Darling Ingredients(DAR) - 2023 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis for the company Financial Statements This section presents the unaudited consolidated financial statements for Darling Ingredients Inc. for the period ended September 30, 2023, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes Consolidated Balance Sheets The company's total assets increased to $10.81 billion as of September 30, 2023, from $9.20 billion at the end of 2022, primarily driven by increases in goodwill, intangible assets, and investment in unconsolidated subsidiaries, while total liabilities grew to $6.34 billion from $5.31 billion Consolidated Balance Sheet Highlights (in thousands USD) | Balance Sheet Item | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $1,842,995 | $1,638,097 | | Total assets | $10,810,337 | $9,202,370 | | Total current liabilities | $1,033,703 | $1,068,443 | | Long-term debt | $4,338,126 | $3,314,969 | | Total liabilities | $6,343,355 | $5,305,880 | | Total stockholders' equity | $4,466,982 | $3,896,490 | Consolidated Statements of Operations For Q3 2023, Net Sales decreased to $1.63 billion from $1.75 billion year-over-year, and Net Income attributable to Darling fell to $125.0 million from $191.1 million, while for the nine-month period, Net Sales increased to $5.17 billion from $4.76 billion, with Net Income slightly decreasing to $563.2 million from $581.1 million Key Performance Indicators (in thousands USD, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,625,204 | $1,747,599 | $5,173,997 | $4,764,121 | | Operating income | $178,369 | $268,331 | $790,898 | $779,842 | | Net income attributable to Darling | $125,026 | $191,081 | $563,210 | $581,130 | | Diluted income per share | $0.77 | $1.17 | $3.47 | $3.54 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, net cash provided by operating activities was $682.3 million, an increase from $638.4 million in the prior year, while net cash used in investing activities decreased to $1.51 billion from $2.22 billion, and net cash provided by financing activities was $902.2 million, down from $1.68 billion Cash Flow Summary (Nine Months Ended, in thousands USD) | Cash Flow Activity | Sep 30, 2023 | Oct 1, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $682,288 | $638,438 | | Net cash used in investing activities | $(1,506,634) | $(2,222,758) | | Net cash provided by financing activities | $902,150 | $1,682,900 | | Net increase in cash | $103,363 | $78,285 | Notes to Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies and further breakdowns of the figures presented in the main financial statements, covering investments in unconsolidated subsidiaries, recent acquisitions, debt structure, segment performance, and revenue disaggregation - The company corrected an out-of-period error related to the contingent consideration liability for the FASA Group acquisition, resulting in an $85.1 million reduction to goodwill and the contingent consideration liability[33][34][51] - The company's investment in the Diamond Green Diesel (DGD) Joint Venture is a significant contributor to earnings, with Darling's share of net income amounting to $361.7 million for the first nine months of 2023[42] - The company completed the acquisition of Gelnex, a global collagen producer, on March 31, 2023, for an initial purchase price of approximately $1.2 billion[45] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial performance, segment results, liquidity, and capital resources, covering the third quarter and first nine months of 2023, with key themes including commodity price fluctuations, contributions from recent acquisitions, DGD joint venture performance, and changes in debt structure and liquidity Results of Operations The company's operating income for Q3 2023 decreased by 33.5% year-over-year to $178.4 million, driven by lower performance in the Feed and Fuel Ingredients segments, while for the nine-month period, operating income increased slightly by 1.4% to $790.9 million, supported by strong performance from the Fuel Ingredients segment and growth in the Food Ingredients segment Segment Operating Income (in thousands USD) | Segment | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Feed Ingredients | $78,271 | $117,881 | $313,375 | $406,225 | | Food Ingredients | $60,538 | $53,837 | $156,779 | $147,040 | | Fuel Ingredients | $65,169 | $119,197 | $402,551 | $294,694 | | Total Segment Operating Income | $178,369 | $268,331 | $790,898 | $779,842 | - The Feed Ingredients segment's operating income decreased in Q3 2023 primarily due to lower fat finished product prices and lower sales volumes[169] - The Food Ingredients segment's operating income increased due to higher sales volumes from the Gelnex acquisition[173] - The Fuel Ingredients segment's operating income decreased in Q3 due to a catalyst turnaround and an unexpected shutdown at a DGD plant, along with lower RIN and LCFS credit prices[176] Non-U.S. GAAP Measures The company provides a reconciliation of Net Income to Adjusted EBITDA, a non-GAAP measure used by management to evaluate operating performance, with Darling's Adjusted EBITDA at $247.8 million for Q3 2023 and $797.8 million for the nine-month period, and Darling's share of the DGD Joint Venture's Adjusted EBITDA being a significant contributor Reconciliation of Net Income to Adjusted EBITDA (in thousands USD) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to Darling | $125,026 | $191,081 | $563,210 | $581,130 | | Darling's Adjusted EBITDA | $247,845 | $274,398 | $797,814 | $830,472 | | DGD Joint Venture Adjusted EBITDA (Darling's Share) | $86,450 | $120,333 | $463,171 | $297,503 | Financing, Liquidity and Capital Resources As of September 30, 2023, the company had working capital of $809.3 million and availability of $1.04 billion under its revolving credit facility, with net cash from operations at $682.3 million for the first nine months, and capital expenditures of $380.6 million with an additional $184 million planned for the remainder of fiscal 2023 - The company had $809.3 million in working capital and $1.04 billion available under its revolving credit facility as of September 30, 2023[232] - Capital expenditures for the first nine months of 2023 were $380.6 million, with an additional $184 million planned for the rest of the year[234] - The DGD Joint Venture partners approved a capital project to upgrade the Port Arthur plant to produce Sustainable Aviation Fuel (SAF), with completion expected in 2025 at an estimated cost of $315 million[239] - The company repurchased approximately $52.9 million of its common stock in the first nine months of 2023, with $321.6 million remaining under its share repurchase program[247] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from changes in commodity prices, interest rates, and foreign currency exchange rates, which it manages using derivative instruments, including interest rate swaps, cross-currency swaps, and commodity options and forwards - The company uses derivative instruments to manage cash flow risks related to interest rates, commodity prices (natural gas, diesel fuel, soybean meal, corn), and foreign currency exchange rates[259] - In Q1 and Q2 2023, the company entered into interest rate swaps with a total notional amount of $900.0 million to hedge a portion of its variable rate debt into Q1 2026[261] - In Q1 2023, the company entered into cross-currency swaps with a notional amount of €519.2 million to hedge its intercompany notes receivable into Q1 2025[262] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter, other than the ongoing integration of controls for recently acquired companies - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[272] - The company is in the process of integrating the Gelnex acquisition, which was completed in Q1 2023, and is evaluating changes to internal controls as part of this process[274] PART II: OTHER INFORMATION This section provides information on legal proceedings and risk factors relevant to the company's operations Legal Proceedings This section refers to Note 18 of the financial statements for information on legal proceedings, detailing that the company is party to various lawsuits and claims arising in the ordinary course of business and has established loss reserves it believes are reasonable and sufficient - Information regarding legal proceedings is incorporated by reference from Note 18 (Contingencies) of the financial statements[277] Risk Factors The company states that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and investors are advised to consider those factors - The company refers to its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, for a detailed description of risk factors affecting the business[278]