q09second.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 July 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
|
|
Accelerated
filer
|
|
|
Non-accelerated
filer
|
|
|
Smaller
reporting company
|
|
|
|
|
|
|
|
(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
82,226,690 shares of common stock, $0.01 par value, outstanding at August
6, 2009.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 4, 2009
TABLE OF CONTENTS
|
|
Page No.
|
|
PART
I: FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
FINANCIAL
STATEMENTS
|
|
|
Consolidated
Balance Sheets
|
3
|
|
July
4, 2009 (unaudited) and January 3, 2009
|
|
|
|
|
|
Consolidated
Statements of Operations (unaudited)
|
4
|
|
Three
and Six Months Ended July 4, 2009 and June 28, 2008
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (unaudited)
|
5
|
|
Six
Months Ended July 4, 2009 and June 28, 2008
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (unaudited)
|
6
|
|
|
|
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
|
|
|
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
19
|
|
|
|
Item
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
|
35
|
|
|
|
Item
4.
|
CONTROLS
AND PROCEDURES
|
36
|
|
|
|
|
|
|
|
PART
II: OTHER INFORMATION
|
|
|
|
|
Item
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
38
|
|
|
|
Item
6.
|
EXHIBITS
|
39
|
|
|
|
|
Signatures
|
40
|
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
July 4,
2009 and January 3, 2009
(in
thousands, except shares)
|
|
July 4,
2009
|
|
|
January
3,
2009
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
57,786 |
|
|
$ |
50,814 |
|
Restricted
cash
|
|
|
375 |
|
|
|
449 |
|
Accounts
receivable, net
|
|
|
46,404 |
|
|
|
40,424 |
|
Inventories
|
|
|
20,073 |
|
|
|
22,182 |
|
Income
taxes refundable
|
|
|
5,170 |
|
|
|
11,248 |
|
Other
current assets
|
|
|
8,195 |
|
|
|
6,696 |
|
Deferred
income taxes
|
|
|
6,969 |
|
|
|
6,656 |
|
Total
current assets
|
|
|
144,972 |
|
|
|
138,469 |
|
Property,
plant and equipment, less accumulated depreciation of
$218,723
at July 4, 2009 and $211,306 at January 3, 2009
|
|
|
146,477 |
|
|
|
143,291 |
|
Intangible
assets, less accumulated amortization of
$49,184
at July 4, 2009 and $47,281 at January 3, 2009
|
|
|
37,397 |
|
|
|
35,982 |
|
Goodwill
|
|
|
66,958 |
|
|
|
61,133 |
|
Other
assets
|
|
|
6,867 |
|
|
|
6,623 |
|
Deferred
income taxes
|
|
|
3,340 |
|
|
|
8,877 |
|
|
|
$ |
406,011 |
|
|
$ |
394,375 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
5,000 |
|
|
$ |
5,000 |
|
Accounts
payable, principally trade
|
|
|
19,162 |
|
|
|
16,243 |
|
Accrued
expenses
|
|
|
42,128 |
|
|
|
49,780 |
|
Total
current liabilities
|
|
|
66,290 |
|
|
|
71,023 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net
|
|
|
30,000 |
|
|
|
32,500 |
|
Other
non-current liabilities
|
|
|
54,117 |
|
|
|
54,274 |
|
Total
liabilities
|
|
|
150,407 |
|
|
|
157,797 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value; 100,000,000 shares authorized;
82,629,970
and 82,169,076 shares issued at July 4, 2009
and
at January 3, 2009, respectively
|
|
|
826 |
|
|
|
822 |
|
Additional
paid-in capital
|
|
|
157,759 |
|
|
|
156,899 |
|
Treasury
stock, at cost; 403,280 and 401,094 shares at
July
4, 2009 and January 3, 2009, respectively
|
|
|
(3,855
|
) |
|
|
(3,848
|
) |
Accumulated
other comprehensive loss
|
|
|
(28,190
|
) |
|
|
(29,850
|
) |
Retained
earnings
|
|
|
129,064 |
|
|
|
112,555 |
|
Total
stockholders’ equity
|
|
|
255,604 |
|
|
|
236,578 |
|
|
|
$ |
406,011 |
|
|
$ |
394,375 |
|
The accompanying notes are an integral
part of these consolidated financial statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
Three
months and six months ended July 4, 2009 and June 28, 2008
(in
thousands, except per share data)
(unaudited)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
July 4,
2009
|
|
|
|
June 28,
2008
|
|
|
|
July 4,
2009
|
|
|
|
June 28,
2008
|
|
Net
sales
|
|
$
|
155,298
|
|
|
$
|
220,858
|
|
|
$
|
288,298
|
|
|
$
|
422,814
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and operating expenses
|
|
|
113,353
|
|
|
|
161,298
|
|
|
|
216,896
|
|
|
|
307,594
|
|
Selling,
general and administrative expenses
|
|
|
15,446
|
|
|
|
13,980
|
|
|
|
30,203
|
|
|
|
28,681
|
|
Depreciation
and amortization
|
|
|
6,223
|
|
|
|
5,845
|
|
|
|
12,160
|
|
|
|
11,637
|
|
Total
costs and expenses
|
|
|
135,022
|
|
|
|
181,123
|
|
|
|
259,259
|
|
|
|
347,912
|
|
Operating
income
|
|
|
20,276
|
|
|
|
39,735
|
|
|
|
29,039
|
|
|
|
74,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(784
|
)
|
|
|
(775
|
)
|
|
|
(1,442
|
)
|
|
|
(1,620
|
)
|
Other,
net
|
|
|
(218
|
)
|
|
|
133
|
|
|
|
(455
|
)
|
|
|
300
|
|
Total
other income/(expense)
|
|
|
(1,002
|
)
|
|
|
(642
|
)
|
|
|
(1,897
|
)
|
|
|
(1,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations before income
taxes
|
|
|
19,274
|
|
|
|
39,093
|
|
|
|
27,142
|
|
|
|
73,582
|
|
Income
taxes expense
|
|
|
7,575
|
|
|
|
15,014
|
|
|
|
10,633
|
|
|
|
28,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
11,699
|
|
|
$
|
24,079
|
|
|
$
|
16,509
|
|
|
$
|
45,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share:
|
|
$
|
0.14
|
|
|
$
|
0.30
|
|
|
$
|
0.20
|
|
|
$
|
0.56
|
|
Diluted
income per share:
|
|
$
|
0.14
|
|
|
$
|
0.29
|
|
|
$
|
0.20
|
|
|
$
|
0.55
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Six
months ended July 4, 2009 and June 28, 2008
(in
thousands)
(unaudited)
|
July
4,
2009
|
|
|
June
28,
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
$
|
16,509
|
|
|
$
|
45,540
|
|
Adjustments
to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
12,160
|
|
|
|
11,637
|
|
Loss
(Gain) on disposal of property, plant, equipment and other
assets
|
|
134
|
|
|
|
(12
|
)
|
Deferred
taxes
|
|
5,224
|
|
|
|
1,319
|
|
Stock-based
compensation expense
|
|
463
|
|
|
|
522
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Restricted
cash
|
|
74
|
|
|
|
102
|
|
Accounts
receivable
|
|
(5,980
|
)
|
|
|
(5,677
|
)
|
Income
taxes refundable
|
|
6,078
|
|
|
|
–
|
|
Inventories
and prepaid expenses
|
|
765
|
|
|
|
(10,626
|
)
|
Accounts
payable and accrued expenses
|
|
(5,281
|
)
|
|
|
(1,723
|
)
|
Other
|
|
2,136
|
|
|
|
824
|
|
Net
cash provided by operating activities
|
|
32,282
|
|
|
|
41,906
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
(10,294
|
)
|
|
|
(13,464
|
)
|
Acquisitions
|
|
(12,500
|
)
|
|
|
–
|
|
Gross
proceeds from disposal of property, plant and equipment
and other assets
|
|
158
|
|
|
|
717
|
|
Net
cash used by investing activities
|
|
(22,636
|
)
|
|
|
(12,747
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Payments
on debt
|
|
(2,500
|
)
|
|
|
(2,500
|
)
|
Contract
payments
|
|
(38
|
)
|
|
|
(94
|
)
|
Issuance
of common stock
|
|
11
|
|
|
|
275
|
|
Minimum
withholding taxes paid on stock awards
|
|
(108
|
)
|
|
|
(871
|
)
|
Excess
tax benefits from stock-based compensation
|
|
(39
|
)
|
|
|
2,292
|
|
Net
cash used by financing activities
|
|
(2,674
|
)
|
|
|
(898
|
)
|
Net
increase in cash and cash equivalents
|
|
6,972
|
|
|
|
28,261
|
|
Cash
and cash equivalents at beginning of period
|
|
50,814
|
|
|
|
16,335
|
|
Cash
and cash equivalents at end of period
|
$
|
57,786
|
|
|
$
|
44,596
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
$
|
1,319
|
|
|
$
|
1,308
|
|
Income
taxes, net of refunds
|
$
|
454
|
|
|
$
|
26,468
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
DARLING
INTERNATIONAL INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
July 4,
2009
(unaudited)
|
The
accompanying consolidated financial statements for the three and six month
periods ended July 4, 2009 and June 28, 2008, have been prepared in
accordance with generally accepted accounting principles in the United
States by Darling International Inc. (“Darling”) and its subsidiaries
(Darling and its subsidiaries are collectively referred to herein as the
“Company”) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (“SEC”). The information
furnished herein reflects all adjustments (consisting only of normal
recurring accruals) that are, in the opinion of management, necessary to
present a fair statement of the financial position and operating results
of the Company as of and for the respective periods. However, these
operating results are not necessarily indicative of the results expected
for a full fiscal year. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant
to such rules and regulations. However, management of the
Company believes, to the best of their knowledge, that the disclosures
herein are adequate to make the information presented not
misleading. The Company has determined that there were no
subsequent events that would require disclosure or adjustments to the
accompanying consolidated financial statements through August 13, 2009,
the date the financial statements were issued. 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 July 4, 2009, and include the 13
weeks and 26 weeks ended July 4, 2009, and the 13 weeks and 26 weeks ended
June 28, 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
|
|
|
July
4,
|
|
|
|
June
28,
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
Income
|
|
Shares
|
|
Per
Share
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
$
11,699
|
|
82,220
|
|
$ 0.14
|
|
$
24,079
|
|
81,665
|
|
$ 0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Option shares in the money
|
|
|
785
|
|
|
|
|
|
1,033
|
|
|
Less:
Pro forma treasury shares
|
|
|
(445
|
)
|
|
|
|
|
(392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
11,699
|
|
82,560
|
|
$ 0.14
|
|
$
24,079
|
|
82,306
|
|
$ 0.29
|
|
|
|
Six
Months Ended
|
|
|
July
4,
|
|
|
|
June
28,
|
|
|
|
|
2009
|
|
|
|
|
|
2008
|
|
|
|
Income
|
|
Shares
|
|
Per
Share
|
|
Income
|
|
Shares
|
|
Per
Share
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
$
16,509
|
|
82,058
|
|
$ 0.20
|
|
$
45,540
|
|
81,530
|
|
$ 0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Option shares in the money
|
|
|
778
|
|
|
|
|
|
1,171
|
|
|
Less:
Pro forma treasury shares
|
|
|
(491
|
)
|
|
|
|
|
(444
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
$
16,509
|
|
82,345
|
|
$ 0.20
|
|
$
45,540
|
|
82,257
|
|
$ 0.55
|
For the
three months ended July 4, 2009 and June 28, 2008, respectively, 32,000 and
20,000 outstanding stock options were excluded from diluted income per common
share as the effect was antidilutive.
For the
six months ended July 4, 2009 and June 28, 2008, respectively, 32,000 and 13,516
outstanding stock options were excluded from diluted income per common share as
the effect was antidilutive.
(3) Acquisitions
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 deemed material to revenues and net income of the Company for
fiscal 2009 and 2008. 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.
(4) Contingencies
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 July 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 $18.4 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.
(5) Business
Segments
The
Company sells its products domestically and internationally and operates within
two industry segments: Rendering and Restaurant
Services. The measure of segment profit (loss) includes all revenues,
operating expenses (excluding certain amortization of intangibles), and selling,
general and administrative expenses incurred at all operating locations and
excludes general corporate expenses.
Included
in corporate activities are general corporate expenses and the amortization of
intangibles. Assets of corporate activities include cash, unallocated prepaid
expenses, deferred tax assets, prepaid pension and miscellaneous other
assets.
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
|
|
Six
Months Ended
|
|
July
4,
2009
|
|
June
28,
2008
|
|
July
4,
2009
|
|
June
28,
2008
|
Rendering:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
$
119,641
|
|
|
$
157,074
|
|
|
$
223,182
|
|
|
$
304,650
|
|
Intersegment
|
4,066
|
|
|
17,049
|
|
|
7,695
|
|
|
30,532
|
|
|
123,707
|
|
|
174,123
|
|
|
230,877
|
|
|
335,182
|
|
Restaurant
Services:
|
|
|
|
|
|
|
|
|
|
|
|
Trade
|
35,657
|
|
|
63,784
|
|
|
65,116
|
|
|
118,164
|
|
Intersegment
|
3,628
|
|
|
2,302
|
|
|
5,791
|
|
|
4,126
|
|
|
39,285
|
|
|
66,086
|
|
|
70,907
|
|
|
122,290
|
|
Eliminations
|
(7,694
|
)
|
|
(19,351
|
)
|
|
(13,486
|
)
|
|
(34,658
|
)
|
Total
|
$
155,298
|
|
|
$
220,858
|
|
|
$
288,298
|
|
|
$
422,814
|
|
Business
Segment Profit/(Loss) (in thousands):
|
Three
Months Ended
|
|
Six
Months Ended
|
|
July
4,
2009
|
|
June
28,
2008
|
|
July
4,
2009
|
|
June
28,
2008
|
Rendering
|
$ 24,866
|
|
|
$ 35,453
|
|
|
$ 42,384
|
|
|
$
70,514
|
|
Restaurant
Services
|
4,647
|
|
|
13,486
|
|
|
4,948
|
|
|
23,539
|
|
Corporate
|
(17,030
|
)
|
|
(24,085
|
)
|
|
(29,381
|
)
|
|
(46,893
|
)
|
Interest
expense
|
(784
|
)
|
|
(775
|
)
|
|
(1,442
|
)
|
|
(1,620
|
)
|
Net
Income
|
$ 11,699
|
|
|
$ 24,079
|
|
|
$ 16,509
|
|
|
$ 45,540
|
|
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):
|
July
4,
2009
|
|
January
3,
2009
|
Rendering
|
$157,128
|
|
$155,318
|
Restaurant
Services
|
61,943
|
|
46,718
|
Combined
Rendering/Restaurant Services
|
100,340
|
|
99,857
|
Corporate
|
86,600
|
|
92,482
|
Total
|
$406,011
|
|
$394,375
|
(6) Income
Taxes
|
The
Company has provided income taxes for the three-month and six-month period
ended July 4, 2009 and June 28, 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; however, 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 jurisdiction is the U.S. (federal and
state). The Company is no longer subject to federal
examinations on years prior to fiscal 2005. The number of years
open for state tax audits varies, depending on the tax jurisdiction, but
are generally from three to five years. Currently, one state
examination is 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.
|
(7)
Financing
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 July 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
July 4, 2009 under the Credit Agreement, the interest rate for $35.0
million of the term loan that was outstanding was based on LIBOR plus a margin
of 1.0% per annum for a total of 1.625% per annum. At July 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 July 4, 2009 and January
3, 2009, respectively (in thousands):
|
|
July
4,
2009
|
|
January 3,
2009
|
Term
Loan
|
|
$
|
35,000
|
|
$
|
37,500
|
|
Revolving
Credit Facility:
|
|
|
|
|
|
|
|
Maximum
availability
|
|
$
|
125,000
|
|
$
|
125,000
|
|
Borrowings
outstanding
|
|
|
–
|
|
|
–
|
|
Letters
of credit issued
|
|
|
15,852
|
|
|
16,424
|
|
Availability
|
|
$
|
109,148
|
|
$
|
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 July 4, 2009, the Company was in compliance with all
the financial covenants and believes it was in compliance with all of
the other covenants contained in the Credit Agreement. At July 4,
2009, the Company had unrestricted cash of $57.8 million, compared to
unrestricted cash of $50.8 million at January 3, 2009 and $44.6 million at June
28, 2008.
(8) Derivatives
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 July 4, 2009, the Company has interest rate swaps and
natural gas swaps, but did not have any natural gas collars or inventory swaps
outstanding.
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.
Cash Flow
Hedges
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.
On May
15, 2009, the Company entered into natural gas swap contracts that are
considered cash flow hedges according to SFAS 133. Under the terms of
the natural gas swap contracts the Company fixed the expected purchase cost of
400,000 mmbtu’s of natural gas representing a portion of its plants expected
usage for the months of July 2009 through October 2009 at a fixed rate of
$4.5248 per mmbtu.
The
Company estimates the amount that will be reclassified from accumulated other
comprehensive loss at July 4, 2009 into earnings over the next 12 months will be
approximately $1.8 million. No cash flow hedges were discontinued
during 2009.
The
following table presents the fair value of the Company’s derivatives designated
as hedging instruments under SFAS 133 as of July 4, 2009 and January 3, 2009 (in
thousands):
Derivatives
Designated
|
|
Balance
Sheet
|
|
Liability
Derivatives Fair Value
|
as
Hedges
|
|
Location
|
|
July
4, 2009
|
|
January
3, 2009
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
Other
noncurrent liabilities
|
|
$
2,836
|
|
$ 3,593
|
|
|
|
|
|
|
|
Natural
gas swaps
|
|
Accrued
liabilities
|
|
220
|
|
–
|
|
|
|
|
|
Total
derivatives not designated
as hedges
|
|
–
|
|
–
|
|
|
|
|
|
|
|
Total
liability derivatives
|
|
|
|
$
3,056
|
|
$ 3,593
|
The
effect of the Company’s derivative instruments on the consolidated statement of
operations for the three months ended July 4, 2009 and June 28, 2008 are as
follows (in thousands):
Derivatives
Designated
as
Cash
Flow Hedges
|
|
Gain
or (Loss)
Recognized
in Other Comprehensive Income (“OCI”)
on
Derivatives
(Effective
Portion) (a)
|
|
Gain
or (Loss)
Reclassified
From
Accumulated
OCI
into
Income
(Effective
Portion) (b)
|
|
Gain
or (Loss)
Recognized
in Income
On
Derivatives
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing) (c)
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ 144
|
|
$
1,113
|
|
$ (386)
|
|
$ (284)
|
|
$ 1
|
|
$ –
|
Natural
gas swaps
|
|
(220)
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
(76)
|
|
$
1,113
|
|
$ (386)
|
|
$ (284)
|
|
$ 1
|
|
$ –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amount
recognized in accumulated OCI (effective portion) is reported as
accumulated other comprehensive gain of approximately $0.1 million and
approximately $1.1 million recorded net of taxes of less than $0.1 million
and approximately $0.4 million for the three months ended July 4, 2009 and
June 28, 2008, respectively.
|
(b)
|
Gains
and (losses) reclassified from accumulated OCI into income (effective
portion) for interest rate swaps and natural gas swaps is included in
interest expense and cost of sales, respectively, in the Company’s
consolidated statements of
operations.
|
(c)
|
Gains
and (losses) recognized in income on derivatives (ineffective portion) for
interest rate swaps and natural gas swaps is included in other, net in the
Company’s consolidated statements of
operations.
|
The
effect of the Company’s derivative instruments on the consolidated statement of
operations for the six months ended July 4, 2009 and June 28, 2008 are as
follows (in thousands):
Derivatives
Designated
as
Cash
Flow Hedges
|
|
Gain
or (Loss)
Recognized
in OCI
on
Derivatives
(Effective
Portion) (a)
|
|
Gain
or (Loss)
Reclassified
From
Accumulated
OCI
into
Income
(Effective
Portion) (b)
|
|
Gain
or (Loss)
Recognized
in Income
On
Derivatives
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing) (c)
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps
|
|
$ 13
|
|
$ (195)
|
|
$ (757)
|
|
$ (347)
|
|
$ (13)
|
|
$ –
|
Natural
gas swaps
|
|
(220)
|
|
–
|
|
–
|
|
–
|
|
–
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ (207)
|
|
$ (195)
|
|
$ (757)
|
|
$ (347)
|
|
$ (13)
|
|
$ –
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amount
recognized in accumulated OCI (effective portion) is reported as
accumulated other comprehensive loss of approximately $0.2 million
recorded net of taxes of approximately $0.1 million for the six months
ended July 4, 2009 and June 28,
2008.
|
(b)
|
Gains
and (losses) reclassified from accumulated OCI into income (effective
portion) for interest rate swaps and natural gas swaps is included in
interest expense and cost of sales, respectively, in the Company’s
consolidated statements of
operations.
|
(c)
|
Gains
and (losses) recognized in income on derivatives (ineffective portion) for
interest rate swaps and natural gas swaps is included in other, net in the
Company’s consolidated statements of
operations.
|
At July
4, 2009, the Company had forward purchase agreements in place for purchases of
approximately $7.0 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 July 4, 2009 and June 28,
2008, total comprehensive income was $12.6 million and $25.0 million,
respectively. For the six months ended July 4, 2009, and June 28,
2008, total comprehensive income was $18.2 million and $45.8 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 and six months ended July 4, 2009 and June 28, 2008
includes the following components (in thousands):
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
July
4, 2009
|
|
|
|
June
28, 2008
|
|
|
|
July
4, 2009
|
|
|
|
June
28, 2008
|
|
Service
cost
|
$
|
246
|
|
|
$
|
267
|
|
|
$
|
492
|
|
|
$
|
534
|
|
Interest
cost
|
|
1,442
|
|
|
|
1,360
|
|
|
|
2,884
|
|
|
|
2,720
|
|
Expected
return on plan assets
|
|
(1,203
|
)
|
|
|
(1,651
|
)
|
|
|
(2,406
|
)
|
|
|
(3,302
|
)
|
Amortization
of prior service cost
|
|
36
|
|
|
|
31
|
|
|
|
72
|
|
|
|
62
|
|
Amortization
of net loss
|
|
1,044
|
|
|
|
87
|
|
|
|
2,088
|
|
|
|
174
|
|
Net
pension cost
|
$
|
1,565
|
|
|
$
|
94
|
|
|
$
|
3,130
|
|
|
$
|
188
|
|
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 July 4, 2009, the Company expects to
contribute approximately $1.8 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 this multi-employer
plan for approximately $1.4 million, which included a release for any future
liability. In June 2009, the Company received a notice of a mass
withdrawal termination and a notice of initial withdrawal liability from another
multi-employer plan in which it participates. The Company had
anticipated this event and as a result had 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 plan has stated that it will provide the
Company with a notice of redetermination liability no later than December 27,
2009. Another of the underfunded multi-employer plans in which the
Company participates has given notification of “Critical Status” under the
federal Pension Protection Act (the “PPA”); however, as of July 4, 2009, the
Company has not received any further information regarding this Critical Status
plan. While the Company has no ability to calculate a possible
current liability for under-funded multi-employer plans that could terminate or
could require additional funding under the PPA, the amounts could be
material.
(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 Company adopted SFAS 157 on December 30,
2007. 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 July 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 July 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
|
$ 3,056
|
|
$ —
|
|
$ 3,056
|
|
$ —
|
Total
|
$ 3,056
|
|
$ —
|
|
$ 3,056
|
|
$ —
|
Derivative
liabilities consist of the Company’s interest rate swap contracts and natural
gas swap contracts. The interest rate swaps 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 natural gas swap
represents the difference between the observable market rate of commonly quoted
natural gas intervals for similar assets and liabilities in active markets and
the fixed swap rate considering the instruments term, notional amount and credit
risk.
(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 July 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 July 4,
2009.
In April
2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP
FAS 107-1 and APB 28-1 requires disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements. FSP FAS 107-1 and APB 28-1 is effective for interim
reporting periods ending after June 15, 2009. The Company’s adoption
of this staff position did not have a material impact on the consolidated
financial statements of the Company.
In May
2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS
165”) effective for interim or annual periods ending after June 15,
2009. The objective of SFAS 165 is to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
165 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was
selected. The adoption of this accounting standard did not have a
material effect to the consolidated financial statements of the
Company.
In June
2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation
46(R), (“SFAS 167”) which modifies how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. SFAS 167 clarifies that
the determination of whether a company is required to consolidate an entity is
based on, among other things, an entity’s purpose and design and a company’s
ability to direct the activities of the entity that most significantly impact
the entity’s economic performance. SFAS 167 requires an ongoing
assessment of whether a company is the primary beneficiary of a variable
interest entity. SFAS 167 also requires additional disclosures about
a company’s involvement in variable interest entities and any significant
changes in risk exposure due to that involvement. SFAS 167 is
effective for fiscal years beginning after November 15, 2009. The
Company is currently evaluating the impact of adopting this accounting
standard.
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification™ and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162,
(“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards
Codification™ (the “Codification”) as the source of authoritative U.S. generally
accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity of U.S. GAAP. The Codification does not change current
U.S. GAAP, but is intended to simplify user access to all authoritative U.S.
GAAP by providing all the authoritative literature related to a particular topic
in one place. The Codification is effective for interim and annual
periods ending after September 15, 2009. The adoption of this
standard will change how the Company references various elements of U.S GAAP
when preparing the Company’s financial statement disclosures, but will have no
impact on the Company’s financial position, results of operation or cash
flows.
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.
Earnings
for the second quarter of fiscal 2009 were higher than the first quarter of
fiscal 2009, driven primarily by higher selling prices for the Company’s
finished products. The Company’s raw material volumes stabilized in
the second quarter of fiscal 2009 as compared to the first quarter of fiscal
2009. Raw material volume in the second quarter of fiscal 2009
was lower than the second quarter of fiscal 2008. The reduction in
the second quarter of fiscal 2009 was due to reduced overrun volume and
production cutbacks from integrated packers, closures of mid-sized packer
operations as a result of the continued difficult economic conditions for the
food service industry and lower dead stock volume. Finished product
prices for BFT, YG, and MBM improved versus the first quarter of fiscal 2009 as
global demand remained strong and values for alternative ingredients
increased. However, overall prices were lower in the second quarter
of fiscal 2009 as compared to the second quarter of fiscal
2008. Additionally, the Company experienced lower operating costs in
the second quarter of fiscal 2009 as compared to the second quarter of fiscal
2008 primarily as a result of lower natural gas and diesel fuel
prices.
Operating income decreased by $19.4
million in the second quarter of fiscal 2009 compared to the second 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 second quarter
of fiscal 2009 are indicative of future operating performance of the
Company.
Summary of Critical Issues
Faced by the Company During the Second Quarter of 2009
·
|
Lower
raw material volumes were collected from suppliers during the second
quarter of 2009 as compared to the second quarter of
2008. Management believes the decline in the general
performance of the U.S. economy and weaker year over year slaughter rates
in the meat processing industry contributed to a decline in raw material
volumes collected by the Company during the quarter. The
Company’s decline in raw material volume was impacted by the closure of
smaller meat packer operations and the reduced overrun volume and
production cutbacks from larger integrated packers, which has occurred
during the current economic environment. The financial impact
of lower raw material volumes is summarized below in Results of
Operations.
|
·
|
Lower
finished product prices for BFT and YG as compared to the second quarter
of fiscal 2008 are a result of the decline of the U.S. economy and world
economy. These lower prices were offset somewhat by higher MBM
prices. The decline in overall finished product prices was
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.
|
·
|
Energy
prices for natural gas and diesel fuel declined during the second quarter
of fiscal 2009 as compared to the second quarter of fiscal 2008, as
overall lower energy costs continued to decline in response to 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
half 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
half 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 second quarter of
fiscal 2009 as compared to the first quarter of fiscal 2009. 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 subsequently published its Final Guidance for
Industry on compliance with the Final BSE Rule on May 6,
2009. 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 August 6, 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
emergence of 2009 H1N1 flu (initially know as “Swine Flu”) in North
America during the spring of 2009 was initially linked to hogs even though
hogs have not been determined to be the source of the outbreak in
humans. The 2009 H1N1 flu has since spread to affect the human
populations in countries throughout the world, although as of the date of
this report its severity is similar to seasonal flu and it has had little
impact on hog production. Management does not believe that the 2009 H1N1
flu will have a material impact on the operations of the Company; however,
an increase in the severity 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. On June 11, 2009, the FDA issued “Guidance for Industry:
Questions and Answers Regarding the Reportable Food Registry as
Established by the Food and Drug Administration Amendments Act of 2007:
Draft Guidance” (the “Guidance”) and announced implementation
of the Reportable Food Registry would be further delayed until
September 8, 2009. In the Guidance, the FDA defined a
reportable food, which the manufacturer or distributor would be required
to report in the Reportable Food Registry, to include materials used as
ingredients in animal feeds and pet foods, if there is reasonable
probability that the use of such materials will cause serious adverse
health consequences or death to humans or animals. The impact
of the Act and implementation of the Reportable Food Registry on the
Company, if any, will not be clear until the FDA finalizes the Guidance
and clarifies certain interpretive and enforcement issues pertaining to
the treatment of animal feed and pet food under the Act. The
Guidance had not been finalized as of August 6, 2009. The Company believes
that it has adequate procedures in place to assure that its finished
products are safe to use in animal feed and pet food and does not
currently anticipate that the Act will have a significant impact on its
operations or financial
performance.
|
·
|
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 August 6, 2009.
|
·
|
On
May 26, 2009, the U.S. Environmental Protection Agency (the “EPA”)
published its proposed regulations implementing changes to the Renewable
Fuel Standard (“RFS”) program. Among other things, the revised
regulatory requirements specify the relative volumes of biofuel/renewable
fuel that must be used in transportation fuel each year, and include new
definitions and criteria for both renewable fuels and the feedstocks used
to produce them, including new greenhouse gas (“GHG”) emission thresholds
for renewable fuels. As proposed, the regulations relating to
the RFS program requires that a renewable fuel must reduce the fuel’s
lifecycle GHG emissions by a minimum of 40% versus petroleum
diesel. In addition, in the revised regulations the EPA
determined, among other things, that biodiesel or renewable diesel made
from animal fat or used cooking oil (which were termed “waste greases”)
results in an 80% reduction in GHG emissions versus petroleum
diesel. The proposed revisions to the RFS program are subject
to a public comment period that was to expire on July 29, 2009; however,
the EPA extended the public comment period and will continue to accept
comments until September 25, 2009. The Company will
continue to monitor this proposed rule and to evaluate the potential
impact on the Company’s business, including it renewable fuel
strategy.
|
Results
of Operations
Three
Months Ended July 4, 2009 Compared to Three Months Ended June 28,
2008
Summary of Key Factors
Impacting Second Quarter 2009
Results:
Principal
factors that contributed to a $19.4 million decrease in operating income, which
are discussed in greater detail in the following section, were:
·
|
Lower
raw material volumes, and
|
·
|
Lower
finished product prices for BFT and
YG.
|
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 second
quarter of fiscal 2009 compared to average Jacobsen prices for the second
quarter of fiscal 2008 follow:
|
Avg.
Price
2nd
Quarter
2009
|
Avg.
Price
2nd
Quarter
2008
|
Increase/
(Decrease)
|
%
Increase/
(Decrease)
|
MBM
(Illinois)
|
$398.01
/ton
|
$315.22
/ton
|
$ 82.79
/ton
|
26.3%
|
BFT
(Chicago)
|
$
25.98 /cwt
|
$ 41.79
/cwt
|
$(15.81)
/cwt
|
(37.8)%
|
YG
(Illinois)
|
$
23.28 /cwt
|
$ 33.49
/cwt
|
$(10.21)
/cwt
|
(30.5)%
|
The
overall decrease in average prices 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 fees charged to suppliers, which are 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 produce finished products of MBM, BFT
and YG and hides. Sales are significantly affected by finished goods
prices, quality and mix of raw material, and volume of raw
material. Net sales include the sales of produced finished goods,
collection fees, fees for grease trap services and finished goods purchased for
resale.
During the second quarter of fiscal 2009, net sales decreased by $65.6 million (29.7%) to $155.3 million as compared to $220.9 million during the second 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
|
|
$ (22.7
|
)
|
|
$ (13.1
|
)
|
|
$ —
|
|
|
$ (35.8
|
)
|
Lower
raw material volume
|
|
(16.4
|
)
|
|
(2.5
|
)
|
|
—
|
|
|
(18.9
|
)
|
Other
sales decreases
|
|
(7.7
|
)
|
|
2.1
|
|
|
—
|
|
|
(5.6
|
)
|
Purchase
of finished product for resale
|
|
(1.9
|
)
|
|
(1.5
|
)
|
|
—
|
|
|
(3.4
|
)
|
Lower
yield
|
|
(1.7
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
(1.9
|
)
|
Product
transfers
|
|
13.0
|
|
|
(13.0
|
)
|
|
—
|
|
|
—
|
|
|
|
$ (37.4
|
)
|
|
$ (28.2
|
)
|
|
$ —
|
|
|
$ (65.6
|
)
|
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. 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 second quarter of fiscal
2009, cost of sales and operating expenses decreased $47.9 million (29.7%) to
$113.4 million as compared to $161.3 million during the second 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
|
|
$ (21.5
|
)
|
|
$ (5.4
|
)
|
|
$ —
|
|
|
$
(26.9
|
)
|
Lower
energy costs, primarily natural gas and
diesel fuel
|
|
(6.4
|
)
|
|
(1.7
|
)
|
|
0.3
|
|
|
(7.8
|
)
|
Lower
raw material volume
|
|
(5.4
|
)
|
|
(0.7
|
)
|
|
—
|
|
|
(6.1
|
)
|
Other
expense decreases
|
|
(5.6
|
)
|
|
2.0
|
|
|
—
|
|
|
(3.6
|
)
|
Purchases
of finished product for resale
|
|
(2.1
|
)
|
|
(1.4
|
)
|
|
—
|
|
|
(3.5
|
)
|
Product
transfers
|
|
13.0
|
|
|
(13.0
|
)
|
|
—
|
|
|
—
|
|
|
|
$ (28.0
|
)
|
|
$ (20.2
|
)
|
|
$ 0.3
|
|
|
$
(47.9
|
)
|
Selling, General and Administrative
Expenses. Selling, general and
administrative expenses were $15.4 million during the second quarter of fiscal
2009, a $1.4 million increase (10.0%) from $14.0 million during the second
quarter of fiscal 2008. The increase in selling, general and
administrative expenses is primarily due to the following (in millions of
dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Other
expense
|
|
$ —
|
|
|
$ 0.1
|
|
|
$ 0.5
|
|
|
$ 0.6
|
|
Consulting
fees
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
0.5
|
|
Payroll
and incentive-related benefits
|
|
0.3
|
|
|
0.4
|
|
|
(0.4
|
)
|
|
0.3
|
|
|
|
$ 0.3
|
|
|
$ 0.5
|
|
|
$ 0.6
|
|
|
$ 1.4
|
|
Depreciation and
Amortization.
Depreciation and
amortization charges increased $0.4 million (6.9%) to $6.2 million during the
second quarter of fiscal 2009 as compared to $5.8 million during the second
quarter of fiscal 2008. The increase in depreciation and amortization is
primarily due to an overall increase in depreciable capital assets on the
balance sheet.
Interest Expense.
Interest expense was $0.8 million during the second quarter of
fiscal 2009 and fiscal 2008, respectively
Other
Income/Expense. Other expense was $0.2 million in the second quarter
of fiscal 2009, compared to other income of $0.1 million during the second
quarter of fiscal 2008. The increase in other expense is primarily due to a
decrease in interest rates on cash included in interest bearing accounts and an
increase in loss on sale of fixed assets.
Income Taxes. The
Company recorded income tax expense of $7.6 million for the second quarter of
fiscal 2009, compared to $15.0 million recorded in the second quarter of fiscal
2008, a decrease of $7.4 million, primarily due to decreased pre-tax earnings of
the Company in the second quarter of fiscal 2009. The effective tax
rate for the second quarter of fiscal 2009 is 39.3% and differs from the
statutory rate of 35% due primarily to state income taxes. The
effective rate for the second quarter of fiscal 2008 of 38.4% differs from the
statutory rate of 35% primarily due to state income taxes.
Six
Months Ended July 4, 2009 Compared to Six Months Ended June 28,
2008
Summary of Key Factors
Impacting the First Six Months of Fiscal 2009
Results:
Principal factors that contributed to a
$45.9 million decrease in operating income, which are discussed in greater
detail in the following section, were:
·
|
Lower
raw material volume,
|
·
|
Lower
finished product prices for BFT and YG, 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 that management
routinely monitors and compares to previous periods as an indicator of problems
or improvements in operating results include:
·
|
Finished
product commodity prices,
|
·
|
Raw
material volume,
|
·
|
Production
volume and related yield of finished product,
|
·
|
Energy
prices for natural gas quoted on the NYMEX index and diesel
fuel,
|
·
|
Collection
fees and collection operating expense, and
|
·
|
Factory
operating expenses.
|
These
indicators and their importance are discussed below in greater
detail.
Prices
for finished product commodities that the Company produces are quoted each
business day on the Jacobsen index, an established trading exchange price
publisher. These finished products are MBM, BFT and YG. The prices quoted are
for delivery of the finished product at a specified location. These prices
are relevant because they provide an indication of a component of revenue and
achievement of business plan benchmarks on a daily basis. The Company’s
actual sales prices for its finished products may vary significantly from the
Jacobsen index because the Company’s finished products are delivered to multiple
locations in different geographic regions which utilize different price
indexes. Average Jacobsen prices (at the specified delivery point) for the
first six months of fiscal 2009 compared to average Jacobsen prices for the
first six months of fiscal 2008 follow:
|
Avg.
Price
Six
Months
2009
|
Avg.
Price
Six
Months
2008
|
Increase/
(Decrease)
|
%
Increase/
(Decrease)
|
MBM
(Illinois)
|
$343.31
/ton
|
$341.38
/ton
|
$ 1.93
/ton
|
0.6%
|
BFT
(Chicago)
|
$
22.76 /cwt
|
$
38.95 /cwt
|
$ (16.19)
/cwt
|
(41.6)%
|
YG
(Illinois)
|
$
19.82 /cwt
|
$
30.80 /cwt
|
$ (10.98)
/cwt
|
(35.6)%
|
The overall decrease in average prices 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 fees charged to suppliers, which are included in net sales,
and collection expense, which is included in cost of sales. The
importance of monitoring of collection fees and collection expense is 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 produce finished products of
MBM, BFT and YG and hides. Sales are significantly affected by
finished goods prices, quality and mix of raw material, and volume of raw
material. Net sales include the sales of produced finished goods,
collection fees, fees for grease trap services and finished goods purchased for
resale.
During the first six months of fiscal
2009 net sales decreased by $134.5 million (31.8%) to $288.3 million as compared
to $422.8 million during the first six months 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
|
|
$ (53.2
|
)
|
|
$ (26.0
|
)
|
|
$ —
|
|
|
$ (79.2
|
)
|
Lower
material volume
|
|
(30.6
|
)
|
|
(4.2
|
)
|
|
—
|
|
|
(34.8
|
)
|
Other
sales decreases
|
|
(14.7
|
)
|
|
3.0
|
|
|
—
|
|
|
(11.7
|
)
|
Lower
yield
|
|
(3.3
|
)
|
|
(1.1
|
)
|
|
—
|
|
|
(4.4
|
)
|
Purchase
of finished product for resale
|
|
(2.5
|
)
|
|
(1.9
|
)
|
|
—
|
|
|
(4.4
|
)
|
Product
transfers
|
|
22.8
|
|
|
(22.8
|
)
|
|
—
|
|
|
—
|
|
|
|
$ (81.5
|
)
|
|
$ (53.0
|
)
|
|
$ —
|
|
|
$
(134.5
|
)
|
Cost of Sales and Operating
Expenses. Cost of sales and operating expenses include cost of raw
material, the cost of product purchased for resale, and the cost to collect raw
material, which includes diesel fuel and processing costs including natural gas.
The Company utilizes both fixed and formula pricing methods for the purchase of
raw materials. Fixed prices are adjusted where possible for changes
in competition. 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 six months of fiscal
2009, cost of sales and operating expenses decreased $90.7 million (29.5%) to
$216.9 million as compared to $307.6 million during the first six months 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
|
|
$ (42.6
|
)
|
|
$ (11.9
|
)
|
|
$ —
|
|
|
$
(54.5
|
)
|
Lower
energy costs, primarily natural gas
and
diesel fuel
|
|
(10.1
|
)
|
|
(2.5
|
)
|
|
0.3
|
|
|
(12.3
|
)
|
Lower
raw material volume
|
|
(9.9
|
)
|
|
(1.2
|
)
|
|
—
|
|
|
(11.1
|
)
|
Other
expense decreases
|
|
(11.9
|
)
|
|
3.8
|
|
|
—
|
|
|
(8.1
|
)
|
Purchases
of finished product for resale
|
|
(3.3
|
)
|
|
(1.4
|
)
|
|
—
|
|
|
(4.7
|
)
|
Product
transfers
|
|
22.8
|
|
|
(22.8
|
)
|
|
—
|
|
|
—
|
|
|
|
$ (55.0
|
)
|
|
$ (36.0
|
)
|
|
$ 0.3
|
|
|
$
(90.7
|
)
|
Selling, General and Administrative
Expenses. Selling, general and
administrative expenses were $30.2 million during the first six months of fiscal
2009, a $1.5 million increase (5.2%) from $28.7 million during the first six
months of fiscal 2008. The increase was primarily due to the
following (in millions of dollars):
|
Rendering
|
|
Restaurant
Services
|
|
Corporate
|
|
Total
|
|
Other
expense
|
|
$ (0.2
|
)
|
|
$ —
|
|
|
$ 0.9
|
|
|
$ 0.7
|
|
Consulting
fees
|
|
—
|
|
|
—
|
|
|
0.7
|
|
|
0.7
|
|
Payroll
and incentive-related benefits
|
|
0.5
|
|
|
0.6
|
|
|
(1.0
|
)
|
|
0.1
|
|
|
|
$ 0.3
|
|
|
$ 0.6
|
|
|
$ 0.6
|
|
|
$ 1.5
|
|
Depreciation and
Amortization.
Depreciation and
amortization charges increased $0.6 million (5.2%) to $12.2 million during the
first six months of fiscal 2009 as compared to $11.6 million during the first
six months of fiscal 2008. The increase in depreciation and
amortization is primarily due to an overall increase in depreciable capital
assets on the balance sheet.
Interest Expense.
Interest expense was $1.4 million during the first six months of
fiscal 2009 compared to $1.6 million during the first six months of fiscal 2008,
a decrease of $0.2 million, primarily due to a decrease in the balance related
to the Company’s outstanding debt.
Other Income/Expense. Other
expense was $0.5 million in the first six months of fiscal 2009, a $0.8 million
increase in other expense as compared to other income of $0.3 million in the
first six months of fiscal 2008. The increase in other expense is primarily
due to a decrease in interest income as a result of lower interest rates on
interest bearing accounts, an increase in losses incurred on sales of fixed
assets and an increase in other non-operating expenses.
Income Taxes. The
Company recorded income tax expense of $10.6 million for the first six months of
fiscal 2009, compared to income tax expense of $28.0 million recorded in the
first six months of fiscal 2008, a decrease of $17.4 million, primarily due to a
decrease in pre-tax earnings of the Company in the first six months of fiscal
2009. The effective tax rate for the first six months of fiscal 2009
is 39.2% compared to 38.0% for the first six months of fiscal 2008, which is
different from the statutory rate primarily due to state income
taxes.
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 July 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 $15.0 million, for an aggregate of $35.0
million principal outstanding under the term loan facility at July 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 July 4, 2009 (in
thousands):
Credit
Agreement:
|
|
|
Term
Loan
|
|
$ 35,000
|
Revolving
Credit Facility:
|
|
|
Maximum
availability
|
|
$
125,000
|
Borrowings
outstanding
|
|
–
|
Letters
of credit issued
|
|
15,852
|
Availability
|
|
$
109,148
|
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 July 4, 2009, the Company was in compliance with all
of the financial covenants and believes it was in compliance with all of the
other covenants contained in the Credit Agreement.
The classification of long-term debt in
the accompanying July 4, 2009 consolidated balance sheet is based on the
contractual repayment terms of the debt issued under the Credit
Agreement.
On July 4, 2009, the Company had
working capital of $78.7 million and its working capital ratio was 2.19 to 1
compared to working capital of $67.4 million and a working capital ratio of 1.95
to 1 on January 3, 2009. The increase in working capital is primarily due
to the increase in cash and commodity prices. At July 4, 2009, the Company
had unrestricted cash of $57.8 million and funds available under the revolving
credit facility of $109.1 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 $32.3 million and $41.9 million for the six
months ended July 4, 2009 and June 28, 2008, respectively, a decrease of $9.6
million, primarily due to a decrease in net income of approximately $29.0
million and changes in operating assets and liabilities, which includes an
increase of inventory of approximately $10.0 million, an increase from income
taxes refundable of approximately $6.1 million and a reduction of accounts
payable and accrued expenses of $3.3 million. Cash used by investing
activities was $22.6 million for the first six months of fiscal 2009 compared to
$12.7 million for the first six months of fiscal 2008, an increase of $9.9
million, primarily due to the acquisition of Boca Industries, Inc. in the first
quarter of fiscal 2009. Net cash used by financing activities was
$2.7 million and $0.9 million for the six months ended July 4, 2009 and June 28,
2008, respectively, an increase of $1.8 million, principally due to less excess
tax benefits from stock-based compensation in 2009.
The
Company made capital expenditures of $10.3 million during the first six months
of fiscal 2009, compared to capital expenditures of $13.5 million in the first
six months of fiscal 2008 for a net decrease of $3.2 million. The
decrease is due primarily to a reduction in spending on a major modernization
project started in fiscal 2008 and completed in fiscal 2009 at the Turlock,
California plant that was identified over normal maintenance and compliance
capital expenditures and a slight reduction in general capital expenditures in
the second quarter of fiscal 2009 as compared to the second quarter of fiscal
2008. Additionally, in the six months ended July 4, 2009, the Company
spent approximately $1.3 million related to the Final BSE Rule and expects to
spend approximately $0.4 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 and $0.5 million during the six
months ended July 4, 2009 and June 28, 2008, respectively.
Based
upon the underlying terms of the Credit Agreement, approximately $5.0 million in
current debt, which is included in current liabilities on the Company’s balance
sheet at July 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
first six months of fiscal 2009, the Company has accrued approximately $6.3
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 July 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 $1.8 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 have had and could continue to 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. In June 2009, the Company received a notice of a mass
withdrawal termination and a notice of initial withdrawal liability from one of
these underfunded plans. The Company had anticipated this event and
as a result had 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 plan has stated that it will provide the Company with a
notice of redetermination liability no later than December 27,
2009. Another of the underfunded multi-employer plans in which the
Company participates has given notification of “Critical Status” under the PPA;
however, as of July 4, 2009, the Company has not received any further
information regarding this Critical Status plan. While the Company
has no ability to calculate a possible current liability for under-funded
multi-employer plans that could terminate or could require additional funding
under the PPA, the amounts could be material.
The
Company has the ability to burn alternative fuels, including its fats and
greases, at a majority of its plants as a way to help manage the Company’s
exposure to high natural gas prices. Beginning October 1, 2006, the
federal government effected a program which provides federal tax credits under
certain circumstances for commercial use of alternative fuels in lieu of
fossil-based fuels. Beginning in the fourth quarter of 2006, the
Company filed documentation with the IRS to recover these Alternative Fuel
Mixture Credits as a result of its use of fats and greases to fuel boilers at
its plants. The Company has received approval from the IRS to apply
for these credits. However, the federal regulations relating to the
Alternative Fuel Mixture Credits are complex and further clarification is needed
by the Company prior to recognition of certain tax credits
received. As of July 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 six months 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
and employer-sponsored 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 six months 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 required by
the PPA requirements; and paying dividends or repurchasing stock, subject to
limitations under the Credit Agreement, as well as suitable cash conservation to
withstand adverse commodity cycles.
The
current economic environment in the Company’s markets has the potential to
adversely impact its liquidity in a variety of ways, including through reduced
raw material availability, 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 continued decline in raw
material availability, 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
$9.3 million consisting of approximately $2.3 million of finished products and
approximately $7.0 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
July 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
$10.6 million in operating lease obligations during the next twelve months,
which are not included in liabilities on the Company’s balance sheet at July 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 July 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 July 4, 2009.
In April 2009, the FASB issued FSP No.
FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP FAS 107-1 and APB 28-1”). FSP
FAS 107-1 and APB 28-1 requires disclosures about fair value of financial
instruments for interim reporting periods as well as in annual financial
statements. FSP FAS 107-1 and APB 28-1 is effective for interim
reporting periods ending after June 15, 2009. The Company’s adoption
of this staff position did not have a material impact on the consolidated
financial statements of the Company.
In May 2009, the FASB issued SFAS No.
165, Subsequent Events
(“SFAS 165”) effective for interim or annual periods ending after June 15,
2009. The objective of SFAS 165 is to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. SFAS
165 also requires entities to disclose the date through which subsequent events
were evaluated as well as the rationale for why that date was
selected. The adoption of this accounting standard did not have a
material effect to the consolidated financial statements of the
Company.
In June 2009, the FASB issued SFAS No.
167, Amendments to FASB
Interpretation 46(R), (“SFAS 167”) which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be
consolidated. SFAS 167 clarifies that the determination of whether a
company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of
the entity that most significantly impact the entity’s economic
performance. SFAS 167 requires an ongoing assessment of whether a
company is the primary beneficiary of a variable interest
entity. SFAS 167 also requires additional disclosures about a
company’s involvement in variable interest entities and any significant changes
in risk exposure due to that involvement. SFAS 167 is effective for
fiscal years beginning after November 15, 2009. The Company is
currently evaluating the impact of adopting this accounting
standard.
In June 2009, the FASB issued SFAS No.
168, The FASB Accounting
Standards Codification™ and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162,
(“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards
Codification™ (the “Codification”) as the source of authoritative U.S. generally
accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements
in conformity of U.S. GAAP. The Codification does not change current
U.S. GAAP, but is intended to simplify user access to all authoritative U.S.
GAAP by providing all the authoritative literature related to a particular topic
in one place. The Codification is effective for interim and annual
periods ending after September 15, 2009. The adoption of this
standard will change how the Company references various elements of U.S GAAP
when preparing the Company’s financial statement disclosures, but will have no
impact on the Company’s financial position, results of operation or cash
flows.
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 such expectations will prove to be correct.
In addition to those factors discussed
in this report and under the heading “Risk Factors” in Item 1A of Part I of the
Company’s annual report on Form 10-K for the year ended 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 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 and the price of diesel fuel and the price of natural gas used in the
Company’s plants. Raw materials available to the Company are impacted
by seasonal factors, including: holidays, when raw material volume
declines; general performance of the U.S. economy; warm weather,
which can adversely affect the quality of raw material processed and finished
products produced; and cold weather, which can impact the collection
of raw material. Predominantly all of the Company’s finished products
are commodities that are generally sold at prices prevailing at the time of
sale.
The
Company makes limited use of derivative instruments to manage cash flow risks
related to interest and natural gas expense. The Company uses
interest rate swaps with the intent of managing overall borrowing costs by
reducing the potential impact of increases in interest rates on floating-rate
long-term debt. 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. The interest rate swaps and natural gas swaps are
subject to the requirements of SFAS 133. The Company’s natural gas
forward contracts are not subject to the requirements of SFAS 133, because the
natural gas forward contracts 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 July 4, 2009, the fair value of these
interest swap agreements was $2.8 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.
On May
15, 2009, the Company entered into natural gas swap contracts that are
considered cash flow hedges according to SFAS 133. Under the terms of
the natural gas swap contracts the Company fixed the expected purchase cost of
400,000 mmbtu’s of natural gas representing a portion of its plants expected
usage for the months of July 2009 through October 2009 at a fixed rate of
$4.5248 per mmbtu. At July 4, 2009, the fair value of these natural
gas swap contracts was $0.2 million and is included in accrued expenses on the
balance sheet, with an offset recorded to accumulated other comprehensive
income.
As of
July 4, 2009, the Company had forward purchase agreements in place for purchases
of approximately $7.0 million of natural gas and diesel fuel. As of
July 4, 2009, the Company had forward purchase agreements in place for purchases
of approximately $2.3 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 QUARTERLY PERIOD ENDED JULY 4, 2009
|
PART
II: Other Information
|
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
The matters voted upon at the annual
meeting of stockholders held on May 12, 2009 were as follows:
(a)
|
The
election of seven directors to serve until the next annual meeting of
stockholders or until their successors have been elected and qualified.
The number of votes cast for and against the election of each nominee, as
well as the number of abstentions with respect to the election of each
nominee, were as follows:
|
Randall C.
Stuewe
|
|
|
|
For:
|
69,017,495
|
Against:
|
7,354,939
|
Abstain:
|
156,226
|
|
|
|
|
|
|
O. Thomas
Albrecht
|
|
|
|
For:
|
68,839,596
|
Against:
|
7,533,538
|
Abstain:
|
155,526
|
|
|
|
|
|
|
C. Dean
Carlson
|
|
|
|
For:
|
68,884,407
|
Against:
|
7,487,528
|
Abstain:
|
156,725
|
|
|
|
|
|
|
Marlyn
Jorgensen
|
|
|
|
For:
|
68,920,825
|
Against:
|
7,463,429
|
Abstain:
|
144,406
|
|
|
|
|
|
|
Charles
Macaluso
|
|
|
|
For:
|
65,231,879
|
Against:
|
11,139,683
|
Abstain:
|
157,098
|
|
|
|
|
|
|
John D.
March
|
|
|
|
For:
|
68,845,400
|
Against:
|
7,526,505
|
Abstain:
|
156,755
|
|
|
|
|
|
|
Michael
Urbut
|
|
|
|
For:
|
68,910,392
|
Against:
|
7,471,501
|
Abstain:
|
146,767
|
|
|
|
|
|
|
(b)
|
Proposal
to ratify the selection of KPMG LLP, independent registered public
accounting firm, as the Company’s independent registered public accountant
for the fiscal year ending January 2, 2010. The number of votes
cast for and against the proposal, as well as the number of abstentions
and broker non-votes with respect to such proposal, were as
follows:
|
For:
|
74,368,108
|
Against:
|
1,831,133
|
Abstain:
|
329,419
|
Broker
Non-Votes:
|
0
|
|
|
|
|
|
|
|
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: August
13, 2009
|
|
By:
|
/s/ Randall
C. Stuewe
|
|
|
|
Randall
C. Stuewe
|
|
|
|
Chairman
and
|
|
|
|
Chief
Executive Officer
|
|
|
|
Date: August
13, 2009
|
|
By:
|
/s/ John
O. Muse
|
|
|
|
John
O. Muse
|
|
|
|
Executive
Vice President
|
|
|
|
Administration
and Finance
|
|
|
|
(Principal
Financial Officer)
|