarter of fiscal 2008, a decrease of $9.9
million, primarily due to a decrease in pre-tax earnings of the Company in the
first quarter of fiscal 2009. The effective tax rate for the first
quarter of fiscal 2009 is 38.9% and differs from the statutory rate of 35.0%
primarily due to state income taxes. The effective tax rate for the
first quarter of fiscal 2008 of 37.8% differs from the statutory rate of 35.0%
primarily due to state income taxes and qualified production
deduction.
FINANCING,
LIQUIDITY AND CAPITAL RESOURCES
The
Company has a $175 million credit agreement (the “Credit Agreement”) that became
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 April 4, 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. The Company has reduced the term loan facility by
quarterly payments totaling $13.75 million, for an aggregate of $36.25
million principal outstanding under the term loan facility at April 4,
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 Credit
Agreement consisted of the following elements at April 4, 2009 (in
thousands):
Credit
Agreement:
|
|
|
Term
Loan
|
|
$ 36,250
|
Revolving
Credit Facility:
|
|
|
Maximum
availability
|
|
$
125,000
|
Borrowings
outstanding
|
|
–
|
Letters
of credit issued
|
|
16,253
|
Availability
|
|
$
108,747
|
The
obligations under the Credit Agreement are guaranteed by Darling National LLC, a
Delaware limited liability company that is a wholly-owned subsidiary of Darling
(“Darling National”), and are secured by substantially all of the property of
the Company, including a pledge of all equity interests in Darling
National. As of April 4, 2009, the Company was in compliance with all
of the covenants contained in the Credit Agreement.
The
classification of long-term debt in the accompanying April 4, 2009 consolidated
balance sheet is based on the contractual repayment terms of the debt issued
under the Credit Agreement.
On April 4,
2009, the Company had working capital of $63.0 million and its working capital
ratio was 2.06 to 1 compared to working capital of $67.4 million and a working
capital ratio of 1.95 to 1 on January 3, 2009. At April 4, 2009, the
Company had unrestricted cash of $38.2 million and funds available under the
revolving credit facility of $108.7 million, compared to unrestricted cash of
$50.8 million and funds available under the revolving credit facility of $108.6
million at January 3, 2009.
Net cash
provided by operating activities was $7.4 million and $27.7 million for the
three months ended April 4, 2009 and March 29, 2008, respectively, a decrease of
$20.3 million, primarily due to a decrease in net income of approximately $16.7
million and changes in operating assets and liabilities, which includes an
increase in inventory of approximately $9.5 million, and a reduction in accounts
payable and accrued expenses of approximately $15.7 million. Cash
used by investing activities was $18.6 million for the three months ended April
4, 2009, compared to $4.1 million for the three months ended March 29,
2008, an increase of $14.5 million, primarily due to the acquisition of Boca
Industries, Inc. and higher capital investment in the three months ended April
4, 2009. Net cash used by financing activities was $1.4 million and
$1.1 million for the three months ended April 4, 2009 and March 29, 2008,
respectively, an increase of $0.3 million, principally due to a decrease in
stock issued and excess tax benefits from stock-based compensation.
Capital
expenditures of $6.1 million were made during the three months ended April 4,
2009, compared to $4.7 million in the three months ended March 29, 2008, for a
net increase of $1.4 million (29.8%), 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, in the three months ended
April 4, 2009, the Company spent approximately $0.8 million related to the Final
BSE Rule and expects to spend approximately $0.6 million in the remainder of
fiscal 2009 to comply with the Final BSE Rule. Capital expenditures
related to compliance with environmental regulations were $0.1 million during
the quarter ended April 4, 2009 and March 29, 2008,
respectively.
Based upon
the 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 April
4, 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 the three
months ended April 4, 2009, the Company has accrued approximately $5.6 million
it expects will become due during the next twelve months in order to meet
obligations related to the Company’s self insurance reserves and accrued
insurance, which are included in current accrued expenses at April 4,
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 cost of health care, the
pending number of claims or other factors beyond the control of management of
the Company. No assurance can be given that the Company’s funding
obligations under its self insurance reserve will not increase in the
future.
Based upon
current actuarial estimates, the Company expects to contribute approximately
$1.4 million to its pension plans in order to meet minimum pension funding
requirements during the next twelve months. The minimum pension
funding requirements are determined annually, based upon a third party actuarial
estimate. The actuarial estimate may vary from year to year due to
fluctuations in return on investments or other factors beyond the control of
management of the Company or the administrator of the Company’s pension
funds. No assurance can be given that the minimum pension funding
requirements will not increase in the future.
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 three of these multi-employer
plans were under-funded as of the latest available information, some of which is
over a year old. The Company has no ability to compel the plan
trustees to provide more current information. Two of the underfunded
multi-employer plans in which the Company participates have given notification
of “Critical Status” under the PPA. Based upon the Company’s initial
review and conversations with other participating employers in one of these
“Critical Status” plans, it appears probable that there will be a mass
withdrawal termination of this plan. As a result, the Company accrued
approximately $3.2 million as of January 3, 2009 based on the most recent
information that is probable and estimable for this plan. The Company
has not received any further information regarding the Critical Status
plans. 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 April 4, 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 first quarter of fiscal 2009, unrestricted cash and funds
available under the Credit Agreement will be sufficient to meet the Company’s
working capital needs and maintenance and compliance-related capital
expenditures, scheduled debt and interest payments, income tax obligations and
other contemplated needs through the next twelve months. Numerous
factors could have adverse consequences to the Company that cannot be estimated
at this time, such as: a further 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 the first
quarter of fiscal 2009 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 finished
product prices, reduced sales, potential inventory buildup, increased bad debt
reserves 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, increases in
energy prices and the impact of the PPA has the potential to adversely impact
the Company’s liquidity. A decline in commodities prices, a rise in
energy prices, a slowdown in the U.S. or international economy, or other
factors, could cause the Company to fail to meet management’s expectations or
could cause liquidity concerns.
OFF
BALANCE SHEET OBLIGATIONS
Based upon
the underlying purchase agreements, the Company has commitments to purchase
$16.6 million consisting of approximately $5.9 million of finished products and
approximately $10.7 million of natural gas and diesel fuel during the next
twelve months, which are not included in liabilities on the Company’s balance
sheet at April 4, 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
the underlying lease agreements, the Company expects to pay approximately $10.8
million in operating lease obligations during the next twelve months, which are
not included in liabilities on the Company’s balance sheet at April 4,
2009. These lease obligations are included in cost of sales or
selling, general, and administrative expense as the underlying lease obligation
comes due, in accordance with accounting principles generally accepted in the
U.S.
NEW
ACCOUNTING PRONOUNCEMENTS
In 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) were adopted by the
Company on January 4, 2009. The effect of this standard depends on
acquisition activity and its relative size to the Company. During the
first quarter of fiscal 2009 the Company did acquire an entity as discussed in
Note 2 Acquisitions. The adoption of this accounting standard did not
have a material impact on the determination or reporting of the Company’s
financial results for the period ended April 4, 2009.
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 were adopted by the Company on January 4, 2009 on a
prospective basis. The adoption of this accounting standard did not
have an impact to the consolidated financial statements of the
Company.
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 was adopted on January 4, 2009. The
adoption of this accounting standard did not have a material effect to the
consolidated financial statements of the Company.
In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, Goodwill and Other
Intangible Assets. FSP FAS 142-3 was adopted on January 4,
2009. The adoption of this staff position did not have a material
effect to the consolidated financial statements of the Company.
In December
2008, the FASB issued 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
are 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.
In April
2009, the FASB issued FSP No. FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies. FSP No. FAS 141(R)-1 amends and clarifies SFAS
141(R) to address application on initial recognition and measurement, subsequent
measurement and accounting and disclosure of assets and liabilities arising from
contingencies in a business combination. The Company’s adoption of
this staff position did not have a material impact on the determination or
reporting of the Company’s financial results for the period ended April 4,
2009.
FORWARD
LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q includes “forward-looking” statements that involve
risks and uncertainties. The words “believe,” “anticipate,”
“expect,” “estimate,” “intend” and similar expressions identify forward-looking
statements. All statements other than statements of historical facts
included in the Quarterly Report on Form 10-Q, including, without limitation,
the statements under the section entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and 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 in this report and under the heading “Risk Factors”
in Item 1A of Part I of the Company’s annual report on Form 10-K for the year
ended January 3, 2009, 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
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
Market risks
affecting the Company are exposures to changes in prices of the finished
products the Company sells, interest rates on debt, availability of raw material
supply, the price of diesel fuel and the price of natural gas used in the
Company’s plants. Raw materials available to the Company are impacted
by seasonal factors, including holidays, when raw material volume
declines; 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; and general economic
conditions, which can impact consumer demand for meat products and therefore
affect rendering and restaurant production of the Company’s raw
materials. Predominantly all of the Company’s finished products are
commodities that are generally sold at prices prevailing at the time of
sale.
The Company
makes limited use of derivative instruments to manage cash flow risks related to
interest and natural gas expense. The Company uses interest rate
swaps with the intent of managing overall borrowing costs by reducing the
potential impact of increases in interest rates on floating-rate long-term
debt. The interest rate swaps are subject to the requirements of SFAS
133. The Company’s natural gas instruments are not subject to the
requirements of SFAS 133, because the natural gas instruments qualify as normal
purchases as defined in SFAS 133. The Company does not use derivative
instruments for trading purposes.
On May 19,
2006, the Company entered into two interest rate swap agreements that are
considered cash flow hedges according to SFAS 133. Under the terms of
these swap agreements, beginning June 30, 2006, the cash flows from the
Company’s $50.0 million floating-rate term loan facility under the Credit
Agreement have been exchanged for fixed rate contracts that bear interest,
payable quarterly. The first swap agreement for $25.0 million matures
April 7, 2012 and bears interest at 5.42%, which does not include the borrowing
spread per the Credit Agreement, with amortizing payments that mirror the term
loan facility. The second swap agreement for $25.0 million matures
April 7, 2012 and bears interest at 5.415%, which does not include the borrowing
spread per the Credit Agreement, with amortizing payments that mirror the term
loan facility. The Company’s receive rate on each swap agreement is
based on three-month LIBOR. At April 4, 2009, the fair value of these
interest swap agreements was $3.4 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 April
4, 2009, the Company had forward purchase agreements in place for purchases of
approximately $10.7 million of natural gas and diesel fuel. As of
April 4, 2009, the Company had forward purchase agreements in place for
purchases of approximately $5.9 million of finished product.
Item
4. CONTROLS AND PROCEDURES
Evaluation of
Disclosure Controls and Procedures. As required by Exchange
Act Rule 13a-15(b), the Company's management, including the Chief Executive
Officer and Chief Financial Officer, conducted an evaluation, as of the end of
the period covered by this report, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. As
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
disclosure controls and procedures are controls and other procedures of the
Company that are designed to ensure that information required to be disclosed by
the Company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is accumulated and communicated to the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Based on
management’s evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this report.
Changes in Internal
Control over Financial Reporting. As required by Exchange Act
Rule 13a-15(d), the Company’s management, including the Chief Executive Officer
and Chief Financial Officer, also conducted an evaluation of the Company’s
internal control over financial reporting to determine whether any change
occurred during the quarter covered by this report that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control
over financial reporting. Based on that evaluation, there has been no
change in the Company’s internal control over financial reporting during the
quarter covered by this report that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE THREE MONTHS ENDED APRIL 4, 2009
PART
II: Other Information
|
Item
6. EXHIBITS.
The
following exhibits are filed herewith:
|
31.1
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of Randall C. Stuewe, the Chief Executive Officer of the
Company.
|
|
31.2
|
Certification
pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934, of John O. Muse, the Chief Financial Officer of the
Company.
|
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, of Randall C. Stuewe, the Chief
Executive Officer of the Company, and of John O. Muse, the Chief Financial
Officer of the Company.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
DARLING
INTERNATIONAL INC.
|
|
|
|
|
|
|
Date: May
14, 2009
|
|
By:
|
/s/ Randall
C. Stuewe
|
|
|
|
Randall
C. Stuewe
|
|
|
|
Chairman
and
|
|
|
|
Chief
Executive Officer
|
|
|
|
Date: May
14, 2009
|
|
By:
|
/s/ John
O. Muse
|
|
|
|
John
O. Muse
|
|
|
|
Executive
Vice President
|
|
|
|
Administration
and Finance
|
|
|
|
(Principal
Financial Officer)
|